Warren Buffett Hopes shares of his investment IBM Languish And Underperform For The Next 5 Years

Strange are the ways of Warren Buffett.....hoping for an underperformance that too for 5 years ...

Indians would say satheya gaya ...NOT REALLY !

This past year, Warren Buffett made a rare foray into tech investing, with a substantial purchase of IBM shares.

He explains  .....

This discussion of repurchases offers me the chance to address the irrational reaction of many investors to changes in stock prices.

When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come;

and second, we also hope that the stock underperforms in the market for a long time as well.

Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today.

Their operational accomplishments were truly extraordinary. But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made
value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.

Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us.

Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares.

Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period?

I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years.

Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire
250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100
million greater under the “disappointing” scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1 1⁄ 2 billion more than if the “high-price” repurchase scenario had taken place


The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise.

You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.

Charlie and I don’t expect to win many of you over to our way of thinking – we’ve observed enough human behavior to know the futility of that – but we do want you to be aware of our personal calculus.

And here a confession is in order: In my early days I, too, rejoiced when the market rose. In the end, the success of our IBM investment will be determined primarily by its future earnings.

But an important secondary factor will be how many shares the company purchases with the substantial sums it is likely to devote to this activity. And if repurchases ever reduce the IBM shares outstanding to 63.9 million, I will abandon my famed frugality and give Berkshire employees a paid holiday.



ps : this post isnt original, rightly so, as i am using what Warren said to highlight a long term strategy but incisive & highly educative

Cricket , Ant , Austerity , Eurozone & the Greeks !!!

Today is the defining day in Eurozone as they say....Greeks who now are openly protesting against the austerity measures are going to elections to elect a government which matches their aspirations.

We have all been hearing of a word Austerity ...which would mean fiscal discipline through controls on excessive spends but also puts a question mark on the life of common people. Their earnings, jobs, pensions get slashed, their way of life is hit, fine, but does this all bring about the improvement in the basic state of the economy. The answer is NO !

The nations got access to cheap funding on joining Eurozone...now its payback time..and they like the typical Cricket in "Cricket & the ant " story haven't prepared themselves for the winters....they were just too busy partying !

Now the ant doesn't want to share its reserves with the cricket...unless the cricket agrees to severe austerity measures. It had been warning the cricket all along that harsh winters are approaching.

Naturally the cricket is upset. It still wants the dole but without austerity.

In my view, what would austerity achieve ....practically nothing....it would lead to harsh cuts but would it increase business, result in growth, motivate people to do more...more importantly would it enable the affected countries to be able to repay their debts...a big NO !

It possibly would make them sink deeper.

The solution to the current situation is investing in growth of those affected countries, restore their self pride, give them the tools to stand on their feet and finally enable them to pay their debts.

Here the argument will be ...what happens to the agreed & settled deals...renegotiating them will break the Eurozone discipline ...yes it would but in the current eurozone so many other and much larger countries are affected.

The panacea to all this is growth. The zone has to usher itself into a place of growth , not for prosperity or anything but just to repay its debts to begin with and then for the overall growth & maintenance of their lifestyles.

The dubious credit for this wake up call goes to Greece but changes have been afoot in other countries  to in France, in Italy and sooner or later through the power of ballot the people in the other countries will respond too.

Eurozone in its current shape is flawed , but the flaws cant be remedied over night. There should be slow progress towards that , a progress which ensures growth and dignity !

The current crises should be used to effect & elicit discipline, to build some semblance of an eco-political union, a basic pre-requisite for a common currency.

But whatever, i am a votary for an approach where the solution shouldnt be worse than the disease itself !!

Let the show begin !!!

Slavery led to Modern Capitalism - Interesting facts via Harvard & Brown Univ Research

Given below is an interesting perspective on an important link between slavery and growth of businesses in the US. Interestingly it also comes out that but for these the business may have grown but wouldn't have thrived & also that most respected and recognized Brands of today (Brown Univ to Berkshire Hathaway) have their root / history steeped in slavery....i wanted to shorten the text below but that would take away a lot of flavor and context...read on ...

Credits - This is from the research of Sven Beckert and Seth Rockman, historians at Harvard University and Brown University respectively & shared by Bloomberg ! 

When the New York City banker James Brown tallied his wealth in 1842, he had to look far below Wall st. to trace its origins. His investments in the American South exceeded $1.5 million, a quarter of which was directly bound up in the ownership of slave plantations.

Brown was among the world's most powerful dealers in raw cotton, and his family’s firm, Brown Brothers & Co., served as one of the most important sources of capital and foreign exchange to the US economy. Still, no small amount of his time was devoted to managing slaves from the study of his Leonard Street brownstone in Lower Manhattan.

Brown was hardly unusual among the capitalists of the North. Nicholas Biddle's United States Bank of Philadelphia funded banks in Mississippi to promote the expansion of plantation lands. Biddle recognized that slave-grown cotton was the only thing made in the U.S. that had the capacity to bring gold and silver into the vaults of the nation's banks. Likewise, the architects of New England's industrial revolution watched the price of cotton with rapt attention, for their textile mills would have been silent without the labor of slaves on distant plantations.

The story we tell about slavery is almost always regional, rather than national. We remember it as a cruel institution of the southern states that would later secede from the Union. Slavery, in this telling, appears limited in scope, an unfortunate detour on the nation's march to modernity, and certainly not the engine of American economic prosperity.

Yet to understand slavery's centrality to the rise of American capitalism, just consider the history of an antebellum Alabama dry-goods outfit called Lehman Brothers or a Rhode Island textile manufacturer that would become the antecedent firm of Berkshire Hathaway Inc.

Reparations lawsuits (since dismissed) generated evidence of slave insurance policies by Aetna and put Brown University and other elite educational institutions on notice that the slave-trade enterprises of their early benefactors were potential legal liabilities. Recent state and municipal disclosure ordinances have forced firms such as JPMorgan Chase & Co. and Wachovia Corp. to confront unsettling ancestors on their corporate family trees.

Such revelations are hardly surprising in light of slavery’s role in spurring the nation’s economic development. America's "take-off" in the 19th century wasn't in spite of slavery; it was largely thanks to it. And recent research in economic history goes further: It highlights the role that commodified human beings played in the emergence of modern capitalism itself.

The U.S. won its independence from Britain just as it was becoming possible to imagine a liberal alternative to the mercantilist policies of the colonial era. Those best situated to take advantage of these new opportunities -- those who would soon be called "capitalists" -- rarely started from scratch, but instead drew on wealth generated earlier in the robust Atlantic economy of slaves, sugar and tobacco. Fathers who made their fortunes outfitting ships for distant voyages begat sons who built factories, chartered banks, incorporated canal and railroad enterprises, invested in govt securities, and speculated in new financial instruments.

This recognizably modern capitalist economy was no less reliant on slavery than the mercantilist economy of the preceding century. Rather, it offered a wider range of opportunities to profit from the remote labor of slaves, especially as cotton emerged as the indispensable commodity of the age of industry.

In the North, where slavery had been abolished and cotton failed to grow, the enterprising might transform slave-grown cotton into clothing; market other manufactured goods, such as hoes and hats, to plantation owners; or invest in securities tied to next year's crop prices in places such as Liverpool and Le Havre. This network linked Mississippi planters and Massachusetts manufacturers to the era's great financial firms: the Barings, Browns and Rothschilds.

A major financial crisis in 1837 revealed the interdependence of cotton planters, manufacturers and investors, and their collective dependence on the labor of slaves. Leveraged cotton -- pledged but not yet picked -- led overseers to whip their slaves to pick more, and prodded auctioneers to liquidate slave families to cover the debts of the overextended.

The plantation didn't just produce the commodities that fueled the broader economy, it also generated innovative business practices that would come to typify modern management.

As some of the most heavily capitalized enterprises in antebellum America, plantations offered early examples of time-motion studies and regimentation through clocks and bells. Seeking ever-greater efficiencies in cotton picking, slaveholders reorganized their fields, regimented the workday, and implemented a system of vertical reporting that made overseers into managers answerable to those above for the labor of those below.

 Property rights in human beings alThe perverse reality of a capitalized labor force led to new accounting methods that incorporated (human) property depreciation in the bottom line as slaves aged, as well as new actuarial techniques to indemnify slaveholders from loss or damage to the men and women they owned.so created a lengthy set of judicial opinions that would influence the broader sanctity of private property in U.S. law.

So important was slavery to the American economy that on the eve of the Civil War, many commentators predicted that the North would kill "its golden goose." That prediction didn't come to pass, and as a result, slavery's importance to American economic development has been obscured.

But as scholars delve deeper into corporate archives and think more critically about coerced labor and capitalism -- perhaps informed by the current scale of human trafficking -- the importance of slavery to American economic history will become inescapable.

Baltic Dry Freight Index - Confusing Signs but Grim Pointers , 3 year low

The Baltic Dry Index, fell to 974 (20th straight fall session) down 49% from its peak last year and slumping 43% in the last month only. 

This indicator is the daily average of prices to ship raw bulk materials and doesn't allow / build in any speculation, and coupled with Power & Coal rates , a far better indicator of the health of the world economy than Oil prices. Oil prices can easily be influenced by geo-political factors.

A scan on potential factors causing the fall, reveal an entire range of factors ...from economic at one end to supply side issues at the other. The following possible reasons emerge -

- Chinese demand for iron-ore cargoes is slowing - elevated inventories, reduced steel production & weakest expansion of economy in 2.5 years in the last quarter

-  Delayed infra projects & restricted finance ...China trying to slow the heat of the economy

- Sluggishness in view of approaching Chinese New Year holidays (Jan 22 – Jan 28 )

- Developed economies esp. Europe not growing - decline in imports, low demand for coal

- Worsening glut of vessels on faster deliveries of new ships.- Vessel delivery went up 12%   compared to 8 rise in Trade (Maersk)

- Weather / rain related disruptions of export shipments from Australia, Brazil (Iron Ore), Colombia and Indonesia (coal) 

Charter rates dropped for all four vessel types within the gauge, led by capesizes.

Capesizes – $7.793 a day, 76% down from last month’s high of $32,889 ( 40% of global fleet of commodity carriers ) Panamaxes - the largest ships to navigate the Panama Canal, dropped to a 33-mth low of $9,257. Supramax - fell to $9,695 a day, the lowest level since Feb. 6, 2009. Handysizes - the smallest ships in the index, retreated to $7,581.

Capesize rents on some routes fell below operating costs, estimated at $7,437 a day excluding fuel. The rate to hire a capesize for a round trip in the Pacific Ocean slid 9.2 percent to $5,336 a day, and the equivalent cost in the Atlantic declined 15 percent to $6,795.

Future Expectations - Growing ship supply, which is outpacing commodity demand, is set to cap dry bulk freight rate gains in the coming months, projected the BDI will remain "very low" at between 1,000 and 1,500 points for 2012. Next year will remain another challenging year for the industry

Flip side - "A decline in the BDI normally indicates a similar decrease in commodity prices. As a result, we should expect exporters to enjoy lower raw material costs, and should help the beleaguered industry.

Reliability - Recently its reliability has been called to question. When it surged to a record high in '08 the S&P 500 actually began to decline about six months before the BDI, making it a lagging indicator of the stock market. It did, however, signal that the global economy was in deep trouble as it tanked 94 per cent in 2008. The BDI also rebounded slightly before the stock market rising nearly 250 per cent before stocks finally bottomed out on March 9, 2009. 

Since then, though, the BDI has meandered at levels about 80 per cent below its pre-crisis peak, providing few glimpses into the state of the economy. One theory is that shipping prices are suffering not through a lack of trade, but through a glut of large ships. 

In other words, the Baltic Dry Index is flashing red – but no one really knows what that means, and fewer people seem to care.

Maybe our troubles are so big that this is one indicator we know will flash red while we focus on the fiscal health of Europe , Chinese slow down, worry wether US is recovering and the budgets wouldn't be struck in the congress or where is the next Friday , the 13th Downgrade coming and hitting...our plates are indeed quite FULL !!!! 

Credits - various sources chiefly Economic times, Reuters, Bangkok Post, The Business Times, The Globe & Mail, Canada, Graph Credits - BIG 

The Economics of Oil and the Strait of Hormuz !!

Regrets being off for a long time and am back to writing the blogs again ....

A quick note on a developing situation which could be the next Economic threat - The Strait Of Hormuz

The importance of the Strait is that its the lifeline of Seaborne oil trade with 35% shipments and 20% of the total traded oil going through it. The economies of large oil producing countries of the region depend on it for their livelihood.

If the strait gets blocked for some reason, it will have large implications on the price of oil and related effect on the world economy still under heavy stress in most regions.

The apparent back ground is the power equation between Israel & Iran....one a small but technologically advanced country and another a large oil player now at crossroads with US and some European powers.

At this point shadow boxing is going on between the US and Iran ....and any grave provocation can ignite it.
US has put effective sanctions against Iran , choking it and Iran has threatened to block the strait to retaliate. If not our oil , then no one ships oil. If it does, it will mean a certain retaliation from the US making it  messy with firing on/from all sides as Iran will involve Israel into the picture and that can be bad for everyone.

Minor achievements like downing of a top end US drone by Iran may have given them some bragging points but then how were they able to achieve it...possibly with some outside help of an interested country ...that must be giving them some sense of security and backing when under fire ....so there must be some other players coaching the unseeded Shadow boxer ..;))

Looks like people are waiting for Iran to fire the first shot and then blame it but the rescue of an Iranian Naval boat and its kidnapped crew may provide some elbow room for diplomacy...looks far fetched.

Though diplomacy should be the key to engage but then for some strategic reasons that isnt being deployed as yet ..hope its put to good use.


If the stand off erupts, Long Oil & Gold will be a great no brainer short term trade !

How to profit from the Kingfisher Misery & general Airline malaise

Scenario : 
Kingfisher is down cancelling flights,on verge of a massive break down
Spicejet in caught in the Amma web for now , assured sarkari business wont come
Air India (IA) - is tardy and getting tardier with striking pilots etc

what i have listed above is > 51% dom mkt share

who will gain.....Its almost no brainer - Jet Airlines , proven n efficient

Pitfall ....Jet has a very high debt ~ 14K Crores

Indigo & Go will gain too ....but they are small airlines and Jet certainly has an edge

The call is risky , but worth a try

Caution & Caveat :
BET = Banta Eco Times, so take this advice with a pinch of salt !!! and two bottles of Vodka ; D))) , when the hangover is over don't forget to consult your financial advisors

Dear Mr. Mukherjee: A Shout-Out for India Budget 2010

Please find below a very good write up on our budget ........

Dear Mr. Mukherjee: A Shout-Out for India Budget 2010 by Paul Beckett

Respected Sir:I haven't had much time to digest your speech but I think you did a good job in both the tone and the substance.

Well done updating the Gandhi you invoked for your compliments to Sonia from Indira (can't hurt when you next say "Ciao" to you know who either, eh?)

And well done putting some specifics out there on how you see the budget deficit declining in the next three years.

We were looking for that, what with the Fiasco in Fetaland, and you delivered some credible targets. It won't surprise you to know we will wait to see your numbers achieved before popping the expensive bubbly but we'll definitely chill the cheap stuff. This is very welcome news for Indian and global investors concerned about which way the deficit has been going recently.

Focusing on trimming individual tax rates to continue the consumption boom was politically clever. It also should give you some cover for that other necessary step which, no doubt, you heard some grumbling about at party headquarters: raising the excise duty and hiking petrol prices.

With summer coming on, I might mutter something unpleasant about you under my breath when I hand over a few more bills for a new air conditioner. But I won't really mean it. And you needed no greater example of the merit of your petrol price hike than the bizarre behavior of your friends across the aisle.

Jumping up and shouting at you before walking out doesn't exactly portray them as a credible alternative government, does it? Let me rephrase that: portrays them as an even more incredible alternative to government. Nice invocation of your constitutional requirement to keep going with the speech, by the way.

"The opposition walking out over the fuel hike was embarrassing," Pramod Bhasin, chief executive of Genpact told me when I asked him his reaction to your speech. Even though you didn't extend his industry's tax holiday, Pramod still liked what he heard overall, too. "It was an excellent budget," he said. "They are finally trying to tackle the fiscal deficit.

"I did want to ask what the deal is with punting your game plan on the overall national debt out another six months, when you're going to produce a report. Did I hear that right? I hope that deadline doesn't slip or that it is not a way for you to dodge a tricky issue when you have the nation's attention. Given the rest of what you said on debt, I'll give you the benefit of the doubt for now.

A year's delay for the Goods and Services Tax also is a bit of a shame. And I must have been distracted when you mentioned the timeline for further liberalizations in insurance, the media and retail, as well as an ambitious plan of public divestitures. You did lay those out, right?

Right?
Oh.

Anyway, that doesn't detract (too much) from your creditable performance. It was good to see that funds for your Mahatma Gandhi Busywork program didn't increase by 144% again, even if they did rise a bit. And it looked like you have shifted your focus somewhat to programs that actually encourage responsible behavior and give people some tools to make their own progress in life.

An expansion of the national pension program to workers in the unorganized sector with a little nest padding from the central government is a good long term step. As is expanding the number of financial institutions and pushing their reach into the furthest corners of rural India. Giving farmers better access to affordable credit is a much better idea than forgiving them loans.

I know you're busy with all those pesky reporters who now want you to talk more when you must already be talked out, so I'll wrap up. I think the stock market's bullish reaction pretty much sums it up, especially on a day when GDP growth came in lower than people were expecting. Your speech seems to have trumped that statistic, which is no mean feat.

In closing, I wanted to make sure you saw a GDP note from Robert Prior-Wandesforde, an economist at HSBC. One of the reasons that he says the number was underwhelming was because of a reduction in government spending in the last three months of last year. He says it fell 10.3% year-on-year, having been up nearly 27% July to September. That may have brought down the big number to 6% but it's good to see that the belt tightening already had begun well before you stood before Parliament. Gives us confidence that what you said this morning you really meant.

Sincerely,
Paul Beckett .....He is the WSJ's South Asia bureau chief, based in New Delhi