There are legions of books written about Warren Buffett, Charlie Munger and their performance at the Berkshire Hathaway* (NYSE:BRK-A) annual meeting. While I have been following them since the early 1980s, and had the distinct honor to introduce Mr. Buffett to the New York Society of Security Analysts, this was my first visit to the annual meeting. (I plan to return again.) There was not much written in the Sunday paper about the meeting except their support for the Goldman Sachs CEO, but I suspect that coverage will be extensive beginning with Monday. As an exercise for myself as well as the members of this blog community, the following 38 briefs come from my five pages of notes, which I hope share some of the wisdom of these two remarkable men.
INVESTMENT OVERVIEW
One of the first steps in the Buffett/Munger intuitive capital allocation process is to develop their thinking on the potential and likely return on invested capital generated by the businesses being examined.
At this point for Berkshire, capital-intensive investing is a bigger drive than intrinsic (value) investing.
THEIR VIEW OF GOLDMAN SACHS & AFTERMATH
In terms of the ABACUS-2007 deal, based on the SEC complaint, Goldman Sachs* (NYSE: GS) did nothing wrong. The motivation of the other side is not relevant when trading. Berkshire may even benefit from the complaint, as it will probably delay the calling of Berkshire’s preferred stock, currently earning 10% annually.
A new version of Glass Steagall is likely. If Berkshire was forced to put up collateral for its derivative position, it would probably put up its stock holding of Coke (NYSE: KO). At the same time it would demand some additional payments from its counterparties, as they paid for uncollateralized derivatives.
NOTES FROM THE EXTENSIVE Q & A SESSION
In terms of currency exposure, they have exposure on both their assets and liabilities sides. They are bearish on all currencies, particularly those who have to borrow using other currencies.
Each July, Warren Buffett will give 1.5% of the stock to five foundations. The current turnover in the stock on the NYSE is over 100%.
Over the next 50 years there is a high risk of a nuclear, chemical, or biological attack on the US. The risk is low in any given year. (This statement which is not new, it may be a plea for some sort of federal guaranty.)
The list of four candidates to replace Buffett on the investment side changes periodically. The directors are familiar with the candidates, They did well in 2009 without leverage.
It is easier to build a new culture than to change an old one. They failed in an attempt to change the culture at Salomon Brothers.
They think that despite the worldwide size of McDonald’s (NYSE: MCD), the company does a better job of educating its employees than universities do their students.
Munger was the one that discovered Chinese auto parts maker BYD and drove the acquisition of its position.
The various CEOs are paid on the basis of the economics of their business. There is not a Berkshire standard and there is no compensation consultant. Managers are paid to widen their “moats.” Headquarter fees for the 21 employees are not charged to the various operations, but there are capital charges.
The major railroads have been rebuilt over the last 30 or 40 years. The big 4 railroads are allowed to earn 10.5% on their invested capital.
In terms of insurance risks, the company will accept volatile returns while others want to have their earnings smoothed.
Read chapter 12 of John Maynard Keynes’s The General Theory of Employment, Interest and Money, written in 1935.
In 1982 Buffett submitted to John Dingell the only letter in opposition to permitting futures on the S&P 500.
Employees should think and act like owners.
Generally they hope a dollar of increase in equity to be equal to more than a dollar increase in market value.
Warren Buffett, Charlie Munger and some of the board members are visiting China in September.
Thomson (NYSE:TRI) always seems to want a 40% return on capital, a habit held over from its newspaper days.
Munger is converting his IRAs to a Roth IRA.
The federal government will have difficulty in not bailing out the failing states. Due to too-low rates, they are no longer writing new municipal bond insurance policies.
For the next 10-20 years one should want to own equity and not bonds and cash.
Moody’s* (NYSE: MCO) is a wonderful business, but they made a bad mistake on residential housing, They, like others (particularly graduates of business schools), relied too much on models.
Berkshire does not have an annual budget for a fear that various managers would “game” the system.
“We can get along without oil if we must.”
“If scared when others are fearful, you won’t make money in securities.”
In practice they are much more comfortable averaging down than up.
Advice to a new investor: “Get your feet wet with a little failure.”
“Solar panels will get cheaper.”
There will be a truly national electrical grid system.
Their portfolio is often undervalued, they do not own any major future winners.
“There is no better way to get happy than to lower expectations.”
They are blessed by not having an investor relations department.
“One should know the perimeter of one’s circle of competence.”
“One should always keep learning as the competitors are surely doing."
“Very few people fail totally.”
“Follow one’s passions.”
Many of these notes might be cryptic. I would be happy to discuss them to the extent of my understanding of what was said and what was meant.
*indicates securities owned by me or by my financial services hedge fund.
_________________________________________
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Showing posts with label ROTH IRA. Show all posts
Showing posts with label ROTH IRA. Show all posts
Sunday, May 2, 2010
Sunday, January 3, 2010
The “Fifth Season” for Investors
Introductions
As an analyst, I was always intrigued with the term that retailers used to describe the time that was spent marking-down their inventory after their financial year closed. For financial statement purposes, (read: borrowing requirements), they needed to adjust ending inventories to provable levels. This period was called the “fifth season.” As an analyst looking at electronics companies’ years ago and financial service companies more recently, I separate the inventory adjustments from the operating results of the fourth quarter. For publicly traded companies, we can make some guesses but we do not know the adjustments to compensation and after-the-close price adjustments, among other items. Only when I work on private companies and non-profit institutions do I regularly see the post-period adjustments. I am still waiting to see a fifth season financial statement.
Investors also have a fifth season that can aid in their own portfolio management. As with most things of value, these facts are hidden in plain sight. The facts hide in the Internal Revenue Services’ required calendar year-end statements. Most of these arrive in the first six weeks of the year. Those who are invested in various forms of partnerships must wait until they receive their K-1 forms. As these documents come in, there is a natural tendency to gather them up for tax preparation work by an accountant or other tax preparer. When reviewing these documents, the focus is almost exclusively on the identification of taxable income. While this is important, it is a lost opportunity to construct the investment section of a personal balance sheet. Those who have read my book MONEY WISE, will know that I believe a properly drawn personal balance sheet with all assets and liabilities, contingent and intellectual, is the key to sound investing. For those who do not want to deal with judgments required to build such a statement, one can still use the formats used in reported financial statements to guide one’s investments. Looking forward on the investment horizon, are your investments where you want them to be? Are your investments in the optimum tax and estate set-up? These are the questions that one should be asking in the “fifth season.”
With the New Year, 2010 offers tax differences that you may not have dealt with before. The most publicized and uncertain of these changes is the absence of the federal estate tax. As this is a moving target, I am not going discuss the longer-term implications of actions today on your personal financial balance sheet and those of your individual and charitable heirs. I am calling to your attention the removal of the income limit on converting a regular investment retirement account (IRA) to a Roth IRA.
Restructuring your Retirement and Estate Plans
Allow me to set the stage for a person who can get optimum benefit from converting their regular IRA to a Roth IRA from a portfolio management viewpoint. Prior to January 1st , 2010, those with income of $100,000 or over were barred from making this conversion, so I am addressing a relative small slice of the population, but numbering in the millions. Most sizeable IRAs are the result of converting a corporate-sponsored retirement program, either from a defined-contribution or defined-benefit plan. For some individuals, we are talking about accounts valued into eight figures. At the same time, many of these people have sizeable after-tax funded investment accounts from earned or inherited wealth. In the early years of IRA accounts there were no restrictions on individuals setting up accounts, even though they were covered by other retirement plans. Many who have shifted employers have multiple IRA accounts.
For example purposes, I am assuming we are dealing with an individual who has a personal after-tax account and a couple of IRAs. Prior to 2010, assume that the size of the personal account was reasonably close to the size of his or her largest IRA. From a tax and estate management point of view, the personal account should have been loaded with equities, where the gains would have been taxed at the more favorable capital gains level while the account holder was alive, and passed to heirs on a date of death basis. The IRA should have been loaded with high income-producing investments, typically bonds and big dividend paying stocks. The income derived would accrue tax-deferred until it was paid out to its owner or his or her heirs. From an overall portfolio management standpoint, the IRA was the reserve element that provided something of a safety net under the more risky, hopefully higher return, equity-oriented account. Note that there is nothing in this two part portfolio set-up to prevent the use of market judgment impacting some reserves in the equity account, and concerns for interest rates and inflation in the IRA.
How does the Roth conversion opportunity change the investments in these portfolios? First, nothing has to change. Second, a decision needs to be made on where the funds will come from to pay the income tax on the conversion. The money can come from either the personal account or the IRA. This decision allows the taxpayer the chance to rebalance the two accounts. Third, if there are more than one existing IRA account, there is no need to convert them all to a single Roth IRA. One might choose to delay moving some to reduce the amount of taxes due in one year, or if there is a belief that one would be in a much lower tax bracket in the near future.
Where to Invest in 2010 for the Future?
The investment results for 2009 were a sizeable after-shock to the earthquake that hit the investment world in 2008. Some investors may feel that these results are normal, cyclical behavior and we can go back to investing as before. Others may feel that we have gone through a seminal period which should lead us to re-examine our thinking and modify our policies.
Space constraints do not permit me to suggest how each of the eleven different investment personalities described in MONEY WISE should view last year’s results and develop plans for the future. Stay tuned for next week’s blog, but the impatient can contact me before next weekend by using the “Comment” button on the blog or by replying to the email version. I will gladly send you the excerpt.
____________________
If you would like to receive my blog automatically through your email system, please subscribe using the box on the left-hand portion of this screen. If you are not sure, use the box above to review past blogs that may interest you.
As an analyst, I was always intrigued with the term that retailers used to describe the time that was spent marking-down their inventory after their financial year closed. For financial statement purposes, (read: borrowing requirements), they needed to adjust ending inventories to provable levels. This period was called the “fifth season.” As an analyst looking at electronics companies’ years ago and financial service companies more recently, I separate the inventory adjustments from the operating results of the fourth quarter. For publicly traded companies, we can make some guesses but we do not know the adjustments to compensation and after-the-close price adjustments, among other items. Only when I work on private companies and non-profit institutions do I regularly see the post-period adjustments. I am still waiting to see a fifth season financial statement.
Investors also have a fifth season that can aid in their own portfolio management. As with most things of value, these facts are hidden in plain sight. The facts hide in the Internal Revenue Services’ required calendar year-end statements. Most of these arrive in the first six weeks of the year. Those who are invested in various forms of partnerships must wait until they receive their K-1 forms. As these documents come in, there is a natural tendency to gather them up for tax preparation work by an accountant or other tax preparer. When reviewing these documents, the focus is almost exclusively on the identification of taxable income. While this is important, it is a lost opportunity to construct the investment section of a personal balance sheet. Those who have read my book MONEY WISE, will know that I believe a properly drawn personal balance sheet with all assets and liabilities, contingent and intellectual, is the key to sound investing. For those who do not want to deal with judgments required to build such a statement, one can still use the formats used in reported financial statements to guide one’s investments. Looking forward on the investment horizon, are your investments where you want them to be? Are your investments in the optimum tax and estate set-up? These are the questions that one should be asking in the “fifth season.”
With the New Year, 2010 offers tax differences that you may not have dealt with before. The most publicized and uncertain of these changes is the absence of the federal estate tax. As this is a moving target, I am not going discuss the longer-term implications of actions today on your personal financial balance sheet and those of your individual and charitable heirs. I am calling to your attention the removal of the income limit on converting a regular investment retirement account (IRA) to a Roth IRA.
Restructuring your Retirement and Estate Plans
Allow me to set the stage for a person who can get optimum benefit from converting their regular IRA to a Roth IRA from a portfolio management viewpoint. Prior to January 1st , 2010, those with income of $100,000 or over were barred from making this conversion, so I am addressing a relative small slice of the population, but numbering in the millions. Most sizeable IRAs are the result of converting a corporate-sponsored retirement program, either from a defined-contribution or defined-benefit plan. For some individuals, we are talking about accounts valued into eight figures. At the same time, many of these people have sizeable after-tax funded investment accounts from earned or inherited wealth. In the early years of IRA accounts there were no restrictions on individuals setting up accounts, even though they were covered by other retirement plans. Many who have shifted employers have multiple IRA accounts.
For example purposes, I am assuming we are dealing with an individual who has a personal after-tax account and a couple of IRAs. Prior to 2010, assume that the size of the personal account was reasonably close to the size of his or her largest IRA. From a tax and estate management point of view, the personal account should have been loaded with equities, where the gains would have been taxed at the more favorable capital gains level while the account holder was alive, and passed to heirs on a date of death basis. The IRA should have been loaded with high income-producing investments, typically bonds and big dividend paying stocks. The income derived would accrue tax-deferred until it was paid out to its owner or his or her heirs. From an overall portfolio management standpoint, the IRA was the reserve element that provided something of a safety net under the more risky, hopefully higher return, equity-oriented account. Note that there is nothing in this two part portfolio set-up to prevent the use of market judgment impacting some reserves in the equity account, and concerns for interest rates and inflation in the IRA.
How does the Roth conversion opportunity change the investments in these portfolios? First, nothing has to change. Second, a decision needs to be made on where the funds will come from to pay the income tax on the conversion. The money can come from either the personal account or the IRA. This decision allows the taxpayer the chance to rebalance the two accounts. Third, if there are more than one existing IRA account, there is no need to convert them all to a single Roth IRA. One might choose to delay moving some to reduce the amount of taxes due in one year, or if there is a belief that one would be in a much lower tax bracket in the near future.
Where to Invest in 2010 for the Future?
The investment results for 2009 were a sizeable after-shock to the earthquake that hit the investment world in 2008. Some investors may feel that these results are normal, cyclical behavior and we can go back to investing as before. Others may feel that we have gone through a seminal period which should lead us to re-examine our thinking and modify our policies.
Space constraints do not permit me to suggest how each of the eleven different investment personalities described in MONEY WISE should view last year’s results and develop plans for the future. Stay tuned for next week’s blog, but the impatient can contact me before next weekend by using the “Comment” button on the blog or by replying to the email version. I will gladly send you the excerpt.
____________________
If you would like to receive my blog automatically through your email system, please subscribe using the box on the left-hand portion of this screen. If you are not sure, use the box above to review past blogs that may interest you.
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