Why Buffett bought BNSF and did stock split?

(Source: lsnhs.leesummit.k12.mo.us)

I can think of a few reasons:

1) He sees value in BNSF;

2) He want to use some cash so that his successor won’t have too much cash to squander (this is legit considering his age, and a lot of times people make mistake when they are rich);

3) Last but most important, financial crisis taught Buffett a lesson: liquidity is very important. GE and GS got his endorsement and got cash by issuing stocks in one day. Buffett could not do that before buying BNSF and the stock split. Now he can. BRK is S&P component, much more widely held. “Get access to capital market” is one reason Goldman went public in 1990s.

I think Buffett only said 1. But I think 2 and 3 are also the factor here. Remember Buffett was against stock split up to this BNSF deal. Although he said publicly splitting Berkshire stock is for small BNSF shareholders, a valid point. Nonetheless I would be astonished that was the only reason to overthrow 40 years belief/rule in one deal.

Reading Buffett letter to shareholder 2009

link to 2009 PDF annual shareholder letter here.

Buffett CNBC interview
(part 1 here, following the link from part 1 to get to part 2 to 8 )

Recommend reading by Buffett
Keynes’s *General Theory*, chapter 12

Intelligent Investor Chapter 8 and 20

My Notes

Portfolio management: trade to lower cost

Buy and hold, long term investing? I hold CROX from $75 to $20, hoping for a rebounce. It never came. Sometimes we got to trade stocks to take advantage of price volatility (up and downs). I was successful on this aspect from time to time, especially since the stock rally started this March. I made some money back from NRG Energy (NYSE:NRG) and Huntsman (NYSE:HUN), to cover the loss from holding Berkshire Hathaway (BRK.B). Here again the lesson of “buy and hold”, even for a good company like Berkshire, I bought it at wrong time (April, May 2008).

BRK.B Berkshire Hathaway Inc. Buy Apr 9, 2008 1.00 4,349.89 7.00
BRK.B Berkshire Hathaway Inc. Buy May 12, 2008 1.00 4,130.00 7.00
BRK.B Berkshire Hathaway Inc. Sell Mar 23, 2009 1.00 2,894.25 7.00
BRK.B Berkshire Hathaway Inc. Sell Mar 26, 2009 1.00 2,939.51 7.00

Pros and Cons of low cost trading: Sogotrade

Exelon NRG Energy saga continues

(Presentation May 27) NRG Energy at Deutsche Bank Securities Energy & Utilities Conference.

(Noise from OptionMonster May 27) Options prepare for drop in NRG. I am not expert in Options, but I think stock price should affect option (derivative) price, not the other way around (as the NRG options shown in Yahoo Finance). Maybe guys at OptionMonster make more money from writing articles (selling Ads) compared to trading options 😀

(Daily Herald May 26) Analyst: Exelon will need to increase its bid for NRG

(Business Wire May 21) Exelon Receives FERC Approval for Proposed NRG Acquisition. Notice this is one of many regulatory hurdles EXC needs to overcome before the acqusition going through.

(WSJ May 15) Exelon CEO: If NRG Energy Bid Fails, Will Look Elsewhere

Notice earlier this year Exelon won 51% NRG shareholder via. the tender offer (WSJ article).

Berkshire sold some ConocoPhillips shares in Q1 and April

(Update) RationalWalk has a much more comprehensive piece on Berkshire Q1 results.

(Original) News from San Jose Mercury News. Quote:

Berkshire says it sold 13.7 million of its 79.9 million shares of ConocoPhillips during the first quarter to generate a loss that can offset past capital gains taxes.

More details from its Q1 earning report (PDF). Again quote:

…Investment losses from other-than-temporary impairments for the first quarter of 2009 predominantly relate to Berkshire’s investment in ConocoPhillips common stock. The market price of ConocoPhillips shares declined sharply over the last half of 2008. In the first quarter of 2009, Berkshire sold approximately 13.7 million shares of ConocoPhillips and sold additional shares in April. Although Berkshire expects the market price for ConocoPhillips shares to increase over time to levels that exceed original cost, Berkshire may sell some additional shares before the price recovers. Sales in 2009 were or may be in anticipation of other investment opportunities, to increase overall liquidity and to carry back realized capital losses to prior years for income tax purposes…

My thoughts

Berkshire annual meeting 2009, David Sokol

(Update 02May09) 4 ways to follow the meeting.

(Original) David Sokol is the Chairman of Mid-American Engergy holding, a subsidiary of Berkshire Hathaway (NYSE: BRK.A; BRK.B). He took interview from Becky Quick of CNBC today. The Berkshire annual shareholder meeting starts tomorrow. CNBC BuffettWatch will follow minute by minute. Some people expect shareholders will ask some real questions this time, unlike in the past, let Buffett go loose by asking general questions like how to be successful in life.

Buffett NRG Energy average cost

From gurufocus, we can see investor gurus like Buffett’s buy and sell actions, usually 45 after the close of a quarter. NRG Energy is an interesting one, because it’s going to build the first nuclear power plant in the US for 30 years, and the offer Exelon put up last Oct. (0.485 share of Exelon for each share of NRG). More interestingly, Buffett’s Berkshire started buying NRG since last year. Here is the transactions: http://www.gurufocus.com/StockBuy.php?action=buy&GuruName=Warren+Buffett

2Q 08: $42.40 * 3,280,100 = 139,076,240
3Q 08: $35.50 * (5,000,000 – 3,280,100) = 61,056,450
4Q 08: $21.50 * 2,200,000 = 47,300,000

By my calculation average cost Buffett paid for NRG is 247,432,690/7,200,000 = $34.3657

Buying a stock Buffett was buying gives one some comfort because Buffett usually did his homework, and adhere to his rules (business; moat; management; price etc). Buying a stock at discount of the price Buffett paid offers some margin of safety. BTW, NRG closed at $18.33 today, about 50% of the Buffett price 🙂

Downside
The main downside of NRG is more than 50% of shareholders already accepted the tend offer from Exelon (they surrendered). Exelon extends tend offer till June 26. So hold on the stocks, just like the Oralce of Omaha does.

Questions for Warren in this year annual shareholder meeting

Also collected here.

1. Why invest in Utilities? Does not Utilities need a lot of capital, what’s the difference between Utilities and the original Berkshire (BRK.A, BRK.B) textile business? You did explained in your letter that utilities can deploy capital for a decent return. And I read this old article “Why Buffett is buying utilities” from MSN money (Jim Jubak). Do you agree some of what Jim said?

2. Why keep American Express (NYSE:AXP) and Moody (NYSE:MCO)? Don’t we see the permanent demage of consumer credit, and the rating companies? How about Wells Fargo (NYSE: WFC)? Why not sell all Bank of America (NYSE: BAC) shares (noticed you did sell half last year)?

3. Derivatives. There are a lot crititics on this, and you have explain this very well in the shareholder letter. But, as I read “Poor Chariles Almanack”, Charile is much more cautious on derivatives, and its systemantic risk (chain effect of credit risk form counter parties). What’s your comments on over the counter derivatives market in general?

Will add more questions when it pops up.

Disclosure: I sold my remaining BRK.B share yesterday. No positions on the other stocks being mentioned.

Berkshire Buffett COP Conoco Phillips stake

(Update Feb 29 2009) CNBC is putting up some nice words on Buffett today. After all, he lent $3 b to GE (the parent co. of NBC) last fall.

(Original) In these turbulant days, investors, ordinary and professional alike, look for directions from investor guru more than ever. Of course among gurus people pay attention, is Warren Buffett quarterly stock holdings change: people are interested in what he bought and what he sold, some (like yours truely) tried to understand his move and thinking, and follow him if makes sense. To avoid copycats, Buffett usually tries to delay his 13G filings as late as possible (within the deadline of SEC, or other regulatories). He famous sent a regular mail to Hongkong Securities Exchange after he sold the PetroChina stock, postmarked by the deadline of HSE.

Buffett lost his touch?

Berkshire Hathaway, a.k.a, Warren Buffett’s diversified holding company, reported a not-so-good quarter Friday after market close. Here are the results.

(full size pic here)

On the surface the result is not good. But I think the loss from derivatives is on the paper and will be temporary.

What do we learn from Buffett
Discipline, discipline, discipline (see the definition at Wesbster Dictionary). There is a new book about Buffett came out lately. Here is the link to Amazon. If you like, you can also help me out buying from my Amazon store. But this is not my point. My point is, among many attributes that contribute to the success of Oracle of Omaha, discicpline is probablly the most important.

Jason Zweig wrote an article about the secret behind Buffett’s success on WSJ. Here is the Chinese translation.

Buffett pretender award