MLPs - High Energy Income

An excellent article in Barrons about MLPs in energy section. See their picks here in MLPs and MLP funds.

Summary:
- MLPs have a great total return, a combination of yield and growth, which is hard to find anywhere else.
- The key to this whole sector is owning the MLPs that raise that distribution over time.
- MLPs are more attractive in low-interest-rate environments.
- The traditional midstream MLP assets include intrastate pipeline systems.
- Retirement accounts: MLP's unrelated business taxable income (UBTI) will make tax filing quite complex. Use MLP funds instead.

Turnaround Story

Mickey Drexler was credited to turn GAP around during the 1990s. Check out his story - Mickey Drexler’s Redemption here.

However, Warren Buffett said " Turnarounds seldom turn. "

Can Ron Johnson in JC Penny do the same thing?

How to Play Energy

A good summary from Barrons this weekend. Check it out here.
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Evan Calio, an energy analyst at Morgan Stanley, wrote recently that many stocks trade "near liquidation value," and the group as a whole is valued at "trough" levels, based on such measures as price to cash flow and reserves relative to enterprise value, which is stock-market value plus debt. He likes stocks that can do well "without commodity support," which is to say rising prices. His favorites include Chevron, Anadarko, and Hess.
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Click the links to read the article and a table .

Thomas Russo's Path to Global Big-Brand Investing

6/16/2012 on Barron's

Barron's: Your portfolio looks like few others, with its exposure to European companies. How did it get that way?
Russo: The best way I've found to participate in the growth of developing markets is through European companies whose brands have been present but unaffordable in those markets, and whose managements are willing to redeploy Western-market cash flows into the expansion of those brands in the developing world, where the tastes already exist, the preferences already exist, but affordability hasn't.
Which companies meet this test?
A perfect example is Nestlé. Another is Philip Morris International [ticker: PM]. In the spirits industry, it would be Pernod Ricard, Diageo [DEO] and Brown-Forman. In beer, Heineken, Anheuser-Busch InBev [BUD] SABMiller [SBMRY]. And in payment systems, MasterCard [MA].
Some of these companies are European. Is that a concern, given the troubles there?
We're buying the rest of the world through Europe, and that gives us the chance to buy a company with solid prospects like Nestlé or Heineken at 10 to 15 times net income.
What have these European companies done well?
Their brands have populated the world because Europeans colonized; their companies were just more global. America has had the great virtue of having a large enough market that companies could get rich without leaving our shores. Nestlé is based in a country [Switzerland] of just seven million people. It had to be global.
What's prevented many American companies from achieving the same success?
The U.S. pioneered option-driven executive compensation, and that put unnecessary pressure on making sure earnings grew at a smooth and steady rate. But those same factors led many American companies to under-invest and left them less competitive than their international counterparts. There are some notable exceptions like Berkshire Hathaway and MasterCard that have deployed capital well and done so without regard for reported profits.
Your portfolio is dominated by a few industries: cigarettes, beer, spirits, financials.
Part of it is a circle-of-competence thing. As an investor, you have to like what you do because it requires staying very close to the subject. I don't care about semiconductors. I'd be a poor investor in that industry.
Some investors are wary of family-controlled companies. You seem to disagree.
Look at the Tisch family. They've been able to build an enormous fortune at Loews [L], and it has been carefully and conservatively run because it is their money. It is Warren's money at Berkshire. It is the Brown family's money at Brown-Forman. It is the Ricard family's money at Pernod Ricard. The best family-controlled companies are willing to invest without regard to reported profits. If you own a company, you don't care what it reports as profits. You care how much more wealth is created over time.
Nestlé has long been one of the largest investments. What makes it special?
The culture. It's really quite phenomenal. Nestlé has 328,000 employees around the world, and they are still able to get the job done in a thoughtful, locally sensitive way. There also is a focus on the long term. When I first invested in Nestlé, in 1987, the CEO at the time was asked about the planning horizon at Nestlé, and he said it was 35 years. He said the company breaks it up into five-year increments, and I thought that was just perfect.
What portion of Nestlé's profits come from the developing world?
About 35%—and it has grown from 25% four years ago. What's intriguing is to look at where Nestlé is committing capital. Two years ago, Nestlé said it was taking its developing-market organic capital spending from a billion to 2½ billion. On top of that Nestlé spent $12 billion to buy Pfizer's [PFE] nutritionals business and $3.5 billion to buy China's leading confectionary company and a local beverage company.
What appeals to you about Berkshire? It's trading for a historically low valuation of less than 1.2 times book value.
It's as interesting an investment today as it has been over the sweep of my career. It is certainly far bigger and more recognized today than in 1982. But at the same time, its opportunity set is far broader. In 1982, it would never have been shown those 700 million of 10-year warrants on Bank of America [BAC] with a strike price at 7 that it got for free (along with a $5 billion preferred-stock investment). That type of investment will reward us as shareholders enormously, tomorrow. The bench that Warren has put together on the investment side deserves high praise: Todd Combs and Ted Weschler.

What about Berkshire post-Buffett?
It will be a different company, but I think it could be a very value-creating company still. It has an able team to help deploy Berkshire's cash, and Berkshire could pay a fairly high dividend when you consider that the bulk of Buffett's shares will end up inside the Gates Foundation, and that entity is burdened with a 4%-5% payout ratio.
You're referring to government rules on spending by charitable organizations? How high could the dividend be?
It could be 4% because Berkshire generates so much cash. At the end of the day, the burden of putting cash to use that Warren has faced may not be faced by his successors because of share buybacks and a big dividend.
What appeals to you about Richemont?
Richemont is our only investment in global luxury. Cartier is its flagship brand, and it's a real gem. On top of that, there's Van Cleef & Arpels and Montblanc, which has evolved from a pen company to a luxury watch and accessories brand. It's family-controlled, and its CEO, Johann Rupert, is fair in the way he runs it. He observes that a luxury good is something that you never knew you needed until you discover it, and then you can't live without it. Richemont is tapping into places in the world that are increasingly prosperous and have a drive for possessions. Half the business at Cartier in Paris is from mainland Chinese travelers, and that has just started. Richemont has opened 300 stores in China. Rupert admits that he is sitting on top of a volcano in China, and he thinks that as long as the consumer calls the shots, he'll win.
Why do you like the liquor business?
Pernod Ricard, Diageo, and Brown-Forman are all investing against current results to deepen their offerings, deepen their distribution, deepen their advertising message, and deepen their on-premise promotions. They are doing all these things today to spark demand for the future. The size of the markets is enormous. In China the market for spirits is 550 million cases a year. Premium imports amount to just five million cases. China probably represents 15% of Pernod Ricard profits, and the industry has scratched less than 1% of that market. When the Chinese travel globally, they come home from England with a taste for Scotch whisky because they saw it in a fancy location prominently displayed. And so we are positioning ourselves through those three companies to participate in that transformation of Chinese consumption to a premium and an import model. India is right behind China, Indians consume about 150 million cases of whiskey a year, and their preference is for scotch and it is currently denied fair access because of tariffs and duties, yet those barriers are falling away.
What about Brown-Forman?
Brown-Forman is the story of Jack Daniel's—and it's a good story. It's investing heavily to grow Jack Daniel's globally. When I first invested in 1987, Brown-Forman sold five million cases of Jack in North America and a half million globally. Twenty-five years later, Jack Daniel's sales in North America are still 5 million cases, but six million are sold internationally. In 18 markets, they've crossed the 100,000- cases-annually mark. That's important because as Jack Daniel's goes from 50,000 to 100,000 cases, the company suddenly starts to absorb their fixed market-development costs, and you have margin.
Will the family ever sell? There's been lots of consolidation in the past decade.
There are pieces of the industry's global-distribution puzzle that yet have to fall into place. Brown-Forman is a critical component, and it'll either be an aggregator or be aggregated over time. It certainly has shown the virtue of investing at the cost of current income, because over the past 25 years, it has put up an awful lot of expenses to develop Jack Daniel's while the stock has generated an annualized return of about 13%.
Do you think Africa is important to the beer industry?
Heineken and SABMiller are extraordinarily exposed to Africa for a larger part of their profits, and they are deploying enormous capital in Africa to build future demand. The appetite is large. Sub-Saharan Africans drink 400 million barrels of beer a year, and only 90 million barrels is now branded and bottled. The rest is home-made. We are investing in the conversion of unbranded home brew to branded and bottled beer. Heineken makes 25% of its profits in Africa, and for SABMiller, it's closer to 35%.
What about Heineken?
Heineken is the laggard in terms of valuation because it is family controlled. The family controls it through a 50.1% holding in Heineken Holding, which in turn owns 50.1% of Heineken NV [HEIA.Netherlands}. We own the holding company—the shares the family owns.
Do they trade at a discount?
A big discount of around 17%. It is almost unprecedented that you get a chance to invest in voting shares at a 17% discount
Any difference between the two stocks?
Everything is the same. Heineken Holding trades for 32 euros, and the company may earn €3.10 next year, so it's trading for about 10 times next year's earnings. Heineken NV trades for 38. It has been tarred by some investors as a Western European company.
Heineken, however, has a partnership in Asia that gives it huge participation in Indonesia and Vietnam. It also owns the second-largest brewer in Mexico. It's involved in the premium business in China and owns 40% of India's largest brewer.
You favor Unilever over its long-time rival Procter & Gamble [PG]. Why's that?
It has been less well-run for a longer period of time. Unilever's CEO, Paul Polman, came in three years ago, having been trained at P&G and having been senior at Nestlé. Polman knows where Unilever needs to go to have the same level of success that Procter has long enjoyed. There is no reason why that can't happen. Unilever also is cheaper. Its ADRs trade around 32, about 14 times next year's earnings. That's less expensive than Procter.
And Unilever has a better developing-market presence?
It has a huge market share, including old colonial markets like India. Brazil also is a big market. Unfortunately, P&G is going the other way. It got to the point of peak performance, but over the past 18 to 24 months it feels like it is slipping.
My summary: It's not easy to find businesses with brands that the rest of the world cares about and have enough money to develop. And you need to find managements that will do so even if it burdens current income. That combination doesn't exist all over the place.
Great. Thanks, Tom.

Get ready to buy great business at bargain prices

Dow Waves Goodbye to 2012 Gains WSJ 6-1-2012

Jobs Slowdown Adds to Global Fears

Wall Street sinks on U.S. jobs data, Dow negative for 2012

The stock market dropped 275 points on last Friday and dropped more today. It has dropped close to 10% within the last 2 months. With possible worse situation in Europe, investor sentiment can go further down. 

I strongly suggest all of you to get your cash ready now. Since excellent opportunities in buying good properties or excellent business will arrive.

For the record, I have taken several positions in past week but still 60%+ in cash position. 

"Be fearful when others are greedy and be greedy when others are fearful." Warren Buffett

Cheers,

Josh

Allan Mecham: The 400% Man

SmartMoney Magazine recently profiled Allan Mecham, a 34-year old college drop-out turned value investor at Arlington Value Management, who returned a cumulative 400% return over the twelve years ending December 31, 2011 (including  the astonishing 11% in 2008 and 59% in 2009 when the market was cratering). Rather than investing in unknown microcaps that soar after being “discovered” by the mainstream financial community, much of Mecham’s returns have been earned from large caps.

Read the rest of the article here.

You can then read the follow-up article called The 400% Man's New Big Bet

[L]ast year he levered up the fund and has invested half the money in Warren Buffett’s Berkshire Hathaway. 
“Able to borrow at around 1.5%, we levered (Berkshire) into a 50%+ position,” he wrote in his annual letter to shareholders. “Though not advocates of leverage, we believe the low cost and modest amount, combined with [Berkshire's] iron-clad safety and cheap price, makes our action sensible.”
There is some method to the madness. Mecham, a long-term Buffett disciple, argues that Berkshire Hathaway stock, on its own, “provides ample diversity, with exposure to disparate businesses (more than 70), sectors, and asset allocations.” Berkshire’s assets include a ton of cash-generative businesses, a book of blue-chip public stocks valued at more than $75 billion, and nearly $40 billion in cash, he says.

He was also interviewed by The Manual of Ideas starting from p7. Check here.

Exxon's big bet on shale gas

America's most profitable company now produces about as much natural gas as it does oil. CEO Rex Tillerson thinks the fracking party has just begun.


See the whole story here. 


1999: $88B mega-merger with Mobil orchestrated by Lee Raymond
2009 Dec: XOM announced XTO all stock acquisition of $41B
Today Exxon, the prototypical oil giant, gets about 50% of its production from, and has 50% of its reserves in, natural gas.



This shale gas boom has turned assumptions about the future of the U.S. and global energy picture upside down. Less than a decade ago the consensus was that America was beginning to run out of economically recoverable natural gas and that the country would need to import vast quantities of it from overseas. Now we're awash in natural gas. U.S. production has increased 28% since 2005. In 2011 about a third of that production was from shale gas, up from just 11% in 2008. By 2035, according to a study by the research firm IHS Global Insight, shale gas will account for 60% of U.S. production.

It is widely thought that the U.S. now has 100 years or more of domestic gas supply at current consumption rates. Already there has been a frenzy of exploration.

Large shale deposits in South America, China, and Europe mean that it should eventually be a global trend as well. The International Energy Agency estimates that the world currently has a 250-year supply of natural gas. "In my 50 years of following the energy business, this is by far the biggest event that I've seen," says John Deutch, an MIT professor and a former CIA director who last year chaired a Department of Energy subcommittee on shale gas.

Gasland, a 2010 Oscar-nominated documentary about the dangers of shale drilling, caught the public's attention with its footage of contaminated tap water that could be lit on fire, though the veracity of some of the film's content was later challenged.

In the early 1980s a visionary, independent natural-gas driller named George Mitchell began experimenting with ways to get gas out of the Barnett Shale, which ranges all across the Dallas-Fort Worth area -- even under Exxon's headquarters in Irving, Texas. Geologists have always known that shale contains trapped gas and oil. In fact, shale is the deep layer of rock where much of the traditional natural-gas supply was "cooked." But extracting hydrocarbons from the rock was thought to be too difficult and expensive to justify.

Mitchell, however, was convinced it could work. After nearly 20 years of trial and error, Mitchell Energy developed a formula for fracking with water and sand that worked spectacularly well. The company's production of natural gas in the Barnett soon spiked. In 2002, Mitchell, then 82, sold his company to Devon Energy (DVN) for $3.2 billion.

Should US be the world's largest LNG supplier?

The short answer: If it wants to be. And it should—to create jobs, double exports, build global trading links and generally boost our economy.

 By JOHN R. SIEGEL in Barrons

By 2017 the U.S. could be the largest exporter of liquefied natural gas in the world, surpassing leading LNG exporters Qatar and Australia. There is one big "if," however. America can produce more gas, export a surplus, improve the trade deficit, create jobs, generate taxable profits and reduce its dependence on foreign energy if the marketplace is allowed to work and politics doesn't get in the way.

In May 2011 Cheniere Energy received an Energy Department license to export LNG from its Sabine Pass LNG import terminal in Louisiana. Cheniere subsequently reached long-term deals with the U.K.'s BG Group, Spain's Gas Natural and India's GAIL. Cheniere is targeting operation in 2016 and plans to export up to 730 billion cubic feet of LNG annually, roughly 3% of current U.S. gas production.

Sabine Pass originally was built as an import facility to alleviate projected U.S. gas shortages. Shale-gas technology changed that assumption radically. Now Sabine Pass is attractive because it already possesses much of the infrastructure for an export plant: LNG storage tanks, gas-handling facilities and docking terminals. Only a liquefaction plant is needed to convert natural gas into LNG. Overall, Cheniere can create its export terminal for half the investment required for a new one.

With world oil over $100 per barrel, equivalent to $17 per million BTUs of gas, versus domestic natural gas at $2.10 per million BTUs, the opportunity is obvious: Cheniere can deliver its gas to Asia or European customers well below current market prices.

Six developers with existing import terminals are following the Sabine Pass model. And Cheniere has another project in Corpus Christi. With the expansion of the Panama Canal, Gulf LNG projects can economically target the lucrative Asia market. By 2017, the U.S. could be exporting upwards of 13 billion cubic feet of LNG per day.

But exporters must overcome growing opposition to LNG exports by environmentalists and industrial users of natural gas. Exporters must also get multiple permits from environmentally conscious federal officials. And Rep. Ed Markey (D.-Mass.) has proposed legislation to bar federal approval of any LNG export terminals until 2025. Those who most fear global warming don't want anyone anywhere to use more fossil fuel, even "cleaner" natural gas.

It is uphill for the anti-gas crowd. High oil prices are driving a transition to natural gas, even as fuel for trucks and cars. In the U.S., the T. Boone Pickens Plan would displace gasoline and diesel fuel for compressed natural gas in large trucks. Pickens estimates savings of two million barrels per day of oil imports if the nation's fleet of 18-wheelers converts to CNG. The Pickens Plan might fail legislatively because it calls for subsidies to fuel the transition. But if CNG's nearly $2-per-gallon price advantage over gasoline continues, the concept will evolve via natural market forces, as it should.

THE ENERGY DEPARTMENT SAYS natural gas has grown its market share in the U.S. in the past three years from 28% to 30%. Globally, the trend is similar, and LNG is integral to the global supply chain.

Despite the recession, global LNG demand has been growing at a 6% to 8% annual clip for the past 10 years. When demand collapsed in 2009, prices in Asian markets fell 50% to about $5 per million BTUs. But the price drop was also driven by the rapid growth in U.S. shale gas. U.S. natural-gas supply -- flatlined for a decade at 19 trillion to 20 trillion cubic feet annually -- increased 15% in the past three years due to the shale-gas revolution. Technology advances created a supply perturbation. As U.S. gas prices plunged, LNG cargoes bound for the U.S. had no market.

Global LNG markets are growing again. By late 2010, the main Asian consumers -- Japan, Korea and Taiwan -- were seeking more LNG, while new customers such as Thailand were entering the market. The Japan tsunami put a call on LNG imports to supplant Japan's nuclear shutdowns, and with increasing demand, Asian markets rebounded to the $15-per-million-BTU range. After the tsunami, Germany plans to close its nuclear plants. Most of Germany's (and all of Europe's) new supply will be gas-fired. Given the choices, would Europe rather grow its gas supply from Russia, North Africa or the U.S.? The policy implications should be obvious, even to the U.S.

Estimates of the job benefits from U.S. LNG projects depend on a variety of assumptions. Roughly 25,000 direct construction jobs would be created if all the projects are built. Increasing the U.S. natural-gas production base by another 13 billion cubic feet might translate to 450,000 direct and indirect jobs and $16 billion in annual tax revenue for federal and state coffers.

It's easier to forecast improved trade balances. Exporting 13 BCF per day of LNG could generate about $45 billion annually. Reaching Pickens' goals could offset another $70 billion annually of oil imports.

Exporting energy, however, rubs a lot of people the wrong way. Pickens wants cheap natural gas for his 18-wheelers and opposes LNG exports. Industrial gas users argue that a vibrant LNG industry would propel domestic gas prices higher. A study by Deloitte said that exporting six 6 BCF per day of LNG would raise wellhead gas prices by 12 cents per million BTU (about 1% on a retail basis). Advocates of "energy independence" argue that exporting LNG would tie U.S. natural gas prices to global markets.

The Energy Department's Office of Fossil Energy is considering whether exporting LNG is in the public interest. In the meantime -- shades of Keystone XL -- the department has effectively put a moratorium on new LNG export licenses.

Energy's decision-making process balances the extent to which exporting LNG drives up prices with the economic benefits of increased production and energy exports. The price assessment comes at a time when U.S. gas fetches the same price in constant dollars as it did in 1975. Producers are now shutting down production and lowering exploration budgets. The shale-gas "job machine" is now in reverse.

Energy's price study, released in January, found that exporting six BCF per day would increase wellhead prices by 50 to 60 cents per million BTU by 2026. The study has a myriad of assumptions and scenarios, the most fundamental of which is future gas production. In 2007, Energy predicted the U.S. would be importing 12.3 BCF a day of LNG by 2030 due to falling gas production. But primarily because of the shale-technology phenomenon, wellhead prices have tumbled from $6.25 six years ago, even as demand increased by eight BCF per day. That demand figure is larger than the six BCF assumption of the Energy study. The Energy Department is not particularly to blame, as most forecasters got it just as wrong on gas production.

Ideally, the Energy Department should move quickly and recognize free-market principles. And the administration could send a clear policy signal that natural gas is integral to the country's energy future and that exporting LNG is good economics and consistent with its 2010 State of the Union address to double U.S. exports over five years and create two million new jobs. But Energy is moving slowly, and administration signals on natural gas are mostly lip service. The economic-benefits study should have been done by the end of March. But last week, Energy delayed its release until late summer, and said there is no timeline to review results and develop policy recommendations. Translation: after the election.

While we are fantasizing, the government could stop singling out the job-creating energy industry for higher taxes, emphasize cost/benefit analysis before adding further regulation to energy production, and get out of the business of regulating LNG exports altogether, which smacks of protectionism. To that end, should we also give veto authority to the Agriculture Department over grain exports (to lower corn prices) and the Commerce Department over auto, airplane and smartphone exports? 

JOHN R. SIEGEL is the president of J.J. Richardson, a registered investment advisor that manages a hedge fund in Bethesda, Md.

 

BKS

From Whitney Tilson:

You might not believe this in light of this morning’s news (Barnes & Noble, Inc. (NYSE:BKS) has roughly doubled, but this is what I wrote over the weekend but hadn’t yet sent:

For only the fourth time in our 13+ year investing history, we’ve gone long something we were previously short.  (Given how well it’s worked out the three previous times with Fairfax, General Growth Properties and Netflix, we should do it more often!)  In the past, there’s been some period of time between our switch, but in this case we went from short to long Barnes & Noble on the same day last week.  Such a rapid shift in opinion is unprecedented for us, but when we encounter new data/analyses that convince us that we’re wrong, we act quickly.

BKS had been a profitable short for us and we were already thinking of covering when two things caught our attention: we saw that Jana, a firm we know well and respect greatly, took a big stake, and read the write-up below on our favorite value stock idea web site, Value Investors Club.  We largely agree with the analysis in the VIC write-up: that the base business is worth almost the entire current stock price, so you get a nearly free call option on the Nook, which is doing much better than we expected.  Plus with more than 2/3 of the stock controlled by insiders and, according to Yahoo Finance, 67.2% of the float is sold short (87% if you include Jana’s new stake), even a hint of good news will likely trigger the mother of all short squeezes.

Also you can find the VIC analysis here.

Wells Fargo Reports 13% Increase in Q1 2012 Profits

While all banks are under great distress, WFC has been grabbing the mortgage lending business from others. I will buy and accumulate during its price weakness from now on to the next few years.  JC 4/17/2012
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Amid improvements in the mortgage sector, Wells Fargo & Company reported a 13 percent increase in first quarter profits, with a net income of $4.25 billion, and earnings per share at $0.75. Last year during the same quarter, the bank reported a net income of $3.76 billion, or $0.67 per share.

 Revenue increased $1 billion from fourth quarter 2011, to $21.6 billion. The $1 billion increase was driven by increases of $506 million in mortgage banking, $458 million in market sensitive revenue, and $181 million in trust and investment fees, the report stated.

Read more here.

Behind Buffett’s Decision, a Lesson From a Mentor

Behind Buffett’s Decision, a Lesson From a Mentor

Posted: 03 Nov 2009 08:20 PM PST

By Jason Zweig (WSJ)

Warren Buffett’s purchase of Burlington Northern Santa Fe Corp. (BNI) is the newest chapter in the oldest story of his professional life.

Mr. Buffett’s mentor, the pioneering “value” investor Benjamin Graham, trafficked for decades in railroad stocks and bonds. In the early 1950s, at the outset of his career, Mr. Buffett read every page in Moody’s voluminous transportation manuals — twice, to make sure he didn’t miss anything. Working at Mr. Graham’s fund, Graham-Newman Corp., Mr. Buffett analyzed a portfolio with 21% to 36% of its assets in railroads.

But there is a more subtle side to the story. Mr. Graham taught Mr. Buffett that at the heart of the relationship between management and shareholders is a profound conflict of interest. Managers, Mr. Graham believed, will always want to pile up cash to protect themselves in case they make mistakes. But that cash belongs to the shareholders, who may be able to put it to better use than the company’s managers.

Graham also highlighted a painful paradox: The better the business and the more skilled its managers, the greater its profits, causing cash to pile up to unreasonable levels. And, to Mr. Buffett’s own chronic discomfort, he and Berkshire Hathaway are living proof of Mr. Graham’s paradox. Because of Mr. Buffett’s extraordinary skill at picking stocks and buying lucrative businesses, Berkshire consistently generates far more cash than even Mr. Buffett thinks he can put to productive use.

As long ago as 1998 — when Berkshire had $122 billion in assets and less than $14 billion in cash — Mr. Buffett worried his company was getting too big for its britches. “We have always known,” he wrote to a fellow investor, “that huge increases in managed funds would dramatically diminish our universe of investment choices.” That’s because investments of a few million dollars apiece could no longer make a material difference to Berkshire’s fortunes.

By 2006, when Berkshire’s cash mountain had risen to $37 billion, Mr. Buffett said, “We don’t like excess cash…We would be much happier if we had $10 billion.”

“Size is always a problem,” Mr. Buffett told me last month. “With tiny sums [to invest], it’s extraordinary what you can find. Most of the time, big sums are one hell of an anchor.”

Mr. Buffett would rather not resort to the simplest way of solving this problem — paying excess cash out to shareholders in the form of a dividend. Since he owns roughly 26% of Berkshire’s shares, a cash dividend would saddle Mr. Buffett with one of the largest personal-income tax bills in American history. That’s not the kind of thing at which he likes to excel. Mr. Buffett’s reluctance to pay a dividend leaves him with little choice but to buy big companies outright.

Mr. Buffett is paying for Burlington Northern partly with Berkshire shares — something he has long been loath to do. In 2007 he lamented buying Dexter Shoe in 1993 for $433 million in Berkshire stock — which would later have been worth at least $3.5 billion if Mr. Buffett had not exchanged them for Dexter, which ended up worthless. “He’s so sensitive to this issue that I can’t believe he would [pay in stock for Burlington Northern] unless he had absolute confidence that it will work out well over time,” says David Carr of Oak Value Fund, which owns $25 million in Berkshire shares.

At age 79, Mr. Buffett has no plans to retire, but he wants to ensure that Berkshire’s businesses will endure for decades after he is gone. He is betting that no new technology can make rail transportation obsolete. Mr. Buffett has sometimes been wrong about which businesses will prosper forever. Over the years, he’s invested in shoes, newspapers and printed encyclopedias. But Mr. Buffett’s approach underscores a key lesson for any investor: Before you buy any business, ask how vulnerable it is to new technology or price competition.

As a result of the Burlington Northern deal, Berkshire’s Class B shares will split 50-for-1, which would knock its share price down from $3,300 to $65. That puts the shares, for the first time in years, within psychological reach of most investors (who have long balked at Berkshire’s high per-share price).

Like Burlington Northern itself, Berkshire’s shares aren’t quite a steal. Mr. Buffett is putting tens of billions of dollars into a company that he thinks has only moderate growth prospects. That implies that the market as a whole isn’t a steal, or he would have put the money elsewhere. But Mr. Buffett has built an investing bulwark — and an industrial conglomerate. Berkshire is likely to survive any storm, but whether it can continue to beat the market by such wide margins is another story.

The Buyer's Briefing: Basics of Acquiring a Biz

This is from our Greg.

You can get this file from
http://groups.google.com/group/value-investment-club/files

Biz Appraisal Sample + Eval Sheet

From Greg, posted by Josh:

One is a sample business appraisal from my favorite business appraisal company, BEAR, Inc. www.bearval.com BEAR works with accountants and attorneys who work directly with the client to gather information and collaborate on the production of the appraisal. BEAR also does many appraisals directly with clients.

The other report is a report I created to help small business sellers understand the value of their businesses – this one is really more like a Comparative Market Analysis (CMA) that a Realtor would give to a homeowner rather than a formal appraisal. I attached the unlocked Excel spreadsheet rather than a pdf of the final report so everyone could play with the spreadsheet if they want. It is not set up to be particularly user-friendly since I am the only one using it besides my marketing administrator. She can turn around and ask me a question if she gets stuck.

You can get those reports at

http://groups.google.com/group/value-investment-club/files

You can make it to Critical mass with small busines

As a business broker for the last 22 years I have sold hundreds of businesses. My most successful small business client came into my office in 1994 to buy his first business. At that time he had a net worth of $75,000 consisting of $40,000 home equity and $35,000 cash. He bought a very troubled Denny's Restaurant and turned it around by hard work, cleaning, firing the thieves, hiring and training good people to staff the restaurant. He doubled sales in six months and tripled sales in a year. He had been working as a manager at Jack-In-The-Box for the previous 8 years.

CRITICAL MASS is a term coined by Bob Brinker, a hedge fund manager and talk show host you can hear on Saturdays and Sundays on KGO 810 and other ABC affiliates across the nation. Critical Mass is the status of having enough passive income from your investments that it totally supports your lifestyle including taxes and inflation. Bob Brinker also publishes an investment newsletter Bob Brinker's Marketimer which has provided me with valuable market information for the past several years. You can subscribe at http://www.bobbrinker.com/

My client reached Critical Mass after building his Denny's chain for several years. Today he owns 32 Denny's Restaurants and 6 Black Bear Diners in several states. He has built a great management team and has state of the art business systems. His revenues exceed $50 million and the pretax earnings are approximately 15% of revenues. He mainly works on business development now.

So you don't have to start the next Google to achieve financial independence!