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On Thursday evening, Columbia Business School's Seminar on Value Investing welcomed Warren Buffett as the guest speaker. I was lucky enough to worm my way into it. Here are my notes. (I don't claim that everything is completely accurate, but I think I captured at least the proper meaning of everything).

10. What do you see in the underwear business that other people didn't and still don't in Sara Lee (owner of Hanes)? What EBITDA do you see for FoL? What stocks are cheap today?

[I'm cringing at the expected answer to the EBITDA and I expect a stonewall to the stock tips.]

Basically, EBITDA is worthless.

As far as underwear goes, Hanes and FoL own the market. There are higher-end makes (Calvin Klein, Jockey), but those two control the mass market. Sara Lee (Hanes) pursued an asset-light strategy. [Note: Enron pursued an asset-light strategy – a desire to take assets off balance sheet by removing ownership. Not that I'm really comparing the two.] We control the assets in place at FoL. You can't really buy another version of FoL because if you buy Hanes, you're buying the rest of Sara Lee's portfolio.

Wouldn't be surprised to see FoL earn $130-140 million pre-tax.

Again, we hate EBITDA. Depreciation is the worst kind of expense. (May have even called it despicable.) It's reverse float.

As far as what stocks are cheap, that sounds like a very theoretical question. [Laughs] That's one question I won't answer. Talks about how they keep their activities private.

As far as what companies are in the picture, WEB will never buy a glamorous stock. Money doesn't know where it came from. There's no sense paying more money for a glamorous company if you're getting the same amount of money, but paying more for it. It's the same money that you could have gotten from a bland company for a lower cost.

11. General question about the attractiveness of distressed debt.

There's nothing intrinsically good or bad about distressed debt.

FoL was bought at about $0.50 on the dollar. It was a very unusual kind of debt because it kept paying interest during the bankruptcy proceeding, so BRK got a lot of cash from it.

On the Finova transaction: They bought it before it was going to go bankrupt, but knew it was going to. The key there was to evaluate their receivables portfolio (about $14 billion?). WEB estimated a worst-case scenario for the receivables and used that to determine the purchase price.

Comparing the two, Finova hinged on an evaluation of the receivables portfolio. Fruit of the Loom hinged on an evaluation of the brand.

Distressed debt requires more expertise than common stock. There is money to be made on some issues. [At this point, WEB and Schloss start rehashing an old railroad bankruptcy where apparently everyone got rich. Phenomenal level of detail remembered by both of these guys.]

We have never bought a junk bond when it was initially offered because Wall St. has a special sales push. We buy them later when they get in trouble.

12. What's your take on companies re-incorporating offshore for tax reasons?

I don't like it. I don't like individuals who made the money here living offshore [without paying taxes]. One guy tried to get himself declared an ambassador so he could live in the US full-time and still be a foreign citizen. [I think I got that right.] I'd like to think that we (BRK) wouldn't take that opportunity if presented, in the same way I'd like to think I wouldn't walk into a bank and take $1 million if it was just sitting there. But you never know until it happens.

All of the big accounting firms have offered tax strategies, but we're not interested. We have a simple tax return.

On tax rates: Imagine that 24 hours before you're born, you and an effective twin (same DNA, etc.) will be born, one in the U.S. and one in Bangladesh. What percentage of your future income would you pledge to be born in the US? Most likely a pretty high amount. The US offers an extraordinary level of benefits.

13. Pro forma earnings are no good. But how can you look at a company like BRK with a 9/11 event without considering pro forma earnings?

You need to look at the long-term results, but you can't ignore the fact that management missed it (9/11 event). Look at the company's normalized earning power.

Look at this most recent quarter. One of the most benign quarters in insurance – nothing happened. No “cats” anywhere. You don't see insurance companies reporting good results and saying “Excluding the abnormally low level of claims, we actually would have reported a loss in this quarter”.

There are 2 keys to valuing BRK:
- How much cash will the current operating companies be kicking off over the next 10 years?
- What interesting things will be done with that cash in the next 10 years?
[I love it – WEB speaks of real options.]

14. On BRK investing abroad

We'd love to find businesses overseas similar to those we own. We have not had luck to date. 2 problems:
- Of the good businesses, most are in the US, so there's just not that many abroad.
- BRK is not as well-known overseas, so it's harder for them to get unsolicited calls.

Mentioned that 80% of Coke's earnings are from outside the US.

We own 15-20 stocks right now. 3 of those are entirely outside of the US. We'd be delighted to own any of those 3 in their entirety at the prices we paid for the piece we do own.

One issue is that reporting requirements are tough. In the US, you must disclose upon obtaining 5% of a firm. If you're an insurance company, you must disclose upon obtaining 10% of a firm – if you obtain between 5-10%, you can wait to disclose until year-end. In other countries, that threshold is lower. In the UK, 3% ownership requires disclosure, so our moves are limited.

last part coming...
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