Warren Buffett : How to spend $145billion

Successful companies make money and hand some of it back to their shareholders via dividends. Some of it they may keep and this piles up over the years. It can be quite a sum. For Ford it's close to $25billion. For Coca Cola it's past $60 billion.  For Berkshire Hathaway its $145 billion. (The last accounts say $143.7 billion  but that was months ago, its piling up at a £1billion plus every month).

No wonder warren Buffett is so good at allocating capital... he's had much more practice than anyone else on the planet.

Blogger owns a bit of Berkshire..... this is for investment purposes only

Buffett bites back

Buffett has a remarkable record with his chief executives. He has hired good ones, kept them in place, and praised them lavishly even if the company is faltering (in his view good managers in bad businesses are still good managers). Until a few years ago he'd never been rude about them, let alone fired one. An extraordinary record over several decades. And then came NetJets, and the news the chief executive had been let go and a new one installed. In his latest 2011 report Buffett is able, once again, to lavish praise on his NetJets chief executive (now Jordan Hansall).

"A few years ago NetJets was my number one worry: Its costs were far out of line with revenues, and cash was hemorrhaging. Without Berkshire’s support, NetJets would have gone broke. These problems are behind us, and Jordan is now delivering steady profits..."

In Buffett terms this is a rare, and stinging, rebuke to earlier management failures.

Disclosure:blogger owns (a bit of) Berkshire Hathaway

Brits power Buffett profits

Within the Berkshire Hathaway's end of year accounts (out this weekend) there is a breakdown of their regulated utilities businesses (called MidAmerican). Despite the name, it include a large chunk of British assets (Northern Electric and Yorkshire Electricity). Operating earnings (before interest and taxes) for the division are up $120M, but all of that is accounted for by UK utilities earnings (up $136M).

So it seems the regulator is keeping a pretty tight grip on the profitability of these regulated industries, with one exception.

Notes

See: http://www.berkshirehathaway.com/2011ar/2011ar.pdf

(full disclosure: this blogger owns Berkshire Hathaway shares)

2012 : The Year of the Churn

In China next year will be the Year of the Dragon - in the UK it looks set to be The Year of the Churn.

The reason? From 2013 IFA's will be banned from taking commission from clients, except there is a loophole as watchdog Consumerfocus notes.

It is particularly galling that existing customers will continue to pay trail commission on their newly written contracts – introduced just before the ban – potentially for several decades.

So there's an immediate incentive to get clients into contracts - or if they are already in contracts to switch them to higher paying one. And this process may may have already started - there's evidence of a pick up in activity in these areas.

Commission based advisors usually get paid a lump sum from companies they steer their clients into, plus an ongoing 'trail commission' of around 0.5% a year. Quite what this is for is unclear. Some see it as deferred fee, others as for 'continuing service'. And it can go on for years and years.

The RDR (retail distribution review) will end trail commission - but in the short term it may have increased it.

There's something weird about Warren

Warren Buffet's annual letter to share holders is out today and well worth the time spent reading it. (http://www.berkshirehathaway.com/letters/2010ltr.pdf).

Well the number one weird thing is the share price. $100000 plus. And part of the reason for that is the way Warren Buffet measures Berkshire Hathaway's (ie his) performance.

You won't find net income given much shrift as a useful figure - in fact it's booted into the long grass. But Warren's favourite metric - growth in annual per share book value - now has a competitor. The rolling five year return.

From 1965-2010 there are 42 five-year periods. Berkshire Hathaway beat the S&P in every period. This is a stellar performance. Not only that: the S&P had six negative periods in that time (nominally at least, the after-inflation picture would be less rosy). Berkshire had none. It was safer and more profitable than the index.

How did they do it?

Here's one quote from the letter:

'At Berkshire, managers can focus on running their businesses: They are not subjected to meetings at headquarters nor financing worries nor Wall Street harassment. They simply get a letter from me every two years and call me when they wish.'

They don't teach that at Harvard.

Pensions: the 10% cashback

So in the end it comes to this for the rich HRT (40% tax) payer: stick £1.5million into your pension fund, and the government gives you 10% - that's £150,000.

It used to be done in the name of pension planning, but under the new rules (from April2011), there needn't be any pension involved. As long as you meet the £20 000 pa minimum income requirement you can take all your cash out of your money-purchase pension scheme at age 55.

25% of that is tax free, and the 40% tax on that £375000 would have been £150000...... The figures work the same if you have £15,000 in your SIPP (self-invested pension plan), but that pensioner may struggle to meet the £20,000 pa income requirement, or pay 40% tax. And while £1500 is welcome, it is scarcely life changing.

it's true that even under the old rules, the 25% tax free cash effectively knocked the 40% tax payer into the 30% bracket. But now the process is more transparent, the income stream (aka pension) can be avoided altogether and the whole lot taken as a lump sum. Whether the rich need to be subsided to the tune of £150,000 under pension laws when there is no pension at the end of the process is a question well worth asking.

Jam today or jam tomorrow?

OK, any jam right now is wishful thinking. But what should you wish for? There is an answer to this, and it depends on who you are. Savers want one thing, and pensioners another. Because savers are accumulators, and pensioners de-accumulators. Both want maximum return at the moment they hold the maximum amount of money - which is at retirement. So if you faced 7lean years, and 7good years, savers want the lean years first. So its jam tomorrow for them.

For pensioners - as they run down their stash - they want the good years first. So for them it is actually jam yesterday. They want the best years to have happened at retirement.

But what about someone who invests a fixed lump sum and leaves it untouched? For them the order of returns doesn't matter.

Which is odd, because it means no one really needs jam today.