Randomly Noted

One of the most interesting aspects of the 26-page annual missive penned by Berkshire Hathaway Inc. Chairman Warren Buffett was the reproduction of a 1939 letter from his grandfather and the mathematical trajectory one can trace from a homespun lesson on savings to Berkshire’s ability to massively benefit from the recent financial crisis.

In that 1939 letter from Ernest Buffett to one of his sons and the son’s wife, Ernest described the $1000 cash reserve he had built for them. “I hope it never happens to you, but the chances are that some day you will need money, and need it badly, and with this thought in view, I started a fund …” Ernest wrote. Without liquidity, he said, one might have to “sacrifice some of their holdings” when cash was immediately needed.

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These are tough days for stock pickers.

“Macro” is everything. Broad trends in economics, risk, regulation, currencies, monetary policy and trade are sweeping stocks in one direction or another.

It’s been mostly up lately, but up or down, ‘macro’ has for now made a mockery of the careful study of individual companies and industries to discern the best investment bets.

To be sure, no investment trend lasts forever, but this one has been hanging on for a while.

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Warren Buffett and Charlie Munger, the gurus of Berkshire Hathaway Inc., are the latest to weigh in on that puzzling concept of securities law, what is and what is not  “material.”

Who can blame them from jumping in? 

The decision about what’s material still winds up way too often in litigation. Sometimes the resulting court decisions are surprising to this layman.

As for the eminence grises of investing, Buffett and Munger, who have sat atop highly successful Berkshire for a long time, their take on materiality came as part of the general defense they offered this past weekend of Goldman Sachs Group Inc., in which Berkshire has a substantial investment.

Goldman, of course, has been charged by the SEC with civil fraud in an instance of selling mortgage-backed securities. Disclosure is the issue there. Goldman vehemently denies the charges.

What caught my eye is a side issue to the main Goldman drama, but important because it happens so frequently in the investing world.

That is whether Goldman had an obligation to disclose to the public when it received a Wells notice from the SEC. That essentially is notice that civil charges are likely to be brought, allowing the company receiving the notice one more attempt to change the SEC’s mind. Goldman didn’t disclose receipt of the Wells notice at the time it received it.

That’s fine with Buffett and Munger, Dow Jones Newswires reported. They said they wouldn’t consider Goldman’s receipt of the Wells notice material.

At least a few Goldman shareholders beg to differ. They have sued Goldman, alleging that the Wells notice should have been disclosed.

The SEC doesn’t like bright line definitions of what’s material. What passes as an announced standard for what’s material includes the following: if “there’s a susbtantial likelihood that a reasonable shareholder would consider it important” in making investment decisions.

I’m no lawyer, but it seems to me investors in any company receiving a Wells notice of pending charges would like to know.  That’s even if the coming civil charges aren’t overwhelmingly important.

On April 15, the day before the SEC charges, Goldman’s common shares closed at $184.27. They trade now around $149.25. Yes, more has happened besides the SEC charges, including news last week that there’s also a Department of Justice probe of Goldman.

Also, share price movement observed after the fact is not in itself confirming evidence that something was material and should have been disclosed. Lots of things influence share prices and court decisions have noted this.

Still, it would make better public policy if not legal necessity if public companies uniformly told investors when they receive Wells notices.

(UPDATE: In an earlier version of this post, Buffett and Munger were incorrectly referred to an non-lawyers. Munger has a degree from Harvard Law School.)

A record 40,000 people are expected to show up at Berkshire Hathaway Inc.’s annual “Woodstock for capitalists,” otherwise known as the Berkshire annual meeting.

The unique Omaha event finds Berkshire at a bit of an odd crossroads. It had a strong 2009, a year in which the firm made a big bet on railroads.

But as successful as Warren Buffett and his partner, Charlie Munger, have been as investors for so many years, they also have been about more than just strong returns. They have occupied a moral high ground in an investment world where sticking strictly to the legal minimums is more the norm.

That Berkshire is somehow expected to behave differently than other large investors is probably a bit unfair to Berkshire. Still, there likely were some disappointed fans when it was reported that Berkshire did some lobbying to try to protect its own interests in the financial regulation bill now the center of Senate attention.

To add to this, the lobbying was about derivatives and collateral that needs to be held against derivatives positions.

The fact that Buffett and Berkshire have derivatives positions at all likely surprised some, given Buffett’s vocal condemnation of them.

But clearly Buffett and group saw a trading advantage in derivatives and acted. Lobbying was done to try to prevent the passage of legislation that would put Berkshire at a disadvantage.

So Buffett and Berkshire seem a bit more like everyone else in the investment community, just more successful than most. Nothing wrong with that. That pedestal just gets in the way, anyhow.

Famed investor Warren Buffett, as is his wont, talked about some corporate governance issues in his recently released annual letter to shareholders.

Though typically not the comments that grab the headlines when stories are written about the much-anticipated letter, Buffett over the years has said some smart and provocative things about boards of directors.

Buffett has been a director, so he speaks from personal experience. And his views have sometimes gone against conventional wisdom. When the independence of directors was the consensus favorite governance play in the aftermath of the late 1990s corporate accounting scandals, defined as separation from management, Buffett said real director independence came in the form of significant ownership of the company’s shares.

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To get a sense of the investment savvy of Warren Buffett, look no further than the opportunistic investments he made over the past 18 months as cash infusions to some of the country’s better known companies. When Goldman Sachs was on the ropes, Buffett’s Berkshire Hathaway invested $5 billion. same with General electric to the tune of $3 billion. He also invested in Wrigley, Swiss re and Dow Chemical.

These $15.8 billion of investments came in the form of preferred stock securities – some convertible into common, some not. And they toss off annual dividends of about $1.484 billion. But here’s the real genius once again of Mr. Buffett.

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At last, Kraft and Cadbury are engaged in “friendly” merger talks – to the tune of $19 billion. Hershey’s global ambitions have been dashed – and a good thing, too. As I wrote the other day, a Hershey-Cadbury combination would have staggered under tremendous debt. Kraft’s sweetened offer amounts to a 5% premium over Cadbury’s most recent share price of 807.5 pence, according to the WSJ. Now, we’ll see if Kraft can pull off a successful merger of a fairly diversified snacks company with a candy-focused firm. Kraft, it seems, covets Cadbury’s global footprint – the availability of its confections the world over. It has offloaded an American frozen pizza business – selling it to Nestle – in order to afford Cadbury. It will be interesting to see what Kraft’s major shareholder, Warren Buffett, has to say about the outcome of a courtship which he interfered in just a couple of weeks ago. Surely, he gave Kraft CEO Irene Rosenfeld his blessing for her to boost the company’s offer to Cadbury.

It's not that Warren Buffett has anything against Kraft. He likes the business with almost a 10% ownership. He doesn't like the current structure of the offer on the table for Cadbury

One of the many things you can say about Warren Buffett and Berkshire Hathaway is that the company and its CEO often engage in an aw-schucks, golly-gee homespun approach that can come across as understatement. Take, for example, the headline on this press release issued earlier today: “Berkshire Hathaway Inc. News Release.”

Nothing misleading about that. But man, what a news release it was…

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Attention Mom and Pop: An investment in Berkshire Hathaway (read Warren Buffett) is about to become more possible. Newswires reporter Geoffrey Rogow notes that as part of Berkshire’s offer to buy Burlington Northern, Berkshire will pay cash and stock – and the shares it will use are the Class B shares that currently trade for about $3,300 each. To help with the fractional share problem that could exist with a stock at that price, Berkshire said it will do a 50-1 stock split. which will drop the Class B shares to around $66 each.

This means a handful of other things as well – you could see Berkshire become eligible for an index like the S&P 500. And with that lower stock price, greater liquidity and inclusion in an index (if it happens) that funds try to mimic, you will introduce much more volatility into the stock price.

I realize Warren Buffett is buying Burlington Northern because he believes it’s a good business opportunity for his holding company, Berkshire Hathaway. But it feels like – and indeed is – an act of optimism which comes at an opportune time. If you read Peggy Noonan’s WSJ column, “We’re Governed by Callous Children,” over the weekend, you’ll know that she’s deeply worried about the future of the United States. Specifically, Noonan frets that America’s promise is more fragile than many of us realize, and there’s a real risk it could succumb to the “endless abuse” being inflicted by the political establishment. The piece’s tone is a bit overwrought but it does ring true, as so much of Noonan’s writing does.  So, when one of the world’s greatest investors spends a pretty penny on a storied American railroad, we feel good, proud and relieved. We are energized by the fact that a man with an exceptional business mind and temperament has faith that an investment in America’s ability to haul stuff at great distances will deliver sound returns. Buffett has a knack for P.R.; by describing his purchase as “an all-in wager on the economic future of the United States,” he is attempting to pierce the aura of anxiety and depression which Noonan described. “I love those bets,” he said this morning as news of the $34 billion investment poured out. We love them, too, because they suggest that there’s work to be done, businesses to build, money to be made, an economy to be nurtured, coal to haul. Continue reading…