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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.

Warren Buffett, billionaire investor, encourages young workers to seek out jobs of which they are passionate about. This is career advice that he offered to youngsters online this Tuesday when he spoke about a number of topics.

Every year, Mr. Buffett takes time out of his busy schedule and he meets with students from roughly 40 colleges. He does this to answer questions about business and life. This Tuesday he did so in an online forum, and he had the opportunity to offer his advice to a much wider audience.

Buffett often chooses to compare the things he does as CEO and chairman of Berkshire Hathaway to painting a canvas with a masterpiece. He also regularly tells us that it doesn’t feel like he works because he loves what he does.

“I love painting on my canvas, and you’re lucky in life if you can find your passion,” said Buffett.

The 82-year-old Oracle of Omaha was fortunate that he figured out what he wanted to do early on in his life when he read books that he found lying around at his dad’s securities brokerage. Now his daily routine consists of finding the best deals for Berkshire Hathaway by reading five or six hours a day, speaking with his friends and playing online bridge.

Buffett tells us that he does not often do things that he doesn’t enjoy, and he’s been able to hand off almost all of the day-to-day tasks of running his company that has 285,000 employees, and other people take care of this for him.

“I have delegated like nobody has ever delegated with a company of this size,” said Buffett.

Berkshire Hathaway actually owns more than 80 subsidiaries, and they include furniture stores, jewelry stores, clothing stores and railroads. They are also in the insurance and utility business, which makes up about more than half of the income that Berkshire Hathaway enjoys. Plus, the company has large investments in businesses such as Wells Fargo, IBM, American Express and Coca-Cola.

Berkshire’s Class A shares, which actually make up the majority of Warren Buffett’s fortune, are still currently the most expensive stock in the United States of America. At Tuesday’s closing, the stock finished the day at $164,690 per share.

Money is not the only way you should measure the success of Warren Buffett. Did you know that he continues to live in the home in Omaha that he bought in 1958? Buffett’s lifestyle could allow him to live on $100,000 a year very easily, with the exception of the private jet that he really enjoys.

Last weekend alone, Warren Buffett spent over five hours answering questions for more than 30,000 people at the annual shareholder meeting held by Berkshire Hathaway. He even entertains groups of shareholders at events and steak dinners during the weekend.

This Tuesday Buffett spent around an hour responding to questions sent to the Levo League website. They help young professionals find job opportunities and mentors early in their career.

“It’s really important in life to have the right heroes,” said Buffett.

Buffett also mentioned that being able to study at Columbia University under Benjamin Graham, and working for Graham’s investment firm for two years, helped solidify his understanding of Graham’s investment techniques that Buffett used to create his huge fortune. Buffett also mentions that his first wife and his father’s influence also played a major role in his success because they taught him about life.

Buffett encourages the younger generation to try and work for and associate with those that they admire.

“If you’re working for somebody that makes your stomach turn, maybe you have to keep doing it for a while to eat, but don’t settle for it,” said Buffett.

Is Buffett’s investment in IBM struggling? Will the company see trouble on the horizon? As of the time of this writing, Berkshire Hathaway, Warren Buffett’s investment company, owns 68.1 million shares of International Business Machines.

What you might not realize is IBM dropped 8.3% last Friday, and the total share price is now $190. What’s the reason for the decline? The company reported earnings last Friday and first-quarter sales were lower than expected.

What’s the total damage to Warren Buffett? Well, the 8.3% drop in value cost him $1.168 billion. The shares are currently worth $12.94 billion. But in reality, Berkshire Hathaway does not have to sell their shares, so it’s not a realized loss until they do so.

Most analysts know that Warren Buffett will buy and hold this stock for many years. So it’s highly unlikely that Berkshire will end up eating this total loss. When looking at Buffett shares from an estimated cost basis, he roughly paid $173 per share. So he is still ahead of the game, even though he just gave away a big chunk of his returns.

The trading volume picked up heavily last Friday. The average trading volume is 4.1 7 million shares, but last Friday 18.85 million shares traded. The stock fell 8.28% and it rose 0.13% in premarket trading.

IBM’s price to sales ratio over the last 12 months is 2.04. The price to cash ratio is 17.59. The return on equity is 83.28% and the company’s return on assets is 14.25%. IBM’s ROI is 21.79%.

With Berkshire Hathaway recently releasing their annual report, Warren Buffett mentions that their performance in 2012 was “subpar” even though they have a growing book value of $24.1 billion and a stock portfolio consisting of 41 companies worth $75.3 billion.

In the most recent letter to Berkshire Hathaway shareholders, Warren Buffett said that ownership interest in the top four companies American Express, Coca-Cola, IBM and Wells Fargo will likely increase at some point in the future. At the end of the year, the total unrealized gain was worth $26.7 billion. From all of these shares mentioned, Berkshire Hathaway gained a total of $1.1 billion in dividends. Here’s a link to the complete Berkshire Hathaway shareholder letter.

Since they are heavily investing in DaVita Healthcare Partner, the behavior of Berkshire Hathaway shows investors they believe that the healthcare provider of kidney dialysis services will continue to grow in Europe and the United States throughout 2013. The company has recently added many shares of DVA to the Berkshire Hathaway portfolio – and as of February 27, 2013, they currently hold 14,808,959 shares.

Here’s a brief review of the top four companies mentioned in the annual letter to shareholders written by Warren Buffett: AXP, KO, IBM and WFC.

Wells Fargo & Co. is Warren Buffett and Berkshire Hathaway’s number one holding. They consist of about 20% of their overall portfolio, and they currently have 439,857,861 shares of the financial institution.

The large banking institution Wells Fargo & Company is in service to one out of every 3 households in the United States of America, as well as 35 other countries. Buffett often speaks very highly of the fantastic management of this bank. It is ranked fourth in assets out of all the banks, but it currently ranks first in market value of its common stock out of all banks in the United States. This is one of the fastest recovering banks during the industry implosion that took place a few years back. The management of Wells Fargo was responsible for turning around the bank just several years ago.

During the past, Warren Buffett has mentioned the bank’s low cost of funding, which is a powerful advantage when it comes to lending. Wells Fargo & Co. is a company incorporated under the laws of Delaware. They are a financial holding company, as well as a bank holding company and they are registered under the Bank Holding Company Act of 1956. The market cap of Wells Fargo & Co. is $187.38 billion. Its shares currently trade near $35.50, they have a P/E ratio of 10.6, and their P/S ratio is 2.2. The dividend yield of the company’s stock is 2.6%. They also possess an annual average earnings growth of 1.5% over the last 10 years.

In a previous annual letter, Warren Buffett commented, “the banking industry is back on its feet, and Wells Fargo is prospering. It’s earnings are strong, its assets solid and its capital at record levels.”

Coca-Cola is Warren Buffett and Berkshire Hathaway’s number two holding at the time of this writing. They consist of about 19.3% of the Berkshire Hathaway portfolio, and the company currently owns 400 million shares.

Coca-Cola is a worldwide brand and a company that is known for its carbonated beverages, and also known for its juices and tea drinks. Seventy five percent of the revenue generated by this company is from countries outside of the United States. The Coca-Cola brand is famous in almost every country in the world, and this includes Africa.

The company is considered to be very healthy, and it is consistently growing. The annual Coca-Cola earnings over the last 10 years have been 9.6% consistently. The soda manufacturer has a market cap of $172.16 billion. At the time of this writing, the shares traded at $38.63. The current P/E ratio is 19.6, and the P/S ratio is 3.7. Coca-Cola’s current dividend yield is 2.6%. They received a business predictability rank of five stars from GuruFocus. Buffett said that he was late to the Coca-Cola party, and he commented on the longevity of the brand at one time. He bought his shares in 1988 along with shares of Freddie Mac. At the time, Buffett said this in regards to his new purchases:

“In 1988 we made major purchases of Federal Home Loan Mortgage Pfd. (“Freddie Mac”) and Coca-Cola. We expect to hold the securities for a long time. In fact, when we own portions of outstanding businesses with outstanding management, our favorite holding period is forever. We are just opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang onto businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.”

International Business Machines Corp. (IBM) is the number three Berkshire Hathaway holding. They currently consist of 17.3% of the Berkshire Hathaway portfolio, and number 68,115,484 shares.

It is widely known that Warren Buffett has praised the leadership of IBM. They rescued this company from the brink of bankruptcy 20 years ago and turned it into the successful company that it is today. In the last annual letter written by Warren Buffett, he mentioned that IBM management has created extraordinary operational accomplishments, saying, “Their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.”

IBM was incorporated in New York on June 16, 1911 under the name Computing–Tabulating–Recording Co. International Business Machines Corp. has a market capitalization of $227.92 billion. At the time of this writing, the shares traded at $204.5 per share. The current P/E ratio is 14.1, and the P/S ratio is 2.2. The IBM dividend yield for company stock is 1.7%. Over the last 10 years, International Business Machines Corp. has had an annual average earnings growth of 12.1%. GuruFocus has rated IBM with the business predictability rank of five stars.

American Express Co. (AXP) is the number four holding in the Berkshire Hathaway portfolio. They currently make up 11.6% of the portfolio, and Berkshire Hathaway owns 151,610,700 shares.

American Express Company is another Warren Buffett favorite. In an effort to create an entire value chain, the company segmented its credit card lending business into three separate businesses: international card and global commercial services, US card services and global network and merchant services. As the owner of the entire chain of value, AXP has created a very profitable niche for itself throughout the financial service market. This presents a tremendous potential for profits. Being it has a very closed loop of its own related services and products, as well as marketing, the pricing of American Express has a competitive advantage already built-in.

American Express Company was originally founded in 1850 as a joint stock association. They incorporated in 1965 as a New York Corporation. The American Express market cap is $69.06 billion. It shares currently trade at $62.5. The P/E ratio is 16, and the P/S ratio is 2.3. The stocks dividend yield is 1.3%, and the American Express Company has seen an average earnings growth of 5% over the last 10 years. GuruFocus has given American Express a business predictability rank of 3.5 stars.

Berkshire Hathaway is drawn to the fair value computation of American Express, and they are a stock currently undervalued with lots of room to grow. In addition, they have a nice dividend. American Express presents a nice opportunity for many investors and according to the recent shareholder letter from Warren Buffett, he will probably be adding to this position in the near future.

Warren Buffett, the most famous investor in America, really holds himself to a much higher standard than most. That’s why he describes the business year of 2012 as “subpar” even though Berkshire Hathaway made a total of $24.1 billion for its shareholders. Buffett pointed out that only for the ninth time in Berkshire Hathaway’s 48 years, their book value of 14.4% was actually less than the S&P’s gain of 16%. This is basically how Buffett kicks off his annual letter, which he released on Friday, March 1. If you are interested in investing, then this document is a must read for you and anyone else interested in this field. It’s filled with plenty of Warren Buffett’s homespun, wry style.

Putting aside the “subpar” performance of Berkshire Hathaway, Buffett’s other major regret was the “inability” to achieve a major accomplishment during 2012. “I pursued a couple of elephants, but came up empty handed,” wrote Buffett. He did find his mojo again during the early part of 2013, being part of a blockbuster 23.3 billion-dollar acquisition of H.J. Heinz Co., the ketchup giant. Berkshire Hathaway is putting up $12 billion to purchase half of the company, along with another group of investors led by Brazilian businessman Jorge Paulo, who is buying the other half of the company.

Buffett wrote that now that this deal is done, it’s time for more big game hunting. “Charlie and I have again donned our safari outfits and resumed our search for elephants.” (Charlie Munger is long-time partner to Warren Buffett and friend of many years.)

Without question, the Buffett annual letter to shareholders is quite educational in regards to his philosophy of value investing, which he learned from Benjamin Graham, his mentor and author of The Intelligent Investor, a classic business tome.

Buffett’s investing philosophy is quite simple: Invest in easy to understand companies, for the long-term, with managers who love their business, and the businesses are currently undervalued. Always disregard all flavor of the month trends.

Buffett personally loves to invest in large, extremely reliable American businesses. This explains why the four biggest Berkshire Hathaway investments are in Wells Fargo, Coca-Cola, IBM and American Express. He increased Berkshire Hathaway’s ownership stake in all of these companies during 2012. The Omaha, Nebraska-based investment firm now owns 8.9% of Coca-Cola, 6% of IBM, 13.7% of American Express and 8.7% of Wells Fargo. “Berkshire’s ownership interest in all four companies is likely to increase in the future,” wrote Buffett. “Mae West had it right: ‘Too much of a good thing can be wonderful.’”

Let’s now take a look at some of the major highlights of the Berkshire Hathaway annual letter:

Guessing about Succession: The question asked most frequently in American capitalism is this: Who is going to finally replace the 82-year-old Warren Buffett? Buffett has made it quite clear that his duties are going to be divided among an investment manager – who is responsible for the allocation of Berkshire’s money – and a CEO, ultimately in charge of running the entire $170 billion empire that is Berkshire Hathaway. Warren Buffett confirmed last year that Ted Weschler and Todd Combs, two relatively unknown hedge fund managers, will be replacing him on the investment side. Buffett was very pleased with their performance during 2012.

Weschler and Combs “have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect fit,” wrote Buffett. “We hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins.” Buffett then added mischievously, in a very tiny font: “They left me in the dust as well.” As a result of this excellent performance, Buffett and Berkshire Hathaway have decided to increase their investment funds to around $5 billion. “Todd and Ted are young and will be around to manage Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they take over,” wrote Buffett.

On the side of management, Warren Buffett didn’t provide any clues, but he did heavily praise Ajit Jain, a longtime favorite of Buffett who manages the reinsurance group of Berkshire Hathaway worth in the multi-billions. He is widely looked upon as one of the top candidates to take over the CEO position at Berkshire. “From a standing start in 1985, Ajit has created an insurance business with float of $35 billion and a significant cumulative underwriting profit, a feat that no other insurance CEO has come close to matching,” wrote Buffett. “He has thus added a great many billions of dollars to the value of Berkshire. If you meet Ajit at the annual meeting, bow deeply.”

Newspapers: We all know that Buffett loves newspapers, “and if the economics make sense, [Berkshire] will buy them even when they fall far short of the size threshold we would require for purchase of, say, a widget company.” Over the last 15 months, Berkshire Hathaway has acquired 28 daily newspapers and paid $344 million for the privilege, he wrote, even with his long-standing prediction that “the circulation, advertising and profits of the newspaper industry overall are certain to decline.”

Here’s Warren Buffett’s logic: “News, to put it simply, is what people don’t know that they want to know,” wrote Buffett. “And people will seek their news – what’s important to them – from whatever sources provide the best combination of immediacy, ease of access, reliability, comprehensiveness and low cost.” Buffett will readily admit that the Internet has been a disruption on the traditional newspaper business model, causing a drastic decline in revenues and readership. But there’s one particular area in this industry where Buffett sees an opportunity:

Newspapers continue to reign supreme, however, in the delivery of local news. If you want to know what’s going on in your town – whether the news is about the mayor or taxes or high school football – there is no substitute for a local newspaper that is doing its job. A reader’s eyes may glaze over after they take in a couple of paragraphs about Canadian tariffs or political developments in Pakistan; a story about the reader himself or his neighbors will be read to the end. Wherever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents. [...]

Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time. We do not believe that success will come from cutting either the news content or frequency of publication. Indeed, skimpy news coverage will almost certainly lead to skimpy readership. And the less-than-daily publication that is now being tried in some large towns or cities – while it may improve profits in the short term – seems certain to diminish the papers’ relevance over time. Our goal is to keep our papers loaded with content of interest to our readers and to be paid appropriately by those who find us useful, whether the product they view is in their hands or on the Internet.

Uncertainty: In one of the more surprising parts of the annual Berkshire letter, Warren Buffett called out a few of his fellow US CEOs who have “cried ‘uncertainty’ when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash).” Buffett is an optimist for America, who wrote that he is not in agreement with their concerns. “If you are a CEO who has some large, profitable project you are shelving because of short-term worries, call Berkshire. Let us unburden you,” wrote Buffett.

American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.)

Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it. My own history provides a dramatic example: I made my first stock purchase in the spring of 1942 when the U.S. was suffering major losses throughout the Pacific war zone. Each day’s headlines told of more setbacks. Even so, there was no talk about uncertainty; every American I knew believed we would prevail.

The country’s success since that perilous time boggles the mind: On an inflation-adjusted basis, GDP per capita more than quadrupled between 1941 and 2012. Throughout that period, every tomorrow has been uncertain. America’s destiny, however, has always been clear: ever-increasing abundance.

Omaha, Nebraska, Next Stop: The Berkshire Hathaway annual shareholders meeting is known as the Woodstock of capitalism – and for very good reason. Each year, tens of thousands of the Berkshire Hathaway faithful make a pilgrimage to the annual meeting of the company, which takes place in Omaha, Nebraska on May 4 this year. It is quite the spectacle: imagine for a moment a Grateful Dead concert populated by hard-core, and in certain cases, the very wealthy, true believers in capitalism. Everyone is always in a great mood. Among this year’s highlights are:

• Berkshire Hathaway’s second annual international newspaper tossing challenge. “Last year I successfully fought off all challengers,” wrote Buffett. “But now Berkshire has acquired a large number of newspapers and with them came much tossing talent (or so the thrower’s claim). Come see whether their talent matches their talk.”
• The “Berkshire 5K” race will start at CenturyLink Center, the arena that holds 19,000 seats and is also the location of the annual meeting. “We will have plenty of categories for competition, including one for the media,” wrote Buffett. “Regretfully, I will forgo running; someone has to man the starting gun.”
• On Sunday, May 5, they hold the Borsheims Fine Jewelry gala. (Berkshire has owned Borsheims, the Omaha-based company, since 1989.) “Around 1 PM on Sunday, I will begin clerking at Borsheims,” wrote Buffett. “Last year my sales totaled 1.5 million. This year I won’t quit until I hit the $2 million. Because I need to leave well before sundown, I will be desperate to do business. Come take advantage of me. Ask for my ‘Crazy Warren’ price.”

The annual Berkshire Hathaway meeting is always a very memorable experience. Buffett can seem like he’s ageless at times, but unfortunately, that just isn’t the case. So if you happen to be a Berkshire Hathaway shareholder in the area of Omaha during the first weekend of May, you never know who you’re going to run into at Piccolo’s or Gorat’s. “These restaurants are my favorites, and I will eat at both of them on Sunday evening,” wrote Buffett. If you decide to go to Piccolo’s, “order a giant root beer float for dessert,” advises Buffett. “Only sissies get the small one. (I once saw Bill Gates polish off two of the giant variety after a full course dinner; that’s when I knew he would make a great director.)”

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.

Even though he spent the last 50 years or so reading about this company without making one move in its direction, and even shunning the tech sector in its entirety throughout his entire career, Warren Buffett suddenly decided to buy over $10 billion worth of shares of IBM for his company Berkshire Hathaway.

Back in November of 2011, on NBC, Warren Buffett announced that he was about to own a stake in the company, and “he would not be announcing it if he were not pretty much done” with purchasing the shares. Over the next three quarters, he has found the stock so attractive that he continues to buy up more and more shares, and it is now the second most owned stock in his entire portfolio, and this has many investors wondering why.

Purchasing History

Mister Buffett started buying up his IBM shares during the first quarter of 2011, and at that time, he purchased 4,517,774 shares for the average price of $159 per share.This purchasing became a lot more aggressive during the second and third quarter while he accumulated another 82.2 million shares for the average costs of $167 per share and $173 per share. He even made smaller purchases during the fourth quarter of 2011, as well as the third quarter of 2012, and the average prices of those shares cost $185 per share and $197 per share.

By the end of the third quarter of 2012, he owned a total amount of shares reaching 67,517,896, which is about nearly 6% of the outstanding shares in IBM. The IBM purchases also amount to 18.6% of the entire Berkshire Hathaway portfolio.

Management – Business Execution

Buffett has nothing but high praise for Lou Gerstner and Sam Palmisano, the CEOs of IBM. It is 2011 annual letter, he talks about how the gentleman rescued IBM from the brink of distraction about 20 years ago as they were facing bankruptcy, and he mentions how they turned it into an incredibly successful business in this day and age. Notwithstanding their “extraordinary” accomplishments from an operational standpoint, “their financial management was equally brilliant,” said Buffett, “particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.”

IBM regularly uses “Road Maps” to figure out targets for the future of the company, as well as measuring the company’s progress in the present. Mister Buffett was very impressed that IBM had met all of its benchmarks for a plan that they introduced during 2007, which they called the 2010 Road Map. Then in 2011 they introduced another strategy called the 2015 Road Map, which they are well on their way to achieving their goals. During 2010, the company will surpassed the goal set in 2007 of $10-$11 gain in earnings per share. They reached an EPS of $11.52 per share during 2010.

The Road Map of put together by IBM for 2015 has some major drivers in place to boost its earnings per share, such as: growth strategies, operating leverage and share repurchases. According to IBM’s 10K, some of the specific metrics they plan to aim for are:

• a $20 earnings-per-share (non-GAAP)
• half of their segment profit coming from software
• $100 billion worth of free cash flow
• dividends in the amount of $20 billion
• $50 billion worth of share repurchases
• growth priorities:

 

1. Growth markets unit making up about 30% of their segment revenue by the year 2015 (during 2010, it’s about 21%)
2. growth in analytics to reach $16 billion in revenue
3. their cloud computing division bringing in $7 billion worth of revenue
4. their Smarter Planet solutions division to grow to $10 billion in revenue

During the year 2011, IBM achieved a certain amount of progress toward their goals in 2015. That progress is:

• paying dividends in the amount of $3.473 billion (which is a year over year increase of 9.32%)
• repurchasing shares in the amount of $15.05 billion
• a record earning diluted operating earnings-per-share of $13.44 billion (non-GAAP)
• a record-breaking amount of $16.6 billion in free cash flow
• five acquisitions in software and the amount of $1.8 billion
• 44% of their segment profit came from software and services
• growth priorities:

 

1. 22% of their geographic revenue comes from growth markets, which is an 11% increase from the year 2000
2. revenue growth reached 16% year over year (growth analytics)
3. revenue growth reaches 200% year over year (cloud computing)
4. revenue growth reaches 50% year over year (Smarter Planet)

IBM mentions that the 2011 positive financial performance is a result of the company’s transformation, where they shift their business model “to higher value areas of the market, improving productivity and investing in opportunities to drive future growth. These changes have contributed to nine consecutive years of double-digit earnings per share growth.”

Some of the changes that IBM has made during their transformation are getting out of the hard disk drive and PC business right before there was a dramatic slowdown in the market in both of those industries. They also created some new services, products, technologies and skills that they entered into the fray.

By focusing on growth, and investing in innovation, this allowed the company to journey into new markets and test out new types of technology, such as cloud computing and business analytics.

Moat

the transition made by IBM has literally transformed this business into a service company, as opposed to the software and hardware company that they used to be. During Warren Buffett interview on CNBC, he mentions that many companies are reluctant to change their IT suppliers, and as they look around the world for companies to develop their IT departments, they will often turn to business icon and trusted company IBM.

Business Metrics

Buffett also mentions on CNBC that it’s currently a good idea to start put your money into American businesses, and specifically the businesses that “are earning very good money, that have high returns on equity, have high returns on incremental capital, or buying in their stock at a rapid rate so that your ownership in the business increases significantly.”

In the case of IBM, it has:

• Return on equity – throughout 2009, 2010 and 2011, the ROI generated by IBM was 59%, 64% and 78.4%. This is much higher than the beginning part of the decade.
• Stock repurchases – IBM regularly repurchases their shares, which you can see throughout history. Buffett mentioned that he would be happy if IBM reduced their share count to 64 million shares. From 2003 to 2011, IBM has lowered its share count from 1.72 billion to 1.179 billion.

Even though future earnings are going to ultimately determine Warren Buffett success with IBM, during Warren Buffett’s 2011 letter, he actually hopes that the stock price languishes because the amount of shares that he is able to purchase with the amount of money IBM dedicates toward repurchases it was “an important secondary factor.” The more shares that IBM is able to buy, the bigger percentage of the company Warren Buffett will own.

Warren Buffett purchased IBM near historical high prices. Over the past year, the stock price has risen about 6%. It’s P/E is 13.5, P/B is 10.2  and P/S is to.

To start this off right, I’d like to point out that Warren Buffett is extremely optimistic about the future of America. “Tomorrow’s always uncertain,” he mentions while on CNBC this morning. “But the future, the longer future, is always very certain. And that’s what you have to keep your eye on.”

It’s this very attitude that allows Mister Buffett to continue building astronomical stakes in businesses that he feels are worthy through the best of times and the worst of times. But how does Warren Buffett choose these particular companies to begin with? Let’s look at Wells Fargo, and find the evidence in this stock which he continues purchasing the most.

Wells Fargo

Wells Fargo has entered into Warren Buffett’s portfolio way back in the 1990s, and it is a great representation of his philosophy of long term investing. Plus, you can see a steady trend of continual buying of this stock since the first quarter of 2009. From that point until the present day, Berkshire Hathaway has bought 1 million 119,940,333 shares of Wells Fargo. This has brought the total position up to more than 422 million shares in all.

Warren Buffett made three very important moves in his portfolio during 2011, and Wells Fargo was one of them, along with Bank of America and IBM purchases. He provides shell holders several different reasons why this was important during his annual letter: “the banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels.”

Wells Fargo is also extremely large – since it currently serves about one out of every three households in the United States of America from its 12,000 ATMs, it’s 9000 branches and their website. They are also prominent in 35 different countries. This company is also the first in market value of its common stock out of all of the United States banks, and the fourth in assets.

Even though Warren Buffett requires a high ROI from a bank, he also insists that the return on investment be gained in a conservative manner. This is great, because Wells Fargo has a very well maintained and controlled operating environment. It has excellent ground rules in place to manage credit risk, and they monitor their loan portfolio performance very closely. It also has set ranges for its interest rates and market risks in its liabilities and assets, while it is able to fuel growth with ample capital levels and liquidity.

In addition, Wells Fargo will continue to remove nonperforming loans from its assets. During the third quarter of 2012, loans that were 90 days past due or more totaled in the amount of $1.5 billion. This is down a half $1 billion from the $2 billion at the end of 2011.

As well, Wells Fargo also solidified its position with capital. The equity earned in the third quarter was increased by $6.6 million from the second quarter numbers, and rose to $156.1 billion. Its tier 1 common equity reached the amount of $105.8 billion, which is equal to 9.9% of the risk-weighted assets. Wells Fargo also has a nice tier 1 capital ratio of 11.5% in their total capital ratio of 14.51%, as well as the tier 1 leverage ratio that they possess of 9.4% which rounds out the third quarter.

The other results that they gained during the third quarter are testament to showing that they are a strong company that can easily withstand economic uncertainty. The bank overall reported a total of $4.9 billion and earnings, which is up 8/10 of 1 billion from last year’s $4.1 billion at the same time.

The improvements that Wells Fargo gained this year were basically brought on by fee income and balanced net interest. They also have a strong credit performance, a diversified loan portfolio and further diversified sources of their fee income. They also grew across many of their businesses.

Wells Fargo’s third-quarter revenue grew to $21.2 billion, which is up from the $19.6 billion that it saw at the same time last year. The revenue was strictly sparked from noninterest income growth in the mortgage banking industry, and you can combine that with a mild increase in their income from that interest. They also originated 56% more loans this year than they did at the same time last year.

Also during the same quarter, Wells Fargo decided the buyback 17 million shares and they also paid a $.22 dividend. The previous year’s dividend was only $.12. During Warren Buffett’s 2010 letter, he predicted that Wells Fargo would have a dividend increase. He also expected that his largest gain in dividend would come from Wells Fargo. They were forced to lower it at one point, though it was “consistently prospering throughout the worst of the recession.”

Buffett seem to have a crystal ball so to speak, but he really knew that the fundamentals and Wells Fargo’s strategy of execution would easily survive the economic turmoil. He made his biggest stock purchases throughout the five years by buying shares during the biggest stock dips. Those took place during the first quarter of 2009, the third quarter of 2009 and the third quarter of 2010. But he’s actually made his biggest purchases over the last year, all while the stock has been rising by almost 23%.

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.

It’s no secret that Warren Buffett is really enthusiastic about Wells Fargo Bank. He just purchased another 11 million shares of the company in the third quarter.

As of the third quarter this year, Berkshire Hathaway now owns 422.5 million shares of Wells Fargo, which we learned from an SEC filing this week.

At the time of this writing, the 400 million shares of Coca-Cola owned by Berkshire Hathaway currently account for 20.1% of the Omaha Nebraska company’s investment portfolio. Wells Fargo is currently at 19.4% of the total Berkshire portfolio, which we learned from Forbes. International Business Machines, better known as IBM, is a close third, with shares numbering 18.6% of the entire portfolio.

Since our current economic troubles began, Warren Buffett has consistently added to his stake in Wells Fargo. He initiated this position during the early 1990s when we were undergoing the commercial real estate crisis.

During an interview with CNBC last week, Buffett mentioned that he will continue buying shares in Wells Fargo, and described it as his overall favorite bank.

“In the last week, I bought some Wells Fargo,” mentions Buffett to CNBC on the 24^th of October. “We only have some 430 million shares. I didn’t feel we had enough.”

By continuing to purchase more and more shares of Wells Fargo, Warren Buffett is showing us consistently that he feels the banks outlook is very bright. He has always admired their competitive advantage in low cost of funds throughout the business of borrowing money at a lesser rate, and then lending it at a higher rate. This advantage should become even more lucrative as interest rates move higher.

To add some contrast to Warren Buffett’s hungry appetite for shares in Wells Fargo, he hasn’t added shares of Coca-Cola to his portfolio since the year 1994. That’s why it’s fairly safe to say that Wells Fargo will eventually become Berkshire Hathaway’s largest holding in relation to publicly traded companies in their portfolio.

It’s exciting to hear what Warren Buffett will have to say it the annual meeting next May. You know he will have plenty to share about his favorite bank Wells Fargo.