The stock markets, the US ones in particular, at this late stage in a bull market, seem to be increasingly influenced by speculators. Warren Buffett and Charlie Munger have long argued against speculation in shares, saying that share buyers should thoroughly understand what they buy (understand the underlying business, the managers and finances). So the following question about the latest manifestation of the ancient human tendency toward speculation posed little intellectual challenge to Buffett and Munger (speaking 1st May 2021).
Q: What do you think about Robinhood and other trading apps or fintech companies enabling all ages and experience to participate in the stock market. BUFFETT: “It [Robinhood, the “free” brokers] has become a very significant part of the casino group that has joined into the stock market in the last year, year-and-half. They have attracted 12% or 13% of casino participants. “You know, I looked up on Apple the number of seven day calls [options], 14 day calls outstanding. And I’m sure a lot of that is coming through Robinhood. They’re gambling on the price of Apple over the next seven days. “There’s nothing illegal about it; there is nothing immoral. But I don’t think you build a society around people doing it. “I mean, if a group of us landed on a desert island and we knew that we’d never be rescued, and I said, ‘well, I’ll set up an exchange over here, and I’ll trade our corn futures and everything!’ [Laughing]. “I think the degree to which a very rich society can reward people who know how to take advantage of essentially the gambling instincts of not only the America public, but the worldwide public…it’s not the most admirable part of the accomplishment. “But I think what Americans have accomplished is pr…………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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In the early 2000s Joe Brandon and Tad Montross really turned around General Re. In thirteen of the next fourteen years between 2003 and 2016 this part of Berkshire reported an underwriting profit – see Figure 10.6. It did so on a decreasing level of business: premiums fell from $8.25bn in 2003 to only $5.64bn in 2016 – see Figure 10.4. In 2017 the data for General Re was subsumed within the Berkshire Hathaway Reinsurance Group when Ajit Jain was put in charge of all insurance activities in early 2018.
The lower revenue also pushed down float from $23.65bn in 2003 to $17.70bn in 2016 – see Figure 10.5. It seems that Joe, Tad and the rest of the team at General Re really were dedicated to Buffett’s philosophy of focusing only on profitable business even if that meant saying no to business, pithily summarised by Buffett as “size simply doesn’t count”. Source: Berkshire Hathaway Annual Reports Source: Berkshire Hathaway Annual Reports Source: Berkshire Hathaway Annual Reports While General Re held back its volume growth to become a “jewel” in Berkshire’s crown on account of its zero-cost float, Ajit Jain’s BH Reinsurance was powering ahead both in volume and in profitability. Its handful of ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Once inside the Berkshire fold insurance giant General Re’s executives were encouraged to feel free of the previous constraints that limited growth. This helped to lift annual premiums from $6bn in the year it was bought, 1998, to $8.7bn in 2000 – see Figure 10.1. Buffett wanted them to continue “increasing the proportion of its business that is retained [rather than passed on to other reinsurers], expanding its product line, and widening its geographical coverage” (1998 letter).
Source: Berkshire Hathaway Annual Reports General Re’s float was building up nicely, as were the floats of Ajit Jain’s operations at Berkshire Hathaway Reinsurance and at GEICO and Berkshire Hathaway Primary Insurance see Figure 10.2. Source: Berkshire Hathaway Annual Reports Buffett sounded a little worried with the “huge” underwriting loss at General Re when he reported Berkshire’s results for 1999, a total of $1.18bn, the worst in 15 years – see Figure 10.3. But said he thought it “aberrational” (1999 letter). In contrast, GEICO reported an underwriting profit of $24 thus supplying float for Buffett to use at better than zero cost. Primary insurance also produced a profit, at $22m, so again Berkshire was paid for holding and investing other people’s money. The 1999 underwriting loss at BH Reinsurance of $251m sounds a lot but it was only 4% of its float compared with the US government 10-year bond rate of 6.7%, and so was relatively cheap float for Buffett to employ. General Re’s float cost, on the other hand, was 7.8% of float in 1999. Source: Berkshire Hathaway Annual Reports Although seeing worrying signs at General Re, for example writing in his 1999 letter that its business was “extremely underpriced, both domestically and internationally”, Buffett maintained that General Re had “the distribution, the underwriting skills, the culture, and — with Berkshire’s backing — the financial clout to become the world’s mos ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Yesterday's newsletter showed that showed that in the eleven years before Warren Buffett purchased it General Re was firing on all four cylinders, in the later years making almost £1bn in profits. It also held $14.9bn of float, which was available at apparently no cost because underwriting pricing was so good.
But would you pay $22bn for this? It seems a high price to earnings ratio, and shareholders’ equity (net assets) was just over $8bn so the price to book ratio was 2.7 times. Buffett must have anticipated some synergies that would considerably enhance profits. Shortly after agreeing to buy he described his thinking:
Berkshire, on the other hand, happily accepts volatility, just so long as there is an expectation of increased profits over time. “As part of Berkshire, this constraint will disappear, which will enhance both General Re's long-term profitability and its ability to write more business. Furthermore, General Re will be free to reduce its reliance on the retrocessional market over time, and thereby have substantial additional funds available for investment.” wrote Buffett in the Berkshire Hathaway News Release June 19, 1998.
On acquisition General Re’s common equities comprised only $4.7bn of the portfolio, less than one-fifth. Until that point it had taken a very conservative approach, placing around three-quarters of funds in bonds. This resulted in low returns compared with Buffett’s investments or those of Lou Simpson over at GEICO.
The Deal The connections between Berkshire and General Re go back a long way. In 1976, for example, General Re helped resuscitate GEICO from near-death by taking some risk exposure off its books. General Re was ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 For nineteen years Berkshire had enjoyed dividends flowing from its 51% stake in GEICO when it bought the remaining shares in 1996 for $2.3bn. GEICO was an exceptionally well-run primary insurer with a focus on auto policies (see earlier newsletters on GEICO). Its two key managers continued to run the business: Tony Nicely managing underwriting (until 2019) and Lou Simpson investing float (until 2010). The acquisition of GEICO immediately increased Berkshire’s total float by nearly $3bn.
In the lead up to the 1998 purchase of General Re Berkshire’s insurance operations were firing on all cylinders – see Table 1. GEICO achieved an underwriting profit in 1997 of 8.1% of premiums (underwriting profit of $281m on revenue of $3,482m), an outstanding result for the auto insurance segment. But even that was trumped by the 32.9% 1997 underwriting profit on National Indemnity’s traditional business (it had a three-year average underwriting profit of 24.3%). The homestate operation produced 14.1% profit (15.1% average over three years) and Berkshire’s workers’ compensation business turned in a three-year record of a positive 1.5%. Aggregating these operations with Central States Indemnity, and Kansas Bankers Surety, in the Berkshire Hathaway Direct Insurance Group we see an underwriting gain of $53m on a revenue of $321m. Berkshire Hathaway Reinsurance Group made a small underwriting profit, which was more than satisfactory given that it generated nearly $1bn in premiums helping to keep its float topped up to around $4bn. Table 1. Underwriting profits of Berkshire Hathaway Insurance Business (including GEICO) 1996 - 1997 (1) (2) Yearend Yield Underwriting Approximate on Long-Term Loss Average Float Cost of Funds Govt. Bonds (In $ Millions) (Ratio of 1 to 2) 1996 profit 6,702.0 less than zero 6.64% 1997 profit 7,093.1 less than zero 5.92% General Re in 1998 General Re is primarily a reinsurance company with a focus on property and casualty risks based in Stamford, Connecticut, the same town where Ajit Jain had his HQ. Indeed, Berkshire and General Re had done a lot of business together over the years. General Re was among the top three global reinsurance companies based on net premium written and capital, operating in 61 cities in 31 countries, providing coverage in over 150 countries and employing 3,869 people. It had four divisions, but almost half of its revenue came from the North American property/casualty business and a third from international property/casualty – see Table 2. Life and health insurance was a large business with $1.3bn of revenues, but in the context of the huge General Re this constituted only 15% of the total. The financial services division had $301m of revenue. North American property/casualty reinsurance Operating in the USA and Canada this division predominately wrote excess reinsurance (indemnifies the primary insurer for that proportion of the loss that exceeds an agreed amount). Casualty accounted for 57% of revenue with property another 30%. The rest was specialty (unusual coverage such as high risk behaviour like skydiving) and surplus lines (high limit and hard-to-place risks). International property/casualty reinsurance In 1994 General Re, Germany, became much more international with the acquisition of 75% of Cologne Re expanding its operations to 29 counties and providing cover in over 150. The majority of business was reinsu ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Insurance float comes in different qualities. Insurance against hail damage to crops over a few days or weeks does not produce much float at all because premiums are paid shortly before the threat and claims are paid shortly afterwards. This means that combined ratio of 100 is of no value to the insurer because it offer no chance to produce profit from investing float. (Combined ratio is cost of operations and claims divided by premiums expressed as a percentage)
In contrast, doctors, lawyers and accountants buying malpractice insurance generate a high amount of float compared with the annual premium – lodges of claims are often long after the alleged bad behaviour, and even after that pay outs might only occur only after lengthy litigation. With this type of “long-tail” business a combined ratio of 115 or more can be profitable because the income and capital gains on the float over a number years can mount up. The snag with long-tail insurance is that outcomes are far less predictable than short-term insurance, and it might be that the combined ratio ends up at 200 or 300, a disastrous loss for most insurance companies. Clearly long-tail insurers need to be very careful in selecting the risks they accept and be diversified so that if a mistake is in made in one area they have strength in many others. Because of the different qualities of float Buffett suggests we measure insurance performance using the metric “loss/float ratio” over a period of years to gain a rough indication of the cost of funds generated by insurance operations. Examination of the table gives us some idea of Berkshire’s loss/float ratio, but only if we avoid looking at single years and instead focus on groups of years, say three or four years. Profit record of Berkshire Hathaway Insurance businesses (1) (2) Yearend Yield Underwriting Approximate on Long-Term Loss Average Float Cost of Funds Govt. Bonds ------------ ------------- --------------- ------------- (In $ Millions) (Ratio of 1 to 2) 1967 ......... profit $17.3 less than zero 5.50% 1968 ......... profit 19.9 less than zero 5.90% 1969 ......... profit 23.4 less than zero 6.79% 1970 ......... $0.37 32.4 1.14% 6.25% 1971 ......... profit 52.5 less than zero 5.81% 1972 ......... profit 69.5 less than zero 5.82% 1973 ......... profit 73.3 less than zero 7.27% 1974 ......... 7.36 79.1 9.30% 8.13% 1975 ......... 11.35 87.6 12.96% 8.03% 1976 ......... profit 102.6 less than zero 7.30% 1977 ......... profit 139.0 less than zero 7.97% 1978 ......... profit 190.4 less than zero 8.93% 1979 ......... profit 227.3 less than zero 10.08% 1980 ......... profit 237.0 less than zero 11.94% 1981 ......... profit 228.4 less than zero 13.61% 1982 21.56 220.6 9.77% 10.64% 1983 33.87 231.3 14.64% 11.84% 1984 48.06 253.2 18.98% 11.58% 1985 44.23 390.2 11.34% 9.34% 1986 55.84 797.5 7.00% 7.60% 1987 55.43 1,266.7 4.38% 8.95% 1988 11.08 1,497.7 0.74% 9.00% 1989 24.40 1,541.3 1.58% 7.97% 1990 26.65 1,637.3 1.63% 8.24% 1991 119.59 1,895.0 6.31% 7.40% 1992 108.96 2,290.4 4.76% 7.39% 1993 profit 2,624.7 less than zero 6.35% 1994 profit 3,056.6 less than zero 7.88% 1995 profit 3,607.2 less than ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Berkshire Hathaway insurance business has always been run with an iron discipline approach. Warren Buffett and Charlie Munger would rather shrink the business than take on poorly priced insurance risk. Thus, in the years preceding 1985 Berkshire was the slowest-growing large US insurer. In fact, it shrank.
It wasn’t that it withdrew from the market. Indeed, it was the industry’s most steadfast provider, but it would only quote premiums that “we believe to be adequate” (1986 letter) said Buffett. There are times, such as the lead up to 1985, when other insurers slash prices to bargain levels to maintain volume. Naturally, clients leave Berkshire and go to them during these times. Then the cycle turns, as rivals run out of capital or become frightened by the losses generated by low premiums exit the market, and customers flood back to Berkshire. “Our firmness on prices works no hardship on…our employees: we don’t engage in layoffs when we experience a cyclical slowdown at one of our generally-profitable insurance operations. This no-layoff practice is in our self-interest. Employees who fear that large layoffs will accompany sizable reductions in premium volume will understandably produce scads of business through thick and thin (mostly thin).” (1986 letter) This policy produced huge swings in volume of primary insurance business. For example, monthly volume of $5m premiums in the final quarter of 1984 jumped to about $35m in the first quarter of 1986. A similar discipline, and therefore volume variability, pervaded the reinsurance business. A low cost of float, not a no cost of float The target of achieving profitability on underwriting, i.e. a combined ratio under one, is a harsh one. Most insurers are content to make small losses on underwriting which they make up for by investing the float. Even Buffett does not require a profit on underwriting, preferring the metric which compares the percentage underwriting loss on float with the rate of interest available on risk-free investments – see Table. Profit record of Berkshire Hathaway Insurance businesses 1967-1995 (1) (2) Yearend Yield Underwriting Approximate on Long-Term Loss Average Float Cost of Funds Govt. Bonds ------------ ------------- --------------- ------------- (In $ Millions) (Ratio of 1 to 2) 1967 ......... profit $17.3 less than zero 5.50% 1968 ......... profit 19.9 less than zero 5.90% 1969 ......... profit 23.4 less than zero 6.79% 1970 ......... $0.37 32.4 1.14% 6.25% 1971 ......... profit 52.5 less than zero 5.81% 1972 ......... profit 69.5 less than zero 5.82% 1973 ......... profit 73.3 less than zero 7.27% 1974 ......... 7.36 79.1 9.30% 8.13% 1975 ......... 11.35 87.6 12.96% 8.03% 1976 ......... profit 102.6 less than zero 7.30% 1977 ......... profit 139.0 less than zero 7.97% 1978 ......... profit 190.4 less than zero 8.93% 1979 ......... profit 227.3 less than zero 10.08% 1980 ......... profit 237.0 less than zero 11.94% 1981 ......... profit 228.4 less than zero 13.61% 1982 21.56 220.6 9.77% 10.64% 1983 33.87 231.3 14.64% 11.84% 1984 48.06 253.2 18.98% 11.58% 1985 44.23 390.2 11.34% 9.34% 1986 55.84 797.5 7.00% 7.60% 1987 55.43 1,266.7 4.38% 8.95% 1988 11.08 1,497.7 0.74% 9.00% 1989 24.40 1,541.3 1.58% 7.97% 1990 26.65 1,637.3 1.63% 8.24% 1991 119.59 1,895.0 6.31% 7.40% 1992 108.96 2,290.4 4.76% 7.39% 1993 profit 2,624.7 less than zero 6.35% 1994 profit 3,056.6 less than zero 7.88% 1995 profit 3,607.2 less than zero 5.95% Buffett is comparing what he calls the “cost of float” with a rough proxy of what Berkshire would obtain if it invested all float in long-term government bonds. Another way of looking at it i………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Until 1982 Buffett took on personal responsibility for Berkshire's insurance business strategy, senior appointments, and monitoring. As the business grew he realised the need to take more of a back seat, freeing time to concentrate on investments. He looked around for a talented manager to take over as head of all Berkshire’s insurance operations, and found such a talent in Mike Goldberg, a former McKinsey consultant.
Self-deprecatingly Buffett said in his 1982 letter that “planning, recruitment, and monitoring all have shown significant improvement since Mike replaced me in this role.” The following year Buffett was very hard on himself “in aggregate, the companies we operate and whose underwriting results reflect the consequences of decisions that were my responsibility a few years ago, had absolutely terrible results. Fortunately, GEICO, whose policies I do not influence, simply shot the lights out. The inference you draw from this summary is the correct one. I made some serious mistakes a few years ago.” Perhaps it wasn’t self-deprecation. The chickens of the late 1970s and early 1980s were coming home to roost in the mid-1980s. Those chickens were some poor underwriting decisions which went unrecognised for some time but had to be acknowledged eventually. In 1983 for every $100 taken in premiums Berkshire recorded an expense of $121 for claims and operating costs. In other words, the “combined ratio” was 121 (combined ratio is total cost of underwriting (including operating costs) divided by total earning premiums). Buffett said that it would “be nice” if the underwriting shortcomings could be placed at the doorstep of Mike Goldberg. But that insurance has a long lead time before the effects of decisions are seen, “so the roots of the 1983 results are operating and personnel decisions made two or more years back when I had direct managerial responsibility for the insurance group.” (1983 letter) Insurers often have great difficulty estimating claims for a 12-month period. The lack of clarity and the dependence on judgement opens the door to over-optimism. The extent of many insurance claims, or even their existence, is not known for many years because there are four parts to insurance loss expenses in any one year: 1. Losses that occurred and were paid during the year; 2. Estimates for losses that occurred and were reported to the insurer during the year, but which have yet to be settled; 3. Estimates of ultimate dollar costs for losses that occurred during the year but of which the insurer is unaware; and 4. The net effect of revisions this year of similar estimates for (2) and (3) made in past years. Revisions under 2 and 3 may occur many years down the line which adds to the cost line of that later year, distorting the profitability of underwriting then. Take an injury from a car accident. The true extent of the medical costs or time off work costs may not be known for some time. If say an unexpected additional $100,000 is paid out five years later then the amount is charged to underwriting profits in the year it is settled. Even well-intentioned CEOs and their accountants, who are conscientiously aiming at conservative estimates, often make mistakes. In the mid-1980s Buffett had to admit to such, “At Berkshire, we have added what we thought were appropriate supplemental reserves but in recent years they have not been adequate.” (1983 letter) In 1984, for example, of the overall $45.4m underwriting loss, $27.6m was a loss on 1984’s business, but $17.8m was a correction for the loss amount recorded for 1983. Errors in this period were largely caused by under-estimating the tendency of juries and courts, influenced by publicity on high-profile cases, to continuously push up pay-outs for injuries in accidents and other events regardless “of the factual situation and the past precedents for establishment of liability” according to an annoyed Buffett. Berkshire also erred in the reinsurance area. Much of this being down to client primary insurance firms making errors, “their mistakes have become our mistakes” wrote Buffett. Buffett ruefully likened the painful experience of having to make surprisingly large payments on business he thought was finished years before to that of the man when travelling abroad received a phone call from his sister infor………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Building Berkshire Hathaway insurance - lessons for investors in evaluating insurance companies26/2/2021 Insurance is at the heart of Berkshire Hathaway. The first significant act after Warren Buffett took control of Berkshire was the 1967 purchase of National Indemnity for £8.6m. There are two main attractions to holding a well-run insurance company within the Berkshire fold. First, it might – although most insurance firms don’t – make a profit on underwriting. That is, what is pays out on claims together with its operating costs (wages etc) is less than it takes in premiums.
Second, the delay between policyholders handing over premiums and insurance claims being paid leads to a “float” of money being held in the company. When Buffett took control of National Indemnity it had a float of $17.3m. That was a considerable sum of money for Buffett to invest; after all Berkshire Hathaway then had less than $30m net assets. His skill would lead to large returns on money under his command. Technically, accountants treat float as a liability for Berkshire because it is set to one day be paid out in claims. In truth, float is a tremendous asset in the right hands. Experiencing the excitement of making money from float while achieving profitable underwriting (in most years) in the 1970s Buffett was determined to build up the insurance side of the business. To National Indemnity, he added an array of other companies, the most significant of which was GEICO. By 1998 the insurance side had a float of over $7bn and was generating annual premiums totalling nearly $5bn. Then Buffett went for a giant leap by trebling the size of Berkshire’s float from $7bn to $22.8bn by buying market-leading General Re. It was paid for, not with cash, but by the issue of A and B shares amounting to approximately 272,200 Class A equivalent shares in Berkshire. This raised its issued share capital by 22% and doubled the number of shareholders in Berkshire to about 250,000. In other words, after the deal former General Re shareholders owned over one-fifth of the economic worth of See’s Candies, FlightSafety, NFM and the other wholly-owned business as well as over one-fifth of Berkshire’s marketable securities such as its 8.1% holding of Coca Cola (worth $13.4bn) and its 11.3% holding in American Express (worth $8.4bn). Also by issuing new shares in Berkshire Hathaway Warren Buffett’s share of the economic benefit from the enterprises owned by the group went down from 43% to 34% (he and his wife Susan between them held 38.4% of the voting rights through their holdings of A shares). But what did Berkshire receive in return? Buffett thought he was getting a conservatively run insurance company that either made underwriting profits or small losses here and there. And he was getting a $15bn float, greatly increasing his firepower. On acquisition he almost immediately reduced General Re’s investment office from 150 to one person, himself, to direct that float. But the company came with a whole heap of trouble. It took Buffett and Munger years to sort out the problems, which ranged from under-pricing of insurance and poor provisioning for likely insurance claims to a massive number of derivative deals (over 23,000 contracts involving 884 counterparties). General Re bled money after Berkshire purchased it. In the first four years it lost $7.5bn on underwriting. By the end of 2001, after the terrorist attack on the Twin Towers in New York, things got so bad that Buffett said General Re would have gone bust had it not been for the deep pockets of Berkshire to bail it out. At that point many, including Buffett, thought the purchase a mistake. But later it was to become what Buffett called a “treasure”. The story of its fall and rise is instructive to anybody interested in investing in insurance companies, not least the importance of having managers with the right cautious mindset for creating float at low cost through taking on underwriting business with a rational profit-focused determination. To understand the significance of the General Re acquisition we need to go right back to basics both in terms of where Berkshire’s insurance business came from and in how the insurance industry works. Building on National Indemnity Following the purchase of National Indemnity and its sister company National Fire and Marine Insurance Buffett too………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 When Dave Sokol took over the management of NetJets at Warren Buffett's request in 2009 he hit the ground running. Within a week he had reshaped the managerial structure, including appointing a new head for NetJets North America and a new Chief Operating Officer. He also announced that NetJets' headquarters would be relocated from Woodbridge, N.J., to Columbus, Ohio, where the company's flight operations were based. (Buffett's deals from 1941 to the 1990s and their lessons for investors today are available to read in previous newsletters - I've yet to write about the twenty-first century deals).
Buffett seems to have accepted journalist Brian Foley’s argument concerning the over supply of fractional aircraft. Buffett wrote in his 2009 letter that NetJets owns “more planes than is required for its present level of operations”. Aircraft orders were cancelled and by Spring 2010 Sokol had lowered debt to $1.4bn from $1.9bn. Within two years 1,700 employees were laid off (from 7,945). Sokol had plans to dispose of “selected aircraft” but refused to do so in fire-sale way, rather waiting until prices were reasonable. The fleet size went from 629 planes to under 500 over three years. He said the tough decisions were necessary, “When you have a major economic shift such as in the fall of 2008, you have to reinvent yourself. Five years from now, I’ll wager all of us will look back at 2008 and say it was the best thing that ever happened to the aviation industry because it’s forcing innovation that wasn’t going to happen.” (David Sokol quoted in Iteknowledgies (2011) “Owners, Profit Return to NetJets” Aerospaceblog, February 2) Stephen Pope’s verdict, writing in The Business Jet Traveler, was “the prognosis for the company is good, I think. The fractional-ownership business model has matured and adapting for the next growth cycle will require fresh thinking…the company's core customer base is still out there. They don't want to go back to charter. They want to be able to pick up the phone, arrive at the airport four hours later and climb aboard a meticulously maintained airplane crewed by well-trained, by-the-book pilots. The trick will be finding the right balance to make the numbers work again.” The remarkably quick turnaround pleased Buffett greatly and in Spring 2010 he wrote (in his 2009 letter) that the plans already implemented would lead to rightsizing. Furthermore, NetJets was on course to make a profit in 2010. Unfortunately, David Sokol’s time at NetJets was limited. Indeed, his time at Berkshire Hathaway was cut short by a regrettable incident early in 2011. He bought shares in Lubrizol before proposing to Buffett that Berkshire Hathaway buy the company. He purchased them because he thought the company to be outstanding and an excellent investment, but he was also asking Lubrizol’s CEO if he might be interested in being bought by Berkshire. Sokol didn’t know for sure that Buffett would buy Lubrizol when he invested his $10m. He had told Buffett that he owned stock in Lubrizol but “It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings” wrote Buffett in his News Release March 30, 2011. Carol Loomis of Fortune Magazine wrote, “the facts about Sokol’s buying – combined with the lift in Lubrizol’s stock that accompanied Buffett’s decision to indeed buy – put Sokol into disrepute for what some onlookers thought might be insider trading.” (Carol J. Loomis (2012) Tap Dancing to Work) Buffett was careful to publicly note that Sokol’s actions were not unlawful, even though he made $3m profit, which was a fraction of his annual remuneration. Sokol resigned March 28 to, as he put it “utilise the time remaining in my career to invest my family’s resources” (Berkshire Hathaway Press Release March 30, 2011). He had submitted two similarly worded resignations in previous years, but Buffett had persuaded him to stay on. In the March announcement Buffett wrote that he had not asked for his resignation and it came as a surprise to him, but he did not set out to ask him to stay in post this time. In April a Berkshire’s audit committee report concluded that its policy of precluding share buying by its managers in companies Berkshire was considering acquiring had been violated. Also, its policy of not using confidential information for personal use had not been followed, and Berkshire’s reputation had been damaged. A few days later, at the annual meeting, Buffett said he regretted that he hadn’t expressed a greater rebuke to Sokol. He corrected that by describing Sokol’s actions as “inexcusable and inexplicable”. Sokol was later told by the Securities and Exchange Commission that he would not face enforcement actions. He continued to maintain his innocence in the matter. Consistently profitable The turnaround within a………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
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