Buffet's Problem

During 2013 as I heard how Berkshire Hathaway (News always just say Buffet this and that..) invested into this and that I've always checked how I see that specific company. And sometimes I would not support that investment decision. 

One example being International Business Machines Corp (IBM)

I don't understand why that investment was made so early.  IBM is strongly overvalued and price had been coming down all year. The company is in the middle of changes to return back to the good track again as they are struggling with profitability. As a rational investor that investment should have waited until the price is right. In the long-term a company like IBM is probably always a good investment. But with price paid that should be about $190 per stock and Berkshire Hathaway owns 68.12 million shares... It is going to take a long time for this investment to pay itself back by dividends. We know that Buffet invests for a long long time, pretty much permanently so price rise isn't even important. But a fact such as a troubled company experiencing price decline should matter!

So why? There are more loveable companies to invest in than IBM. But perhaps IBM is seen as a bank. They will (most likely until a huge random event occurs... I can hear Nassim Nicholas Taleb screaming in my mind) continue to be a huge market player and pay large dividends. Still I criticize the timing! So I wonder if this was purely Buffet's own decision. We know he has at least one pupil who is planned to take over the company as Buffet himself retires. 

So.. Why!?

Berkshire Hathaway is too big, they have too much money. Investing into small companies isn't worth the trouble because they are looking for opportunities to invest billions of dollars (IBM, about 13 billion). And the more money they acquire the harder it is to spread it out. Berkshire isn't like Blackrock, they have very different investing methods and as Berkshire gets wealthier their job gets more and more difficult. 

What I mean by all this is that Berkshire Hathaway is about to change. And they have two main problems that are

• Buffet will eventually retire
• Berkshire Hathaway has too much wealth to invest

I am not too confident that people replacing Buffet are able to continue with his investing methods and handle all that wealth. Unless they want to play it safe and just keep everything as it currently is. One thing Berkshire has been quiet about is company purchases outside the U.S. Yes they have done something, but not a whole lot. There are plenty of businesses to buy and stocks to purchase if they start looking more actively into those markets. Then they should be able to invest all their current money in acceptable manner and continue growing for a few more decades before facing this same problem again.

So the third problem I'll point out:

• Too focused on the U.S.

Treat the whole world as your portfolio, not just one country of it.

Some reading on the matter: http://www.bloomberg.com/news/2014-01-02/berkshire-seen-failing-buffett-5-year-test-for-first-time.html


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UPDATE 16th of March 2014 based on news about Berkshire Hathaway's 2013 results.

As we finally got the results of Berkshire's investment portfolio for 2013 two things are clearer:
• Berkshire Hathaway didn't beat the S&P500 index but still provided a lovely return for the long-term (32.4% versus 18.2%).
•BH made $19.5 billion. Therefore they have even more problem of putting their money in to work. I am not saying Buffet isn't a smart enough man to do it and he certainly is not too old for the job. But, more money means more investments and what I fear is that eventually BH's portfolio is so over diversified that returns by percentage measure will keep going lower (Although money wise they are breaking records).

Portfolio return for 2013 +69%

End of 2013 marks one interesting fact: Return reports from fund managers and the likes. Past year was kind to my investment portfolio. It could have gone better and worse depending of made choices, but I can be very happy with the return I've gained and lessons I've learned this year.

First, the final return:

In August I listed what was my portfolio's return at the time, which was 52% in total (without any dividends). Last months of the year continued to be kind and final return jumped to 69% with dividends included. For me dividends are a nice bonus but I don't do my stock picks based on dividend levels. I aim to pick companies long before they start to grow their dividends ;)

             Changes in the portfolio:

Some changes in my portfolio will be made for 2014. AIG and Nordic Mining are tightly kept for now. Bank of America, Citigroup and Protective Life Corp are kept for now but followed. They are over or too close to their book values, but I'm sure these companies will be growing if the economical situation of the US continues to improve. These are quality companies that I like having in my portfolio and could be kept for years to come. 

China Green Agriculture, First Solar and Xinyuan are sold from the portfolio. First Solar is clearly over its book value at the moment. Also I am not seeing any big momentum moments coming that would catapult it to higher levels. Therefore it will be removed from the portfolio but if the price returns to appropriate levels later on, it is likely that it will return into my portfolio. Clean energy companies are something I like to follow. CGA is too small and suspicious to be kept for longer. If I was managing client's money I couldn't anymore justify the risk with the knowledge I am able to obtain of them. Same goes with Xinyuan. Xinyuan seems good and growing, but the one thing that bothers me is that their internet site still, after all these years, has no info or pictures of their development projects. I tried to email them and ask about it, but received no reply. Therefore I'm now withdrawing my investment as I do not possess the resources to go and actually meet the management and verify their projects. 

Longwei was deemed to be a lost investment very early this year. Sadly not early enough so I wouldn't have included it in my portfolio. But it provided an important learning opportunity. Tesla was already sold earlier this year after their huge price jump. Timing was quite perfect as although Tesla's stock has shown some strength later on but the price is still about 22 USD below my selling price. Because the stock is greatly overvalued it won't be returning into my portfolio for a long time. 

New additions are Genworth Financial ($15,53), Symetra Financial ($18,96) and Aegon NV (6,86€). Basically adding three insurance companies to the portfolio. I would like to add a few more companies and avoid too much weight on insurance companies (or to USA as Aegon is only non-American company being located in Holland), but I haven't been able to find many well priced quality companies with the time I have in my disposal. I'll try to fix this soon as I'd prefer having at least ten stocks in my portfolio.

              Thoughts: What is there to be learned

Longwei Petroleum Investment Holding showed the importance of good background work and carefulness with companies that are under suspicion from other investors. Chinese companies As reports against Longwei were published it was hard to know if it was true or not. But eventually Longwei failed to defend itself so the truth became clear and this stock which had shown great returns till this was suddenly worthless. This kind of risk is why we must be ready to lose what we have invested, therefore only investing money we are ready to live without, and also the importance of diversifying your portfolio. 

Tesla was more of a technology company in which I believed in because I really liked their products and the company seemed to have a solid plan under their visionary CEO. Then luck came and suddenly I had a 400% return form my investment. So it wasn't a value company, but a promising technology company that was on a good track and possibly having a very promising future. Intuition is an important part of investor's psyche. With more experience you learn to value different opportunities. Valuing growing tech companies is difficult, but because I like to stay updated on how the technology around us is evolving, I will continue to make more investments into tech firms when I find something to my liking. This mostly means technological advancements that are part of the future, such as google's self-driving cars. Tesla also showed how easily such a company can have a huge uplift in stock price when market loves good news. And how easy it is to come down as market gets afraid of something negative (news of a burning Tesla).

Nordic Mining has given me a lot of lessons on what to expect from start-ups. NOM has waited for its mining permit for a long time now. And slowly its stock price has been coming down as they have needed more financing and released stocks because of this. Earlier during 2013 their price dropped from 0,7 to 0,3 because of this. And because of promising news (Norway's governmental elections made room for a more mining friendly government, and some typically positive results from the mining locations were released) NOM's price got up from 0,3 all the way to 1,5. So patience indeed is a key. You must have a strategy when you invest and if you have done your background work well, then you don't need to worry about price declines because those will come. You invest what you invest and wait as long as is needed.

Something else worth mentioning is the importance of crisis periods. Bank of America, AIG and all of these other big companies with record low pricings when the financial crisis started have given great returns to those who were not afraid to jump in early. If you do your background work well, you have a solid strategy that you are ready to always follow then you indeed embrace such crisis times. Because those make you rich.

             Expectations:

Budget talks in the US could create problems and investment opportunities

Source: The Economist KAL's Cartoon

US Congress will be having budget talks again this year (bloody battles where they reach no permanent results). The scarier the situation the more the stock market will react, but after difficult talks they will surely again reach a short-term solution and market won't really notice anything. But we can't forget that these budget talks could become a problem and if that does happen investors should be happy because that gives us a great chance to invest into some quality companies for cheap. The stock market would take a big hit, perhaps even do a HUGE dive down. So investors would need to be prepared with their actions. As soon as congress would have a working budget plan the market would start to recover. And I expect that the reactions could be quick.

Bubble? No

Many indexes have risen greatly during 2013. If you look at S&P500 you see it is at record high numbers. But the growth is not fast enough to show signs of a bubble. So, for now I expect that this growth will continue. Budget talks of the US congress will slow it down, but it shouldn't be a real problem. And if we do not uncover any other crisis this year (2014) then indexes will continue to grow well. If you look at the picture below (S&P500 index during 2013 by money.cnn.com) you see that the summer time from May till the start of September was the weakest period of the year in total return (also two big dips provided). I would expect things to go in this fashion again. And last part of the year could show signs of slowing down if overall growth is as strong as this year. Or perhaps we are just at the start of a new economic boom that will continue for a few more years. In this case finding value investing opportunities will be more difficult and I'll surely have to dig harder for profitable investment opportunities and be more flexible with my choosing. Such as young growth companies need to be considered more openly.

After these few pointers I am not seeing any big things happening in our near future. Europe hasn't had any real drama in a while. Things are handled, well or badly is a different matter, but handled and market have stayed happy. Greece and Spain among others have been more stable and as long as Italy avoids doing the same mistakes then Europe will remain calm. 

2014 should be a positive year for the markets, and if not, it will be a very positive year for long-term investors ;) So even a bad news carries golden opportunities.

I hope you all have a great year!