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Billionaire investing success Warren Buffett does not like owning bonds at this point, and he thinks the average investor should avoid them as well.

The chairman and CEO of Berkshire Hathaway, major investment conglomerate, believes that individual investors should have plenty of cash on hand so they are comfortable just in case something unexpected happens.

He also believes that they should invest the rest of their money in stocks, even though the price of stocks has risen quite higher than they were years ago when the Great Recession first hit.

On Monday while giving an interview on CNBC, Buffett told the world that bonds are a terrible investment at the current time, and he also mentioned that long-term bond owners may see large losses once interest rates eventually rise again.

The Oracle of Omaha also said that stocks are selling for very reasonable prices generally even though the Dow Jones Industrial average is seeing record high levels, along with the S&P 500 index.

Buffett, 82 years old, also mentioned that he doesn’t have any plans to retire in the near future, and he also believes the efforts of the Federal Reserve, with keeping interest rates low, have helped the stock market. Income improvements continue to play a role for stocks as well.

Buffett is a continued fan of Federal Reserve Chairman Ben Bernanke, and he mentions that he believes bond prices are artificially inflated because of the stimulus that is ongoing from the Federal Reserve. The stimulus is $85 billion worth of bonds being bought every month, which keeps the interest rates at a low level. At this time, bond yields are near historic lows, and they move inversely to prices.

On Monday, Buffett gave interviews to Fox Business News and CNBC after Berkshire Hathaway’s annual shareholders meeting this past weekend. It was a star-studded event.

At the time of this writing, Berkshire Hathaway owns more than 80 companies and has large investments in IBM, Coca-Cola and Wells Fargo, as well as other iconic brands.

Buffett also reiterated his support of Jamie Dimon, J.P. Morgan Chase chairman and CEO. He said that Chase has the right person running the show, and he also owns the stock as part of his personal portfolio.

Buffett also believes that Berkshire Hathaway will own a stake in H.J. Heinz – the ketchup maker – forever, and he said that he didn’t have any problem taking on 3G Capital as a partner. They are the Brazilian investment firm that split the bill for H.J. Heinz. He also hopes that the Berkshire Hathaway stake in Heinz will grow as time goes by.

He was also questioned about the way the Heinz deal was structured. People wonder if the 50% split is a change in the way Berkshire Hathaway will invest and do business from now on. Berkshire Hathaway typically buys a company outright, and they let the company run without any intervention whatsoever.

3G Capital is not your typical private equity firm, said Buffett, since they put a large amount of their own money in deals, and they also run businesses.

Buffett even mentioned that Burlington Northern Santa Fe railroad’s traffic is picking up, but it’s probably going to haul fewer carloads than it did before the recent recession.

Burlington Northern Santa Fe “has been a terrific acquisition for Berkshire,” said Buffett.

BNSF contributed $798 million to Berkshire Hathaway’s $4.9 billion profit for the first quarter, which the company reported on Friday. Berkshire Hathaway’s profits rose by over 51%, beating last year’s net income of $3.3 billion by a wide margin.

Most companies would dream of having a one year stock chart similar to Union Pacific. They have steadily risen in value, but the stock has seen very little volatility. Apparently, it is a great business to move things around the country. It’s also the kind of business that looks to produce returns steadily, which is something everybody would want in their portfolio. If you are a shareholder of Union Pacific, beware as Warren Buffett is trying to spoil the fun.

Berkshire Hathaway announced a couple of weeks ago that Burlington Northern Santa Fe Railroad is looking to launch a program that will ultimately test the viability of running locomotives on natural gas, or LNG. Even though it will be very expensive for Burlington Northern Santa Fe to retrofit their 6900 engines to accept this new fuel source, it will be dramatically less expensive for them to operate their locomotives using natural gas. This will change the entire railroad industry and force the Union Pacific shareholders to truly evaluate the tremendous impact that this move is going to have upon the company.

In the week to come, Union Pacific is going to release their quarterly earnings report. The street is expecting a 9 ½% raise in the first-quarter EPS. They expect it to jump to $1.96 per share. They also expect a 2% uptick in revenues. That will bring them to $5.22 billion. Both of these statistics should have the Union Pacific stock moving up higher and right on track. It is unlikely that an industry shakeup is going to occur anytime in the near future.

Since Warren Buffett is behind the major push to change railroads from operating on diesel fuel to natural gas, it is very significant. He has a dramatic effect on anything that he touches. Plus, Burlington Northern Santa Fe is actually the second-largest consumer of diesel fuel. They are second only to the United States Navy. If they switch over to natural gas, this will be a significant shift and have a major impact on the industry.

Plus, we all know that Warren Buffett has a tremendous amount of political influence, so it wouldn’t be surprising to see Buffett push for this, and Berkshire Hathaway will certainly support LNG powered rails if it is a transitional success. Even if there is not any regulatory pressure, the savings in cost has a tremendous potential, so Union Pacific stock owners need to be advised that they should follow these developments very closely. They will have a tremendous effect on the marketplace and the price of your shares.

If you’ve been paying attention, railroads have slowly but surely become the preferred option of shipping for the US in increasing crude oil production. In 2012 alone, delivery of petroleum and crude oil products by railroad increased by more than 30%. Mainly, this increase is due to the added production coming out of the Bakken region in North Dakota.

Continental Resources, a Bakken producer, seemed to really enjoy using the railroads as their favorite mode of transportation. This company and many of its peers have been producing a lot more oil than the current infrastructure and pipeline was capable of handling. That created a very wide differential in the price of crude oil produced out of Bakken and that of the United States benchmark West Texas intermediate. Thanks for the railways, the differential has come down quite a bit recently.

In what may be the best quote from the previous year, Rick Bott, COO and President of Continental told his investors that “We’ve recently seen a significant improvement in Bakken oil price differentials, reflecting higher volumes being shipped by rail to the coasts and the anticipation of increased pipeline capacity… We now have excess transportation capacity in both pipe and rail, and, with additional infrastructure projects in the planning and construction stages, capacity should remain ahead of Bakken production growth.”

This is fantastic news for specific railroad owners and certain producers of crude oil. But in reality, this may be bad news for the future of pipelines.

When dealing with the investment world, we often speak about terms in regards to accompany as having “first mover” status because it takes over and has a large, sustainable advantage over the competition. This tends to be great in regards to future profits.

It’s quite noticeable that the railroads have a major advantage over pipelines. If it’s any indication, the rails are here to stay as the Bakken crude oil vehicle of choice. Since it’s quite obvious that this advantage exists, it’s making it a lot more difficult for the pipelines to compete in this territory. They’re having a difficult time moving in.

The main advantage is quite simple – it’s very easy to transport crude oil with the railways from coast to coast. The pipeline is not currently capable of doing that. Even with the extra shipping costs, domestic oil is a lot cheaper than the oil that we import. That’s why it’s very noticeable that refiners like Phillips 66 are starting to step up their game. They are looking to gain access to crude oil by any means necessary, and that includes the railways.

Since this advantage is so prevalent, it’s highly likely that the railways are going to stick around. This is a lot more than a short-term solution. Pipeline projects are already being affected by the railways. Last year, we learned that ONEOK Partners was not going to move forward with their proposed Bakken Crude Express pipeline project. The company was unable to secure the proper and necessary long-term commitments from crude oil producers. Don’t be surprised if other proposed pipeline projects end up getting scrapped. Since there is ample rail capacity, it wouldn’t be surprising if crude oil producers continue to stick with the rails.

Who’s the big winner in this situation? Berkshire Hathaway’s Burlington Northern Santa Fe Railway, which is a subsidiary of the company. They are currently transporting around one third of the oil produced out of Bakken. This provided the railway company with a 60’s percent jump in petroleum and crude oil product shipments over the first part of 2012. The CEO of the company said that it probably moved about 350 million barrels of crude oil during 2012 alone. Having such a major presence in the area, Warren Buffett’s railroad is strategically positioned to continue to benefit from this new trend.

The other big winner of crude oil being shipped by railway is Plains All American Pipeline. At the end of last year, this company spent over $500 million to purchase five terminals that will complement their existing facilities. All in all, this company is expected to have about 250,000 barrels per day of loading capacity. They will also have about 335,000 barrels per day of unloading capacity. Since there is limited connectivity to the East and West Coast by pipeline, Plains All American has the existing facilities that are going to enable them to deliver cheap Bakken crude oil to the refineries on the coast.

The key takeaway is simple…

Railways will most likely be part of a permanent solution to move crude oil from production basins to market centers. As we have all noticed in the Keystone XL debate, it is not easy to build a major pipeline in the United States of America. That will make it less likely that an east or west coast pipeline will ever be built. So, more than likely, crude oil will continue to keep being shipped through the rails, and Warren Buffett is going to continue to be the conductor of choice.

According to billionaire investor Warren Buffett, he recently chose Howard Buffett, his son, to take over as chairman of Berkshire Hathaway when he finally retires.

You might wonder why Mr. Buffett picked his son to take over as the chairman of the company. Was it preferential treatment? Was it laziness? It was neither those things. As a matter of fact, Buffett had a great reason to make this decision.

His son Howard is a philanthropist, a farmer and he’s also served on Berkshire Hathaway’s Board of Directors for the past 20 years. So, for the last two decades, he’s sat in on all of the meetings relating to the company. He was part of all of the biggest decisions. And when he takes over as chairman, he will be able to make sure the Berkshire Hathaway culture stays the same once his father is finally gone.

When something works, you should stick to it.

By putting Howard Buffett in charge, his father is showing the world that Berkshire Hathaway’s way of doing things is not going to change after he gone. Who would know how Berkshire Hathaway operates better than Warren Buffett’s own son? He’ll be able to preserve the culture of the company while helping the Berkshire Hathaway conglomerate grow. That would be very difficult for an outsider to handle.

Howard Buffett received the greatest apprenticeship you could ever ask for. He was able to sit in on everything happening at Berkshire Hathaway, and he observed it all. Howard was part of the most monumental decisions regarding Berkshire Hathaway, and he made them along with his father and the Board of Directors. Some of the decisions they made were: buying Burlington Northern Santa Fe Railroad, the recent acquisition of Heinz and having the foresight to invest in Goldman Sachs while the financial market was in the toilet.

How Can You Give Your Own Family an Advantage Similar to the One Buffett Provided His Son?

If you plan to achieve success, you’ll do so by putting forth a compounding effort over a period of time. That’s why it’s ideal for your children to leverage their effort and time as efficiently as possible. They need to stay focused on a specific area if they plan to become an expert in that field.

Your children will benefit tremendously, and have a serious advantage, if they learn something and know it better than everyone else. It’s important that they stay focused in one specific area where they will have a tremendous advantage over all of the others.

Think about Howard Buffett for a moment…

He’s accumulated a tremendous amount of knowledge over the last 20 years while he watched his father choose investment opportunities. It’s a major advantage to learn something better than everyone else.

It takes a long time to develop the right contacts. It may even take longer to develop trust in the marketplace. Plus, it takes time to learn through experience how to hone your instincts and hunches that will provide real world value in your real life. It will also take time to learn how to work with people. Lastly, it takes time to learn how to use all of the acquired knowledge, insights and hunches and turn them into an opportunity that your experience will provide.

This is more than just a nice way of doing things.

It’s extremely important to your family’s wealth and well-being. If you have a family business, a motivated member will be a great asset. They will bring the right relationships and continuity to the family business.

If your children understand how to run the family business better than anyone else, then they would naturally be the greatest choice to take over the leadership positions within the company.

They have been already established as an expert in the company. They know how to leverage the family business and they are already a part of a trusted team.

It makes sense that family members are in the best position to make use of the advantages because they grew up around the business. They know all of the people involved. They’ll have an easier time learning the business secrets because they are proactively being taught to them.

What If Money Were No Object?

In order for this to work, your children (and their children) need to have an affinity for the family business. If they don’t love it as much as you do, or they don’t have an aptitude for it, they may want to focus their time and talent elsewhere.

Your children should focus on the things they love, as if money were no object. Because here’s what normally happens…

If you pursue a skill to the point of mastery, the money will typically tend to follow. Your kids will be motivated to work longer, spend more time in the field and really stick it out because they are passionate about it.

Having family money is a great way for children to find their passion. But you have to use the money to help them instead of hurt them. There are a lot of options available when you have family money, and it could also lead to lots of distractions. It’s important that the family members are using the money correctly; instead of using this money to harm themselves when it should help them. You wouldn’t want to see your children become spoiled brats. There’s potential to use this money to distract themselves by only choosing hobbies instead of working hard, and this could lead to feelings of sadness, bitterness and uselessness.

You never want your children to feel like they could’ve had their own success if money didn’t get in the way. When Warren Buffett’s son Howard began farming, his father purchased land for him in Tekamah, Nebraska, but he didn’t give him the land outright. He made him pay rent. Warren Buffett did not give his son a free ride. This was a good thing, because Howard is now ready to take over as chairman of one of the richest companies in the world.

If you have children working outside of the family, it’s good to have them provide progress reports in regards to their success. This is especially true if they are using family money. It’s only natural that they would keep everyone abreast of how things are going. Find out what goals they are trying to achieve. Learn about the steps they are taking in order to achieve them. Asking simple questions will keep your children on track and heading in the right direction.

It’s important that your children focus once they figure out what it is they want to do. They must do the work in order to become experts in their chosen field. It’s a great way to become confident, successful, as well as independent. It’s important that any family money being offered will help them achieve this. Don’t allow family money to turn your children away from success.

The majority of the freight trains in the United States only run on diesel fueled engines. Recently, Burlington Northern Santa Fe Railway, owned by Warren Buffett and Berkshire Hathaway, will begin to test using liquefied natural gas (LNG) as a fuel source.

Burlington Northern Santa Fe tells us that it’s motivation comes strictly from the fact that liquefied natural gas produces much less greenhouse gases than does diesel. Nevertheless, it also happens to be 88% cheaper than diesel fuel, so I’m sure that’s another very favorable aspect of liquefied natural gas.

Burlington Northern Santa Fe’s CEO and chairman, Matt Rose, stated that “the use of liquefied natural gas as an alternative fuel is a potential transformational change for our railroad and for our industry. While there are daunting technical and regulatory challenges still to be faced, this pilot project is an important first step that will allow BNSF to evaluate the technical and economic viability of the use of liquefied natural gas in through freight service, potentially reducing fuel costs and greenhouse gas emissions, thereby providing environmental and energy security benefits to our nation.”

Prior to undergoing any actual tests, it is up to federal regulators to determine if the new LNG fuel tanks are safe. They will have to come up with new supply systems in order to deliver the liquefied natural gas to the various train depots. They would also need to train depot workers in how to properly use the fuel.

Burlington Northern Santa Fe has experienced a great benefit from the boom in producing oil domestically. Using the railways to transport crude oil around the country is becoming very popular. BNSF currently ships about 10% of all of the oil produced in the United States each day, and Warren Buffett tells us that “all indications are that BNSF’s oil shipments will grow substantially in the coming years.”

The shareholders of Berkshire Hathaway may have been seeing glimpses into the future without Buffett for some time now. Most of the deals that Berkshire Hathaway made last year were not directly involving the 82-year-old billionaire investor. They either started with one of the two investment managers Buffett recently hired over the last few years, or they started with one of the subsidiaries. No matter what way you look at it, Berkshire Hathaway did quite well during 2012.

Buffett will release his annual letter to shareholders this Friday afternoon, which is later on today.

The author of Warren Buffett’s Successor: Who It Is and Why It Matters, Jeff Matthews, tells us that last year’s deals are very comforting because they show how Berkshire Hathaway could work once Buffett is no longer there.

“It’s very reassuring. This didn’t used to happen,” said Matthews.

The main thing shareholders will miss most about Warren Buffett is his fantastic judgment and excellent connections. Take the 23.3 billion dollar deal to purchase a portion of H.J. Heinz, a Pittsburgh-based company.

No matter what kind of deal is being made by Berkshire Hathaway, the annual letter written by Warren Buffett is possibly the best read document throughout the entire business world. This is all because of his incredible record of accomplishment and his excellent ability to explain complicated matters in plain English.

There’s no question that shareholders are wondering about the future of the former textile manufacturer known as Berkshire Hathaway. Buffett is getting up there in years. He also recently suffered from prostate cancer, although it wasn’t life-threatening and he seems to have gotten through it quite nicely.

Some of the biggest dollar value deals Berkshire Hathaway made last year are:

Repurchasing $1.2 billion worth of Berkshire Hathaway Class A shares and purchasing $1.5 billion in mortgage loans from Residential Capital.

They also made a $4 billion deal to cover CIGNA Corp.’s insurance losses, and received a $2.2 billion premium in exchange.

Other deals were made but the terms have not been disclosed. Analysts tell us that the Oriental Trading Co. acquisition, as well as the Prudential real estate network will not likely be a major boost to Berkshire Hathaway’s bottom line by themselves.

The only Berkshire Hathaway deals that Warren Buffett likely initiated are the share repurchase acquirement, the acquisition of Oriental Trading Co. and potentially the deal with CIGNA. The rest of the deals started elsewhere. But there’s no question that Warren Buffett signed off on each and every one of them.

Buffett seems to enjoy all of the speculation revolved around who will eventually run the company. Meyer Shields, KBW analyst, said that Buffett probably won’t help narrow down the competition because of his enjoyment of the speculation.

If you follow the company as an investor, you might look upon these four people as the strongest potential candidates: Greg Abel, CEO and President of MidAmerican; Burlington Northern Santa Fe CEO Matt Rose; Ajit Jain, head of the Berkshire Hathaway reinsurance division; and CEO of Geico, Tony Nicely.

Buffett told us that his son Howard, also a member of the Berkshire Hathaway board, is ideally suited as the company chairman.

Berkshire Hathaway also hired two hedge fund managers, Ted Weschler and Todd Combs, who will eventually be able to run the entire Berkshire Hathaway portfolio. They each manage portfolios worth around $4 billion. Buffett continues to make the majority of the investments on behalf of Berkshire Hathaway as he searches for large acquisitions.

Warren Buffett once told us that avoiding dividends during the early years of Berkshire Hathaway gave him the ability to refocus the company’s money on better businesses, just like a person would overcome “a misspent youth.”

The billionaire Warren Buffett, now 82 years old, is focusing on his legacy as he prepares Berkshire Hathaway for new management as his time with the company winds down to a close. Using the annual letter being published on March 1 as a way to outline a dividend plan could show shareholders a way for the next leaders of the company to look at the challenge of allocating profits.

“It may ease the burden on the successors” if they have the ability to pay a dividend, Richard Cook tells us, co manager of the Cook & Bynum Fund, which has Berkshire Hathaway as one of its largest holdings. Berkshire and its subsidiaries “generate a lot of cash.”

Buffett’s annual letter is there to teach Berkshire Hathaway shareholders about corporate governance, investing and business, as well as the annual meetings in Omaha, Nebraska, where the company is located. As Berkshire grew through acquisitions and investment gains, so did its rather large pile of cash, which by the end of September 2012 amounted $47.8 billion. This large sum has made it very difficult to allocate the funds, since it is often difficult to find large investments that are worthwhile, we learned from Buffett himself.

The CEO and Chairman started buying back Berkshire shares in 2011 and used part of the most recent annual letter to explain when share repurchasing made sense. Last May, while on CNBC, he said that he would probably discuss the makings of a logical dividend policy in the upcoming annual letter.

Buffett’s Blessing

“It’s a very sensible move” to discuss when the company should begin paying a dividend, so the next CEO of Berkshire Hathaway will appear to have a Buffett’s blessing, we learned from Tom Russo, currently a partner at Gardner Russo & Gardener, overseer of more than US$5 billion, and that includes Berkshire Hathaway shares. After Warren Buffett is gone, many will have “a tendency to second-guess,” said Russo.

In 1965, Warren Buffett took over Berkshire Hathaway and changed it from a company that made men’s suit linings and textiles, and turned it into a $251 billion company that currently has retail businesses, lots of manufacturing companies, subsidiaries that generate electricity, they sell insurance and haul freight among many other things. His opinions about investments, due to his excellent record of accomplishment, make his annual letters a must read on Wall Street.

In his 1985 letter, Warren Buffett said that dividends make sense when a company’s managers cannot generate adequate returns when keeping the money inside the business. Berkshire Hathaway never paid a dividend because it’s always been able to earn better rates on retained profits, he told us at the time.

Averting Disaster

Buffett once wrote that paying a significant amount of money to his investors could have actually been “disastrous” in the beginning because the three businesses that he and Charlie Munger oversaw in the beginning had very little money. They also incurred losses and were only a fraction of their original size just 20 years later.

“It’s been like overcoming a misspent youth,” said Buffett of the Berkshire Hathaway effort to expand their chocolate making, newspaper publishing and insurance businesses. “Clearly, diversification has served us well.”

Buffett continually finds the best ways to invest the extra cash that Berkshire Hathaway has on hand. Over the last 30 years, he’s amassed tremendous stakes in large companies including IBM, Coca-Cola and Wells Fargo & Co. He even buys whole companies such as General Re reinsurer and Burlington Northern Santa Fe railroad.

Just this month, he teamed up with Jorge Paulo Lehman’s 3G Capital in a deal worth $23 billion to purchase H.J. Heinz Co. and make it a private company. The deal will provide Berkshire Hathaway with $4.1 billion worth of equity and $8 billion in preferred stock that pays a dividend of 9%, we learned from the regulatory filing.

Charles Munger’s Wish

Warren Buffett points out his own mistakes in his annual letters, and he also uses them to praise his managers like Ajit Jain, his reinsurance chief, and the CEO of Burlington Northern Santa Fe Matt Rose. Warren Buffett relies heavily upon the subsidiary heads to oversee the day-to-day operations of these businesses. This leaves him and Charlie Munger the time they need to allocate the profits properly.

I believe that some of the people reading this article will live to see the day when Berkshire Hathaway pays a dividend. But hopefully it isn’t in the very near future.

The enormous size of Berkshire Hathaway could very well make a dividend a necessity at some point in the future since they may not have a better way to invest the accumulated funds, we heard from Munger at a meeting during 2011 in Pasadena, California.

“I think that some of you will live to see Berkshire pay a dividend, but I hope I don’t,” said Munger, 87 years old at the time, responding to the question of a member of the audience. “You’re saying, ‘Do you predict failure?’ And I suppose I do.”

During last year’s annual letter, Warren Buffett told us that the board chose a manager to take over as the next CEO, but they chose not to identify this individual. For a while now, Mr. Buffett has been allowing his investment managers Ted Weschler and Todd Combs to oversee more of the company’s $88 billion worth of stock.

Stock Rally

As of this morning, Berkshire Class A shares gained 0.5% to reach the amount of $152,650 at the opening around 9:35 AM in New York. Over the last 12 months, Berkshire has rallied for a 29% gain due to the gains in their operating units, a buy back in stock and Bank of America Corp. investment. In the same period of time, the S&P 500 index only gained 10%.

One roadblock to potentially paying a dividend now is that Warren Buffett, as the largest shareholder of Berkshire Hathaway, would have to do something with the payments he earns, said Russo. You probably know that he has pledged the majority of his wealth to charity, but he still has stock in Berkshire Hathaway worth more than $50 billion.

“Warren doesn’t want cash. He doesn’t need it. He doesn’t want the burden of investing it,” said Russo.

Paying a dividend could certainly makes sense once Buffett is no longer leading the firm, and more of the current shares he has passed over to the Bill & Melinda Gates Foundation as well as his children’s philanthropic endeavors, Russo said. These charitable organizations are obligated to spend the money generated by a dividend, Russo also said.

The mutual fund manager, Cook, said he’d rather Berkshire skip paying a dividend and hold onto the cash for the time being.

“You’ve got a 50 year track record of being the best capital allocator in the world,” said Cook of Buffett. “As long as he’s alive, we think we’re generally better off with him” handling the money.

It’s almost crazy to mention that you have regular deals, and then you have Warren buffet style deals. And when looking at a Warren buffet style deal, the acquisition of H.J. Heinz for $23 billion certainly fits the bill.

Warren Buffett is known specifically for choosing a target that he like to buy, letting them know his price and then ultimately acquiring that target without doing too much bargaining in the process. Would you like to take a look at a few examples? Then check out the Berkshire Hathaway acquisitions of Wrigley’s, Burlington Northern Santa Fe railroad and Lubrizol. In every instance, once Warren Buffett came to the table, each company lost interest in looking for any other bidders. That’s a powerful position to be in.

As of this time, it’s difficult to know the full story around the Heinz acquisition, and we have no clue how they looked at other suitors when trying to make sure that their shareholders will get the best deal. Once the proxy statement for the deal is filed, we will certainly learn more information. But as I’m sure you can imagine, this is already a very unusual deal from the beginning. If you’d like to see further evidence, then you can take a look at the last Friday morning agreement filed in regards to this deal.

One occurrence you need to be aware of is that there is no “go shop” provision that will allow Heinz to search for other bidders once the deal was announced. This type of provision is very common when a private equity deal takes place, and it also happens in some strategic deals as well, since it prevents the target from negotiating with any other bidders prior to announcing the deal.

But once the deal is announced, the target company can do a market check and look to see if there are any other bidders. If another bidder does come along, then the termination fee they would have to pay in order to acquire the company is actually lower than when there is no go shop provision in place.

There are some very good reasons for this particular type of mechanism. For starters, it will let the board of directors feel comfortable that it is actually receiving the best reasonable price that is available. Secondly, even though a ghost out provision is not mandated under the laws of Delaware, companies feel like it helps them satisfy their Revlon duties, which basically requires that a board of directors receive the highest price that is reasonably available when they sell a company.

You may have already gathered this, but there is no go shop provision in place during the Heinz deal. The company has only negotiated with 3G Capital and Berkshire Hathaway, according to all reports that are circulating. If there were another bidder to possibly come along, they would have to pay a $750 million termination fee, and there would also be another $25 million worth of expenses. That estimates to roughly 3% of the total transaction value, and this is a standard for a deal like this. But if a go shop provision were in place, it would typically be about three times less than this amount. No matter what way you look at it, we are still talking about a very large sum of money.

The deal is ultimately structured a lot more as a private equity deal than a strategic deal. 3G and Warren Buffett are financial buyers, and this deal specifically depends on the financing. They have jointly negotiated a common right in the private equity deals that if there is a failure and financing, Heinz will be able to sue them and they will be forced to obtain the financing. But if it is still not available, both buyers will be able to walk away from this deal, even though they would have to pay Heinz a whopping $1.5 billion.

I’d like to make a note that both Berkshire Hathaway and 3G capital also negotiated a very unique financing extension provision that will actually be for Heinz from forcing the payment of this see immediately if there is an event that financing failure takes place. This will allow the buyers to delay the termination and force the banks to finance this deal. We are going to officially call this new requirement The Ketchup Provision.

Getting back to the main story, it appears that Heinz has purposely gone out of its way to limit their options. Do you have any idea why they would do this?

One potential reason is simply the market dynamics, meaning that 3G and Warren Buffett didn’t allow a go shop provision with the deal. Since mergers are often driven by the market, the very common go shop provision use in situations like this would have provided Heinz a good reason to draw a line in the sand. All in all, it would show the shareholders that this truly is the best deal available to them.

There is also another potential reason that may come into play – the Heinz peculiarities. The company is actually incorporated in Pennsylvania, unlike most major American corporations that incorporated in Delaware.

The law of that state is created to provide total latitude to boards when it comes to deciding whether or not they should reject or accept the takeover offer. Under the Pennsylvania statute, the board is not required to take the shareholders into consideration as their main deciding factor when they choose to sell the company. The directors are able to base their decision on the interests of the “employees, suppliers, customers and creditors of the Corporation, and upon communities in which offices or other establishments of the Corporation are located.”

The overall effect of this particular statute is there to repudiate the Revlon rule in Delaware. Heinz, which is a Pennsylvania company, has no obligation whatsoever to take the highest price possible for their shareholders, and the courts in Pennsylvania have rejected this doctrine specifically. Instead, there are other interests such as community that come into play. (Mister Buffett and 3G must agree to section 7.15 that states that Heinz headquarters must stay in Pittsburgh, the company has to continue to retain the name Heinz, and they have to preserve the charitable commitments and heritage of this business. They also have to honor the naming rights of Heinz Stadium.)

Based on the advice of Heinz lawyer – Wachtell Lipton for special committee and Davis Polk for the company – they are told that the board doesn’t have to make shareholders their main requirement, and since this isn’t the state of Delaware, they can take other interests into consideration and still justify the sale to 3G and Warren Buffett.

Deals like this have been made before under great criticism. During the year 2009, Apax Partners purchased the Bankrate under similar circumstances. Since the Corporation was based out of Florida, they did not have to adopt the same safeguards you would normally come across during a private equity deal, mainly because the Florida laws did not require it. The board of Bankrate chose to go with the letter of the law instead, and they were also advised by Wachtell.

So what it all boils down to is this… If there is another bidder interested in purchasing Heinz, since there is no go shop provision in place, the Board of Directors can legally turned down this bid even if it is higher. The board can easily justify this rejection as the better move for Heinz if it feels the original deal upholds the interests of the community.

In reality, the state of Pennsylvania truly assisted Warren Buffett in his latest blockbuster deal.

There is no question that Warren Buffett is actually the best investor the world has ever known. He started out with only a few hundred dollars in the year 1956, yet he managed to transform that money into $20 million in 1969 when he liquidated Buffett Partnership Limited. By this point in time, his entire net worth was tied up in Berkshire Hathaway stock, which was a small textile mill that he transformed into a diversified business conglomerate.

After reading many SEC filings and checking out the letters to shareholders, we have noticed an interesting trend in Berkshire Hathaway’s long-term investments. It is most notable that Warren Buffett has focused his investing in companies that can grow their income without having to invest additional capital. This is very possible if the company you invest and has strong pricing power, because the consumers are currently addicted to the brand name product or the company possesses another strong type of competitive advantage. Purchasing See’s Candies in 1972 is an excellent example. Warren Buffett mentioned the following in his 2007 letter to his shareholders:

“We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses.”

It is quite evident that Warren Buffett likes to invest in companies that need minimal capital, and they utilize their profits in order to purchase other businesses. This is very similar to what a typical dividend investor does – they accumulate distributions and then reinvest them in other high quality long-term opportunities.

In reality, the See’s Candies investment in 1972 is producing incredible yields on cost at this time. The same holds true for American Express, Coca-Cola and the Washington Post, which have all resulted in double and sometimes triple digit yields on cost.

During the year 1973, Warren Buffett opened a position in the Washington Post in the amount of $10,628 million. The effective cost basis of those shares are $6.15 per share. Since they are currently at an annual dividend of $9.80 per share, Berkshire Hathaway enjoys a 159% yield on cost.

Between the years 1991 and 1994, Warren Buffett picked up over 151,670, 700 million shares of the company American Express for a total cost of $1.287 billion. This amount, when translated, is $7.96 per share. When he initially invested in the company, it was by purchasing preferred shares which he could convert into ordinary shares at a fixed price, plus additions to his holdings. With the current annual dividend of $.80 per share, his yield on cost is over 10%.

Between the years 1988 and 1994, Berkshire Hathaway picked up over 400 million split-adjusted shares of Coca-Cola four $1.30 billion. The average cost per share of this purchase is in the neighborhood of approximately $3.25 per share.

If you base this on an annual dividend of $1.02 per share, Berkshire Hathaway has a stunning yield on cost of 31.40% per year. This simply means that by accumulating the dividends for over three years, Berkshire Hathaway is capable of accumulating its entire investment and fully recovering the total amount. But the beauty is they still retain the ownership of their Coca-Cola shares, and can gather future dividend distributions. This is what Warren Buffett said in his 2010 letter to shareholders:

“Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn’t be surprised to see our share of Coke’s annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business.”

As Berkshire Hathaway group bigger and had to allocate their billions of dollars on a monthly basis, it’s unfortunate that Warren Buffett had to focus mostly on large-cap elephant sized acquisitions. A prime example is the 2010 acquisition made by Berkshire Hathaway when purchasing Burlington Northern Santa Fe railroad.

It’s interesting to note that the majority of the businesses purchase by Warren Buffett, such as FlightSafety International, Geico, and Wesco Financial also achieved either dividend champions or dividend achiever status. He likes to purchase wide moat companies of quality that are growing in earnings, that they large and rising dividends.

These dividend payments are often reinvested into other businesses, which expand Berkshire Hathaway’s cash flow availability to dramatically reinvest. This is a very good strategy, and it’s one used by many dividend growth investors to this very day.

Berkshire Hathaway, the company owned by Warren Buffett, recently discovered that it owned two short line railroads, which it sold off to satisfy regulators who could have potentially reviewed the 2010 Berkshire Hathaway acquisition of Burlington Northern Santa Fe railroad.

Earlier this month, Berkshire Hathaway let the Transportation Department’s Surface Transportation Board know that it successfully completed its sale of both of the short line railroads ahead of the required schedule.

The surface transportation board would have needed to scrutinize their railroad purchase of Burlington Northern Santa Fe if Berkshire Hathaway reported owning those two railroads at the time of the purchase. Berkshire didn’t disclose owning the two railroads to the Surface Transportation Board until this past September 2012.

Buffett was left a message on Wednesday in regards to this situation, but he didn’t immediately respond to any word about the short line railroads. But, officials at both MidAmerican Energy, and Burlington Northern Santa Fe, to Berkshire Hathaway companies, confirmed that the sale of both railroads have been completed.

Prior to Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe railroad, as a way to avoid problems with regulators, Warren Buffett sold 1.9 million shares of Northfork Southern Corp. and shares of Union Pacific Corp. to the tune of 9.6 million.

A spokesperson for the Surface Transportation Board was also left a message this past Wednesday in regards to this matter, but he or she did not respond to the message. But, in this past October, Berkshire Hathaway put together a plan to sell the railroads by the end of the year, and the Board seemed to be satisfied with that plan.

RVTR Rail Holdings bought WCTU from Berkshire Hathaway this December. It is a 12-mile long railroad in service of an industrial park near the area of Medford, Oregon.

The previous owner of the WCTU Railroad is Railserve Inc., and it’s a part of Marmon Holdings, an industrial conglomerate. Berkshire Hathaway has owned the majority interest in Marmon since the year 2008.

CBEC railroad, which is 6 miles long, is used to transport coal for MidAmerican Energy at a plant south of Council Bluffs, Iowa. It was sold this past November to two of the other co-owners.

The Corn Belt Power Corporation now owns 6% of the railroad, while the Central Iowa Power Corporation owns the other 94% of CBEC.

None of the companies that bought the two of the railroads from Berkshire Hathaway owns any other railroads, which helps ensure that there was not a need for any Surface Transportation Board approval for the deals to be completed.

An attorney of Burlington Northern Santa Fe, Roger Nober, mentioned that Berkshire Hathaway accidentally overlooked the small railroads in a letter sent this past September.

Berkshire Hathaway is an entirely de-centralized major conglomerate with over 80 subsidiaries, including furniture stores, manufacturing plants, clothing outlets, utility businesses, jewelry businesses and insurance companies.

Warren Buffett and some of the other top officials at Berkshire Hathaway do not have major input into the day-to-day operations of its many businesses, and the officials running these companies do not necessarily interact with Buffett and the other officials all that often.

Berkshire Hathaway also owns stock in companies like Wells Fargo, IBM and Coca-Cola.