Economic Behavior
Berkshire Hathaway
It will be fun to follow Bershire Hathaway because Warren Buffett is a mastermind at selecting companies in which to invest and I have never had the time to really learn about his holdings.
Berkshire Hathaway, Inc. is a publicly owned investment manager in the property and casualty industry of the finance sector (Yahoo Finance, 2011). Essentially, the firm is a holding company with a variety of businesses across the globe (Yahoo Finance, 2011). In the beginning, the company was just a group of textile mills, but Warren Buffett got the controlling shares in the mid1960s and began to divert cash flows (float) from the core businesses and invest the money in other types of businesses (Yahoo Finance, 2011). Berkshire Hathaway’s subsidiaries engage in the business of insurance and reinsurance of property and casualty risks (Yahoo Finance, 2011).. The firm was founded in 1889 and is headquartered in Omaha, Nebraska (Yahoo Finance, 2011).
Buffett’s astute investment skills and keen eye on operations have resulted in one of the largest companies in the world by market capitalization (Investopedia, 2010). In the New York Stock Exchange, Berkshire stock trades as both A shares and B. shares (Investopedia, 2010). .The A shares command high prices, often in excess of $10,000 (Investopedia, 2010). Buffett invests for the long-term and doesn’t favor a diversified portfolio (Investopedia, 2010). . He puts his money in a small number of trusted investments that are over-weighted to leverage anticipated return (Investopedia, 2010).
Warren Buffett announced plans to buy back his own shares saying that they may be the best and cheapest investment in the market right now (August CNN Money, 2011). Since the supply and demand in reference to to investments and stocks, some of the dynamics may be disrupted (August CNN Money, 2011). Berkshire Hathaway was not short of cash at the time of the repurchase, but it is possible that the company looked around for investments and didn’t find anything it liked sufficiently to warrant an investment (August CNN Money, 2011). The repurchase will be no more than 10% premium of the “” of the shares (August CNN Money, 2011). Shareholders who do retain interest in Berkshire Hathaway will benefit from the repurchases due to of the shares (August CNN Money, 2011).
Buffett gave Bank of America an infusion of cash when he bought $5 billion in equity (September CNN Money, 2011). The bank gave Buffett an option to buy up to 700 million of its shares at $7.14 per share, any time in the next decade (September CNN Money, 2011). Analysts assume that Buffett was looking for a (September CNN Money, 2011). Buffett is famous for making good calls. He refused to make loans to Lehman Brothers during the fiscal crisis of 2009 (September CNN Money, 2011). But he did invest $5 billion in Goldman Sachs and saw a 10% dividend, and a $3.7 billion profit from the deal. Lehman, of course, folded (September CNN Money, 2011).
The number of warrants Bank of America gave to Buffet is very high. Together, they give Buffett the option of purchasing 6.5-5 of Bank of America’s equity (September CNN Money, 2011). In addition, the bank will pay $300 million, or a 6% annual dividend or $861,000 each day for a decade on the $5 billion in preferred shares. (September CNN Money, 2011). For comparison, 10-year Treasuries at yielding 2.2% annually (September CNN Money, 2011). The 6% rate that Buffett is enjoying is commensurate with the riskiness of the bank stock and of the financial sector at this time (September CNN Money, 2011).
References
Farrell, M. (2011, August 26). Buffett’s one-day win on Bank of America: $357 million. CNN Money. Retrieved http://money.cnn.com/2011/08/26/markets / warren_buffett_bofa_profit/index.htm?iid=EL
Farrell, M. (2011, September 26). CNN Money. Retrieved http://money.cnn.com/2011/09/
26/markets/buffett_berkshire_buyback/index.htm
Berkshire Hathaway, Investopedia. Retrieved http://www.investopedia.com/terms/b/berkshire-hathaway.asp#ixzz1ajECr68Z
