Unstructured Finance

Lessons from Buffett-palooza: Six months in

Buffett.jpgSure, there were the prosaic T-shirts with Warren Buffett’s face at the annual Berkshire Hathaway meeting this May. But there were also boxers. Ketchup bottles. Rubber ducks. Why not? The country’s most famous investor is also its most consummate pitchman – only one of the distinctions that differentiate Berkshire Hathaway from other companies.

 

Of course, Warren Buffett is so iconic an investor that the word “iconic” seems inadequate. He’s the fourth richest person in the world, an avuncular-seeming investor who nonetheless made money off Goldman Sachs, who themselves are hardly pushovers. He’s got a humble, down-to-earth demeanor and a personal fortune somewhere around the entire GDP of Croatia  (WB: $65 billion; Croatia, around $60 billion).

 

It’s now been six months since I started covering Berkshire, and it’s been a learning experience, to say the least. Covering this company is not like any other (can you imagine AIG selling out of Bob Benmosche-emblazoned shirts? How about just giving them away?). Below I’ve compiled a roundup of things the Berkshire beat has taught me at the half-year mark, along with things to watch for in the rest of 2014 and beyond.

1. While Buffett’s been rightfully lauded for his investing track record, his biggest gift might simply be in hiring. In his annual letter to shareholders, he lavishes praise on managers such as Ajit Jain (Berkshire Hathaway Reinsurance Group), Greg Abel (at MidAmerican Energy, now Berkshire Hathaway Energy) and Matt Rose and Carl Ice (BNSF), but many, if not all, the analysts, shareholders and more to whom I speak echo those words. And on the investment side, he’s got Todd Combs and Ted Weschler, as well as rising star Tracy Britt Cool. Buffett makes a big deal of finding the right people because he knows he can let them handle things without his constant interference. That’s part of what makes Buffett able to head up such a sprawling company – Berkshire Hathaway includes dozens of businesses and employs, in total, more than 330,000 people. That’s larger than the entire city of Cincinnati.

2. Buffett is very aware he’s not going to live forever. He’s 83 years old (turning 84 in August), and he knows that his time left at the head of his company is limited. He’s consciously shifting the company to run without him in the future, toward operating businesses with solid managers that do not need him to keep running smoothly. While he hasn’t publicly disclosed his designated successor, he (and his business partner, 90-year-old Charlie Munger) have gone out of their way to reassure investors that the board has eyeballed Berkshire’s roster and has picked out some potential heirs. Whoever takes those reins will, I’m sure, be very competent… but they won’t be Buffett. The kinds of deals that Buffett has managed to pull off have come in part on the strength of his considerable fame. Think of the Goldman Sachs deal during the crisis; it was a big boost for Goldman to be able to say that the most famous U.S. investor had given them a sort of de facto vote of confidence (at what would become a nice profit). Buffett’s lieutenants do not have that same fame, and they won’t be able to command that sort of fame premium that Buffett does.

‘Bond King’ Gross speaks to 700 at Pimco client event in Big Apple

By Jennifer Ablan

Bill Gross did something last week he rarely does — venture from his Newport Beach, Calif. home to meet with investors twice. 

First in Chicago at the Morningstar Investment Conference where he made waves for donning sunglasses and joking he’d become “a 70-year-old version of Justin Bieber,” and then, the next day at a less-publicized event for 700 clients in New York City. 

The meetings are a sign that Gross, dubbed the market’s “Bond King,” is trying to make amends with investors and the media after a brutal first half of the year. 

GUEST BLOG: Edge over the markets and do you have it?

This is a guest post from author and former hedge fund manager Lars Kroijer. The piece reflects his own opinion and is not endorsed by Reuters. The views expressed  do not constitute research, investment advice or trade recommendations.

Most literature or media on finance today tells us how to make money.  We are bombarded with stock tips about the next Apple or Google, read articles on how India or biotech investing are the next hot thing, or told how some star investment manager’s outstanding performance is set to continue.  The implicit message is that only the uninformed few fail to heed this advice and those that do end up poorer as a result.  We wouldn’t want that to be us!

What if we started with a very different premise?  The premise that markets are actually quite efficient.  Even if some people are able to outperform the markets, most people are not among them.  In financial jargon, most people do not have edge over the financial markets, which is to say that they can’t perform better than the financial market through active selection of investments different from that made by the market.  Embracing and understanding this absence of edge as an investor is something I believe is critical for all investors to understand.

Jim Chanos, bad news bear, urges market prudence

Prominent short-seller Jim Chanos is probably one of the last true “bad news bears” you will find on Wall Street these days, save for Jim Grant and Nouriel Roubini. Almost everywhere you turn, money managers still are bullish on U.S. equities going into 2014 even after the Standard & Poor’s 500’s 27 percent returns year-to-date and the Nasdaq is back to levels not seen since the height of the dot-com bubble in 1999.

“We’re back to a glass half-full environment as opposed to a glass half-empty environment,” Chanos told Reuters during a wide ranging hour-long discussion two weeks ago. “If you’re the typical investor, it’s probably time to be a little bit more cautious.”

Chanos, president and founder of Kynikos Associates, admittedly knows it has been a humbling year for his cohort, with some short only funds even closing up shop.

What the? Money managers and the fog of bitcoin

“I still don’t even know what it is” – Jim Chanos, famed short-seller and founder of $6 billion Kynikos Associates.

“You know,  I don’t understand bitcoin” – Bonnie Baha, head of Global Developed Credit at $53 billion DoubleLine Capital.

“I don’t really know enough to have a view” – Chris Delong, chief investment officer of $8.1 billion multi-strategy hedge fund Taconic Capital Advisors

Berkowitz, Ackman bets on Fannie and Freddie puzzle investors and policy buffs

On Thursday, the United States threw cold water on Bruce Berkowitz’s daring proposal to recapitalize mortgage finance behemoths Fannie Mae and Freddie Mac, saying the only way to revamp the home loan market is through proper housing finance reform.

Berkowitz’s Fairholme Capital Management said it wants to buy the mortgage-backed securities insurance businesses of Fannie and Freddie by bringing in $52 billion in new capital, in a bid to resolve the uncertain future of the mortgage financiers by freeing them from U.S. government control. For its part, the government said the way forward would be to create a new housing finance system in which private capital would play a pivotal role.

Up until a few days ago, the idea that the government would hand Fannie and Freddie back to private investors seemed unlikely. Now, the idea appears all but dead. This appears to be bad news for a number of well-known money managers – the most prominent of which are Fairholme and Bill Ackman’s Pershing Square – which recently scooped up shares in both companies.

The nine lives of the eminent domain for mortgages debate

By Matthew Goldstein and Jennifer Ablan

Law professor Bob Hockett, widely credited with popularizing the idea of using eminent domain to restructure underwater mortgages, says he continues to be approached by yield-hungry angel investors looking for a way to help out struggling homeowners and make money at the same time.

He said an increasing number of wealthy investors on “both coasts” regularly reach out to him to get more information about how eminent domain would work and get a better read on “the prospects of municipalities adopting one or another variance of the plan.”

Hockett also is continuing to advise local officials in a variety of cities including some in New Jersey and New York (Irvington, N.J. and Yonkers, N.Y. for instance) on how they might use eminent domain to condemn, seize and restructure deeply underwater mortgages for homeowners determined to keep-up with their high monthly mortgage payments.

Carl Icahn in his own words

Icahn’s Big Year in investing and activism

By Jennifer Ablan and Matthew Goldstein

We held an hour-long discussion with Carl Icahn on Monday as part of our Reuters Global Investment Outlook Summit, going over everything from his spectacular year of performance to his thoughts on the excessive media coverage of activists like himself who push and prod corporate managers to return cash to investors. We also talked about the legacy he wants to leave.

There was much Icahn wouldn’t talk about on the advice of his lawyer, however. While he said he took a look at Microsoft, he won’t say why he decided not to join ValueAct’s Jeffrey Ubben’s activist campaign. He also stayed mum on any plans for his Las Vegas white elephant, the unfinished Fontainebleau Las Vegas resort, which he bought out of bankruptcy proceedings in 2010.

Never one to mince words, Icahn said he takes issue with Bill Ackman’s brand of activism which he believes borders on micromanaging by telling chief executive officers how to do their jobs. “I think Ackman is the opposite of what I believe in activism. You don’t go in and you don’t go tell the CEO how to run his company.”

Money manager titans who can’t wait until 2014

The year can’t end fast enough for some of the world’s biggest investors.

Bill Gross, who many like to consider the King of Bonds, lost one of his prized titles last week when his PIMCO Total Return Fund was stripped of its status as the world’s largest mutual fund because of lagging performance and a swamp of investor redemptions.

The PIMCO Total Return Fund — somewhat of a benchmark for many bond fund managers — had outflows of $4.4 billion in October, marking the fund’s sixth straight month of investor withdrawals, and lowered its assets to $248 billion, according to Morningstar.

Dimon, Schwarzman served as the butt of Moynihan’s jokes at NYC charity dinner

Brian Moynihan brought the funny to Manhattan’s Waldorf-Astoria hotel Thursday evening. The Bank of America chief was on hand to receive the first-ever Happy Warrior award at the Alfred E. Smith Memorial Foundation Dinner, where he shared the dais with political dignitaries like Senator Chuck Schumer and New York Governor Andrew Cuomo as well as comedic heavyweight Stephen Colbert. In his remarks, Moynihan cracked a few jokes at the expense of JPMorgan CEO Jamie Dimon and Blackstone Group co-founder Steve Schwarzman that brought the house down.

The Al Smith dinner is the culmination of an annual Catholic charity drive that seeks to raise money to aid poor New York City children. This year, the foundation’s organizers announced that the dinner had raised $3 million, one-third of which came from Moynihan and his friends. The award Moynihan took home was meant to celebrate a corporate executive who embodied former New York Governor Al Smith’s character, grace and leadership skills and who had an established record of generosity.

Here a couple of Moynihan’s lines that got the biggest laughs:

On the Happy Warrior Award going to a bank CEO who has had a tough time: 

Earlier this summer, Cardinal Dolan [the archbishop of New York] called me and he said, “We’re going to name an award the Happy Warrior Award and we want to give it to you.” I sort of said, “Why me? Why a bank CEO? We don’t get much awards these days.” His Eminence said they wanted to award a CEO who had been through the ringer over the last few years. He wanted to recognize a CEO whose every decision had been scrutinized. Every decision had been questioned by the press, by the politicians and others. So I thought about it. And then he said, “But Jamie wasn’t available.”

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