Blog Archives

Here’s a brief look at some of the most important topics touched upon in a conversation that Charlie Rose has with Warren Buffett during an interview.

Enjoy!

Charlie Rose: I want to start with your recent opinion piece on a minimum tax for the wealthy. You take a stand against the idea of taxes curbing investment.

Warren Buffett: I’m going to call you tonight at midnight, and I’m going to be panting, and I’m going to say, “This is the best investment idea I’ve ever had.” Are you going to say, “How much will the tax be?”

Charlie Rose: So where do you set the rate?
Warren Buffett: On incomes of over $1 million, the excess $1 million should have a minimum tax of 30 percent. And then over $10 million, 35 percent. The reason I’m suggesting that is because the 400 highest taxpayers in the most recent year we have figures for, 2009, who had average incomes of $202 million, half of those people paid at a rate below 20 percent. A quarter paid at a rate below 15 percent. And believe it or not, six, average income of $202 million, paid nothing. I mean, they were members of Romney’s 47 percent, and I suspect he got their vote. That’s just a bunch of moochers. I think tax law should be progressive. And I think that when people make $15 million or $20 million or $200 million and pay a 10 percent rate, something should be done about it.

Charlie Rose: Do you think the president will listen?

Warren Buffett: I hope the president and Congress are responsive to it. There are all kinds of things wrong with the tax code, and reform is called for, but I don’t want to wait around until all of that stuff is done to do some things that are obvious now.

Charlie Rose: How dangerous is the fiscal cliff?

Warren Buffett: I don’t think it will do that much. People assume that a solution will be found quite promptly. It’s a little like the debt ceiling. The rest of the world may think we’re idiotic at times, but they don’t think we’re going to commit suicide.

Charlie Rose: You’re confident about the U.S. economy?

Warren Buffett: It’s getting better. It’s been getting better since, really, the summer of 2009. We’ve got four years straight now where the stock market has given a positive return. We had a tremendous bubble, and when it burst it had ramifications for all aspects of society. And it was magnified by the abuses that had taken place on Wall Street. So the dominoes were lined up, but we’ve been on the mend now for three years.

Charlie Rose: What would you tell investors?

Warren Buffett: Overwhelmingly, for people that can invest over time, equities are the best place to put their money.

Charlie Rose: Not bonds?

Warren Buffett: Bonds might be the worst place to put their money. They are paying very, very little, and they’re denominated in a currency that will probably decline in value. Other than that, they’re terrific.

Charlie Rose: You’re adept at valuing companies. Why are you so good at it?

Warren Buffett: I only get into situations where I know the value. There are thousands of companies whose value I don’t know. But I know the ones that I know. And incidentally, you don’t pinpoint things. If somebody walks in this door and they weigh between 300 and 350 pounds, I don’t need to say they weigh 327 to say that they’re fat.

Charlie Rose: You’ve said you’re hunting for a big elephant. How do you choose a company to acquire?

Warren Buffett: If you’re talking about buying an entire business—which we’re talking about in this case—I’m familiar with all the companies when you get to that size. It’s really a question of when the CEO, the board, is actually thinking about doing something. The initiative really has to come from them because Coca-Cola (KO) isn’t for sale, Wells Fargo (WFC) isn’t for sale, 99 percent of the companies are not.

Charlie Rose: In international terms, where do you see the best economic prospects?

Warren Buffett: Europe is still drifting downward to some degree. And Asia’s coming off the best rate of growth, but they’re coming down somewhat. The U.S., actually, is strongest relative to where it was six months ago or nine months ago. Housing is coming back big-time. But five years from now, 10 years from now, the world everywhere will be doing better.

Charlie Rose: Why?

Warren Buffett: Just because capitalism and market systems work. It’s been working, you know, since 1776 here. And it wasn’t because we had stimulus programs in 1794. Our system unleashes people’s potential. And we’ve got 312 million people that want to do better tomorrow than today. Over time, that works. This country goes forward, and it’ll continue to go forward. The luckiest person in history on a probability basis is the baby being born in the United States today.

During the month of June, Warren Buffett raised some eyebrows when the news told us that he was purchasing 63 newspapers from media conglomerate Media General. There were two different camps in regards to this purchasing decision. Some people thought that Warren Buffett finally lost his mind. While others believed that he noticed an opportunity that nobody else seems to recognize.

Since Warren Buffett has been such a successful investor for the last 50 or more years, I would believe that he knows a good opportunity when he sees one. The only caveat that I’ll mention is that this is definitely a speculative potential opportunity. What investors need to look at is this: do you invest in Berkshire Hathaway because of this move, or do you mimic their investment choices and begin to buy into newspapers? The answer is basically no to both questions, and I’d like to share why I feel this is so.

It’s very tempting to follow the lead of Warren Buffett because you believe he noticed another anomaly that most people didn’t understand. When this happens he’ll cause the headlines to go crazy, and people even believe that he’ll currently save the newspaper industry.

But the truth is that he didn’t actually save the newspaper industry. But he did decide to invest in the community aspect of newspapers, because he is buying small-town papers that really cannot be replaced, as opposed to big, metropolitan newspapers. This is very distinct to his investing strategy, and you need to recognize this.

He recognized what a gentleman named Bert saw.

Throughout the mid-1990s, an entrepreneur named Bert started his first newspaper in Eudora, Kansas, as opposed to the bigger and supposedly better option of De Soto, Kansas which is right on the outskirts of Kansas City. Bert said the reason he made this choice after carefully evaluating both towns is that he believed Eudora “had a better sense of community.”

If you fast-forward to May 29th of 2012, here’s what Warren Buffett said when talking to CNN Money: “in towns and cities where there is a strong sense of community, there is no more important institution than the local paper.”

So that’s what Warren Buffett based his investments off of in a nutshell: Warren Buffett is one of the best investors in this world because he has the ability to take a long look at the big picture, and he will really get into the head of the local entrepreneur to try and understand what they are thinking and what they are going through. Bert opened his newspaper because of a “sense of community,” and the great Warren Buffett bought his newspapers for the exact same reason.

While Warren Buffett was doing his research, he noticed that there was no major sense of community in the large metropolitan newspapers. That’s why he really isn’t interested in purchasing a large paper like The Los Angeles Times. He told reporters, “if you live in South Central Los Angeles, you’re not interested in who dies in Beverly Hills.”

Buffett also observed that “in Grand Island, Nebraska, everyone is interested in how the football team does. They’re interested in who got married.”

They are also very interested in seeing pictures of their children and grandchildren accepting awards in the local paper, or going on class picnics and Cub Scout meetings. It’s not surprising that a lot of these pictures are often taken by the parents of the young children, and then submitted to the local paper with a little blurb about the event. The small-town news is obviously going to be interesting to anyone living in that particular small-town.

Buffett doesn’t only spend his time in Omaha, Nebraska. You can bet that he has gone to Wahoo, Ashland and Blair, Nebraska as well, so he understands the role of the local newspaper in regards to the small-town community. He also gets that a “sense of community” is all tied in with a “community ownership of the local paper.”

The local newspaper is the diary, chronicle and photo album of the local community. It provides you with a present-day history, and you get to see the perspective of people that live right in your hometown.

It’s no question that Warren Buffett is still invested in some of the larger metropolitan newspapers. He has legacy holdings in The Washington Post and The Buffalo News. He also bought the Omaha World-Herald last year, but it was most likely a civic minded gesture than a major investing opportunity.

The purchase that he made from Media General recently was a very well thought out, and hard-nosed business decision, even if it was one of high speculation. It fits right along with his “moat” criteria, since the local newspaper is basically a monopoly for that small section of the world, plus the valuation multiple fit in with the way that he likes to invest as well.

But the truth is that Warren Buffett really doesn’t know the total valuation of these newspapers at this time. He thinks he’s buying a hard asset that is currently undervalued. But he is also under the impression that a lot of these local newspapers are going to continuously lose money for the time being. Plus, he knows that the community newspapers are trying to figure out a way to stay relevant in the Internet world. Their business model has basically been turned on its head, and they have to come up with a plan that will allow them to compete.

Buffett recently told the New York Times that “I do not have any secret sauce. There are still 1400 daily papers in the United States. The nice thing about it is that somebody can think about the best answer and we can copy him. Two or three years from now, you’ll see a much better defined pattern of operations online and in print by papers.”

Warren Buffett can afford to make that particular speculation, since he only laid out $142 million, which for him is basically pocket change. The ordinary investor does not have the ability to ride the coattails of the Oracle of Omaha since they do not have the same kind of capital that he does.

There’s no particular reason for you to immediately invest in Berkshire Hathaway because of this newspaper investment. Warren Buffett said outright about this newspaper investment that “it’s not going to move the needle at Berkshire”

Second of all, there’s no way to really replicate this investment, at least in the sense that it will appeal to an ordinary investor. There is only one thing that even slightly resembles a pure play in non metro newspapers, and that is GateHouse Media. But that’s the kind of investment you want to stay away from since it lost $21.6 million last year, and their current book value is $-14.15 per share. If you were to invest in this company you would be certainly speculating, because there’s no reason to think that this investment is going to pay off anytime soon.

The other mainly newspaper public companies really aren’t all that close to the Media General buy that Buffett made. There’s mostly only big metro paper investment opportunities, like A. H. Belo Corp., but they lost $10.9 million last year. Then there is Lee Enterprises, who lost a total of $146.8 million last year. One investment that actually made money is the McClatchy Company, who brought in a total of $54.4 million last year. But it looks like their earnings are only going to grow at a rate of 5% during the next five years.

If you think the modest earnings forecast from McClatchy is very compelling, then that’s fine for you, but there are much better investment choices out there. But if you want to invest like Warren Buffett, then you need to realize that McClatchy’s Metro style newspapers are exactly what Warren Buffett has been staying away from.

I know many people find it fashionable to watch Warren Buffett and follow the moves that he makes, but it wouldn’t be a good idea for you to try and replicate this move at this time. And don’t look at this as a buy signal for the entire industry of newspapers because it’s not.

There are a whole host of different reasons why an insider might sell some of their companies shares, and they are too numerous to list here, but the only reason why an insider would buy more shares of their company’s stock is quite simple: they believe the shares are going to go up in value.

We all know that the stock picking ability of Warren Buffett has literally made him one of the wealthiest men alive. So if you are looking for a good way to begin research on stocks that you might want to own, it would probably be a good idea to look into his portfolio and see which of those companies has a lot of insider buying taking place. Remember, insider buying means a belief that the stock is about to rise. That is a good sign that you should certainly use to your ultimate advantage.

There are three stocks in Warren Buffett’s portfolio that have recently had some insider buying. The companies getting the most attention are Gannett Co. Inc. (GCI), The Washington Post Company (WPO), The Coca-Cola Company (KO) and General Electric Company (GE).

Gannett Co. Inc. (GCI)

As of March 31, 2012, Warren Buffett officially owns 1,740,231 shares of Gannett Co. Inc. (GCI). This company only represents an insubstantial 0.035% of his overall portfolio.

Gannett Co. Inc. (GCI) is actually tied with General Electric Co. (GE) where the second-most insider buying is taking place at one of the companies in Warren Buffett’s portfolio. One of the directors of Gannett Co. Inc. (GCI) actually made a 20,000 share purchase during the second-quarter. The company closed trading on Tuesday at $14.04 per share, and this was after a 6.3% rise in price. Many different newspaper company’s stock went up on Tuesday due to reports that News Corp. plans to spin off its publishing division.

In the first quarter of 2012, Gannett announced a $0.28 earnings per share which is down from $0.37 earnings per share in the prior year quarter. It made this announcement on April 16. The net operating revenues were also down by 2.6% from the prior year in advertising gained through publishing as well as publishing circulation. They did have an increase in their digital and broadcasting segments.

The company has mainly focused on building their digital content and advertising platforms. This will allow them to generate further growth and expand their business using the current technological advances. There digital revenue growth has increased 13% already in its publishing segment.

As far as future plans are concerned, they expect to generate anywhere between 2% to 4% growth in annual revenue, as well as higher earnings growth, by the year 2015. They also plan to return more than $1.3 billion of this money to the shareholders by the year 2015.

Gracia Martore, Gannett’s CEO and president, shared the company’s plans at a presentation that he gave on Thursday in New York to media and entertainment analysts. This is what he had to say:

“In addition, our new all-access subscription model has been rolled out in 38 markets and is progressing as anticipated. New ventures like Digital Marketing Services and the USA TODAY Sports Media Group that leverage and extend our brands and assets are gaining traction and delivering results. We are confident in our strategy and our ability to achieve sustainable revenue growth while maintaining a strong balance sheet and generating increasing shareholder value.”

Gannett also increased its annual revenue by 150% to an overall $0.80 per share. They also purchased 2.4 million shares for roughly $35.5 million during this quarter.

The Washington Post Company (WPO)

Warren Buffett officially owns 1,727,765 shares of stock in the Washington Post Company (WPO). This was determined at the end of the first quarter, and these shares represent 0.86% of Mr. Buffett’s overall portfolio. He actually bought the shares in the middle of 1973, and he is also the largest shareholder in The Washington Post Company. Although Warren Buffett has been on the board of this company for nearly 40 years, The Washington Post recently told us that he doesn’t plan on seeking re-election to the board now that his term has expired in May.

The last time there was an insider buy at The Washington Post was on December 30, 2011. 76 shares were purchased for the cost of $392 per share. Although since then, the share price has fallen to a much cheaper level of $363.55 this past Tuesday. And this was on an uptick of 0.18% during the trading day.

In May of 2012, The Washington Post reported first-quarter earnings of $31 million. This increased to $15.2 million in the quarter of the prior year, and their revenue came in at $972 million which is down from $1.04 billion in the prior-year quarter. The television broadcasting division increased their revenues while the cable TV division had flat earnings. The education and newspaper publishing divisions were both down as well.

Warren Buffett has been increasing his purchases of newspapers lately. In a CNBC interview he actually stated that he did not like The Washington Post business model of not charging for their product:

“Newspapers have been giving away their product at the same time they’re selling it, and that is not a great business model. So when they put papers up on the internet and you get it free, you’re competing with yourself… And you’re seeing throughout the industry a reaction to that problem and an answer to it. You shouldn’t be giving away a product that you’re trying to sell,” he said.

There are other online newspapers such as The Wall Street Journal, The New York Times and News Corporation who are certainly charging for their online product right now.

Coca-Cola Company (KO)

Warren Buffett’s portfolio consists of owning 200 million shares of Coca-Cola (KO), which was determined at the end of the first quarter. This is actually 20% of Mr. Buffett’s entire portfolio, and he has never once sold any shares of his Coca-Cola stock since he first started buying it up many years ago.

There were actually three insiders buying Coca-Cola stock during the second quarter. All three of the buyers were Coca-Cola directors. The biggest purchase out of the three was made by Director Barry Diller in April where he spent $20.3 million to purchase his shares. He bought each share at an average about $77 each, and the price has dropped a little bit since then although it is relatively close at $75.25 per share. That price is actually a 0.67% increase on the day.

It should also be noted that there were six insiders that sold shares of Coca-Cola stock in the second quarter as well.

Director Barry Diller, along with one another director, bought their shares two days prior to Coke announcing that they were seeking approval for a 2-for-1 stock split. The chairman of Coca-Cola was pushing for this split, and if it goes through it will be the 11th stock split in the 92 year history of the company. Coca-Cola stock last split 16 years ago, and the shareholders are going to vote on this decision on July 10.

“Our recommended two-for-one stock split reflects the Board of Directors’ continued confidence in the long-term growth and financial performance of our Company,” said Coca-Cola CEO and Chairman Muhtar Kent. “Our system’s 2020 Vision to double our revenues over this decade provides a clear roadmap for creating value for our consumers, customers, bottling partners and shareowners. A stock split reflects our desire to share value with an ever-growing number of people and organizations around the world.”

The other first-quarter announcement that Coke made was a dividend increase from $0.47 to $0.51 per share per quarter. This is actually the 50th annual dividend increase in consecutive years.

General Electric Company (GE)

Warren Buffett also own shares of the General Electric Company (GE). His total shares of this company are 7,777,900, and it makes up about 0.21% of his total portfolio. There were two GE insiders who bought company shares over the last three months. One of the directors purchased 30,000 shares at a cost of about $19.50 per share. The second director bought 4000 shares, and paid roughly $19.75 per share.

Both of these purchases happened toward the end of April, and the stock has gone up slightly for both individuals since it closed on Tuesday at $19.80 per share. This was a 1.43% share price increase for that particular day.

The Wall Street Journal reported a rumor that General Electric is seriously considering selling off large portions of GE Capital. There are many investors who believe that GE is getting much too large, and that it needs to downsize in this area.

GE announced earnings growth for the eighth consecutive quarter, and GAAP earnings from continuing operations of $3.3 billion, which is down 4% from the quarter in the prior year. The company’s revenues also declined around 8%, and this is largely due to the sales of Garanti and NBCU in the same quarter of the prior year.

GE is expecting double-digit growth in earnings during the year 2012 within its industrial business. They believe this is good news for GE Capital since they are hoping that the industrial growth will take advantage of overall global growth. This company earns 50% of its revenue from businesses overseas.

The first-quarter earnings of GE capital were up 27%, and this is excluding the sale of Garanti, for a total of $1.8 billion. This division of General Electric benefited from their first profit in real estate since the third quarter of 2008. It is also known that General Electric is going to start getting dividend payments from GE Capital. This will be the first time receiving dividend payments since the financial crisis first began. The dividend is said to consist of about 30% of the total earnings of 2012.