Buffet’s Advice: Any financial advisor who doesn’t suggest that you (a) diversify your investments and (b) use offshore banking and offshore incorporation in some way – is doing you a serious disservice.
from Advice for The Middle Class Aspiring Millionaires
Warren Buffett Has Some Brilliant Advice For Investors Freaked Out About GeoPolitics
2014 has been unnerving.Every day, a new worrisome headline comes out of Russia, Iraq, Libya, the Gaza Strip, or any of the world’s other geopolitical hotspots. And there’s the ongoing fears of an Ebola outbreak in West Africa, an unstable volcano in Iceland, and the ever-present risk of a solar flareknocking out the world’s communications networks.
Warren Buffett would probably recommend taking a step back, reflecting on history, and then looking to the future.
Any financial advisor who doesn’t suggest that you (a) diversify your investments and (b) use offshore banking and offshore incorporation in some way – is doing you a serious disservice. from Advice for The Middle Class “Aspiring Millionaires “http://taxhavenguru.wordpress.com/
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise — none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.
Another paper examining the source of Warren Buffett’s outperformance has been published. The paper, “Buffett’s Alpha,” which can be found online, published by AQR Capital Management (Andrea Frazzini, David Kabiller and Lasse H. Pedersen) says the Oracle of Omaha’s alpha is the result of a sophisticated application of leverage to a portfolio of quality, low-beta stocks.
Here is the abstract from the paper: “Berkshire Hathaway has a higher Sharpe ratio than any stock or mutual fund with a history of more than 30 years and Berkshire has a significant alpha to traditional risk factors. However, we find that the alpha become statistically insignificant when controlling for exposures to Betting-Against-Beta and quality factors. We estimate that Berkshire’s average leverage is about 1.6-to-1 and that it relies on unusually low-cost and stable sources of financing. Berkshire’s returns can thus largely be explained by the use of leverage combined with a focus on cheap, safe, quality stocks. We find that Berkshire’s portfolio of publicly-traded stocks outperform private companies, suggesting that Buffett’s returns are more due to stock selection than to a direct effect on management.”
Buffett’s low-cost insurance and reinsurance businesses has given him a significant advantage in terms of unique access to cheap, term leverage. AQR estimates that 36% of Berkshire Hathaway’s (BRK.A) liabilities consist of insurance float on average. The estimated average annual cost of
Berkshire’s insurance float is only 2.2%, more than 3 percentage points below the average T-bill rate. Berkshire Hathaway’s
Sharpe ratio is 0.76 over the period 1976-2011, nearly double the Sharpe ratio of the overall stock market – but way lower than
many investors would imagine.
The Sharpe ratio is used to show how well the return from an asset compensates an investor for the risk taken – the higher the number the better.
Buffett cut long-held holdings of J&J, P&G and Kraft Foods. Why? (Image credit: Getty Images via @daylife)
Berkshire Hathaway took the ax to some of the longest-held names in its stock portfolio last quarter, sparking questions over just how much sway Warren Buffett is sharing with his recently-installed investing colleagues.
to help manage a chunk of the firm’s approximately $75 billion equity portfolio. Both managers were expected to start small and gradually manage more and more of the company’s holdings until ultimately taking over whenever Buffett steps down.
Deal Journal’s Erik Holm says the cuts may represent a changing of the guard to some small degree, with Buffett sharing more investing responsibility with his younger colleagues:
The moves, disclosed in a regulatory filing Tuesday, reveal an uncommonly active quarter for Berkshire leader Warren Buffett and Berkshire’s new portfolio managers, Todd Combs and Ted Weschler.…
Tom Russo, a longtime Berkshire shareholder who manages more than $5 billion as a partner at Gardner Russo & Gardner, theorized that Buffett was selling off the positions to allocate more capital to Combs and Weschler, who are expected to take on ever-larger slices of Berkshire’s investment portfolio in coming years.
The cuts were substantial, and did come from some of the biggest positions in the Berkshire portfolio: J&J, P&G and Kraft were three of 14 equity positions worth more than a billion dollars at the end of 2011. Positions of that size are assumed to be Buffett’s bailiwick, considering the Oracle of Omaha told shareholders earlier this year that his two deputies each had their mandates raised by a billion dollars and manage about $2.75 billion.
At recent prices, and with the caveat that it is quite possible Berkshire’s positions have changed since June 30, Buffett holds $706 million worth of J&J, just under $4 billion in P&G and $2.4 billion in Kraft. Those positions were cut by two-thirds, a fifth and a quarter from March 31. But it is not a guarantee that the cash raised from paring those stakes found its way into the baskets of Combs and Weschler
While the logic makes sense, another longtime Berkshire shareholder, money manager and Forbes contributor Martin Sosnoff, thinks the portfolio reduction – the overall equity portfolio was trimmed to $74.3 billion from $75.3 billion — might mean Buffett is readying another big acquisition along the lines of his 2010 takeover of Burlington Northern Santa Fe.
Sosnoff, who manages $6 billion at Atalanta Sosnoff Capital writes that while Buffett may be conserving capital in the face of ”investment waters filled with riptides ,” he thinks there is just as good a chance the world’s third-richest man is readying for one last mega-play, another opportunity to step up to the plate when few others can or will. Remember, Buffett also stepped up with sorely-needed capital in 2008 for Goldman Sachs Group and General Electric — bets that paid off handsomely — and again in 2011 for Bank of America.
Berkshire’s Class A shares rose this week to the highest in 16 months. The Omaha, Nebraska-based company, which is expected to report second-quarter earnings tomorrow, is about 3% away from the top closing price since 2008.
I don’t know if he’s lucky, smart or patriotic, but it’s worked out for him
Buffett added to holdings of Wells Fargo & Co., the largest U.S. home lender, bought real-estate brokers and bid on mortgage assets of bankrupt Residential Capital LLC as he bets on a rebound in housing in the world’s largest economy. Rather than spend his company’s cash pile on European companies after a 2008 trip to the region, he made his largest acquisitions in the U.S., including Fort Worth, Texas-based railroad Burlington Northern Santa Fe.
“I don’t know if he’s lucky, smart or patriotic, but it’s worked out for him,” Cliff Gallant, an analyst at KBW Inc., said in a phone interview. He estimates that Berkshire will post an operating profit of US$1,750 a share for the second quarter, a 6.7% increase from a year earlier.
The economy in the 17-nation euro area may contract this year as governments institute austerity measures to lower borrowing costs, according to the median estimate of 35 analysts surveyed by Bloomberg. Buffett said last month that Europe’s monetary union may fracture if its leaders can’t rewrite their rules, while U.S. housing was beginning to show signs of a rebound after the worst crash in seven decades.
“For the last two years, I’ve seen everything except housing moving forward in the economy,” Buffett, 81, told Betty Liu in a July 13 interview on Bloomberg Television. “In the last few months, the rest of the economy actually has flattened out. Housing is picking up.”
The number of available U.S. homes has been declining, a trend Buffett has said was inevitable as new households form. Properties for sale fell to 2.39 million in June from an average supply of 2.93 million in 2011 and 3.22 million in 2010, data from the National Association of Realtors show.
A turn in the housing market will benefit Berkshire’s businesses tied to home building and repair, said Josh Brown, who helps oversee US$350-million at Fusion Analytics Investment Partners LLC in New York, including Berkshire shares.
“Buffett has spent the past decade amassing a portfolio of companies that are involved with home remodeling,” he said in a phone interview. “It’s got the right drivers if this housing trend continues.”
Berkshire’s subsidiaries include Acme Brick Co., paint maker Benjamin Moore & Co., builder Clayton Homes and carpet manufacturer Shaw Industries. The firm has stakes in some of the country’s largest mortgage lenders, including U.S. Bancorp and Bank of America Corp. The Wells Fargo stake was valued at more than US$13-billion at the end of March, making it the second- biggest holding in the company’s stock portfolio.
“When we compare Berkshire to the macro economy, there’s more exposure to housing,” Meyer Shields, an analyst at Stifel Nicolaus & Co., said in a phone interview. “That should mitigate some of the other disappointing areas of the economy.”
Gross domestic product, the value of all goods and services produced, slowed to a 1.5% annual rate in the second quarter from 2% in the first three months of the year as limited job growth prompted Americans to curb spending, U.S. Commerce Department data released July 27 showed. Federal Reserve policy makers said yesterday that “economic activity decelerated somewhat over the first half of this year.”
Buffett struck a deal last August to buy preferred stock and warrants for US$5-billion in Bank of America, the second- largest U.S. lender, after its shares plunged amid costs tied to soured mortgages. A month later, the billionaire said he wouldn’t come to the aid of European lenders in need of capital.
Berkshire offered to buy ResCap for US$1 before it entered bankruptcy protection in May. Buffett’s firm is set to be the lead bidder for the company’s loan portfolio in a court- supervised auction this year. Nationstar Mortgage Holdings Inc., backed by Fortress Investment Group LLC, will be the first bidder for ResCap’s mortgage servicing and underwriting business, which Berkshire had also sought.
Buffett has favored the U.S. for larger acquisitions. He hasn’t announced any deals valued at more than US$1-billion for European companies after visiting Germany, Switzerland, Spain and Italy in 2008 to scout potential targets.
Berkshire’s 2010 buyout of Burlington Northern for US$26.5-billion was an “all-in wager” on the U.S. economy, Buffett has said. The firm spent about US$9-billion last year for Wickliffe, Ohio-based Lubrizol Corp.
A recession in Europe could still hurt Berkshire because it has subsidiaries that operate there as well as bullish derivative bets on equity indexes in the region, said Shields. Lubrizol has struck deals to buy at least two companies in Spain since being acquired by Berkshire in September.
European leaders are deepening their ties in response to the sovereign debt crisis by collaborating on bailouts and insisting on budget-deficit curbs. Buffett said last month that the number of nations involved has made action more difficult.
“The system that they put in place had a fundamental fatal flaw” of a common currency without a common fiscal policy, Buffett said on Bloomberg Television in July. “It can’t survive with the present rules. That’s what they’re learning. The question is: Can 17 countries get together in a way to essentially redo something?”
Still, Buffett’s company may be benefitting from a “flight to quality” as Europe’s troubles worsen, Shields said. Berkshire had a US$37.8-billion cash hoard at the end of March.
Investors may be speculating that Buffett will be able to cut deals amid market dislocations that boost shareholder returns, said Shields. Berkshire took stakes in Goldman Sachs Group Inc., General Electric Co. and Swiss Re Ltd. during the 2008 financial crisis. The securities were redeemed last year for more than US$12-billion.
Insurance and investment giant Fairfax Financial Holdings Ltd. says second-quarter profit rose 14%, largely due to improved underwriting results and a jump in revenues from premiums written by its insurance and reinsurance businesses.
The Toronto-based financial services company, which reports in U.S. dollars, said Thursday it earned US$95-million, or US$3.85 per diluted share, up 14% from the US$83.3-million, or US$3.40 per diluted share during the year-ago quarter.
The underwriting business at the casualty and property insurer swung back to profit — US$34.8-million — from a loss of US$6.1-million during the quarter a year-ago, when it booked losses related to an influx of tornadoes in the U.S.
Net insurance premiums written increased by 14% to US$1.6-billion from US$1.37-billion in the 2011 quarter.
However, the improved results from its underwriting and premiums were offset by lower investment gains and lower interest and dividend income during the volatile quarter.
Our underwriting results continued to improve on increased premiums and we produced a small investment gain notwithstanding unrealized investment losses related to our defensive hedging strategy,” said Prem Watsa, chairman and CEO of Fairfax.
“We continue to maintain our equity hedges as we remain very concerned about the economic outlook over the next few years.”
Companies buy hedges — contracts that protect the future value of investments and other assets — during volatile stock markets. However, unexpected share price swings can lead to paper losses on the balance sheet, which must be accounted for.
Operating income in the insurance and reinsurance businesses fell to US$117.3-million from US$146.2-million in the quarter of 2011, largely due to the decrease in interest and dividend income.
Interest and dividend income slipped to US$104.9-million from US$195.1-million as the company increased its holdings in low-yielding cash and short-term investments.
The company saw lower gains from investments, coming in at US$71.5-million during the quarter, compared to a gain of US$119.6-million in the 2011 quarter.
It also booked a US$7.2-million loss from its equity hedging strategy, which compared to a US$396.6-million gain in the year-earlier quarter. That was largely offset by a US$40.9-million gain on equity investments this quarter, compared to a US$624.8-million loss during the quarter of 2011.
The company decided to hedge its exposure to equity investments in response to significantly higher stock valuations and economic uncertainty and equity hedges represented 104.2% of its equity and related holdings as of June 30.
“The market value and the liquidity of these hedges are volatile and may vary dramatically either up or down in short periods, and their ultimate value will therefore only be known over the long term,” Fairfax said in its earnings release.
During the quarter, the insurance and investment giant announced plans to buy a 77% interest in travel business Thomas Cook (India) Ltd. for about US$150-million.
And it also revealed it would acquire Brit Insurance Ltd. of London from Brit Group for about US$300-million.
Research In Motion
The company also recently doubled its stake in Research In Motion after the company announced a new chief executive and revamped board of directors. Watsa also took a seat on its board.
Free Trial – Tech device that measures your driving habits
In hopes of enticing more drivers to switch to Progressive, the Mayfield Village, Ohio-based insurer announced Monday for the first time that it is offering a “try-before-you-buy” option for its Snapshot program. The computer-mouse sized Snapshot device, which is plugged into a port into any car made after 1996, tracks the driver’s speed, braking, and distance.
The program is uses motorists’ real-time driving behaviour and lets Progressive know whether drivers are eligible for any discounts. While previously, customers were required to be signed to Progressive in order to be eligible, non-customers are now open to try Snapshot before deciding whether to make the switch.
The insurer notes that highest-risk driving behaviour accounts for over 2.5 times the costs of drivers with the lowest-risk behaviour – suggesting that the scope of ranging insurance rates is wider than what is currently being offered. The company boasts that seven out of ten drivers who try Snapshot are qualified for a discount, which can be as high as 30%.
“The consumer was right all along,” said Glenn Renwick, Progressive’s President and CEO. “For most, the rates they’re paying are higher than the risk they actually present – and in many cases, much higher. Until now, insurers had no effective way to capture actual driving behaviour and factor that into the rates they could offer. But we have made a meaningful start toward personalized insurance pricing that’s based on measuring real-time driving behaviour – the statistics of one.” The tracker has backing from environmentalists looking to reduce accident costs and fuel consumption, but some consumers fear that as trackers become the norm from the highly aggressive auto-insurance industry, companies may usethe technology to raise rates instead.
I predict – or suggest – Geigo offer free little green pets to fight this battle.