MICHAELCOVEL.COM: Warren Buffett Spin Machine

Holy Grails | November 24th, 2009

A young guy from the U.K. has been writing me this morning. He has been making a case for why Buffett is the best investor ever. I have said, “Sure up until his bailouts and sweetheart government daddies helped save him in the Fall of 2008. If not, he was toast.” The young guy responded:

As regards the bailout, to be frank, if there wasn’t a bailout last year, it wouldn’t have been just BRK that went down the tubes - it would have been the entire global economic system. The disintegration of the banking system = no more credit = extreme deflation. Dunn Capital Management and every other business wouldn’t have been able to get short-term credit to pay its employees and suppliers. Asset prices would have gone into the abyss. If you think that trend followers would have made money in such conditions, remember that (a.) the rule of law and the enforceability of legal claims on assets may well have broken down, leading to civil disorder (b.) markets may well have failed to function, (c.) there would be no access to assets held by prime brokers, because they’d have gone down with the banks (see LEH). Basically anyone without tinned food and a log cabin in Montana would have lost under such a situation. BRK with its oodles of cash and AAA credit rating would have been one of the last to fail. My point is that you have to disassociate the investor and his record from the company - if for some reason Dunn failed under such a scenario, it wouldn’t reflect on Dunn as an investor, because we are talking about an event that has nothing to do with his skill as an investor. So, yes, maybe Buffett did manipulate the system to his advantage, but would we all honestly rather he hadn’t? Personally, I think this argument is rather overdone - the Fed and Treasury knew what happened in 1929, and there is no way, Buffett or not, they were going to let all the banks fail. I believe it is possible to replicate Buffett’s strategy - or at least its core - as much as it is any trend follower - buy companies with high free cash flow, strong franchises, little debt, during market crises when the P/E comes down below 15 or 20.

Bollocks. 100% bollocks. This is how the college text books will be rewritten to continue to salute “value” investing. They tell us the system would have crashed, but all we know now for sure is that the likes of Buffett and GS were saved. That is not a worthy investment strategy to follow.

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KYLE LACEY.COM: Twitter Should Listen to Warren Buffett. He Was Right in 1999.

November 23rd, 2009 Posted in

I am in the process of reading Alice Schroeder’s book entitled The Snowball: Warren Buffett and the Business of Life. The book is a massive source of information about the life of Warren Buffett. Needless to say the book is unbelievable! I love to read about the life of people who, in my opinion, have lived a valuable and influential life.

At the beginning of the book Alice recounts an event from the Sun Valley Conference in Hailey, Idaho. Allen & Company, a boutique investment firm in Hollywood handles the event inviting such notables as Bill Gates, Oprah Winfrey, and Rupert Murdoch.

In 1999 Warren Buffett was asked to be the keynote speaker to end the conference. This was a special year because the conference was filled with Internet tycoons ready to embark on billion dollar ventures in the new year. They were invited and were making the most of rubbing shoulders with the richest individuals around the world.

The Internet tycoons walked into the conference room that day hoping for a glowing reception and the blessings from one of the greatest investors of our time. What they received was quite the opposite.

Warren Buffett practically dismantled the belief in the new Internet startup companies. He likens the Internet Boom to that of the airline industry:

“…So I submit to you: I really like to think that if I had been down there at Kitty Hawk, I would have been farsighted enough and public-spirited enough to have shot Orville down, I owed it to future capitalists.”

“It’s wonderful to promote new industries, because they are very promotable. It’s very hard to promote investment in a mundane product. It’s much easier to promote an esoteric product, even particularly one with loses, because there’s no quantitative guideline.”

Warren Buffett, pg 19.

Most of the venture capitalists and entrepreneurs left the meeting slightly chuckling at “old Warren’s mistake.” They found out later that he was exactly right.

Web 2.0 companies should listen to Warren Buffett. He has always cautioned the vamping of over-promoted companies and increasing investment in techonolgy companies with no substance.

“You can get in way more trouble with a good idea than a bad idea, because you forget that the good idea has limits.” -Warren Buffett, page 21

I have always been a skeptic of increasing investment in social media and web 2.0. I do love the sites and I love the fact that they are free. I have a problem with the valuation of multiple billions of dollars for the site like Twitter.

This is a dangerous game we are playing when it comes to the multitude of millions of dollars invested in Internet startups. I am afraid we never learned to begin with.

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REUTERS: BYD says 9-mth net up 201 pct on strong car sales

Thu Nov 26, 2009 7:12pm EST

HONG KONG, Nov 27 (Reuters) - Chinese car and battery maker BYD Co Ltd (1211.HK) said late on Thursday its nine month earnings rose 201 percent due to strong car sales in its domestic market as it benefited from Beijing's supportive measures.

BYD, 10 percent owned by U.S. billionaire Warren Buffett's Berkshire Hathaway (BRKa.N), posted a net profit of 2.34 billion yuan ($342.8 million) from January to September, up from 777.8 million yuan the previous year.

This is the first time the company reported its nine-month results.

BYD will exceed its target of doubling its conventional car sales this year to 400,000 units, a BYD executive told Reuters on Monday in Guangzhou. (Reporting by Alison Leung; Editing by Ken Wills) ($1=6.826 Yuan)

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THE STREET.COM: Professor Buffett Slows Down

By Don Dion 11/26/09 - 07:00 AM EST

Stock quotes in this article: BNI , BRK.A , WMT , XOM

NEW YORK (TheStreet) -- Warren Buffett has traditionally been known to discover and invest in undervalued firms with a lot of potential upside. However, today the famous investor appears to be taking a much safer approach to making money.

In recent months, instead of making big bets on risky firms with strong upside potential like BYD. At play, the investor has set his sights on larger, safer firms. If this is a sign of a new era of Buffett investing, investors looking to mirror the financier should be prepared to for slow, steady returns in the future.

Although the global economy appears to be on the heal, a number of issues continue to threaten the long-term stability of the market's rally. These various weaknesses have not only caught the attention of Professor Buffett, but a number of other prominent financiers including Bill Gross, George Soros, Jim Rogers and John Paulson.

Each individual has designed and shared his unique investment strategy with the public through personal buying and selling, market commentary or a combination of both. Whether it's by using gold, commodities, utilities or traditional fundamental analysis, each strategy strives to successfully prepare for future market conditions in an environment that has never before been experienced.

For Buffett, being successful in today's market is an issue of managing safety. During the downturn that left the vast majority of investors gasping for air, Buffett's portfolio was not spared. In fact, during the drop, he lost over $20 billion as well as his top position on Forbes' list of wealthiest people. Since taking the hit, the investor appears to have taken a note from the tortoise made famous in the fable, The Tortoise and the Hare, as his recent investments appear to be aimed at steady, albeit slow, positive performance.

The largest of these new plays was his purchase of Burlington Northern Santa Fe(BNI Quote). At $34 billion, the railroad investment is Buffett's biggest on record.

However, unlike BYD, which has rocketed in value in the short time since receiving Buffett's blessing, the Oracle does not expect BNI to blast off. On the contrary, he expects the firm's performance to remain relatively stable. Buffett has even implied that the play is not for the short term, but rather a 100-year play for Berkshire Hathaway(BRKA Quote).

Additional signals that Buffett is looking to take on less risk could be found in his recent holdings disclosure last week. Investors anxiously waiting to see which exciting new firms would received the Oracle's blessing in the third quarter instead found a number of increased bets on previously held, top-ranked, well-known companies.

Some of the most notable bets included Wal-Mart(WMT Quote), Nestle(XOM Quote). and Exxon Mobil(NSRGY Quote). In the case of Wal-Mart, Buffett nearly doubled his exposure to 37.8 million shares from 19.9 million shares.

By holding strong, stable discount retailers, candy makers and oil firms in his portfolio, Buffett appears to be diversifying his holdings across a number of sectors with the aim of positioning himself for limited growth over the long term.

Interestingly, he also appears to be prepping his portfolio to benefit from short-term boosts that will likely occur during the holiday season. In particular, as cash strapped consumers look to discounters rather than higher end retailers for holiday shopping, Wal-Mart and Nestle will see some of the biggest boosts. Exxon will also likely see a strong performance as the winter season drives thermostats up.

With the market's rapid turnaround, many investors who were wary of the environment are now kicking themselves for not jumping in earlier. However, although the recent rally has been stellar, this does not mean that investors should be taking on excessive risk in hopes of catching up.

On the contrary, with the longevity of this rally still very much up in the air, investors would do better by spreading their assets across a broad number of strong sectors and asset classes. Like Buffett, this strategy may not lead to the biggest jumps, but it will ensure that you will not be left in the dust in the event of another gut-wrenching downturn.

Over the long haul, slow and steady will win this race.

-- Written by Don Dion in Williamstown, Mass.

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ASSOC PRESS: Capmark Financial gets OK to sell units

(AP) – 1 hour ago

HORSHAM, Pa. — Capmark Financial Group Inc. said it has received approval to complete the $515 million sale of its North American servicing and mortgage banking units to a joint venture owned by Warren Buffett's Berkshire Hathaway Inc. and Leucadia National Corp.

Capmark Financial Group, one of the nation's largest commercial real estate lenders, filed for bankruptcy protection amid mounting bad debt last month.

The sale to Commercial Mortgage LLC was recommended to the bankruptcy court by the unsecured creditors' committee and Capmark's management, the company said in a statement released late Tuesday.

The transaction is expected to close by year end.

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CNBC: Hedge Funds Take Early Lead in Warren Buffett's 'Big Bet'

Published: Wednesday, 25 Nov 2009 | 12:50 PM ET

By: Alex Crippen
Executive Producer

Warren Buffett is losing his "big bet" against a collection of hedge funds, but it's still early in the game.

Buffett and Protégé Partners LLC of New York City started a 10-year wager last year.

With a Treasury bond that will be worth $1 million at stake, Buffett has put real money behind his contention that an S&P 500 index fund will outperform five funds-of-hedge-funds over a decade, after all fees and expenses. (The money goes to the winner's favorite charity.)

Buffett is represented by Vanguard 500 Index Fund Admiral Shares (VFIAX). Protégé chose the five funds-of-funds. (Buffett knows the names of the five funds, but they are not being publicly revealed.)

Now, Fortune's Carol Loomis writes, the results for 2008 are in (it took awhile for all the funds to submit audited financial statements) .. and .. the hedge funds "soundly whipped" the index.

They fell, on average and net of all expenses and fees, only 23.9 percent. That's not great, but its still much better than the Vanguard index fund's 37 percent plunge, even with the index fund's much smaller fees and expenses.

Loomis notes, "Considering that hedge funds can and do sell short, and that they are not limited to investing in stocks, Protégé's victory in a bear market year like 2008 was not surprising to anyone involved in the bet."

But it's still a long time until December 31, 2017 .. and this year the S&P is doing much better than last year, up almost 23 percent.

Buffett tells Loomis: "I just hope that Aesop was right when he envisioned the tortoise overtaking the hare."

Current Berkshire stock prices:

Class A: [BRK.A 102119.6016 -580.40 (-0.57%) ]

Class B: [BRK.B 3403.00 -12.00 (-0.35%) ]

Topics:Investment Strategy | Hedge Funds | Wall Street | Warren Buffett

Companies:Berkshire Hathaway Inc.

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CNN: Buffett sizes up rags-to-riches China tailor

By Emily Chang, CNN

November 24, 2009 -- Updated 1313 GMT (2113 HKT)

A man works in the Dayang Trands factory while Trands suit jackets hang on a rack.

STORY HIGHLIGHTS

• Little-known Chinese company that began making clothing for peasants is now a favorite of tycoon Warren Buffett
• Dayang Trands is based in Dalian, China, a northeast port city known for manufacturing
• Buffett has not invested in Dayang Trands, but he cannot seem to contain his praise for their products

Dalian, China (CNN) -- Dayang Trands, a little-known Chinese company that began making clothing for peasants and now makes suits and separates for a slew of Western brands, is getting a lot of attention from one famous client.

Warren Buffett, better known for setting investment rather than fashion trends, cannot seem to stop talking about the company's in-house "Trands" label.

"I now have nine suits made in China. I threw out the rest of my suits," Buffett said in a video message for the company's 30th anniversary this year.

Dayang Trands is based in Dalian, China, a port city on the northeast coast known for manufacturing, petrochemicals and computer exports --- but not high fashion.

Buffett, ranked as the world's second-richest man by Forbes.com with a net worth of $37 billion, has not invested in Dayang Trands, but he cannot seem to contain his praise for their products.

"The suits we received we never had to alter a quarter of an inch," Buffett said in the video. "They fit perfectly. We get compliments on them. It's been a long time since I got compliments on how I looked."

It turns out Chinese President Hu Jintao wears Dayang Trands, too, and the company sells to clothiers such as Banana Republic, DKNY, Calvin Klein, Ralph Lauren, Macy's and Marks & Spencer.

China is better known for imitating luxury goods then selling them. However, Dayang Trands is an entirely home-grown Chinese luxury brand with original high quality products. The flagship store in Dalian could fit in well between Gucci and Prada.

The woman behind it all is Li Guilian, or "Madame Li," as she is called by her employees (and Buffett). She said she was just a farmer's daughter with a single sewing machine when she started making suits 30 years ago.

"At the beginning, we were a small countryside outfit," said Madame Li. "Our goal was to make sure poor peasants had enough clothes to wear. We made simple shirt sleeves, shoulder pads and work trousers, which people wore in the countryside while they worked. Little by little, we started sewing more difficult clothes."

Her company's launch coincided with China's long-isolated economy opening up to the world in the late 1970s. To advance her design and products, Madame Li led a small group of tailors to Japan, where they observed suit-making in a factory.

When the group returned to Dalian, they implemented what they learned and eventually started exporting to Japan. Now they make more than 15 million garments a year which they export around the world.

In a country where a large share of successful businesses are state-owned in some form, the charmed rise of a small, private company is unusual.

Perhaps one of the best decisions the company ever made was to track down Buffett and get his measurements. He happened to be in Dalian for the opening of a metals factory, one of the latest acquisitions of his investment company, Berkshire Hathaway Inc.

"I asked if I could make a couple of nice suits for him," said David Margalit, Dayang Trands' international marketing director. "We took our tailors in and measured him, and introduced him to Madame Li."

Six months later, Margalit received a letter from Buffett asking for six more suits.

Buffett invited Madame Li to the annual meeting of Berkshire Hathaway in Omaha, Nebraska, last May where he touted her suits and her success.

Buffett claims his business partners and Bill Gates now wear Trands too.

"I think maybe Bill Gates and I should start a men's clothing store and sell the suits made by Madame Li," he said in the video. "I think we would be great salesmen because we love them so much."

Buffett's endorsement has given the company a major boost, Madame Li said.

"Warren Buffett chooses Trands suits like he chooses stocks," she said. "He knows we have a bright future ahead."

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