☀️☕️ Buffett’s Buybacks, living past 90 and “Truly Foolish Prices”

Happy Tuesday!

The last day of the month… already!

Market Roundup 📊 28-Feb-23

US large-cap S&P 500 closed 0.31% UP ▲
Tech-heavy Nasdaq Composite closed 0.63% UP ▲
Pan European STOXX Europe 600 closed 1.14% UP ▲
HK’s Hang Seng Index closed 0.33% DOWN 🔻
Japan’s Nikkei 225 closed 0.11% DOWN 🔻

— The MoneyFitt Morning (@MoneyFitt)
Feb 28, 2023

📝 Focus

Buffett’s Buybacks, living past 90 and “Truly Foolish Prices”

📊 In the Markets

Commodities (still!) sliding

Adani: One month and US$145 billion later

📖 MoneyFitt Explains

🎓️ Share buybacks

📝 Focus

Buffett’s Buybacks, living past 90 and “Truly Foolish Prices”

Truly legendary investor and one of the richest men in the world, Warren Buffett, the Chairman and CEO of Berkshire Hathaway, released “his” annual report and hotly awaited annual letter to shareholders over the weekend. It started in 1965, and it’s been a font of quotable investing wisdom drawn from real-life, first-hand experience ever since.

► Berkshire Hathaway (the 5th largest S&P500 component) was originally a failing textile company that Buffett bought in the 1960s but eventually transformed into an insurer, using the cash regularly coming in to invest in other businesses. In the 1970s, he acquired the Government Employees Insurance Company (GEICO), an auto insurer, now the core of Berkshire’s insurance operations and still a major source of cash.

► As he reminds us in the 2023 letter, he invests in both entire companies, where he can direct management, and shares of publicly traded companies, where he trusts management. And he does both with the principles of “value investing” learned from his hero, mentor and professor at Columbia, Ben Graham, known as “the father of value investing.”

Investing the cash coming in regularly from insurance premiums – Image credit: GEICO via Tenor

“It’s crucial to understand that stocks often trade at truly foolish prices, both high and low.”

Warren Buffett

► The results for 2022 showed earnings from its underlying businesses (which exclude gains and losses on paper) earned a record $30.8bn last year. Perhaps shocking to uninformed observers, Berkshire reported a loss of US$22.8 billion driven by $53.6bn in “unrealized losses on its investments” (and losses on derivatives contracts.) As Buffett says, to focus on that would be “100 percent misleading” since volatility is the nature of public markets from period to period. The long term, whether or not you’re 92 years old, is what we should all focus on for our investments.

When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to… an economic illiterate.”

Warren Buffett

► Buffett focused much of his writing on how much he likes stock buybacks 🎓, which were illegal until 1982, but now a staple of corporate America (from this year they will be taxed at 1%.) The concept is that they reduce the number of shares so that remaining shareholders end up with more of a company “for free” — though of course it costs the company money to do so. Unhelpfully, Buffett says he only likes them when the price paid is “at value-accretive prices”, i.e. low enough to create shareholder value, wherever “low enough” might happen to be. Among the alternative uses for company profits are 1) investing further in the business, 2) paying employees more, 3) sitting on a growing cash pile, and 4) paying shareholders higher dividends. Of these, #3 is probably the worst (actually, many companies load on debt for buybacks), while #1 & #2 are the most popular for politicians of all stripes. As for #4, investors who pay taxes generally prefer buybacks because dividends are taxable as income.

At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares. At Apple and Amex, repurchases increased Berkshire’s ownership a bit without any cost to us. The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up.”

Warren Buffett

“🎶 Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Image credit: Tenor

“The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.”

Warren Buffett (particularly referring to American Express and Apple, and saying how he’s invested in many stinkers and lucky near-misses over the years.)

📊 In the Markets

Markets were generally strong overnight, more from bouncing after last week’s miserable showing, with Europe particularly firm. Stock traders watched bond traders and vice versa, convinced the other knew more and weren’t telling.

Over in HK and China, the real estate market is picking up. Transactions in 16 major Chinese cities surged 32% in February over January, though still down 7.6% from last February. Second and third-tier cities (many of which have enormous, multi-million populations though not as great as in the Tier-1 cities Beijing, Shanghai, Guangzhou, and Shenzhen) saw increases of over 40%.

► Across the sort-of-border in Hong Kong, Wheelock’s latest Koko Rosso sale was 33 times oversubscribed for 160 flats of 300 to 497 square feet. SHK Properties’ latest sale of Novo Land was 16 times oversubscribed for flats of 271 to 561 square feet. Henderson Land will sell 8 more flats in Fanling on Friday sized between 208 and 329 square feet, with the cheapest at HK$3.13 million (US$400,000.)

Commodities (still!) sliding

Meanwhile, commodity prices, one of the biggest initial drivers of last year’s huge spike in inflation, continue to fall away. The iShares GSG ETF, which tracks a broad range of commodities via futures in energy, industrial and precious metals, agriculture and livestock, is down 23% since the peak in early June last year, having trebled in the prior two years.

► It will be interesting to see how long food producers such as Nestlé, Unilever and Pepsi can keep shoving higher prices down the throats of long-suffering consumers while complaining about input costs.

► Sidenote: In 2022, Nestlé returned CHF18.2bn to shareholders through dividend and share buybacks, Unilever did €1.5bn in buybacks and paid €4.3bn in dividends and Pepsi increased dividends by 10% and had US$1bn of buybacks. See Buffett segment above.)

The GSG ETF: iShares S&P GSCI Commodity-Indexed Trust – Image credit: Trading View

Adani: One month and US$145 billion later

A month ago, Gautam Adani was the world’s third richest man on global fanboy tables like Forbes and Bloomberg and, surprising many India-watchers in particular, India and Asia’s richest man. But after US short seller Hindenburg accused Adani of stock manipulation and accounting fraud, his business empire has now had more than US$145 billion, well over half, hacked off its value.

► Former US treasury secretary Larry Summers recently likened the crisis to the accounting scandal in US energy major Enron in 2001, in which management and “Big Five” accounting giant Arthur Andersen inflated revenues and hid trading losses.

► Adani has denied the allegations, calling them “malicious”, “baseless”, and, flag-waving furiously, a “calculated attack on India.” However, his ten publicly traded companies, which range from seaports to airports, edible oil and commodities, energy, cement and data centres, remain under intense pressure.

► And for the record (for any fanboys reading), rival Indian industrialist Mukesh Ambani is back on top as the richest person in Asia, clocking in at #8 and #10 globally on Forbes and Bloomberg.

📖 MoneyFitt Explains

🎓️ Share buybacks

Buybacks, or repurchases, happen when a company uses cash that’s not being used to grow the business, pay workers more or paid out as dividends to buy shares in itself in the open market, and then usually cancels (destroys!) those shares.

The end result is fewer shares in issue, which means that remaining shareholders will own more of the company -a higher percentage- without buying more shares. (Financial return ratios are also improved.)

This increases the value of each share, which will then be reflected in the market price of each share, though prices often react to the announcement even before the actual buybacks happen, and of course, the very action OF buying the shares in the market will exert upward pressure.

The alternative use of extra (or borrowed) cash is to pay shareholders higher dividends, though there can be tax implications, and the share price impact may vary.

(C-Suite management is often rewarded based on share price performance and financial ratios, and they benefit from the effect of buybacks on their share options directly, too)

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