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  • How To Beat Buffett at His Own Game
    Ummm...

    "EDF’s new offer of $52 a share for half of the company is almost as much as... Berkshire Hathaway (NYSE: BRK.A), paid for the entire company in September."

    Of course, BRK didn't actually buy the company in September, it entered into an agreement to purchase it. The deal's schedule has it closing in 09Q2.

    "His $4.7 billion deal for Constellation - about what it cost to build one nuclear reactor - bought him three nuclear plants and 75 power-generating units. CEG jumped 12% on the news."

    Confusing. Which news? Your structure makes it appear that CEG shares increase on the news that BRK was paying $4.7B for CEG.

    "Buffett has been on a buying spree of U.S. equities over the past few months. And he even wrote an op-ed for the New York Times to support why."

    You're confusing things. Buffett wrote that he's buying equities for his personal account, which is completely separate from BRK's recent purchases.

    "But before this, CEG was trading below his purchase price. And it’s not the only one."

    Before what? This piece desperately needs an editor.

    "A $3 billion investment in General Electric (NYSE: GE) got Buffett warrants to buy GE common stock for $24.50. It sells today for $17.23."

    Uh, yeah, it also got BRK $300M in annual dividend payments until GE decides to buy back the investment at a 10% premium.

    "In September, he purchased Goldman Sachs (NYSE: GS) for $115 a share. GS is trading around $68 - a 40% discount."

    Buffett may indeed have purchased GS at $115 for his personal account, but that's not what you're talking about (editing, please). You're talking about BRK's investment, which was a $5B preferred investment that will yield $500M in annual dividends until GS decides to repurchase it - at a 10% premium. This is entirely unrelated to the common share price.

    The warrants that BRK got in each of these deals are there so that BRK can share in any long-term gains in the common stock. So far, they're worthless. Which means that BRK's investment is only worth 10% more than he paid for it, plus 10% annually.

    "In addition to receiving a 10% return on his $300 million investment in USG Corporation (NYSE: USG), Buffett’s notes are convertible into common stock at $11.40 a share. USG is trading at $8.79."

    Again, where's the problem? BRK's investments are based on a long-term thesis. In the meantime, it collects a healthy dividend. Let me ask you something. If you could buy an untraded preferred share of GE or GS that yields 10%, has a 10% redemption premium, AND gives you options at twice the current common share price, would you do it?

    "Flagship Berkshire Hathaway also has some issues. Last quarter’s profit dropped 77% and its shares reflect that. And just last month, its stock plunged to $74,100, a level not seen since October of 2003."

    Oh geez, will you please look just a LITTLE past the headlines, please? Did you happen to see BRK's operating profit? Down 19.2%, due in large part to outsized hurricane-related claims. The rest was due to mark-to-market rules and the drop in value of the long-term derivatives BRK sold against four market indexes.

    And that plunge to $74,100? Did you note that at the close the next day, the stock had gained 21% from that low? Which do you think this is indicative of, a problem at BRK or a problem in the market?

    "...by picking up a few of these shares, you can say you got a better deal than he did."

    Um, which shares are you talking about? You mentioned four companies here: GS, GE, CEG, and BRK. The GS and GE preferred shares are not available to be picked up. CEG is trading at 27 and change, and BRK, aside from being a major shareholder, also has a deal with a pretty punitive cancellation clause, so it'll profit nicely if the deal falls through.

    This was a very weak effort, U.
    Dec 04 15:53 pm |Rating: 0 0 |Link to Comment |View article
  • Berkshire Hathaway's Stock Slump
    Who cares about negative comments? Is it that hard to just ignore things?
    Nov 20 13:05 pm |Rating: +1 0 |Link to Comment |View article
  • Berkshire Hathaway's Stock Slump
    Need to include dividends to get S&P total returns.
    Nov 20 08:07 am |Rating: +1 0 |Link to Comment |View article
  • TARP vs. Non-TARP: Investing with Uncle Sam at a 60% Discount
    The preferreds are indeed interesting - take a look at the PGF, the dividend of which has been impaired (dropping from about 0.125/month to .108), now yielding about 9.5% and priced about 27% lower than its August average, (when the yield was a bit more than 8%), and 37% less than its average from the first part of the year (when the yield was about 7%). Assuming the big banks' and insurers' preferred dividends survive (which they must, since losing those dividends are would crush their ability to raise additional capital), this fund should have a nice capital gain; if not it still provides a monthly income stream.

    Of course, yesterday it lagged the overall market by more than 8%.

    One quibble: don't expect 3-month LIBOR to grow at any point in the near future; expect it to shrink.
    Oct 29 08:26 am |Rating: 0 0 |Link to Comment |View article
  • Here I Go, Criticizing Warren Buffett
    Oh boy. Looks like I get to do another point-by-point.

    "It was an unfair deal HIGHLY in favor of Buffett and no one else."

    You mean, other than the shareholders of the company he heads? Isn't he SUPPOSED to make deals that favor his shareholders?

    "The $2.5 billion in additional capital GS raised from ordinary shareholders certainly didn’t come with any of these benefits."

    GS raised $5B, not $2.5B, and it was a public offering that was OVERSUBSCRIBED. Did you think somebody was twisting those folks arms to force them to buy the shares?

    Quite simply, GS saw the value of the Buffett investment to be not just the cash, but also the cache. Would GS have been able to raise as much money for as high a price per share without Buffett's investment? It's certainly reasonable to think not. Overall, the cost of the capital raise may have been less because of Buffett's investment. In which case, existing GS shareholders benefit.

    "However, what pushed the Goldman deal over the brink from “unfair” to outright improper was that Buffett was consulting with Congress over the then-proposed $700 billion Bailout almost immediately... Buffett said the plan was 'absolutely necessary, in [his] view, to really avoid going over the precipice.'...for Buffett to be consulting with Congress about the deal is a serious conflict of interest, if not insider trading."

    Who, exactly, was Buffett consulting with? A Congressman? A congressional committee? Are you sure? I believe your quote is from his CNBC interview; does that mean that everybody who goes on CNBC is "consulting with Congress"? From an ethics standpoint, as long as everybody was aware of all of the financial positions of those involved, which they were, there is no ethical problem. Would it be improper for anyone in government to speak to ANY CEO about these problems? Then it wouldn't be improper for somebody to ask Buffett for his thoughts.

    By the way, do you know what insider trading means? And does it matter to you that Bailout v1.0 FAILED TO PASS?

    "Then came the GE deal. As was the case with GS... this long list of perks was made exclusively to Buffett, NOT the poor saps who ponied up $12 BILLION for GE via the ordinary share offering it issued at that time."

    And again, would GE have been able to raise as much in the secondary at as high a price without the BRK stamp of approval? If not, then GE did right by the deal.

    "But then, Buffett goes on CNBC — a GE subsidiary —to discuss how great an investment GE is!!! Again, a serious conflict of interest AND seriously bordering on insider trading."

    First, have you never seen anybody on CNBC talking about a stock they already own in a positive way? Why are you so aghast that Buffett was doing the same thing done by the vast majority of guests on that network?

    And again, you don't seem to know what insider trading is.

    "Finally, last Friday, Buffett writes an op-ed...does Buffett really need to be on a soapbox telling people to buy stocks right after $2 trillion in retirement and pension funds has been wiped out?"

    Need? Who cares? You're offended that the man speaks his mind at the time he thinks is most opportune? Why are you complaining?

    "Especially when he knows darn well that most people don’t have his ability to ignore the stock market for a year… let alone five to ten years?"

    Do you expect every op-ed to be pertinent to the majority of people? When somebody writes about something happening in some foreign country that most Americans couldn't pick out on a map, does that offend you? The fact is that a very large number of people who have money invested can and do ignore the stock market for years at a time.

    "this latest string of deals is inappropriate to say the least. And while investors who heed Buffett’s advice to buy now will certainly make money in the long run, I guarantee Buffett won’t be writing additional pieces assuring them of the value when they’re down another 10%, 20% or even 30% in the next few months."

    My goodness but you can whine, can't you?

    Buffett made good deals for his shareholders (who, by the way, he has a fiduciary responsibility to), and you complain. He goes on CNBC to share the reasoning behind these investments, as dozens of money managers do every day, and you complain. He writes an op-ed explaining his decision to invest his non-BRK money in stocks for the first time, specifically and repeatedly stating that he doesn't know if the market will go up or down in the short run, and you complain.

    Don't you have anything better to do?
    Oct 20 15:18 pm |Rating: 0 0 |Link to Comment |View article
  • Schumer Is Way Off
    You write as if you think this capital infusion is the sum total of what's happening. Did you even listen to Neel Kashkari Monday morning?
    Oct 15 08:29 am |Rating: 0 0 |Link to Comment |View article
  • Why Is Everybody Selling as Buffett Is Loading Up?
    Because he's smarter than us.
    Oct 06 11:48 am |Rating: 0 0 |Link to Comment |View article
  • GE Dilution Questioned
    Russ - do you know how warrants work? BRK isn't putting another dollar into GE until it decides to, which is VERY likely to be within a couple of months of the expiration of the warrants.

    The deal brought $15B in, including $12B from the common offering, at an overall cost which may or may have been better than a secondary alone.
    Oct 03 08:22 am |Rating: 0 0 |Link to Comment |View article
  • Does Warren Buffett Think Goldman Is More Creditworthy Than GE?
    Same as with GS, this deal is obviously good for BRK. But it's not a bad deal for GE, either. It provides cover for them to price their secondary common offering, which is 400% of the BRK preferred, as opposed to 50% (expanded to 100%) for GS. The question when evaluating it from GE's side is, would it have cost less to raise capital purely from a common offering? Not bloody likely.

    The three-year-to-call part is a material difference, and I'd guess is there because GS was cheaper on an expected growth basis. So in GE, BRK expects to make less on the appreciation of the warrants, so it requires additional returns from the preferred to make up the difference.
    Oct 02 08:07 am |Rating: 0 0 |Link to Comment |View article
  • Buffett's Big Bet: The Real Value of the Berkshire Investment in Goldman Sachs
    HLO: Why?
    Sep 29 23:35 pm |Rating: 0 0 |Link to Comment |View article
  • Buffett's Big Bet: The Real Value of the Berkshire Investment in Goldman Sachs

    Yes, this is a great deal for BRK, but that doesn't mean it wasn't a great deal for GS as well. GS needed to raise capital - does this deal result in a lower cost for that new capital?

    Napkin math included.

    Buffett's $5B preferred issue works exactly the same as if GS borrowed the money, in that it has a high pseudo-interest rate, is junior to all of Goldman's existing debt, is senior to the common shares, and will never appreciate from its current value of $5.5B. The only difference is that it adds to Goldman's capital position.

    Because it will never appreciate in value, as traded preferreds may, BRK also gets warrants. BRK can buy that same $5B of stock at a price close to the market price when the deal was struck, at any time in the next 5 years. So BRK's benefit will include any common stock appreciation.

    BRK gets a 10% premium for the pseudo-loan, plus 10% annually until it's retired, on top of the benefit from common stock appreciation. The deal is similar (except for balance sheet accounting) to a short-term loan at 10% in exchange for 43.48 million warrants at a price of about $104.50 (applying the 10% retirement premium to the warrants instead of the preferred). Sweet deal.

    But the real question from the GS side is whether they are better off than they would have been raising capital in another way. GS decided to raise $7.5B. The cost was the 43.48 million BRK warrants plus 20.32 million shares sold at $123 (GS raised an additional $2.5B because the response to the offering was greater than expected - it's quite reasonable to say that GS may have underpriced the offering). Cost of raising $7.5B: 63.8 million shares, or 15% dilution of ownership, plus $42M per month until the company retires the BRK preferred. My guess is that GS will retire that preferred issue as soon as this financial crisis is over. Because they raised more than originally planned in the offering, they have $2.5B more capital than originally expected - half the cost of retiring the BRK shares. I'll put the over/under on retirement at 1 year, in part for simplicity's sake. If this is accurate, the BRK preferred dividend will add $500M to the cost of the capital raising. Discounting it at 6%, for the 63.8 million shares in effect GS raised $7.028B at $110.16 per share.

    So what if GS had chosen to do a $7.5B equity issue instead? Would it have been able to price the issue at at $110.16? Based on the price of GS and MS in the day of and after the BRK investment, it's not clear to me that this is the case.

    However, based on the uncertainty of the situation, it is clear to me that this was a good deal for GS. While it is possible that they could have raised the money in a public offering priced slightly higher than $110.16 (resulting in less dilution), it's also quite possible that such an offering would have failed. Removing this risk was certainly worth more than the potential reduction in dilution.

    I'm long GS and MS.
    Sep 28 21:40 pm |Rating: 0 0 |Link to Comment |View article
  • Buffett Is Not a Savior but an Investor
    The $210 number you state is based on Goldman, the investment bank. It's reasonable to assume that Goldman Bank Holding Company will not be able to obtain the future cash flows that (presumably) went into your $210 number.
    Sep 25 07:58 am |Rating: 0 0 |Link to Comment |View article
  • What's the Smartest Money Doing? Buffett's Buying Goldman Sachs
    Haven't seen the actual deal, but my understanding is that the BRK preferred will not trade, nor appreciate. They're exactly like a 10% bond with a 10% call premium, except that as equity they boost the balance sheet. Expect them to be called as soon as Goldman is comfortable with its new position in a recovering financial marketplace.
    Sep 24 18:58 pm |Rating: 0 0 |Link to Comment |View article

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