Berkshire Hathaway Media Holdings 1977

Berkshire Hathaway has issued shareholder letters every year since 1977.  I was reminded by this of Joe Kraus’ investing tips which included the recommendation from David Siminoff to read all of Warren Buffett’s letters.   In 1977 the holdings (which you could have gotten for $131, preparing for your 1,000x return over the next 25 years) were surprisingly for me concentrated in media companies both on the content side (Capital Cities, Knight Ridder, Washington Post) as well as the agency side (Ogilvy & Mather, Interpublic Group); 5 out of effectively 7 investments that were publicly held.  Privately BRK owned the Buffalo Evening News as well.  Knight Ridder appears to be flipped the following year, and Capital Cities exchanged for ABC (well before the 90s takeover, I’m not sure what happened there).  Still as a window into the 20th century’s greatest investing mind it’s nice to see a strong window of support into media.

No. of Shares Company Cost Market ------------- ------- -------- -------- (000’s omitted)
    220,000    Capital Cities Communications, Inc. ..... $ 10,909   $ 13,228  
  1,986,953    Government Employees Insurance 
                  Company Convertible Preferred ........   19,417     33,033  
  1,294,308    Government Employees Insurance 
                  Company Common Stock .................    4,116     10,516
    592,650    The Interpublic Group of Companies, Inc.     4,531     17,187  
    324,580    Kaiser Aluminum& Chemical Corporation ...   11,218      9,981
  1,305,800    Kaiser Industries, Inc. .................      778      6,039
    226,900    Knight-Ridder Newspapers, Inc. ..........    7,534      8,736
    170,800    Ogilvy & Mather International, Inc. .....    2,762      6,960
    934,300    The Washington Post Company Class B .....   10,628     33,401
                                                         --------   --------
               Total ................................... $ 71,893   $139,081
               All Other Holdings ......................   34,996     41,992
                                                         --------   --------
               Total Equities .......................... $106,889   $181,073

Intuit’s PR Push

Barrons and Forbes both did big profiles on Intuit (INTU 58) this weekend.  When this happens it’s not likely by accident and you can thank a good PR company.  Rising stock prices affect the likelihood of feature articles.  Reporters want to explain to their readers what is going on, and whether to get on the bandwagon.  Sometimes they do themselves. Continue reading

East Bay Real Estate Thoughts

Besides our primary residence, we still own our old house in Pleasant Hill’s “Poet’s Corner” whose streets are named after poets like Byron and Shelley and other names most people who live there will vaguely remember from tenth grade English.  This is presumably more respectable or better marketing than the names of the daughters of the real estate developers or some trees and flowers and other conventions, and is among the better neighborhoods of this suburban community.  Most of Pleasant Hill was like the rest of the East Bay, developed after World War 2.  Our neighborhood was built in 1947 on what appears to have been a former Mushroom farm, whose spores still disproportionately take hold in the spring.  There are touches of character such as Molino’s Ravioli but dining like “Nibblers” Catalan menu sadly failed in competition with Roundtable Pizza or BBQ.   This is family-raising territory, good California living subject to all the pros and cons that means.

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Tale of Three Once and Future Dividend Providers, April 1996 to present

Investor return can come from appreciation, or dividends.  Microsoft (MSFT 31) announced this week the quarterly dividend will be raised to .23/quarter, going ex-dividend November 13.  It yields 3%.

I thought this would be interesting to compare to GE as classic growth stock, and Altria as a “high dividend payer” from the same approximate time.

If you’re even vaguely familiar with the market you’ll know MO & its descendants are going to come out ahead on total dividends, but what about total appreciation as well?

MSFT:

Microsoft paid a $3 special dividend in 2004, and has paid a dividend since 2003, starting at a humble .08 for the year.   In the fiscal 4th quarter of 2004, the dividend went quarterly at .08.   The dividend is unlikely to triple in the next eight years — for one thing the payout ratio has gone up.

It will have paid a total of $7.02 in dividends.  For those long term holders, this means if you bought in April 1996 congratulations you’ve just (before taxes) recouped your investment — of then a maturing company ten years after its IPO.   (This was a full two years after I made the worst investing decision of my life, selling the little America Online because Microsoft was coming to get it.)

Chart forMicrosoft Corporation (MSFT)

The classically safe large cap growth stock, GE, traded at 14.4 in April 1996 (now a humble 22, but probably a touch undervalued.)

GE has had their ups and downs of dividends, cutting it notably to .10/quarter in the financial crisis.  From the summer of 1996 you would have had $11.57 of dividends from GE (Genworth shares appear not to have been spun out to GE shareholders, but had some dividends they did.)

Chart forGeneral Electric Company (GE)

MO:

Phillip Morris a.k.a. Altria is the classic dividend stand out.  You would have made your $34.6 investment back in Altria dividends alone, $35.06 since the summer of 1996, but there is also Kraft and Phillip Morris International which were spun out in 2007 and 2008 respectively.

Each MO share got .692 of a share of KFT which has generated $6.51 of dividends, for $4.51/share.

Each MO share got 1 Phillip Morris International PMI share, which has delivered $11.35 of dividends.

$50.92 in total dividends of MO and its two major spin offs in the same time.

Chart forAltria Group Inc. (MO)

Chart  for Kraft Foods Inc. (KFT)

Chart forPhilip Morris International, Inc. (PM)

For total return calculation purposes you’re still ahead with Microsoft, but barely.

You’d have approximately $150 per share from that $34 investment, 440% price appreciation that is nearly identical to Microsoft’s, with higher dividend return!

I did hold MO, PM and KFT in a retirement account — to avoid the dividend taxation for a number of years, and reluctantly (and foolishly) sold to go into TBT instead.  Is the next MO…MO and its heirs?  Buy and hold is tough for me to stomach but when the right stock is found the results are spectacular.  MO was the classic poster boy for Jeremy Siegel’s The Future for Investors and it has held since the books’ publication.

Yield-hungry investors have piled into stocks like MO and PM and I think I will wait for a drop to get back in.

 

Interactive Brokers’ Mobile App Lightens Up

Interactive Brokers for the professional investor is hands down the best brokerage option, but the emphasis on account security, through requiring custom alphanumeric security codes for every login is a little tedious.  These numbers match a physical card, custom made for you.

You can waive this but then they profess no liability for hacked accounts in the event you do.  A software update in the last few days allows the mobile app to have “read only” access to your real time quotes now.  This psychologically might have the effect of me trading more given the ease of checking now.  It removes the last obstacle to making this a seamless mobile trading experience.   Nice job IB.

Lessons for Big Retail from The Great A&P and the Struggle for Small Business in America

Marc Levinson has a good history of one what probably should be characterized as the first dominant grocery retailer in America, the Great Atlantic & Pacific Tea company, or as ever more frequently known, the great A&P.   Histories of retail often benefit from the abundant number of records kept and A&P is no exception save for a mysterious void of corporate records from the 1920s.  This is an unfortunate loss whose vacuum is filled more by minuate of political response to A&P, most notably in the person of Congressman Wright Patton.  The more juicy loan  made by John Hartford under apparent pressure to Elliot Roosevelt is comparatively unexplored!

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LULU to become a Downward Facing Dog?

I am looking into where a short short entry point is on Lululemon Athletica (LULU, $77).  There is motivation aplenty.  Competition from Gap’s Athleta?  Patents on pants?  Rising inventory?  Color Bleeding?  Who is John Galt?  Landmark Forum participation (see the correction obviously added after some legal notice)? One can over-react to errata but I’ll hone in on other details the website has spacing errors after periods:

 The training program was such a success that the lululemon people have created a life for themselves that most people could only dream of.lululemon is a company where dreams come to fruition.

Notifications about particular stores include information that the Walnut Creek, California store will in fact be open on July 4th.  Congratulations.  For a company whose prime value is brand identity these scratches on the fender do reduce the value of the car.

Chart forLululemon Athletica Inc. (LULU)

A small position probably could be had now with a stop over the spring highs…will look more closely in following days.  I feel bad to have missed the (first big?) decline in Deckers DECK 45, whose story has some eerie parallels with LULU

Chart forDeckers Outdoor Corp. (DECK)

LULU is a sloppy company, poorly managed, riding a fashion craze and about to hit severe price competition.  SHORT!  Namaste.

POSITION UPDATE: Soybeans vindicated today, only commodities position now.  Bought some ZNGA outright as it heads into a ferocious short squeeze.  Out of ANF.

Notes on Ray Dalio on Global Financial Situation

Ray Dalio addressing the Council on Foreign Relations, interviewed by Maria Bartiromo:

History repeats itself in the cause-effect relationship machine of history, how do deleveragings work?  Thinks of 80-82/Latin American debt crisis when he sees the market today.  Credit cycle described: three positive effects of lower interest rates — lowering debt service costs, items cheaper to buy on credit and increasing net present value of cash flowing assets (which produces wealth which allows more borrowing.)  But debt can’t rise faster than income forever; then de-leveraging happens which is painful.  Depression is the phase of de-leveraging when austerity and debt restructuring happens.   Austerity, write downs, printing of money: two deflationary one inflationary — a balance between them is a beautiful de-leveraging.

Problems with VAR: borrow short lend long fine until volatility changes.

How he sees Europe: different countries so different dynamics between central banks and different fiscal policies.  Facing $2 trillion losses he estimates on the debt that exists (ECB debt?)  Solve this from either Germans & other northern europeans but that will fall short.   Could try austerity and debt write downs, but that’s a depression: a la 1933 Roosevelt.   Or print money.  Does the Euro look different in a year?  50-50 Greece leaves the Euro  in a year.  Classic lost decade similar to Latin America’s.  Big de-leveragings is a test of the character of the people (but social questions are emerging.)  Right now, Japan has total debt to GDP of 500%, Government debt of 275%.

Should we be worried about the debt here then knowing that the buyer (China) could have alternatives?  Dalio hedged this answer.  Can’t have a bad downturn due to social consequences; can’t have another 2008.

Stock market up 4% and major bull market after Nixon took dollar off gold (Dalio was on NYSE Floor in 1971.)  Mexico default 1982 (Dow 777) was the low of the market; market printing 1933 — all bottoms of the stock market.  China accounts for 1/3rd of growth globally since 2008.  More deflation than inflation risk short term, reverse longer term (five years+)

Is Gold a constraint on Fed printing?  Gold is a currency, but not effective for large scale funds.  But he owns gold (got audience laughter.)  Maria asks “how much exposure then as an asset class?”  Ray says you need a strategic asset allocation mix overall…Most people shouldn’t do this.  Cited website (presumably this?  Registration requires) for how to balance risk.  Slow absolute reduction in debt to GDP ratio in the US with positive growth right now and that’s good.  Not worried about imminent explosion in US — look at Japan.

No answer on risks in shooting war in Iran; would not buy oil right now.  “so many positions in so many markets” but no view on oil.  Movement towards reform coming in China but as always there will be tensions.  Will contribute to volatility.   Biggest worry is lack of broad expertise in monetary policy which could make us hit an air pocket.

Lazy Data Sets and Technology Dividends

Bloomberg reported and Barron’s amplified a very weakly corroborated story that technology stocks underperform when they begin to pay dividends.   Timothy Ghriskey of the Solaris Group among others claims it’s “probably not a good thing.”  The proof of this?

Apple Inc., Dell Inc. (DELL) and SAIC Inc. (SAI) are among the 13 companies in the S&P 500 that have initiated a quarterly payout this year, according to data from S&P. Dell dropped 11 percent and SAIC slumped 6.9 percent since announcing the decision, while Apple is up 13 percent.

and

Investors who bought Microsoft after the world’s biggest software maker started paying 8 cents a share in 2003 would have been better off owning its competitors. The Redmond, Washington- based company rose 5.9 percent that year, compared with a 47 percent surge for S&P 500 computer stocks. Technology companies that don’t pay a regular dividend make up seven of the 10 biggest gains in the industry since January 2003.

Ten years sounds like a long time in the course of things but this particular ten year period comes after:

a) a significant change in 2002 in the tax treatment of dividends, lowering the rate to 15% at the federal level: this ironically may have made some companies give out more in dividends than they should (see: Citibank!)

b) the largest run up in the history of technology stocks followed by a two year shake out when nearly every non-dividend paying technology stock dropped by 90%+.  A tweak of the window of study to fifteen years would generate tremendously different results.  Nearly _any_ 10 year period would produce dramatically different results.

c) Microsoft announced a $3 special dividend in 2004, characterized by Rick Sherlund, the famed Goldman Sachs software analyst as “breathtaking.”  So besides the fact from the second quote MSFT’s peers were coming off lower lows this alone was a 10% return.  The theory of risk-adjusted returns has some flaws, most notably how one calculates risk but if you were to look at risk-adjusted returns with this special dividend in mind the results were almost certainly different from what is described.

Dividend paying “tech stocks” including IBM, Texas Instruments, and the like almost certainly outperformed non dividend paying stocks; it is the tech companies that _cut_ their dividend (Kodak, Xerox, etc.) which is probably the more reliable forward-looking indicator.

It’s true dividend paying tech stocks are in a different phase of their corporate lives, and are no longer as high growing (read: capital intense.)  But high growth famously comes at a price for technology stocks.  Investor return?  That’s another matter.  In Jeremy Siegel’s “The Future for Investors” he writes about stock returns up to 2003 (p. 126):

From 1871 through 2003, 97 percent of the total after-infaltion accumulation from stocks comes from re-investing dividends.  Only 3 percent comes from capital gains.

Technology companies do really stupid things with large cash piles; even small tech startups lose discipline when they get their Series A wires in.  That technology companies return capital as large cap growth companies should be expected and should be demanded.  If you can find the 5 successful hypergrowth tech companies out of the 100 or so possible by all means skip the MSFT dividend.

 

ANF: Gary Smith v. BusinessWeek

Abercrombie & Fitch has plenty of problems both managerially and in its sector to be an interesting long term investment.  But it is a volatile one, and perhaps set for a small technical run here, according to Gary Smith of Fox Business.

His argument is very Peter Lynchish, seeing lots of kids in the malls at his local ANF.  I’m not sure I’d look for it to climb to 50 but somewhere in the mid 40s seems probable, and I’ve set my alert accordingly.

For the opposing view, and perhaps the Businessweek-as-contrarian indicator, there was a negative piece about the secular trends for ANF in Businessweek last month.

 

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