Edmonds and Author Robert Hagstrom Chat on Yahoo!

Chatters discuss Warren Buffett's views on the Internet, among other things.
Author:
Publish date:

TSCEllen:

Welcome everybody. Without further ado ... Chris Edmonds.

CEdmonds:

Thanks Ellen - Its great to be here.

CEdmonds:

Fresh off the Berkshire annual meeting in Omaha. I'm a contributing editor for

TheStreet.com

and cover REITs, utilities, and Buffett It's great to have Robert Hagstrom with us, a long time Buffett watcher and author of the new book The Warren Buffet Portfolio. A great read on Buffett.

RHagstrom:

Good afternoon everyone, it's a pleasure to be with you. I look forward to having a conversation.

rwierz asks:

Buffet has missed boat on Internet stocks. Why does he not use research staff to learn something that he admits he is ignorant of?

RHagstrom:

My take on that is that Warren Buffett very much enjoys the game of analyzing investments and investing himself, and to defer to someone else's judgement would take away from that pleasure.

CEdmonds:

Buffett is amazingly independent. He wants to understand the business someone else perceives it.

RHagstrom:

Good answer.

CEdmonds:

He says he doesn't understand the net and hence, wont invest there.

RHagstrom:

That's right.

Icover asks:

In his latest letter to shareholders Buffet takes off against "creative accounting practices" and improper accounting with options. How will this effect the overall price of an equity if an option is ever placed over as an expense?

RHagstrom:

First of all, that's an excellent question. In my opinion the issue of accounting abuses and executive compensation was the dominant theme of this year's annual report. But the annual meeting as well my guess is that as this becomes more clear among investors and analysts it will have a potentially negative effect on those companies which are the greatest abusers it is wise to surround yourself with high quality companies that don't abuse accounting standards.

CABob39 asks:

Do you believe he doesn't understand the Net, or just thinks in general it is overvalued?

CEdmonds:

I think both. He clearly thinks it's overvalued. But he doesn't have knowledge to give him an advantage. So he wont go there.

gungadin_ asks:

How can Buffet be 15 billion in cash? When an investor gives a fund money they expect it to be used to buy stuff!

RHagstrom:

Berkshire Hathaway isn't a mutual fund, but a holding company comprised primarily of insurance companies. The money in question is the float from the insurance cop many that must be responsibly invested to insure an adequate return for investors, and responsible coverage for insurers.

CEdmonds:

As Charlie Munger would say, Nothing to add.

yaggakc asks:

Did Mr. Buffet make all his money in the stock market?

CEdmonds:

Not all of it but most of it. He invests in other places when he thinks there's value like last year in Silver and Zero Coupons.

CEdmonds:

But, he focuses on good companies, not good stocks. He doesn't think of them as stock, he thinks of them as businesses. That is where he has an advantage over a lot of other investors who don't look at the market in that way.

mhughsam asks:

What's your best estimate or range of berkA?

RHagstrom:

Our current model suggests that the business is worth about $90,000-$100,000 per share. As a conservative estimate, based on the growth of the insurance business.

CEdmonds:

From a technical standpoint,

TheStreet.com

's Gary B. Smith thinks the chart says it could go to 100K.

johndoeone asks:

Does Warren Buffett own UK companies, like System Southwest?

RHagstrom:

We do not have any evidence as yet that he owns UK companies. He's said publicly that he is presently investing in a UK company, but the disclosure won't occur until he owns 3% of the stock outstanding. We don't know when that will happen, or which stock it is.

applefool asks:

Do you think Buffett will ever something like a DELL or a MSFT in the future?

CEdmonds:

I think its possible. I think he just needs to get more comfortable with the finances of the business.

CEdmonds:

His investment style has evolved over time and there's nothing to say he wont continue to look. Check out my column this evening on Buffetts real feelings about tech.

rwierz asks:

What are Buffet's ten largest holdings in stocks?

RHagstrom:

Largest: Coca Cola, next, American Express, third, Gillette, fourth Freddie Mac, fifth, Wells Fargo sixth, Disney co. seventh,

The Washington Post

.

RHagstrom:

Then, there's a basket of $5B worth of common stock that's not disclosed.

Icover asks:

Bob, is Warren still bullish on Coke?

RHagstrom:

At yesterday's annual meeting, he reiterated his long term belief that Coke will generate economic returns far superior than the market over a 10 to 20 year period. However, there have been periods and will continue to be periods, when Coke will under perform the market in shorter time frames.

CAN_Rick asks:

Historically, Buffett has described international investing as being outside his circle of competence. Is he beginning to look at global opportunities now?

CEdmonds:

I think that he feels there may be opportunities, especially with valuations so high in the US.

CEdmonds:

He said he was especially intrigued with opportunities in Japan and the UK. Another example of his continued evolution in style and increase in knowledge.

RHagstrom:

My sense is that the delay in Buffett's investment overseas centers on his comfort in the accounting statements of different countries, to the degree he becomes more comfortable with the economics and how it's reported. My sense is the probability of him investing overseas will increase.

glensp asks:

Buffet is a master, but don't forget, with his reputation, he has about 10% built into any co. he buys.

CEdmonds:

No doubt that people grab his coattails. But as a long term investor, he really doesn't pay that much attention to that.

gratianus asks:

How does Buffett deal with the Buffett effect? For example, he individually ignited a rally in REITs, and in particular in those REITs in which he took a position. When the SEC filings appeared, they created a frenzy. Does it concern him that he creates his own stock climate when he takes a position? It certainly is a fast way to close the gap between price and intrinsic value.

RHagstrom:

The answer is yes. The way he's able to navigate is through an allowance the SEC and the state insurance commissioner. They allow him up to 2 years to disclose any unusually large positions at his discretion.

RHagstrom:

This allows him to build any position in a stock without necessarily having to disclose it, which ultimately would affect the future price of the security.

CEdmonds:

True, and that is certainly a benefit. There are a lot of people who suggest he has too much power to manipulate.

CABob39 asks:

You correctly pointed out that Berkshire is a holding company, not a fund. But for an investor isn't the bottom line essentially the same as long as you like the holdings?

CEdmonds:

I suppose so and most of the people like the long-term returns. If you bought $1000 of Berkshire in 1990, it would be worth almost 9000 today. WOW!

BMWNTUX asks:

Mr. Hagstrom, what are Mr. Buffet's current intentions in silver futures? He has spoke infrequently on this topic recently.

RHagstrom:

Buffett's position is that he'll no longer comment on "unconventional investments." My concern is that these unconventional investments would mislead investors into entering transactions with commodities with which they have very little knowledge.

RHagstrom:

It's possible he feels the same way for most investors, speculating in commodities is inappropriate. However Mr. Buffett has had a long successful career of profiting periodically from commodity imbalances.

RHagstrom:

But you must be highly intelligent and knowledgeable to do so, it's not for everyone.

CEdmonds:

Its a two-edged sword. If he doesn't disclose, everyone wants to know; if he does, everyone wants to jump aboard. I think Buffett really does worry about the impact he will have on markets. And I think that his worry is sincere.

Dr_John_in_LA asks:

Why don't Buffet buy back stock with the cash in hand, if he sees nothing to buy?

RHagstrom:

Great question. He admitted at the annual meeting that would be a rational act -- if at the time, Berkshire's stock price had traded at a significant discount to its intrinsic value.

RHagstrom:

But repurchasing stock at only a modest discount is usually not a good idea, according to him. Still, I am of the opinion that he believes there will be opportunities to deploy that cash in the near future, so he's reluctant to give it back yet.

CEdmonds:

A lot of people think he should buy back now because of the shares issued in the General Re acquisition. But, I don't think he will ever do that. Unless, of course, the stock is way below - like 25% - its intrinsic value.

Taurusforever asks:

What is he going to do with all of his money?

RHagstrom:

If he dies first, the money is left to Susan Buffett, his wife. After her death, it goes to the Buffett foundation, which will then be the largest charitable foundation in the history of the world.

RHagstrom:

It has 2 primary beneficiaries: one, to solve the problem of nuclear proliferation., second: to discover solutions for population overcrowding.

CEdmonds:

Go to Disney World? I think Robert knows what he's talking about.

Kuttaway asks:

What Japanese company do you think he is interested in?

CEdmonds:

If I knew, I wouldn't be here. I think he's looking at big companies. I think there is a possibility its a leasing or finance company with good numbers

CEdmonds:

But that's speculation.

Icover asks:

With both Buffet and Munger being long in the tooth, are they training any one to succeed them? If so, are they giving them the chance to buy equities now?

RHagstrom:

Oh yes, it's been disclosed that Lou Simpson, who manages the portfolio for GEICO, would assume responsibility for Berkshire's investment portfolio.

RHagstrom:

Not to worry, Lou Simpson's record is outstanding. past this, there are the names of individuals already selected to run the operating side of the business. so in the unfortunate event, there are people handpicked ready to go.

CEdmonds:

I think Lou Simpson has done a great job at Geico. I also think the Gen Re acquisition will help with the transition. Ron Ferguson at Gen Re is a great manager and could step in. Buffett says Berkshire runs itself and for the most part that's true. But, Buffet is irreplaceable!

MT asks:

Does B plan to make any additional RE IT purchases or add to the three he recently bought into?

CEdmonds:

Great question -- I don't think so. The RE IT purchases are not equity purchases and they are a part of his personal portfolio.

CEdmonds:

He wants the income from them. He said so he can go to D every night!

phlox asks:

What is Mr. Buffet's current position in silver futures?

RHagstrom:

We don't know if he's sold, bought more, or what his position is.

December asks:

What is B's cost of capital?

RHagstrom:

Warren Buffet charges 15% for capital. That's what he thinks the cost is.

grains asks:

At the annual meeting, Charlie Manger implied that the value in Refits perhaps is gone merely a month after B's Tangier filing. Two questions: was Manger trying to minimize the Buffet Effect, and why, given B's concern over what the Net could do to retail stocks, did he personally buy several million dollars worth of a RE IT that is 100% retail bricks and mortar. Tangier?

CEdmonds:

Great question, and somewhat puzzling. Tangier may be one retail RE IT that is less impacted from the net.

CEdmonds

A factory outlet center has a certain draw. But, remember, its for the income primarily and Tangier was yielding north of 10% when he bought it. That's why I don't think Manger really cares what impact Buffet's move had on the market. Manger is to the point, and blunt.

CEdmonds:

And that is exactly what he was. He thinks the valuation extreme is gone.

sib_95 asks:

Does he feel that the current companies that he is invested in are not trading at a discount to there intrinsic value?

RHagstrom:

There are different levels of discounts which would attract Warren's attention our analysis was that coke traded briefly at a slight discount to intrinsic value.

RHagstrom:

Slight is not enough for him. he needs a wider discount in the price relative to intrinsic value to allocate capital.

CEdmonds

He said he felt most of his positions are now too expensive to add to positions. But, he did say he would be almost certain to add to all of those positions over the next decade. In other words, he's not selling anytime soon.

RHagstrom:

Yup.

pahoox asks:

What's the difference between BRKa and BRKb ?

RHagstrom:

BRKa converts into 30 shares of BRKb, however BRKb cannot be converted back to BRKa.

RHagstrom:

BRKb does not have voting rights, nor can it participate in the charitable contribution program aside from these two points its long term economic relationship o BRKa is identical.

CEdmonds:

Price - most people cant afford A so there is B. Seriously, they introduced B stock because certain money managers were trying to create investment trusts that would allow people to buy into Berkshire without owning the stocks. So, as Charlie said this weekend we lowered our 16 inch guns and blew them out of the water!

RHagstrom:

Well done.

mhughsam asks:

Could you review your valuation model of how you got to $90-100K on BerkA?

RHagstrom:

No. The way in which we model business is proprietary to how we give advice.

CEdmonds:

I don't have any idea how a technician like Gary B gets to his ideas, but he right sometimes. For Robert, he runs the Legg Mason Value Trust and his models are proprietary for clients use only. Give him a break, we all have to make a living.

CEdmonds:

Oops, the Legg Mason Focus Trust.

glensp asks:

Would Buffet think BRK.a is overvalued?

RHagstrom:

Buffett never comments on the intrinsic value of Berkshire, thus rarely comments on its relationship in price. There's only been a few occasion in history that the stock was trading at extreme overvaluation and investors be cautious.

RHagstrom:

Past that, he's never signaled when it was the right time to buy.

CEdmonds:

However, relative to B he would say no. It's still very close to the 1/30 ratio and he said he doesn't think there is an arbitrage opportunity if that's the question.

RHagstrom:

Good point.

gratianus asks:

Well, Tanger wasn't and isn't the only REIT yielding over 10%. Several have better balance sheets and larger floats. What was it about Tanger (other than the family angle)?

CEdmonds:

I think he liked the family for one. I also think he liked the fact Tanger is working hard to create a brand name in their business.

CEdmonds

I also think he likes the balance sheet. Its pretty clean for a REIT with no creative accounting, or Joint Ventures that he doesn't like nor understand.

ndcampbel asks:

What periodicals does Buffett read?

RHagstrom:

At the annual meeting, Charlie Munger admitted he and Warren read judiciously read all the major business magazines, countless annual reports, and past that we don't know what other publications he queries.

RHagstrom:

But I'm sure they'd include industry trade journals of the companies he owns.

CEdmonds:

Buffett reads a lot. I know he reads Forbes, Fortune and others. He also owns stock in at least 200 companies (100 shares of each) so he gets there filings in a timely fashion. Does he read

TheStreet.com

? I hear rumors to that effect.

Icover asks:

How does Buffet and group maintain such secret ness in their trades? There are very strong indications that traders that work for him are very tight lipped.

Ralston:

Warren Buffett has cultivated over the years a group of traders that recognize their future business will be enhanced to the degree they can remain silent about their work.

CEdmonds:

If you ran a company that generated the potential commissions that Berkshire does, you'd be quiet too! His has very loyal partners in his business, and that includes his brokers.

CABob39 asks:

Earlier you spoke about WB buying back shares. Wouldn't that send a message that might result in a buying spree that might overvalue Berk.

RHagstrom:

That's a possibility, although it could send the opposite message: his ability to increase the instrinsic value of the business at at least a 15% rate was no longer possible.

RHagstrom:

It would put selling pressure on the stock for those expecting that return.

speisert asks:

There is certainly a possibility for arbitrage if BRKB becomes more highly valued than BRKA. One simply converts their BRKA into BRKB and sells. There isn't the same protection for BRKB shares. What prevents BRKB from becoming undervalued (less than 1/30 BRKA) in a statistically significant way?

RHagstrom:

There's nothing to prevent the BRKb stock from trading at a discount to BRKa, however over its history the greatest discount has been in the neighborhood of 3-5%.

RHagstrom:

If the stock traded at a very large discount to A, it might suggest that the B shareholders have sold the shares irresponsibly if you consider the majority of the Berkshire A stock is held by Warren, Charlie, the sequoia fund and some original investors.

RHagstrom:

Their thinking on the company is likely to be superior. Basically, Warren wouldn't want to do that to create a taxable situation.

CEdmonds:

Actually, that's pretty simple. If it trades at a discount, Buffett said he would buy B as well. I just don't think that will happen!

ksravi asks:

Does the Buffett style of investing hold good in the technology laden world of today ?

RHagstrom:

The market gets it wrong over a short period but not over the long period. Can I promote the book? In our new book, "The Warren Buffett Portfolio" we share Bill Miller's point of view that the Warren Buffett way template fits neatly over many technology stocks.

RHagstrom:

It simply requires you to think about economic models in slightly different ways, which is not terribly difficult. In the book we lay out Bill's thinking on this subject, which is quite compelling.

CEdmonds:

Buffett may someday buy tech. See my column tonight. By the way, about Robert's new book, Charline Munger, who doesn't hand out complements very often, put it on his must read list. That's good enough for me. Go buy it!

RHagstrom:

Thank you Chris.

bigcat567_1999 asks:

What do you think about WB playing T as an tech stock with a low PE?

RHagstrom:

He and Charlie said they hadn't had a lot of success in the telecommunications business.

CEdmonds:

Buffett said he thought it wasn't terribly compelling at these levels. Both he and Charlie said they really hadn't done a very good job with telecom stock in the past. Don't think telephone is in BRKs cards!

Icover asks:

A couple of years ago his daughter wrote a book about her father and the method of his stock selection. Does she or the book have any credibility?

CEdmonds:

Buffetology was by Mary Buffett, who was married to Peter. Its an alright book, but Roberts new book is much better and more thorough. And, that's not just because he's on the chat. It's true!

warren2323 asks:

Why don't you follow Bill Ruane as much as Buffett?

RHagstrom:

Bill Ruane is a great thinker, and his track record is incredible. My sense is both he and Warren think about things in similar ways, so I'm not sure there's much distinction.

glensp asks:

Buffet says he does not invest in tech. b/c he can't forecast earnings 10 years out. Are MSFT and INTC earnings not easier than G or KO?

CEdmonds:

Not at all, at least to Buffett. He said that he knows what Coke and Gillette will look like ten years from now. He doesn't think Microsoft will look anything like it looks today.

CEdmonds:

Same with Intel.

RHagstrom:

That's exactly right.

CEdmonds:

That doesn't mean he thinks they are bad companies, just he doesn't understand them to make an informed decision. That's an admirable trait in an investor.

mhughsam asks:

Do you not think that Buffett's discomfort with overseas investing is about the ability to properly evaluate management.

RHagstrom:

That could be an additional factor but the first pass through has to be an understanding of the economics and that's not perfectly clear for him just yet.

CEdmonds:

But I think as valuations become more attractive in certain market relative to the US it will!

ndcampbel asks:

Why is float so important to BH?

RHagstrom:

Float is an interest-free loan from policy holders that allows WB to grow the net worth of Berkshire at an accelerate rate.

RHagstrom:

As long as he writes the insurance policies profitably and invests smartly, the value of the float will grow exponentially. It's the single greatest value driver in Berkshire Hathaway.

SMCC1963 asks:

Is Warren related to Jimmy?

RHagstrom:

There's some distant related cousin there, but it's true.

CEdmonds:

Rumor has it they are distant cousins. Warren can sing too! Come to an annual meeting and find out. A CD is not the cards.

ksravi asks:

Don't you think Buffett is lionized because he did well during the times when the economy was in tatters?

RHagstrom:

I think Warren's reputation has grown because of his ability to earn excess rates of return in all economic and market periods.

CEdmonds:

There are some people who fear the idolatry of Buffett. They say it isn't healthy.

RHagstrom:

It's a feat that's unparalleled.

ndcampbel asks:

Is "The Warren Buffett Way" a decent read?

RHagstrom:

I believe, for first-time investors, it is an accurate and useful way to help learn stock-picking, according to Warren Buffett.

RHagstrom:

For many who've read and studied Buffett for years, there may be nothing new here. But in the Warren Buffett porfolio, we've broken new ground and helped connect the dots a little further.

CEdmonds:

Its a good book. Robert wrote it too. Charlie Munger prefers the new book over the old. But, its in paperback!

JohnM11663 asks:

Comment on Buffett retirement or demise.

CEdmonds:

Read my column tonight. I think it is a concern, and I think most people think the stock will drop big time when it happens. But that is short-term.

MrWarrenBuffett asks:

Hello guys. I think people need to get back to investing in businesses, rather than putting your money into something on the basis of it going up because its hot or the market is hot. Invest in businesses you understand, and like, going forward and stick with them!

RHagstrom:

It's great advice. sounds like the man himself.

CEdmonds:

Warren, thanks for dropping by. I thought you were on vacation. Get back to your family!

gratianus asks:

Has WB ever discussed his less successful investments? For example, he disposed of his US Air position only to see the airlines recover? What triggers a decision to liquidate?

RHagstrom:

Warren is renowned for admitting past mistakes both publicly as well as through the annual report.

RHagstrom:

He believes confessing the errors will make them less likely to repeat them going forward. Remember that success is not synonymous with infallibility.

mhughsam asks:

What's different about your new book from The Way, i.e. should I be buying it?

RHagstrom:

The Warren Buffett way is about how to pick stocks according to the tenets outlined by Buffett.

RHagstrom:

The "Warren Buffett portfolio" is how to manage a concentrated big bet portfolio and the intellectual framework that you need to be successful.

glensp asks:

What could you tell us that we have not heard about Buffet?

RHagstrom:

Good question! My take is that you're getting very much the real McCoy, the only thing that might be misconstrued is that his attitude about inheritance in no way reflects the love he has for his kids.

RHagstrom:

He doesn't plan to leave the money to the kids. But that in no way infers he doesn't have a great deal of love for his family. They're incredibly important to him. Words that Charlie shared with us were that the welfare of his family is the single most important thing before his family.

CEdmonds:

He's an avid sports fan. He loves Nebraska football, he loves major and minor league baseball, and he lives his life without worries of what other people think. He invests the way his discipline has taught him, not worrying about others thought. A lot of money managers could learn from that discipline.

TSCEllen:

Thanks for joining us Chris and Robert!

RHagstrom:

I enjoyed it. Thanks for having me. Look forward to doing it again.

CEdmonds:

Thanks Ellen, and thanks a lot Robert. Thanks to all for dropping by and we'll see you on

TheStreet.com

!

TSCEllen:

Make sure to look for the transcript in the community section of TheStreet.com and on the home page.

TSCEllen:

And make sure to join us this Thursday at 5pm for a chat with

TheStreet.coms'

Ben Holmes about the current IPO Market.

TSCEllen:

Sam bat channel, same bat time!