Buffettucation

Video Interview: David Sokol resigns from Berkshire Hathaway

noreply@blogger.com (Anonymous) — Thu, 31 Mar 2011 19:13:00 +0000

Get the reason from David Sokol himself about why he decided to resign. David, thank you for creating so much value for Berkshire shareholders. Best of luck in your future endeavors.

Warren buffett’s secret to success and Longevity

noreply@blogger.com (Anonymous) — Wed, 30 Mar 2011 10:22:00 +0000

"It hasn't been a question of going to work; it's been a question of tap-dancing to work."

Warren Buffett believes that one should always pursue what one loves and never settle for anything less. This is the true secret to his success. He does declare that he was fortunate to have come across what he was passionate about very early in life and also had role models and heroes that never let him down.

The lesson here is to be conscious of what you spend your time and energies doing and surround yourself by people who have qualities you admire. The result: success will follow you like a shadow.

Be inspired.

Buy Warren Buffett Stocks Undervalued

noreply@blogger.com (Anonymous) — Mon, 28 Mar 2011 22:30:00 +0000

The Associated Press had an interesting article about stocks in Warren Buffett’s Berkshire Hathaway portfolio that he believed to be greatly undervalued by the market. These are the five companies he endorses (as of March 28, 2011):

1. Wells Fargo
2. Kraft Foods
3. U.S. Bancorp
4. Swiss Re
5. Sanofi-Aventis

These are companies that you can buy now, provided that you fully understand the businesses, at prices that Buffett believes to be lower that their intrinsic value. Regulators questioned whether Berkshire should write down the values of these investments in its portfolio, however, Warren Buffett believes that the market would soon realize their value.

See full article here. Associated Press article

Full disclosure: I own shares of Berkshire Hathaway and U.S. Bancorp.

Warren Buffett answers questions in India

noreply@blogger.com (Anonymous) — Mon, 28 Mar 2011 11:35:00 +0000

Warren Buffett’s trip to India

noreply@blogger.com (Anonymous) — Sun, 27 Mar 2011 16:29:00 +0000

Warren Buffett and the Gates’ speaking with India’s wealthy about philanthropy.

10 ways to wealth by Warren Buffett

noreply@blogger.com (Anonymous) — Sat, 25 Dec 2010 04:31:00 +0000

1. Reinvest Your Profits: When you first make money, you may be tempted to spend it. Don't. Instead, reinvest the profits. Warren Buffett learned this early on. In high school, he and a pal bought a pinball machine to pun in a barbershop. With the money they earned, they bought more machines until they had eight in different shops. When the friends sold the venture, Warren Buffett used the proceeds to buy stocks and to start another small business. By age 26, he'd amassed $174,000 -- or $1.4 million in today's money. Even a small sum can turn into great wealth.

2. Be Willing To Be Different: Don't base your decisions upon what everyone is saying or doing. When Warren Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. He worked in Omaha, not Wall Street, and he refused to tell his parents where he was putting their money. People predicted that he'd fail, but when he closed his partnership 14 years later, it was worth more than $100 million. Instead of following the crowd, he looked for undervalued investments and ended up vastly beating the market average every single year. To Warren Buffett, the average is just that -- what everybody else is doing. to be above average, you need to measure yourself by what he calls the Inner Scorecard, judging yourself by your own standards and not the world's.

3. Never Suck Your Thumb: Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a deadline. Warren Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking "thumb sucking." When people offer him a business or an investment, he says, "I won't talk unless they bring me a price." He gives them an answer on the spot.

4. Spell Out The Deal Before You Start: Your bargaining leverage is always greatest before you begin a job -- that's when you have something to offer that the other party wants. Warren Buffett learned this lesson the hard way as a kid, when his grandfather Ernest hired him and a friend to dig out the family grocery store after a blizzard. The boys spent five hours shoveling until they could barely straighten their frozen hands. Afterward, his grandfather gave the pair less than 90 cents to split. Warren Buffett was horrified that he performed such backbreaking work only to earn pennies an hour. Always nail down the specifics of a deal in advance -- even with your friends and relatives.

5. Watch Small Expenses: Warren Buffett invests in businesses run by managers who obsess over the tiniest costs. He one acquired a company whose owner counted the sheets in rolls of 500-sheet toilet paper to see if he was being cheated (he was). He also admired a friend who painted only on the side of his office building that faced the road. Exercising vigilance over every expense can make your profits -- and your paycheck -- go much further.

6. Limit What You Borrow: Living on credit cards and loans won't make you rich. Warren Buffett has never borrowed a significant amount -- not to invest, not for a mortgage. He has gotten many heart-rendering letters from people who thought their borrowing was manageable but became overwhelmed by debt. His advice: Negotiate with creditors to pay what you can. Then, when you're debt-free, work on saving some money that you can use to invest.

7. Be Persistent: With tenacity and ingenuity, you can win against a more established competitor. Warren Buffett acquired the Nebraska Furniture Mart in 1983 because he liked the way its founder, Rose Blumkin, did business. A Russian immigrant, she built the mart from a pawnshop into the largest furniture store in North America. Her strategy was to undersell the big shots, and she was a merciless negotiator. To Warren Buffett, Rose embodied the unwavering courage that makes a winner out of an underdog.

8. Know When To Quit: Once, when Warren Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He lost again, leaving him with close to nothing. He felt sick -- he had squandered nearly a week's earnings. Warren Buffett never repeated that mistake. Know when to walk away from a loss, and don't let anxiety fool you into trying again.

9. Assess The Risk: In 1995, the employer of Warren Buffett's son, Howie, was accused by the FBI of price-fixing. Warren Buffett advised Howie to imagine the worst-and-bast-case scenarios if he stayed with the company. His son quickly realized that the risks of staying far outweighed any potential gains, and he quit the next day. Asking yourself "and then what?" can help you see all of the possible consequences when you're struggling to make a decision -- and can guide you to the smartest choice.

10. Know What Success Really Means: Despite his wealth, Warren Buffett does not measure success by dollars. In 2006, he pledged to give away almost his entire fortune to charities, primarily the Bill and Melinda Gates Foundation. He's adamant about not funding monuments to himself -- no Warren Buffett buildings or halls. "I know people who have a lot of money," he says, "and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age, you'll measure your success in life by how many of the people you want to have love you actually do love you. That's the ultimate test of how you've lived your life."

[SOURCE: http://www.warrenbuffett.com/warren-buffett-10-ways-to-get-rich/]

Warren Buffett’s hires New Investor

noreply@blogger.com (Anonymous) — Tue, 26 Oct 2010 01:12:00 +0000

Warren Buffett today announced that Todd Combs, a 39-year old investment manager of Castle Point Capital, has joined Berkshire Hathaway to help manage the company’s investment portfolio.

“For three years, Charlie Munger and I have been looking for someone of Todd’s caliber to handle a significant portion of Berkshire’s investment portfolio. We are delighted that Todd will be joining us.”

Todd Combs owns the following companies in his financially-focused fund; U.S. Bancorp, MasterCard Inc, State Street Corp, The Western Union Company and CME Group Inc. His portfolio is concentrated in financials with more than 70% invested.

I trust in Warren Buffett’s choice, so it will be interesting to see what this young new executive can do.

Investing Like Warren Buffett | Part 4

noreply@blogger.com (Anonymous) — Sun, 24 Oct 2010 18:20:00 +0000

Part 4 of our Investing Like Warren Buffett series discusses Berkshire Hathaway’s 1980 Chairman’s letter to shareholders. As always, I will focus on the important points highlighted in this material. Enjoy!!

Click here for 1980 Chairman’s Letter to Shareholders

Warren Buffett on non-controlled ownership earnings;

Non-Controlled Ownership Earnings

When one company owns part of another company, appropriate accounting procedures pertaining to that ownership interest must be selected from one of three major categories. The percentage of voting stock that is owned, in large part, determines which category of accounting principles should be utilized.

Generally accepted accounting principles require (subject to exceptions, naturally, as with our former bank subsidiary) full consolidation of sales, expenses, taxes, and earnings of business holdings more than 50% owned. Blue Chip Stamps, 60% owned by Berkshire Hathaway Inc., falls into this category. Therefore, all Blue Chip income and expense items are included in full in Berkshire’s Consolidated Statement of Earnings, with the 40% ownership interest of others in Blue Chip’s net earnings reflected in the Statement as a deduction for “minority interest”.

Full inclusion of underlying earnings from another class of holdings, companies owned 20% to 50% (usually called “investees”), also normally occurs. Earnings from such companies - for example, Wesco Financial, controlled by Berkshire but only 48% owned - are included via a one-line entry in the owner’s Statement of Earnings. Unlike the over-50% category, all items of revenue and expense are omitted; just the proportional share of net income is included. Thus, if Corporation A owns one-third of Corporation B, one-third of B’s earnings, whether or not distributed by B, will end up in A’s earnings. There are some modifications, both in this and the over-50% category, for intercorporate taxes and purchase price adjustments, the explanation of which we will save for a later day. (We know you can hardly wait.)

Finally come holdings representing less than 20% ownership of another corporation’s voting securities. In these cases, accounting rules dictate that the owning companies include in their earnings only dividends received from such holdings. Undistributed earnings are ignored. Thus, should we own 10% of Corporation X with earnings of $10 million in 1980, we would report in our earnings (ignoring relatively minor taxes on intercorporate dividends) either (a) $1 million if X declared the full $10 million in dividends; (b) $500,000 if X paid out 50%, or $5 million, in dividends; or (c) zero if X reinvested all earnings.

Warren Buffett on great investments;

“For capital to be truly indexed, return on equity must rise”. Business earnings consistently must increase in proportion to the increase in the price level without any need for the business to add to capital – including working capital – employed. (Increased earnings produced by increased investment don’t count.) Only a few businesses come close to exhibiting this ability. Berkshire Hathaway isn’t one of them.

Warren Buffett on turnarounds;

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

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Bruce Berkowitz's HUGE Bet On Financials | Interview On WealthTrack

noreply@blogger.com (Anonymous) — Sat, 28 Aug 2010 17:41:00 +0000

Anyone who is an avid student of Warren Buffett should pay attention to Bruce Berkowitz, founder of Fairholme Fund. The philosophy of this fund is to "Ignore the Crowd", therefore his investment decisions are usually contrarian in nature and he tends to go to where investors are scared to go or running from. This sounds just like Buffett's famous quote "Be greedy when others are fearful and fearful where others are greedy". Great interview by Consuelo Mack on his current portfolio positions.

What do you think of Berkowitz’s HUGE bet on financials?
Leave your comments here.

Secrets of Warren Buffett’s Success

noreply@blogger.com (Anonymous) — Sun, 29 Nov 2009 07:30:00 +0000

These are the secrets to Warren Buffett’s success as stated by Alice Schroeder. Alice Schroeder is the author of The Snowball: Warren Buffett and the Business of Life. She spent five years with Mr. Buffett to write this book, and was the only one that he allowed exclusive access to his family and life to produce this great piece of work. In this video, she talks about the characteristics that Warren Buffett exhibited, skills he had and what he did that allowed him to be such a successful investor. Enjoy!!

Buffett on Value Investing

noreply@blogger.com (Anonymous) — Thu, 26 Nov 2009 08:43:00 +0000

Warren Buffett speaks about value investing at the Columbia University Town Hall Meeting.

Buffett on Value Investing

David Sokol on CNBC

noreply@blogger.com (Anonymous) — Wed, 25 Nov 2009 09:48:00 +0000

One of Berkshire’s top managers named CEO of NetJets as an additional role.

Bruce Greenwald on Value Investing

noreply@blogger.com (Anonymous) — Tue, 24 Nov 2009 21:35:00 +0000

Berkshire Hathaway Board wants to Split Class B shares

noreply@blogger.com (Anonymous) — Sun, 22 Nov 2009 08:08:00 +0000

A recent SEC filing states that the Board of Directors unanimously approved, has declared to be advisable and is recommending to the shareholders of the Corporation for approval a 50-for-1 stock split of the Corporation’s Class B stock. The Board wants recommends this split regardless of the Burlington Northern Santa Fe deal.

Read the SEC filing here.

Shareholders will have the opportunity to vote at a meeting in January on the stock split. The expected price after the split should be in the range of $65 - $70.

Warren Buffett Holdings as of September 2009

noreply@blogger.com (Anonymous) — Thu, 19 Nov 2009 05:31:00 +0000

This is the list of Berkshire Hathaway Inc. (NYSE: BRK-A)(BRK-B) public US equity holdings as of September 30, 2009.

Highlights from the portfolio of the greatest investor of our time.

American Express Co. (NYSE: AXP) over 151.6 million shares, same as last quarter.
Bank of America Corp. (NYSE: BAC) 5 million shares; same as last quarter.
Becton Dickinson & Co. (NYSE: BDX) 1.2 million shares, same as last quarter.
Burlington Northern Santa Fe (NYSE: BNI) was reported as 76.77 million shares but frankly it does not really matter as BNSF is becoming part of Berkshire.
Carmax Inc. (NYSE: KMX) 9 million shares is same as last quarter.
Coca Cola Co. (NYSE: KO) right at 200 million shares, still same as before.
Comcast (NASDAQ: CMCSA) 12 million shares, same as before.
Comdisco Holdings (NASDAQ: CDCO) roughly 1.5 million shares, same as before.
ConocoPhillips (NYSE: COP) 57.43 million shares, ~~DOWN FROM~~ 62.485 million at the end of June.
Costco Wholesale (NASDAQ: COST) 5.254 million shares, same as before.
Exxon Mobil Corp. (NYSE: XOM) is a NEW HOLDING of 1.276 million shares.
Gannett Co. (NYSE: GCI) 3.447 million shares, same as before.
General Electric Corp. (NYSE: GE) 7.777 million shares is the same as before, but does not include the huge preferred investment from late 2008.
GlaxoSmithKline (NYSE: GSK) 1.51 million shares, same as before.
Home Depot Inc. (NYSE: HD) 2.757 million, same as last quarter.
Ingersoll-Rand (NYSE: IR) 636,600 shares; ~~WAY DOWN~~ from the 7.78 million listed last quarter.
Iron Mountain (NYSE: IRM) 3.3722 million shares, same as before.
Johnson & Johnson (NYSE: JNJ) was just over 36.91 million shares; Same as last quarter and still well under the 62 million shares at one point in 2008.
Kraft Foods (NYSE: KFT) over 138 million; same as last quarter.
Lowe’s Companies (NYSE: LOW) 6.5 million shares, same as last quarter.
M&T Bank Corp. (NYSE: MTB) 6.71 million shares, same as before.
Moody’s (NYSE: MCO) was listed as over 39.2 million shares, but that is ~~WAY DOWN~~ from the 48 million last quarter. Be advised that he has noted sales and hinted at more sales here.
Nalco Holding (NYSE: NLC) 9.0 million shares, same as last quarter.
Nike Inc. (NYSE: NKE) 7.641 million shares, same as before.
Norfolk Southern (NYSE: NSC) 1.933 million shares, same as before, but we already know Buffett has or is selling out of non-BNSF shares in rail companies.
NRG Energy (NYSE: NRG) 7.2 million, same as before.
Eaton Corp. (NYSE: ETN) was ~~NOT LISTED ANY LONGER~~, so sold from holdings.
Procter & Gamble (NYSE: PG) 96.3 million, the same as before.
Republic Services Inc. (NYSE: RSG) 3.625 million shares; NEW POSITION following Bill Gates.
Sanofi Aventis (NYSE: SNY) more than 3.9 million shares, same as before.
Sun Trust Bank (NYSE: STI) 3.079 million shares; DOWN FROM 3.2+ the quarter before.
Torchmark Corp. (NYSE: TMK) roughly 2.82 million, same as before.
Travelers Cos (NYSE: TRV) 27,336; NEW POSITION but small.
US Bancorp (NYSE: USB) roughly 69 million; Same as quarter before.
USG Corp. (NYSE: USG) 17.072 million shares, same as before.
United Health Group (NYSE: UNH) 3.4 million shares; DOWN from 4.5 million last quarter and down from over 6 million in Q1.
Union Pacific Corp. (NYSE: UNP) 9.55 million shares, same as quarter before but this does not matter as Buffett is dumping his non-BNSF rail holdings.
United Parcel Service (NYSE: UPS) 1.429 million shares, same as before.
Wal-Mart Stores Inc. (NYSE: WMT) 37.8 million; WAY UP from the 19.9+ million shares last quarter.
Washington Post (NYSE: WPO) over 1.72 million shares, same as before.
Wells Fargo & Co. (NYSE: WFC) 313.3 million shares; ABOVE THE PRIOR 302+ million last quarter and above the 290+ million in Q1.
Wellpoint Inc. (NYSE: WLP) 3.394 million; ~~DOWN SLIGHTLY~~ from the 3.5 million last quarter and from the 4.7773 million in Q1.
Wesco Financial Corp. (NYSE: WSC) 5.7 million shares, same as before.
WABCO Holdings (NYSE: WBC) IS GONE after being 2.7 million shares last quarter.

Alice Schroeder on Warren Buffett's Purchase of Burlington Northern

noreply@blogger.com (Anonymous) — Wed, 18 Nov 2009 09:24:00 +0000

Bruce Berkowitz of Fairholme Fund talks about Investing

noreply@blogger.com (Anonymous) — Tue, 17 Nov 2009 08:41:00 +0000

The Fairholme Fund is one of my favorite mutual fund because of Bruce Berkowitz and its performance. He has a Buffett-style philosophy and is very focused on being a steward of shareholders’ wealth. He runs Fairholme as a concentrated portfolio of stocks and holds about 17% cash. In this video, he talks about his investment philosophy, stocks, lessons from the economic downturn and some of Warren Buffett’s recent purchases.

Buffett and Gates at Columbia Town Hall Meeting

noreply@blogger.com (Anonymous) — Sat, 14 Nov 2009 06:58:00 +0000

Click here for full transcript courtesy of CNBC.

Bruce Berkowitz Interview by PBS

noreply@blogger.com (Anonymous) — Wed, 11 Nov 2009 07:50:00 +0000

Bruce Berkowitz, founder of the Fairholme Fund, is interviewed by PBS. He is a well-known value investor that follows many of Warren Buffett’s investing philosophies. His top 5 holdings account for 40% of the fund and includes Pfizer, St. Joes, Americredit and Sears Holding company. Great 3 minute interview of Bruce.

For more information on the Fairholme Fund, go to http://www.fairholmefunds.com

Warren Buffett continues to sell Moody’s

noreply@blogger.com (Anonymous) — Tue, 03 Nov 2009 10:52:00 +0000

Chairman of Berkshire Hathaway continues to sell his stake in Moody’s Corp raising $28.7 million in the transaction. Berkshire still holds 38.1 million shares of Moody’s. What does this move indicate? Let’s hear your comments.

Average price range during that selling period was $24.86 and $25.27.

Warren Buffett talks to Evan Davis

noreply@blogger.com (Anonymous) — Wed, 28 Oct 2009 03:46:00 +0000

PART 1

Warren talks about the propensity of humans to make stupid mistakes in the future.
Warren talks about derivatives.
Evans talks about investment opportunities in Goldman Sachs and others.
Warren discusses liquidity.

PART 2

Evan asks Warren about his private jet.
Warren talks about the value of money and being wealthy.
Evan asks about taxes.

Warren Buffett on Benjamin Graham

noreply@blogger.com (Anonymous) — Mon, 05 Oct 2009 18:39:00 +0000

Warren Buffett talks a bit about his professor and mentor, Benjamin Graham. He attributes his success and entire investment philosophy to Graham and shares with us how great and intelligent a human being he thought Graham was. Graham, through his generosity, wrote two of the greatest investment books of all time; Security Analysis and The Intelligent Investor. These are considered must reads for anyone interested in investing.

Watch this short clip of Warren Buffett speaking to us about his mentor.

Source: [www.valueinvestingpro.com]

Warren Buffett on The One Year Anniversary of Lehman

noreply@blogger.com (Anonymous) — Wed, 16 Sep 2009 05:57:00 +0000

Warren Buffett on Wells Fargo

noreply@blogger.com (Anonymous) — Sat, 12 Sep 2009 14:04:00 +0000

“The key to the future of Wells is continuing to get the money in at very low costs, selling all kinds of services to their customer and having spreads like nobody else has.”

Article Source: money.cnn.com

Fortune: How is Wells Fargo unique?

Warren Buffett: It's sort of hard to imagine a business that large being unique. You'd think they'd need to be like any other bank by the time they got to that size. Those guys have gone their own way. That doesn't mean that everything they've done has been right. But they've never felt compelled to do anything because other banks were doing it, and that's how banks get in trouble, when they say, "Everybody else is doing it, why shouldn't I?"

What about all the smart analysts who think no big bank can survive in its present form, including Wells Fargo?

Almost 20 years ago they were saying the same thing. In the end banking is a very good business unless you do dumb things. You get your money extraordinarily cheap and you don't have to do dumb things. But periodically banks do it, and they do it as a flock, like international loans in the 80s. You don't have to be a rocket scientist when your raw material cost is less than 1-1/2%. So I know that you can have a model that works fine and Wells has come closer to doing that right than any other big bank by some margin. They get their money cheaper than anybody else. We're the low-cost producer at Geico in auto insurance among big companies. And when you're the low-cost producer - whether it's copper, or in banking - it's huge.

Then on top of that, they're smart on the asset side. They stayed out of most of the big trouble areas. Now, even if you're getting 20% down payments on houses, if the other guy did enough dumb things, the house prices can fall to where you get hurt some. But they were not out there doing option ARMs and all these crazy things. They're going to have plenty of credit losses. But they will have, after a couple of quarters of getting Wachovia the way they want it, $40 billion of pre-provision income.

And they do not have all kinds of time bombs around. Wells will lose some money. There's no question about that. And they'll lose more than the normal amount of money. Now, if they were getting their money at a percentage point higher, that would be $10 billion of difference there. But they've got the secret to both growth, low-cost deposits and a lot of ancillary income coming in from their customer base.

Insurance revenues for example, which had double-digit revenue growth in 2008.

And I would say that most of the critics of Wells don't even know they've got that business. That business alone is worth many billions of dollars. And their mortgage business, as you can imagine in this period, I mean, the volume that is poring through there, is huge. The critics have been right on other big banks, so I think they're inclined to sweep Wells in as well to some extent. And if you've been right on Citi and you've been right on BofA, it gets easy to say, well, they're all going to go.

We own stock in four banks: USB, Wells, M&T, and SunTrust. SunTrust I don't know about because South Florida is going to be the last to come back, and they've got a concentration down there. The other three, they're going to have a lousy year, but they'll come out of it with far more earnings power. The deposits are flowing in. The spreads are wide. It's a helluva good business.

Dick Kovacevich specifically told me to ask you your views on tangible common equity.

What I pay attention to is earning power. Coca-Cola has no tangible common equity. But they've got huge earning power. And Wells ... you can't take away Wells' customer base. It grows quarter by quarter. And what you make money off of is customers. And you make money on customers by having a helluva spread on assets and not doing anything really dumb. And that's what they do.

Incidentally, they won't lend Berkshire money. They're not interested in national credits or any of that stuff where the spreads are narrow. We did a big deal about six or seven years ago on Finova, which we did jointly with Leucadia. And what was then the old First National of Boston sort of headed the deal up, and people would come in for $500 million or $200 million. Wells wasn't interested. There wasn't enough money in it, basically. I got a big kick out of that because that was exactly how they should think. Everybody else wanted to be in it, and they were doing it for 20 basis points or something of the sort. And they'd make commitments for all kinds of credit for 6 or 8 basis points, and the ones that were in the underwriting business, they would do it just get the underwriting.

But back to tangible common equity...

You don't make money on tangible common equity. You make money on the funds that people give you and the difference between the cost of those funds and what you lend them out on. And that's where people get all mixed up incidentally on things like the TARP. They say, 'Well, where'd the 5 billion go or where'd the 10 billion go that was put in?' That isn't what you make money on. You make money on that deposit base of $800 billion that they've got now. And that deposit base I guarantee you will cost Wells a lot less than it cost Wachovia. And they'll put out the money differently.

They'll have to work through a lot of this stuff that they inherited from Wachovia. Those option ARMs, they explained exactly how they break them down, and in the end they may lose 3 or 4 billion more. Nobody knows exactly. But I would say that California residential real estate is not deteriorating. It hasn't moved up. But it has flattened out with good volume recently. So my guess is that the option ARMs will work out about as they guessed.

What if the Treasury imposes new capital requirements? Will it hamper their earnings power?

I don't think it'll hamper their earnings. But if you make them sell a lot of common equity it would kill the common shareholder. It wouldn't increase the earning power in the future, and it would increase the shares outstanding. Wells, if they want another $10 billion in common equity or something like that in Wells, they'll have it in a very short period of time at this dividend rate. [In March, Wells cut its dividend by 85%.] Wells will be piling up the equity while they're paying nominal dividends. They could afford to pay the old dividend. But since they won't be paying the old dividend, that's $4 billion a year or something that they'll be adding to equity.

I would have been fine if they had just said, 'Look it, we'll quit paying any common dividend until our equity has gone up by whatever it might be, 10 or 15 billion.' And they'd get there in no time. Then they could pay the regular dividend. They elected to do it this other way because everybody seems to be kind of doing it. The idea of forgoing all or most of the dividend for a year to build the common equity ratio up, if that's what the government wants, that's fine. But that isn't really the key to the future of Wells, unless the regulators make it the key to the future of Wells. The key to the future of Wells is continuing to get the money in at very low costs, selling all kinds of services to their customer and having spreads like nobody else has.

How is Wells differentiated from the banks you own and the ones you don't?

Wells just has a whole different attitude. That's why Kovacevich calls them retail stores. He doesn't even like the word banking. I mean, he is looking to have a maximum enduring relationship with many, many millions of people. Tens of millions. And at the base of it involves getting money in very cheap. When you do that that's a helluva start in the business. The difference between getting your money at 1-1/2 % and 2-1/2% on a trillion-dollar asset base is $10 billion a year. It's hard to overemphasize that. He thinks more like Sam Walton than he thinks like J.P. Morgan. I'm talking about the individual there. He's a retailer. He's not trying to influence Washington or be the most important guy on the scene or anything like that. He's just trying to do business with millions of people every day and make a few bucks off of them.

Now that you mention it, Kovacevich has done a pretty good job of annoying Washington, wouldn't you say?

That's hard to tell. There's an advantage to being that way too. He's not going to cozy up or be sycophantic toward his regulator, and I would say most bankers probably are now. They need to be. But his strong point is retailing not diplomacy. I kind of like that. It's hard for a guy that knows his institution forward and backwards to have somebody come in that really may be working off a check list or something and is telling him what to do. And I'm sure that Dick gets antagonized by that sometimes. In the end, he's got the record. And he's got the business to back up what he's doing.

To the extent that his tangible common equity is low, a) nobody was even talking about that a year ago. And b) they should be talking about earning power. But it comes about in part because he saved the FDIC's bacon on Wachovia. I mean they had a deal on Citigroup (C, Fortune 500) that had big assistance involved in it, and the FDIC moved about what would have been about 5% of the deposits in the United States without a dime of expense to the taxpayer or the FDIC to Wells. And Wells took it over. And if they'd gone to Citigroup a) they would have looked like idiots, and within a very short period considering what happened to Citi. So to penalize them because they solved the FDIC's problem without cost to the FDIC would be a little crazy. And I imagine that's what gets Dick a little riled up.

So what is your metric for valuing a bank?

It's earnings on assets, as long as they're being achieved in a conservative way. But you can't say earnings on assets, because you'll get some guy who's taking all kinds of risks and will look terrific for a while. And you can have off-balance sheet stuff that contributes to earnings but doesn't show up in the assets denominator. So it has to be an intelligent view of the quality of the earnings on assets as well as the quantity of the earnings on assets. But if you're doing it in a sound way, that's what I look at.

How confident will you be in Wells when Kovacevich retires?

Well, John [Stumpf] is in charge. Dick is a terrific help to John. I play bridge with John on the Internet. He plays under the name of HTUR. His wife's name is Ruth. My bridge partner, who I probably play bridge with four times a week, developed online banking for Wells. A woman named Sharon Osberg. And she's worked with those people. And she told me about John Stumpf ten years ago. I've had some insight through her on these people. But the real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do. And what Wells didn't do is what defines their greatness.

How is John's bridge game?

John is a very good bridge player. But he doesn't play as much as I do. I play all the time. He's smart. He's a different personality than Dick. Dick is a real sales person. They both subscribe to the same principles of banking. They just don't think you have to do things that the other guy is doing.

The Greenback Effect by Warren Buffett

noreply@blogger.com (Anonymous) — Wed, 19 Aug 2009 12:09:00 +0000

IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.