And why his “recent drought of acquisitions” is likely to continue.
Warren Buffett explains in his annual letter to Berkshire Hathaway shareholders why he made only one large deal in 2017 (the 38.6% stake in Pilot Flying J) though his investment vehicle is sitting on a huge pile of cash, and why it will continue to sit on this pile of cash, rather than invest it. This “recent drought of acquisitions,” as he says, came down to this: Companies are overvalued.
He blames the “purchasing frenzy” by deal-crazy CEOs, “cheap debt,” and other factors, including those CEOs’ promises of “synergies” that then rarely or never materialize.
Buffett goes through it step by step. One of the four “key qualities” for acquiring stand-alone businesses is a “sensible purchase price,” he said:
That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers.
“Why the purchasing frenzy?” Buffett asks and then shows how that frenzy happens:
- “In part, it’s because the CEO job self-selects for “can-do” types.”
- “Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase.”
- “Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size.”
- “Investment bankers, smelling huge fees, will be applauding as well.”
- “If the historical performance of the target falls short of validating its acquisition, large “synergies” will be forecast. Spreadsheets never disappoint.”
Then there’s the central-bank aspect – the effects of their experimental emergency monetary policies that have now endured for nine years. In the corporate credit market, these policies have pushed the cost of borrowing, even for risky companies doing highly leveraged deals, to ludicrously low levels:
The ample availability of extraordinarily cheap debt in 2017 further fueled purchase activity. After all, even a high-priced deal will usually boost per-share earnings if it is debt-financed.
At Berkshire, in contrast, we evaluate acquisitions on an all-equity basis, knowing that our taste for overall debt is very low and that to assign a large portion of our debt to any individual business would generally be fallacious (leaving aside certain exceptions, such as debt dedicated to Clayton’s lending portfolio or to the fixed-asset commitments at our regulated utilities).
We also never factor in, nor do we often find, synergies.
Then there’s the issue of leverage. When money is cheap, companies lever up. As bankers used to say: Bad deals are made in good times – though bankers no longer say that. In tough times, money is expensive, liquidity is scarce, CEOs are prudent, and bad deals are hard to pull off because the bad deals that had been made in good times are now disintegrating into a costly mess before their very eyes.
But Buffett is not big into leverage, and it shows in the returns, he says:
Our aversion to leverage has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.
This is not to say that Buffett might not make another “very large” acquisition “from time to time” if an opportunity arises. “In the meantime,” he says, “we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own.”
This statement about “prudence” – and the reasoning behind it – is sort of a warning about the risk-taking prevalent in the markets these days, and the distortions and overvaluations it’s causing, and the fact that this frenzy won’t last forever, and that there will be many buying opportunities after this frenzy has unwound.
Buffett and other billionaires love buying newspapers though they have a “terrible future,” as Buffett himself said. Now his own newspaper conglomerate announced the second round of layoffs in 10 months. So here are the billionaires that bought US papers. Read… Why do Billionaires Keep Buying US Newspapers despite their “Terrible Future,” as Buffett Said?
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Old Warren obviously won’t waste a dime of his money on bad deals.
“Patience is a virtue”
I beg to differ. I worked at PCC when BRK acquired. He did zero DD and I know PCC has performed at best 65% of its forecast (EBITDA) in the first 2 years. Purchasing accounting was based on this forecast. Mark needed Warren to be his savior from all the activist. Warren needed him to show he was doing deals (similar to Mark). As a thank you Mark bought Schulz for $800 million based on 2016 revenues of $210m (really much less because no one checked the intercom sales) and a below zero margin. He doesn’t have to admit mistakes because all continue to believe he is god. PCC produces less than a 30 y UST.
I remember Buffet took a beating in the run up to the 2000 bubble. He held firm and said he wouldn’t invest in many tech companies because he couldn’t understand their business model. That turned out to be wise.
However, why is he promoting stock market investments to others during this bubble? When asked if things are overvalued, he touts the resilience of the U.S. economy and the long-term history of stock price increases. He seems to be a market timer with respect to this own investing, but recommends a buy and hold strategy to others.
In this case, I think we should do what he does, and not what he says on CNBC. I wish he would be more honest with the public about the state of today’s overvalued markets.
Think about it…. if OTHERS didn’t buy and hold, it would affect his own investment moves. On the other hand, Buffett is nearly 88, succession must be on his mind, not making bold stock market moves and large buyouts.
Gotta agree though, keeping a chunk of cash on the side is prudent.
Buffet understands psychology well, and never wants to be the bearer of bad news – that the markets are overvalued is plain obvious but unpleasant news to most.
In the trough of the next downturn, he would have an op-ed in the nytimes goading folks onto equities after berkshire has taken its positions – just as he did in 2009.
I understand your concern.
In Buffet’s defense, remember that he is still in the market, overwhelmingly, because Berkshire owns all those companies. He hasn’t been spinning them off. It’s only new money that he’s holding out of the market. So some few or maybe 10, wild ass guess, percent more than usual out of the market.
I have a collection of studies which purport to show that Buffett could only have become a billionaire through systems of insider trading and stock manipulation, systems which have proven sufficiently sophisticated as to avoid serious prosecution despite numerous investigations, going back decades. Each study concludes that it is statistically unlikely in the extreme that he could have so successfully and repeatedly beaten the market by legal means. Either that or he should be investing in lotteries and playing roulette in Monte Carlo.
You can google up related information if you’re interested and aren’t disgusted with Google. It’s not impossible that you could find such studies online. The conclusions of these studies are taken for granted in certain investing circles where insider trading and stock manipulation are routinely deplored. There are many examples: Jim Cramer has publicly boasted about profiting through pump-and-dump schemes, but free speech is not a confession, you know. Circumstantial evidence is rarely sufficient for successful prosecution, and it’s almost unheard of for insiders to turn states evidence.
Generally speaking, beating the market means you don’t make your best research public, regardless of how it is acquired. Research can be expensive and therefore used for best advantage. Normally, the most the public can hope for is partial truth and sophisticated misdirection. IMHO, it is dangerous to trade on information provided by those who may have a stake in market outcomes, particularly if sourced from suspiciously successful investors, and inference based on their publicly-known trading behavior is little better.
There are extremely good reasons why retail investors have been notorious for losing.
I watched David Tepper say he had insiders at the Fed and BOL don’t have a link though.
walter map – Doesn’t he also invest in ethically shady but very profitable things like buying up RV parks and jacking everyone’s rent up, high interest used car loans, and things like that?
He’s kind of like the real-life “Mom” from Futurama.
Buffet is a master at manipulating the message for his gain. When AAPL stock was trading around $90/share he was proffering his usual line about how he will not own AAPL because he does not understand the business and he believed they were too dependent on a single product that may become a cheap commodity consumer good. While he was saying this about AAPL Charlie was buying hand over fist and it became their largest holding. Moral of the story Buffet lies and like all things in life pay attention to actions not words – expect to hear about a big acquisition soon. He is probably just trying to talk down the market – per usual before a big purchase.
The guy is a liar – says he lives on 6 coca cola’s and fast food, a bald face lie. He is doing everything he can to extend his life while encouraging others to eat garbage. I think he is evil incarnate.
Buffet is no way a plain equity-value investor and why the press looks the other way is anyone’s guess.
I agree with you!!
I think he bought Apple a lot later than that if you look at his listed acquisition cost. For the life of me I can’t figure out why he bought Apple given the fact that computers and phones are a commodity and Apple cannot maintain its price advantage for ever. I wonder if anyone has any ideas on that?
The stock market is a simple game: buy low, sell high.
So why in the world would a guy, who is the most watched investor on the planet, say what he thinks and show what he planned, if he wants to win this game?
people here should take a quick look into how Buffet has treated his own grand daughter if they desire a window into his real character … or lack thereof.
Buffet is no different in character than any other conglomerate investor. He is NOT an entrepreneur.
The main bearing plank upon which his empire stands is being in the top 3 companies of any given market. If the company has no or few competitors, then deceitful, ol’ Warren will take a gander. If you have many competitors, ol’ Warren will drive on by.
Exactly, he is not telling the truth to the public, he is expecting a crash in stock market so that he can buy many companies extremely cheap with his huge 100 billion usd cash. But he keep advising that there are stock to buy, future is good, bla bla bla..
If you are in it for the long haul, and you aren’t buying with leverage, and you re-invest your dividends, and you don’t overpay, or expect the people managing the companies you own to artificially goose returns that looks great in the short term, but risk the enterprise when times get tough – then your portfolio probably looks a whole lot like Warren’s – and you’ll be just fine. Because the market may correct in a vicious way like 2009 – but it will come back, and you will be fine. But if you can get some dry powder now, and be patient – who knows the month or day, but there are bound to be some terrific opportunities after the next major correction. Buffet is being perfectly consistent in his messaging.
Bobber I absolutely agree. I’ve been saying the same thing about Warren. It’s funny how every Buffett quote is about how the American economy will always do well and stocks will too, and to buy stocks, and not overthink it. And then, boom, he comments that they’re overvalued. He can move the market with comments I know so he does have to be careful. But it’s a bummer for the people that have been buying based on him touting that it’s good for the long term. And just like that he’s concerned they’re overvalued now? Not much has changed in the past year or two. They’ve been overvalued; if interest had been anywhere near levels they should have been.
So all those folks who are in or close to retirement and are too deep into the markets(like a lot of people I see), a drop of 40-50% in value may mean they won’t be able to make it to the long term.
Buffett isn’t adverse to the loansharking business either, Wells Fargo and Quickenloans. He finds the pickings slight because Fed policy put a permanent barrier between (expensive) SB loans and free money for Wall St corporations. Wall St doesn’t want to mess with the little guys, which is why you will never see a chance to buy Microsoft again. SBs represent COMPETITION to established companies, (and Gates either bought out or killed off his) but we live in that age. How many sequels are there to Star Wars? This is a dead economy walking, and should we ever get a deflationary reset of assets it would destroy the stock market, while money goes into productive business ideas, not to buying back shares of already bloated companies who use financial tricks to fool the bean counters (who live to be fooled). Buffett has said he has cash waiting to buy when the price of assets comes down, he will be stunned when prices stay down.
A lot of companies and assets will get wiped out in a deflationary reset because they reside on a junk bond house of cards. This really is a zombie economy where all the jobs that pay well are in places too expensive to live and most people anywhere you go are riding on the edge. One small downturn will have a huge negative feedback effect as suddenly the capital wasting reality of a number of industries is made obvious a large number of jobs are shed and negative demand shock sets in to effect other industries. However, I do believe the fed will come back with enormous stimulus. This will not allow for permanently depressed asset prices, however it will more than allow for permanently depressed standards of living.
“In tough times, money is expensive, liquidity is scarce, CEOs are prudent…”
I cannot understand how the blockheads at the central banks cannot or will not understand that when money is expensive it is used judiciously and thus invested wisely. IMO, unless you get CEOs willing to share the wealth with the workers so that wages also grow, these central banksters can only create an illusion of growth (using cheap debt).
All I can say is we are all doomed till we can get rid of the central banksters. I also doubt it will ever happen!
While I agree with you sentiment, the Federal Reserve is essentially all about the banks and the government. Prudent lending would restrain the growth (no matter how fake) economy and therefore bank profits. They do what is favorable to both of those interested parties. Prudance is not part of their vocabulary
The Federal Reserve was created to provide liquidity in times of crisis. That’s their role in the banking system. To always bailout the banks.
I haven’t forgiven Woodrow Wilson for establishing the Fed. My wife says I should let it go. But it’s difficult. I dunno.
I’m with you Jim, but I also hold a grudge against a Democratic member of the House from Virginia, Carter Glass (yup, Glass-Steagall Act), and a Democratic member of the Senate from Oklahoma, Robert Latham Owen who coauthored the origin of the Federal Reserve Act.
H. R. 7837 began on 29 August 1913, and it was soon called the Glass-Owen Bill. And on 23 December 1913, it finished by being signed into law by President Wilson. Of course, Congress gave the Federal Reserve Bank a 20 year charter, as had been done in the past, but in February 1927, they changed their minds and declared that the Fed should live forever unless Congress changed their minds again or “until forfeiture of franchise for violation of law.”
No, seriously, I did not make this story up, and evidently, the Fed has not forfeited their franchise for violation of law …
Jim Mitchell – Beavis & Butt-Head talked about Woodrow quite a lot. Maybe your wife is right … let it go, stop beating Woodrow up so often…
(I couldn’t resist!)
He blames everything but himself i.e. he received a bailout. Sure it’s not a direct bailout, but had the government not bailed anyone out in 2008/2009, Uncle B might have walked in front of a train like that German “billionaire”.
Either way, I always pray that he’ll live long enough to see his empire collapse.
well, he does own BNSF ,,,
The *Silver Fox* is nobody’s fool. He can manipulate with the best of them.
During the famous Buffet Silver scandal of 1997-1998, to justify taking silver up in price they had to make the inventories appear to decline. The easy way to do that was simple. Buffet bought the silver but in the London market – not COMEX. Thus, the silver was moved from New York to London and then everyone touted silver was in short supply as if it had been consumed like wheat.
It would be interesting to know what percentage of stock purchases are companies buying their own stocks. There are all kinds of things that could end the era of easy money, in which case those stocks that were bought at the top of the market could lead to huge losses.
Is it not amazing that those same companies buying their stock at inflated prices always stop buying when the stock collapses and they could buy back cheap. After all, why purchase stock when the price drops – there’s no easy stock option bonus in that game.
Buffet made a smooth move up here in Canada.
Alt but legit mortgage co Home Capital got into trouble with regulators AFTER reporting to them that it had fired a small number of brokers for lax standards. It was suspended.
Then came a run on its notes it used to fund mortgages and share price plunged.
The co was saved short term by a VERY expensive loan from Ontario Pension Fund, who had determined, as did Buffet, that the firm was fundamentally sound with a good portfolio of mortgages, many of the properties up double digits in value since loan.
So now the Buff strikes: first he buys a bunch of its still very depressed stock.
THEN he lends it 2 billion, still at a juicy rate but better than before.
(Question: If you are going to lend a co money, is buying stock before insider trading?)
Don’t have exact results on hand but co has recovered nicely and so has Buffet.
PS; in the settlement with regulators, who are widely thought to have overreacted, the co was forbidden from blaming regulators for its near death.
Ahh but come on He’s a sweet old grandpa who likes ice cream cones and teddy bears NO?
Insider trading only applies to small fish like Martha Stewart. The whales have way too much power to be charged with a crime. No billionaire has ever been charged with insider trading, they are shielded by their wealth – they are above the law. Martha was a mere millionaire, incapable of paying off the necessary players and easy to frame.
Martha Stewart has been out of prison for a while now, so when everything goes to hell again they blame her again. This time they may throw away the key to make sure shenanigans never happen again.
Insider trading rules are like taxes, they apply only to “losers” like us… and, to a lesser extend, Martha
AGAIN FACTUALLY INACCURATE.
Martha was locked up for lying to the investigators.
“(Question: If you are going to lend a co money, is buying stock before insider trading?) ”
how can acting on what you personally or your corporate, has decided it will do in a given situation be Insider trading there is not second or third party acting on the Internal decision/Information,
Talk about overvalued!
Class A shares of Berkshire Hathaway as of January 8, 2018 sold for $304,280,00 each! Thats because there has never been a stock split and according to Buffett there won’t be.
Yet the Class B shares issued a 50 to 1 split in January 2010 and as a result Buffett acquired the BNSF Railway.
Another little known fact is their insurance “Cash Cow” GEICO, is a major source of capital for Berkshire Hathaway’s other investments.
Warren’s plans for handing over the leadership of the conglomerate are being kept under wraps, but are proceeding according to his direction. In all likely hood, Charley Munger will probably step down at the time Buffett does.
With a Class A share price of over 300 grand each, I wonder if a stock split is in offing once Warren and Charley are put to pasture?
This stock market is pumped up by cheap money and greed. Companies have borrowed money to buy back their stock, and margin traders have bought stock with cheap money. The underlying fundamentals are not strong. Consumers are loaded up with debt. Now that the cheap money era is ending, the market will come down to reality. And it will be mediocre at best. My bet is that Asian stocks will outperform U.S. stocks for the forseeable future.
Buffet clearly understands the CEO support staff mindset. If I wrote something like that it would be sneered at, yet it’s only a small step away from how economists keep their jobs – kiss up and support the people who need specific theories promoted as fact otherwise unemployment and obscurity for economists is the alternative. This is why we have QE and negative rates, and debt monetization as respected ideas, even at the central bank level. They are captured entities.
Looking ahead, China and Japan are mostly closed systems that need an outside world for limited purposes. The Eurozone is likely to become another one to keep ECB QE in process. Virtual walls, rather than concrete boarder walls, will isolate each so that the outside world does not impact their internal processes. These wall will appear and grow as needed. The US, without corresponding QE and rate management, will gyrate and Buffet plans to get in on the bottom of a few gyrations. After that, we will probably have our own closed system to live in, using the best ideas from the ECB, BOJ, and China to start with. The alternative is free markets. Which seems more likely?
1) BRK have 116B in the US gov vault. Mostly in the short duration, with
an average of 88 days.
No holdings in any corp bonds, BRK don’t trust them.
Why BRK need the 116B, sitting idle and not joining the M&A party :
==> Equity + current & LT debt + liability > 700B. Cash is bout 16%.
The margin of current & LT debt + liabilities is over 60% of the total.
Better than many other co, but not great.
2) WB can do some media layoffs, because the gov moat is currently idle.
Just saw this probable money-laundering scheme re Amazon:
“‘Patrick Reames had no idea why Amazon.com sent him a 1099 form saying he’d made almost $24,000 selling books via Createspace, the company’s on-demand publishing arm. That is, until he searched the site for his name and discovered someone has been using it to peddle a $555 book that’s full of nothing but gibberish.’
What sort of criminal enterprise allows someone to register someone else as an “author” for some sort of publication and then lists it for sale without any sort of verification that said person actually was involved in and is financially part of the transaction?
The obvious scam is to “buy” the book using a stolen card and then the thief siphons off the money. But then, Amazon “credited” that sale to someone else for tax purposes and sent said person a 1099!
Never mind listing “books” for sale that are full of garbage — in other words, blatant scams as they’re not “books” and 30 seconds of someone actually reading the material would make that clear.”
How much of retail sales is blatant money laundering?
Gotta hand it to the money launderers….that is rather clever.
Nicko2 – and down in the “Comments” section at the link, another person was billed almost $200.00 for two CD’s he never ordered off CreateSpace (an Amazon company). It was only after arguing with the customer service rep at Amazon and then threatening to call the FBI that Amazon refunded his money. How many people don’t bother calling, or don’t even notice the charges? I’m wondering how pervasive this really is. I mean, who is looking?
They should get with the program: buy properties in Canada.
He did one better. He bought 10% in Home Capital north of the border. Bailed them out and pumped up their value. He’s not going to buy 1 house, he will take an entire town when they foreclose for far less money.
1998 just called, it wants its web page back.
Buffet has this great act like he is the people’s billionaire and a chuckling gosh golly Grandpa Walton. He games it like the best of the land sharks and gets bailed out as well. He made gazillions on cheap warrants on Goldman ,gee right before overnight they went from a brokerage to a holding bank. Who knew? His loan sharking financing for poor people with Clayton homes another nice one. He had trouble with his insurance on insurance in 2008 and the new tax cut just got him an extra 29 billion in savings. But the financial networks worship him
Pigeons will still shit on his statue
Perhaps it’s relative…when I interact with people from the companies he has acquired in my industry: Lubrizol, Fruit of the Loom,et.al., they were thrilled to be acquired by Berkshire. Why? He buys companies for the long haul. He gives them the resources and tools they need to get the job done. He doesn’t lever them up, saddling them with debt to hustle and flip like so many of hustlers on Wall Street. Bill Ackman comes to mind. Maybe you should seek to admire folks in a different line of work. Within the industry, There are mostly worse than Buffet.
What can you buy in a “everything “bubble”. Wonder if he is considering buying gold ? Warren has a nice war chest to deploy the next downturn.
Warren a small man compared to his father;
Isn’t cheap credit ending anyway? That’s gonna put a stop to more than just purchases of “acquisitions”.
Buffet isn’t an asset manager, is a corporate CEO. Money managers have to give dividends to investors. Buffet has never paid and will never pay dividend.
IMO, long term Berkshire investors in Berkshire are idiots. If Buffet wasn’t CEO, HE wouldn’t buy Berkshire. If you gave buffet $60,000 in 1990, you would have a piece of paper that said Berkshitre hathoway on it, which is what you’d have today.
100 years ago, people bought businesses and they used the cash flow from their businesses to live. This is what Buffet does. His investors? They’re going to die and their kids are going to blow the money. Hot diggity.
Fascinating outpouring of cynism about Warren Buffett from your readers!
Quite the Scoundrel of Omaha, it would seem.
I would note that Buffett’s reputation for fantastic investment wisdom and gains were all built in the early years when Berkeshire Hathaway was much smaller, and in the last decade or two, BH has mostly matched the SP500 in performance. This seems to be the fate of almost all gigantic investment funds.
Curious what you think of the general barrage of negative comments about Buffett
I don’t know Buffett personally and have no opinion of him as a person. Some commenters called him names (“evil,” “thief,” etc.). I blocked or deleted most of those because “name calling” violates our commenting guidelines.
However, much of the criticism of how he operates is justified. Buffett is a master of market manipulation and media manipulation.
For example, he quietly buys a big stake in company X. This buying pressure and some insider dealings drive up the share price 10%. Then he discloses it via an SEC filing and goes on CNBC to explain how great X and its management are, yada-yada-yada. Shares jump 20%. Then he quietly buys more shares, but a much smaller amount, discloses it, explains on CNBC that he just loves the company and yada-yada-yada. Shares jump another 10%. He does that one more time. CNBC and other media organizations go gaga over him. He made 50% on this stock because he masterfully manipulated up the stock price.
Then he quietly sells part or all of X, and shares begin to sink from the selling pressure. His firm then discloses in an SEC filing that it no longer holds these shares. The media doesn’t discuss it much. There is none of Buffett’s yada-yada-yada. Shares continue to sink. And those retail investors that bought in late just helped Buffett get out at the peak. This is called a “wealth transfer.”
This is just one example. He has many tricks up his sleeve, and the media eats out of this hand. And that is where part of his above-market performance comes from.
He is also the single biggest beneficiary of the Fed’s gigantic bailouts and of the government bailouts, including TARP and loan guarantees, due to his financial and insurance empire that got bailed out. He had advance knowledge of the Fed bailouts. The Board of the New York Fed, which decided and handled the actual bailouts, consists of executives of the largest financial firms in its districts. So they all knew and spread the word about the coming bailouts. Buffett is best friends with Goldman CEO Blankfein. So when Buffett made this big investments in Goldman and BofA (much of it warrants), he had insider knowledge. He later admitted as much.
And the sanctimonious donations of stock he made to charity, for which he got such lavish media praise, were nothing but an even more gigantic tax dodge. He had practically no cost in those shares, never paid taxes on the gains, but then got to reap billions of dollars in tax benefits when he donated them. He doesn’t donate unless it slashes his tax bill.
The list is long. But in short, Buffett is the avuncular face of, and a big power behind, our crony-capitalist system that privatizes profits and socializes losses and that masterfully creates such immense income and wealth disparities.
But he is a very smart and knowledgeable guy. And you ignore him at your own risk.
Not to mention is opposition to the Keystone pipeline which insured that heavy oil and blending components remained on his choo choos
Well said, even in the information age some people still are only able to access the rose of the story and never see the fertilizer used to create the lovely story.