Berkshire Hathaway's Machine

If you believe recent commentaries, Berkshire Hathaway’s Warren Buffett – once considered one of the greatest investors in the world – is now “too old” for investing and is washed up, tired, and has lost his touch.  The people making these comments have clearly not taken the time to examine Berkshire’s financial statements!

In investing, timing is everything.  An undervalued investment can sometimes take months or years to begin rising in price; and, while waiting, returns will be stagnant.  Berkshire has found a way around this problem.  Berkshire is now so synonymous with safety and stability (and for being a good business partner) that it obtains exclusive deals – unavailable to anyone else - where it is actually paid to wait.

Take, for example, Berkshire’s investment in Bank of America.  BAC’s current share price is $7.07.  Berkshire bought preferred shares of BAC that earn 6%.  With this preferred share deal came warrants to purchase up to 700 million shares of BAC at $7.14 per share, and these warrants don’t expire until 2021.  In other words, any time between now and 2021, Berkshire can purchase BAC shares at $7.14 per share, even if the stock doubles or triples (or more).  While waiting, Berkshire earns 6% on the Preferred shares!

Berkshire has a similar deal with Dow Corporation.  Berkshire currently earns 8.5% on Dow Preferred Shares.  Berkshire can purchase up to 72.6 million shares of Dow at $41.32 per share with no expiry date, except the stipulation that Dow has the option to redeem the preferred shares when the stock attains stable prices of $53.72 or more!  Put more simply, this means that Berkshire will earn 8.5% from its investment in Dow for months or years, and then make at least $12.40 per share ($52.72-$41.32) when the Preferred shares are converted to common shares, for an additional profit of 900 million dollars.

Berkshire Hathaway is an incredible moneymaking machine...especially for those who have the luxury of time, and the patience to wait.

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"The most important attribute for success in value investing is patience, patience, and more patience.  The majority of investors do not possess this characteristic."

Peter Cundill

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Stocks I Like - Leucadia National Corp

Leucadia National Corporation (stock symbol: LUK) may be the biggest, most successful company you've probably never heard of.

A quick look at Leucadia's website (www.leucadia.com) reveals that this company is different; the homepage looks like it was designed by a high-school student twenty years ago (and maybe it was).  One would never guess that as of Q3 2011, the company had assets in excess of 9 billion dollars, and that in 2010 - Leucadia's last fully reported year - the company had $1.3 billion in revenues.

Virtually everyone these days has heard of Berkshire Hathaway and it's famous value investor, Warren Buffett.  Yet, Leucadia National Corp. has managed to stay under the radar of the average investor: presumably where they want to be.

Like Berkshire Hathaway, Leucadia is a conglomerate, specializing in the purchase of undervalued, under priced assets.  Also like Berkshire, their annual reports are easy to read, honest and straightforward.  Unlike Berkshire, Leucadia loves to buy "turnarounds" - companies with bad management, shoddy business practices, or lack of funding.  It then sticks with these companies - often for years - providing the management expertise and funding required until the moment of fruition.

At present, Leucadia owns investment banks, mines, timber companies, plastics manufacturers, wineries, energy companies, hotels , auto retailers and natural gas drillers.  Leucadia also has a 50% stake in "Berkadia Commercial Mortgage Inc.," a  joint venture with Berkshire Hathaway.

Leucadia frequently carries a massive cash and stock portfolio: as of Q3 2011, $306 million in cash and $811 million in investments.  Due to this large stock portfolio (and the fact that Leucadia purposely invests in money-losing companies), the company's income tends to swing wildly; despite this, the company has averaged a stunning equity growth rate of 20.2% annually since 1978.

Knowing that Leucadia's investors are value investors, you can be fairly certain that their current investments are drastically undervalued.

Leucadia is currently trading at $25.45 per share.

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"We quickly changed the name from Goober Drilling to Keen Energy Services."

Ian Cumming and Joseph Steinberg of Leucadia National Corp, regarding their 2009 purchase of Goober Drilling of Stillwater, Oklahoma.

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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Potash Corp shows its Strength

Potash Corp of Saskatchewan, the company with the hippest stock symbol in the world (POT), announced today that it was halting production at its Allen mine for 4 weeks. The stated reason: world potash prices are too low, so the company is “adjusting supply.”

Though Potash Corp controls only 20% of global supply (according to its website), it is also one of the lowest cost producers.  In addition, Potash Corp markets its product - along with local competitors Agrium and Mosaic - through a company called Canpotex, "an international marketing and distribution company wholly owned by the Saskatchewan potash producers."

If there was ever any doubt that Potash Corp and Canpotex have a virtual monopoly on potash prices, now there is none. By shutting down one plant (the Allen mine) that provides only 10% of Potash Corp’s total supply, the company believes it will be able to stabilize world prices. That is power.

Potash is currently trading at $42.94 CDN on the TSX exchange.  It's a reasonable price, but with a forward P/E of 10 and slowing BRIC demand, not a screaming deal.  If POT hits $35 or lower, consider loading up.

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"Money is power - and what can one accomplish without power?"

Cecil Rhodes

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Assess This

 

In yet the latest reminder of the inevitable Canadian real estate apocalypse, B.C. Assessment announced this week that home prices in Vancouver rose between 10-25% during 2011.   In the family-oriented West Side of Vancouver, prices “skyrocketed” (their words) as much as 20-40%.

In order to lessen the blow to existing homeowners, B.C. Assessment sent what it calls “extreme letters” to approx. 1500 households, letting them know in advance (as a matter of courtesy) that their property taxes will be increasing dramatically.

Since 2002, Vancouver real estate fairy tales have become so commonplace that many people now actually believe that their run-down house on an average size lot is worth $1.3 million dollars (1.26 million USD).

In the East Side of Vancouver (the city’s equivalent to New Jersey), an average single family home is now worth more than $800,000.

In a brilliant understatement earlier this week, the deputy assessor for the Vancouver Sea to Sky region stated: “It’s been a really strong market for Vancouver, a good one –a robust one."

Apparently, BC Assessment sees no downside risk to real estate prices rising at rates up to 37% faster than wages.

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"In our view, the housing market is one of the most vulnerable sectors to this weakening economic environment, showing classic signs of overvaluation, speculation and oversupply.  We are not calling for an all-out rout in the market, but caution is now decidedly warranted."

Bank of America Merrill Lynch, regarding Canadian real estate, December 2011.

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Happy New Year

Fresh off a nice holiday, and it's a new year.

Recognizing that there is no reason to start off the year too seriously, here's my favorite (repeatable) Inbox joke from the past couple of weeks.  Enjoy!

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The American Investment Banker and the Greek Fisherman

An American investment banker was at the pier of a Greek coastal village when a small boat with just one fisherman docked.  Inside the small boat were several large tuna.

The American complimented the Greek on the quality of his fish and asked, “How long does it take to catch them?”

The Greek replied, “Only a little while.”

The American then asked why he didn't stay out longer and catch more fish.  The Greek replied that he had enough to support his family’s immediate needs, so there was no reason to.  The American then asked, “But what do you do with the rest of your time?”

The Greek fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, and stroll into the village each evening where I sip wine and play cards with my friends.  I have a full and busy life.”

The American scoffed: “I am a Harvard MBA and could help you. You should spend more time fishing, and with the proceeds, buy a bigger boat.  With the proceeds from the bigger boat you could buy several boats.  Eventually you would have a fleet of fishing boats.  Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution.  You would need to leave this small coastal fishing village and move to Athens, then London and eventually New York where you will run your expanding enterprise.”

The Greek fisherman asked, “But, how long will this all take?”

“15-25 years,” the American answered.

“But what then?” the fisherman asked.

The American laughed and said, "That’s the best part.  When the time is right you would announce an IPO and sell your company stock to the public and become very rich.  You would make millions.”

“Millions … then what?” the fisherman asked again.

The American said, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play cards with your friends.”

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