50 Years of Warren Buffett at Berkshire

2015 marks 50 years since Warren Buffett took the helm at Berkshire Hathaway and the roughly 40,000 attendees at this year’s annual meeting were in a celebratory mood.  The morning began, as usual, with a video.  The highlight of this year’s production was a hilarious bit featuring Warren Buffett as the Berkshire Bomber facing off in a grudge match against welterweight boxing champion Floyd Mayweather.

With the video feature concluded Warren Buffett and Charlie Munger took the stage for the main event, their annual question and answer session.  The Q&A was, as always, wide ranging and included audience questions from natives of Germany, Taiwan, China, Korea, and a seventh grader from Florida.

There was much well deserved praise for Mr. Buffett and Mr. Munger on their remarkable longevity and success running Berkshire, and the role of Berkshire’s corporate culture in creating and maintaining its success was a thread that ran throughout the Q&A session.  Choosing carefully those you associate with, nurturing your reputation and setting the proper tone at the top were all offered as key components for anyone seeking to create and sustain an enduring corporate culture.  They emphasized that Berkshire’s culture was not created overnight and that good fortune and being ready and open to opportunities when they were presented were also important parts of their success at Berkshire.

Not every questioner heaped praise on Berkshire.  The morning’s first question was probably the most pointed.  A shareholder asked Mr. Buffett to defend mortgage lending practices at Berkshire’s manufactured home subsidiary Clayton Homes.  Mr. Buffett, clearly anticipating a question on Clayton, offered a well-documented and persuasive defense of Clayton and its lending practices, pointing out that 97% of Clayton’s borrowers successfully pay off their mortgages and concluding that “Clayton has behaved very well.”

The same shareholder also questioned Berkshire’s association with buyout firm 3G Capital which has a reputation for cutting jobs at the companies it acquires.  With respect to 3G, Mr. Buffett remarked, and Mr. Munger seconded, that some of the companies it acquired had too many employees to work efficiently and that no one is required or expected to retain more people than needed to run a business.  He added that after being acquired by 3G, performance at those companies improved considerably.

Succession, which has been a frequent topic at Berkshire meetings in recent years, was discussed only briefly this year with Mr. Buffett stating his belief the person at the top must have extensive operational experience, not simply investing prowess.

On stock valuations Mr. Buffett was asked whether he felt that the ratio of total market capitalization to GDP, one of his favored market valuation metrics, was now too high.  He responded that in the current environment of exceptionally low interest rates current valuations were very reasonable.

They also remarked that the reinsurance business, where Berkshire is a major player, is not the attractive business it once was as competition has grown and made pricing unattractive.

Responding to a question about China and whether the principles of value investing have applicability there, Mr. Buffett and Mr. Munger agreed that the principles of value investing know no borders.  They added that China could benefit from shifting toward a more value-oriented approach to investing and away from the speculative fevers that tend to dominate markets in China today.

Turning to China again, both Mr. Buffett and Mr. Munger expressed admiration for the speed with which China has transformed itself over the past four decades and agreed that China and the U.S. must find a way to cooperate over the long term for their mutual benefit and for the benefit of world.

On the acquisition front, both expressed interest in doing more deals in Europe, having recently closed on the acquisition of a German motorcycle equipment retailer.

As the Q&A wound to a close Mr. Munger offered a fitting conclusion, saying that simply being a shrewd investor, passively holding stocks, is not enough to make a life satisfying and that we all should strive to contribute more.

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Waiting on the Fed

In this latest installment of our quarterly report, my colleagues and I share some observations on the first quarter of 2015, offer our outlook for the global economy and markets, and discuss several of the securities we are currently buying: Google (GOOG), Johnson Controls (JCI), and international mutual funds from Dimensional Fund Advisors.

Click here to go to the full report on our website.  Following are a few highlights:

- Stocks rose slightly in the first quarter as U.S. Federal Reserve chair Janet Yellen’s remarks about gradual interest rate increases comforted investors, who are adjusting to lower oil prices, a stronger dollar, and mixed economic conditions around the world.

- Whenever the Fed finally raises rates – likely before year-end – we expect the increase to be gradual and believe the U.S. economy will continue to expand.

- The United States is currently the strongest of the major global economies, even though real GDP growth has been limited to 2%-2.5% for several years and is likely to remain in a similar range in 2015.

- The dramatic fall in oil prices – over 50% since last summer – is both good and bad for the U.S. economy but should have a positive impact overall.

- Some of the world’s major economies are not faring as well as the United States and require more stimulus, so central banks abroad are easing rates in Europe, China, and Japan.

- The relative health of the U.S. economy provides select opportunities to make good investments here at home, and Europe and other foreign markets also present pockets of opportunity for disciplined, patient investors.

- For income, we continue to favor utilities, real estate investment trusts, preferred stocks, master limited partnerships, and convertible securities over bonds in the current environment of low interest rates that are likely to rise.

- We remain optimistic that the stock market, bolstered by the economic benefits of lower energy prices and low interest rates, will again provide positive returns in 2015.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

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What do lower oil prices mean for investments?

After a plunge of more than 50% since last summer, oil prices appear to be stabilizing – at least for now – around $50 per barrel.  Where they go from here is unknown, but easier to predict is the impact of lower oil prices on investments in certain sectors or regions of the world.  Click here to read a research report from Fidelity that forecasts continued low oil prices, compares the impact of lower prices on net importers like the United States (positive) to the impact on exporters like Russia (negative), and suggests sectors that will benefit from oil’s decline.

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Positive Thoughts for the New Year

In this latest installment of our quarterly report, my colleagues and I share some observations on the fourth quarter of 2014 and the heightened volatility to start 2015, offer our outlook for the economy and markets, and discuss three of the securities we are currently buying: PNC Financial Services (PNC), General Electric (GE), and Blackstone Mortgage Trust (BXMT).

Click here to go to the full report on our website.  Following are a few highlights:

- 2014 was another good year to be invested in U.S. stocks, which rose again due to continued recovery in the U.S. economy, increased corporate earnings, and support from the Federal Reserve.  Elsewhere in the world stock prices generally fell, primarily due to weaker economic conditions.

- Like last year, stocks are off to a bit of a volatile start to 2015, this time amid concerns regarding oil prices, the global economy, and geopolitical events, including terrorism.  The market likely will remain volatile, and we expect to see a correction at some point during the year.

- We foresee continued economic recovery in the United States and low interest rates around the world, even though the Fed may begin to gradually raise the federal funds rate later this year.

- We believe that, on balance, the drop in oil prices over the past six months will be a net benefit that will support ongoing U.S. economic growth and help to boost the earnings and stock prices of many of the companies we own.

- Investors will be closely watching for any hints from the Fed regarding upcoming changes in its rate policies.  Current expectations are for an increase in the federal funds rate in the second half of this year, but the exact timing will depend on the Fed’s view of economic conditions.  Other central banks are being more aggressive than our Fed as they face slowing economic growth.

- When rates do increase, the value of bonds will fall.  Meanwhile, rates are currently so low that the rewards for holding bonds are not attractive enough to offset the risks of buying them.  We continue to prefer utilities, real estate investment trusts (REITs), preferred stocks, master limited partnerships, and convertible securities for income, given their higher yields and our expectations that many will increase payouts to investors over time.

- The dollar’s strength benefits consumers, businesses heavily dependent on imported goods, and manufacturers (due to the lower price of energy), but it makes U.S. companies’ products more expensive in other countries.  We are monitoring our positions for any signs that the dollar’s rise, or a sluggish global economy, is negatively impacting the ability of companies we own to generate profits.

- Overall, we remain cautiously optimistic regarding prospects for the stock market and more so for the specific stocks in our portfolios.  We expect the market to rise in line with corporate earnings and for our holdings to outperform due to their reasonable valuations and favorable business prospects.

As always, feel free to contact us if you have any questions or comments.  For more information, visit our website.

Jordan Smyth and the Edgemoor Investment Advisors Team

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Falling Oil Prices Likely to Provide Economic Boost

While it is clear that oil prices are falling, the net effect of reduced prices on the economy is more difficult to determine.  Lower gas prices should enable consumers to spend more on other goods and services, and declining energy costs also benefit many industrial businesses.  However, lower oil prices hurt oil and gas producers and the many companies that support the energy sector.  Overall, we see a net benefit to the U.S. economy, as Fidelity argues in this excellent review of the impact of the falling price of oil (click to access).

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