Blog Archives

Yes, you read that correctly. Warren Buffett is about to go social.

On Thursday at noon Eastern time, before the kickoff of the Berkshire Hathaway annual meeting weekend, Warren Buffett is going to sit down and give an interview that will incorporate social media. This is going to be the first time for Buffett to interview this way.

This is also a relatively new topic for Warren Buffett as well. It is “Warren Buffett on Women and Work… and other Wisdom.”

He’s also planning to sit down and do a live video chat with Fortune in order to promote “Warren Buffett is Bullish on… Women,” which is an essay that he published online this past Thursday, and it will also be in a Fortune 500 issue to come out on May 6, 2013.

Warren Buffett is no stranger to women – each year, he is an honorary guest and interview subject at Fortune’s Most Powerful Women Summit. This is the first time he’s actually written about women. He’s very motivated by the current buzz around women and work – thanks to Facebook COO Sheryl Sandberg’s Lean in and Marissa Mayer’s HR policies as the CEO of Yahoo.

Not only is Buffett going to be answering Fortune’s questions on Thursday, but he’s also be fielding questions from Twitter.

The three main topics being discussed are women and investing, women and management and women and the economy.

If you have any questions you would like to send via Twitter, do so to #FortuneBuffett

Buffett is going to be talking to an audience of students and VIPs, as well as the interviewer, at the University of Nebraska Omaha at 12 PM Thursday Eastern standard time. You can watch the chat live on CNNMoney.com.

In an effort to become the biggest online insurance provider, Warren Buffett’s Berkshire group is leading an Indian venture that believes the popularity of social media and mobile phones will boost their business.

Berkshire India, an insurance company, sells health, motor and travel insurance products over the Internet on their website Berkshireinsurance.com. They also plan to sell various life insurance products in the near future as a corporate agent of Bajaj Allianz Life Insurance.

In 2011, the company started its operations with just eight employees. Berkshire India is a mostly owned non-direct subsidiary of Berkshire Hathaway Inc., and they currently have over 100 employees at this time.

The business has a very unique insurance sales model that they employ over the Internet, and they expect it to grow in popularity due to internet-enabled mobile devices like tablets and smart phones. They will greatly aid in cost-effectiveness to this particular business model.

“…Over half of India’s total Internet user base will access Internet solely through mobile or tablet devices by 2015. Since our direct model of business employs telephone and Internet, we are positioned to enjoy a great advantage,” BerkshireInsurance.com CEO Arun Balakrishnan told PTI.

“We are confident of our business model and are continually developing it to make it even more efficient and cost effective,” he said.

It is estimated that India has the third-largest user base on the Internet. The total number is about 120 million people.

Berkshire India also believes that Facebook and Twitter will play a major role in their overall success.

“As we progress towards becoming the one-stop shop for insurance, our aim is not just to sell insurance but to help the customer understand the nuances of insurance. It is here that social media plays a major role… We realise that the major attraction of the online mode for a customer is a relatively cheaper pricing,” said Balakrishnan.

Berkshire Hathaway’s reinsurance business global leader, Ajit Jain, also plays a very active role in the business’s operations in India. He is also looked upon as a potential successor to Warren Buffett when he finally retires.

“Ajit Jain is a part of the Board of Berkshire India Limited and a regular participant in our discussions and formulations. Being actively involved and well versed with our operations, Jain is both aware and happy of our progress as a company,” said Balakrishnan.

He also told us that he knows the life insurance business is different to what they currently offer. But if they do their adequate research, they will be able to come up with products well-suited to the Internet market.

“Products that are both a good value proposition for the customer and viable to sell online,” he said.

“As use of mobile Internet increases, our penetration to the rural and semi-urban areas will grow rapidly given that a large part of our web traffic today stems from mobile devices. Our rural penetration is expected to closely toe that of the telecom sector,” said Balakrishnan.

At this point in time, the United States is about to hold a very critical debate that’s really important to the future the country. The debate is about whether or not to tax, consume and redistribute income that would otherwise likely be invested.

When Warren Buffett weighed in with his opinion, he told us that he supports higher taxes on our nation’s wealthy taxpayers. But the information that he uses to make his point is both flawed and superficial.

Warren Buffett is chairman and CEO of Berkshire Hathaway Inc., and he’s an iconic leader. It’s no question that the US needs insightful guidance from this investing genius. But the claim that higher income earners should pay more taxes, and this will not reduce investments, is counter to all economic logic.

A survey by the Federal Reserve shows that the top 5% of all households save and then invest about 40% of their total income. Households of a median income save hardly anything at all. In the Buffett household, they probably invest about 99% of their total income.

So, if America is to consume, tax and redistribute money that would otherwise have been invested, the investable pool of savings begins to disappear. With that said, the less attractive investment opportunities will logically go without funding.

Buffett also claims that investors are going to continue to invest in opportunities where returns are expected to go above the cutoff point. But at that margin, the investment is lost.

During his examples, Warren Buffett uses the 1950s and the 1960s as his timeframe of proof. At that point, marginal tax rates were a lot higher. So he claims that because the economy grew much quicker back then, it’s feasible that our economy will grow faster today with the same higher marginal tax rates.

But he fails to mention two important factors that took place during the 1950s. We had the advent of interstate highways, and the boom in creation and distribution of the television, which really pulled together the US economy. So you had large companies like Procter & Gamble and General Motors rushing to fund and exploit these previously unrealized economic opportunities. The result of that being that individual tax rates didn’t matter as much to less growth as they matter today. The growth rate acceleration was completely independent of the tax rate.

Plus, the United States had put its workforce into college a lot earlier than the rest of the world. That also created a lot more new investment opportunities. There were two decades of underinvestment in the private sector – this was during the Great Depression and World War II – which provided a lot further potential for an economic rebound. The cost of food fell by 20%, and the GDP dropped to less than 10%, which provided a lot more resources to fuel the boom in manufacturing.

Back then, a much smaller portion of GDP was also taxed at that time. And, local, state and federal government spending was roughly 28% of GDP, where it’s now closer to 40% at this point in time.

Using the 1950s and 1960s as evidence to increase government consumption by raising taxes on the wealthy, shows us that it played no meaningful affect on economic growth. As a matter of fact, it showed us that investments matter more than ever.

Buffett also tells us that the commercialization of the Internet during the early and mid-1990s created a large tailwind that ultimately benefited the rich – basically saying that investors didn’t do much to earn this success. There are many other proponents of higher taxes and spending who often use the same argument – saying that the 1990s showed us that placing higher taxes on investors isn’t going to hurt economic growth. They say commercialization of the Internet would have accelerated growth regardless of the tax rate.

If you compare the growth of the US with Europe during that early 1990s, you can remove the Internet effect. Both of the economies had the same technology, and the workforces were similarly educated to take advantage of the opportunities on the Internet. Since then, the United States economy grew by 63% up until the year 2010, but Germany and France combined grew less than half of that amount. Productivity growth in the United States between the years 1972 to 1995 increased from 1.2% per year to 2% between the years 1995 to 2004. On the flip side, Germany and France’s productivity growth dropped to less than 1.5% each year.

If there was no US innovation involved, the growth in Europe would have even been slower.

There’s truth to the matter that high labor redeployment costs limited Europe’s transition to move away from manufacturing. But it doesn’t fully explain why talented and young European workers held onto jobs in declining industries, while their counterparts in America happily walked away to join risky startups instead of sticking with their otherwise promising careers.

Well for starters, in the US there were higher payouts that drove employees to take greater risks. The most promising of US students flocked in droves to business schools, and were willing to work much longer hours than their counterparts who were being underutilized in Europe. The European work effort actually declined. The success of these early American startup companies created such large Internet businesses like Facebook and Google, among countless other companies that provided immense on-the-job training to the US workforce. This training provided much-needed increases in the chance to have entrepreneurial success.

And the entrepreneurial success we’ve seen put more equity in the hands of investors willing to take risks in order to improve innovation. It’s no surprise that the US has more equity per dollar of GDP then both Japan and Europe, as well as more innovation.

Even though the commercialization of the Internet actually created a tailwind, much of that tailwind was definitely earned.

During that 1990s, federal spending was also a lot lower than it actually is today. It was 18% of GDP at that time, versus the current 24%. As well local and state government spending was also much lower too. Because of this, President Bill Clinton was able to increase taxes across the board in order to pay down US debt. This was a good move and was able to strengthen the US economy. In today’s world, paying higher taxes is going to fund an increase in unproductive consumption, which will seriously slow down economic growth.

Far from showing that government spending and tax rates provided no effect on growth, on the contrary, the 1990 show us plain and simple evidence that payoffs for risk-taking, as well as accumulating equity, actually do matter.

This debate of whether we should tax, consume and redistribute income that would otherwise be invested is critical to the future of the United States. The US cannot afford to base this major decision on arguments that are superficial. The United States deserves much more from a leader such as Warren Buffett.

Berkshire Hathaway held their annual meeting on May 5, 2012 of this year. During this meeting, Warren Buffett gave a response to a shareholder question, and he said:

“We should stay away from things we do not understand”.  He (Buffett) “needs to understand competitive position and and earnings power 5-10 years into the future.  BRK has not bought an IPO in 30 years.  IPO’s come to the market when sellers want to sell.  It makes no sense to spend 5 seconds on a new issue.  The idea that a new issue is going to be the cheapest thing to buy among thousands of stocks is crazy.”

Warren Buffett was clearly warning people about the upcoming Facebook IPO that went public on May 18.

Just three months after the Facebook IPO debuted at $38 a share, the stock is now trading at $19 per share on August 20, 2012, which is a decline of 50%. Do you know why the IPO failed? Is there a way for investors to avoid making this mistake in the future?

Business Insider contributor Dr. David Kass was invited on Fox News to discuss the Facebook IPO just recently on August 21. During his interview, he mentioned that the company was very difficult to value since there was such a high demand for the shares. After the first hour or two of the IPO’s release, the price of Facebook went from $38 a share up to $42 a share. It then immediately rose to $45 a share just a little while afterwards. From there, the price has steadily declined to its current level which is around $19 per share.

The supply of Facebook shares is also increasing because investors are selling their shares. There is also going to potentially be 1.4 billion more shares on the market on November 15, when Facebook insiders and employees have the ability to sell their shares after the lockup period comes to an end.

Dr. Kass also had a discussion about the quarterly earnings report of Facebook, which was recently released on July 26. Facebook actually reported a quarterly loss, due to increased expenses and slow growth in revenue. 84% of Facebook’s revenue during the second quarter was from advertising.

If you base the current $19 price of Facebook on valuation, then you’ll see that it’s actually selling 40 times higher than its estimated earnings of the next 12 months. To compare price and earnings of corresponding companies, Google is only selling at 20 times its yearly earnings. Apple is at 15 times yearly earnings and Microsoft is also at 15 times its 12 month earnings. To get a clear understanding of what this means, the market technically believes that Facebook is going to grow more rapidly than Microsoft, Google and Apple.

Is there any way that investors can avoid making an IPO mistake like this in the future? Dr. Kass mentioned in his interview that you should compare the price to earnings ratio of the new IPO with IPOs that were recently released in industries that are similar.

One question you should ask yourself is if all price-to-earnings ratios are comparable. You need to check and see how the recent IPOs that are similar performed. Did the prices of these recent IPOs decline once the initial public offering was made? Did the prices stabilized in these businesses, or did they even increase? If the upcoming IPOs P/E ratio is a lot higher than the recent IPOs that are comparable, then it would probably be a good idea for you to avoid the IPO altogether.

The list of billionaires invited to the Sun Valley, Idaho media conference by Allen & Co. includes Mark Zuckerberg, Bill Gates and Warren Buffett. The event is taking place next week and the information in this article comes from a guest list that Bloomberg News obtained.

Eric Schmidt, chairman of Google Inc., Jeff Bezos, CEO of Amazon.com Inc., and Apple’s CEO Tim Cook are all other billionaires who made this year’s guest list. And let’s not forget Rupert Murdoch who is the CEO and chairman of News Corp.

This is a very exclusive gathering that is sponsored by Allen and Co. They have been holding this event since 1983, and it is the type of setting where media executives can connect on an intimate level, discuss the things going on in the industry and also enjoy forms of family entertainment like bike riding and fly fishing. It’s well-known that many of the biggest media buyouts in history were either first spawned, or pushed along at the Sun Valley event. Comcast decided to purchase NBC Universal in 2011 at this very event, so it’s an extraordinarily big deal.

You’ll also find many elected officials at the Sun Valley event. Mayor Cory Booker of Newark, New Jersey met Mark Zuckerberg at this event last year and their relationship turned into a $100 million donation from Zuckerberg which was used for Newark schools. Zuckerberg is the chairman and CEO of Facebook Inc. You will find both men on the guest list this year, and another famous political figure, New York City Mayor Michael Bloomberg, will also be in attendance. He is the founder of Bloomberg News.

Warren Buffett also attended this event in 2011, and since then he has been acquiring many newspapers because he believes that these publications for local communities won’t have any trouble thriving since there really isn’t any competition in their local market.

Rupert Murdoch and his sons James and Lachlan have all been invited and are expected to attend. Murdoch announced recently that he is planning on spinning off the publishing division of his company. Others close to Murdoch that were invited are Joel Klein, who heads up his company’s education division, and Chase Carey, COO.