The Downside of Berkshire Hathaway’s No Liability Insurance Policy

Mailbag question from a reader: “Tim, is there any downside to Berkshire’s policy of not covering the Directors with liability insurance against losses. This is something Warren Buffett occasionally brags about. What’s the downside? [rest of conversation redacted] -William.”

Warren Buffett is right to brag about the lack of insurance coverage Berkshire agents have regarding their stewardship of the firm. It is the most surefire way to avoid approving of things that you do not understand, and it invites caution towards those deals that appear lucrative at first glance but have some type of remote catastrophic risk attached (this is why Berkshire avoided an acquisition of Lehman Brothers for pennies on the dollar while Bank of America opened arms for Countrywide Financial).

But that’s not what you asked. The way I see it, there are two potential downsides to not carrying personal liability insurance for directors. The first theoretical downside … Read the rest of this article!

Pandora Is A Fundamentally Flawed Stock

One of the difficulties of evaluating firms in the nascent stage of business growth is trying to figure out the role that share dilution will have on returns. That is one of the reasons why I have never covered Pandora as an investment. It is committed to having a debt-free balance sheet, and has also lost money every year it’s been publicly traded. That combination leads to heavy share dilution: Pandora had 163 million units in 2011, and now has 215 million pieces of ownership claims (i.e. shares of stock). If you’re a long-term shareholder of Pandora, the consequence of Pandora’s delayed onset of profitability is that each share of Pandora will perpetually earn 31.9% less than would be the case if Pandora had been profitable in 2011.

This fact isn’t a deal-breaker. If a company has the possibility of earning such lucrative future profits that the returns would be … Read the rest of this article!

The Dividend Production Of A Single Exxon Share

Since 1977, Exxon has raised its dividend by 7.47% annually. This is a figure that can be a little bit misleading if you intuitively conclude that it tracks the earnings growth of the firm, as the Board of Directors decided in 1984 that a strategy dedicated equally to buybacks and dividends was in the best interest of shareholders. It’s served shareholders exceptionally well, as 6% annual growth from production expansion and commodity price increases has translated into over 9% earnings per share growth. Throw in the dividend, and Exxon shareholders have collected 13.12% annualized returns since 1977 (the results would be even better if dividend reinvestment were included, though they would be lower if held in a taxable account).

What I like about Exxon’s dividend is that it is the only firm where you can have over 95% certainty that the dividend won’t be cut, even in an extended period … Read the rest of this article!

A Speculative Investment For The Next Recession

On page 4 of the annual report for Brunswick Corporation (BC), you will encounter the following passage: “Demand for a significant portion of Brunswick’s products is seasonal, and a number of Brunswick’s Dealers are relatively small and/or highly-leveraged. As a result, many Dealers require financial assistance to support their businesses, enabling them to provide stable channels for Brunswick’s products. In addition to the financing offered by BAC, the Company may also provide its Dealers with assistance, including incentive programs, loan guarantees and inventory repurchase commitments, under which the Company is obligated to repurchase inventory from a finance company in the event of a Dealer’s default. The Company believes that these arrangements are in its best interest; however, the financial support that the Company provides to its Dealers exposes the Company to credit and business risk.”

That is a very, very important paragraph. Brunswick Corporation is one of the most fascinating Read the rest of this article!

Chipotle Stock: Growth-Stock Value Investing

There are two main ways that you can get a fair (or better) price on a stock with a strong growth profile. You can either purchase a stock when the general economy is in a recession, or you can purchase an otherwise fast-growing company during good/ordinary economic times when it is presented with a solvable crisis that makes the stock temporarily cheap.

On August 5, 2014, I gave an example of the latter when I wrote “Target: Blue-Chip Value Investing in Action” in which I discussed how the temporary problem of the hacking scandal led to a slightly distressed stock price that provided a good deal for investors with a 5+ year time horizon. Since that date, Target has delivered 23.37% annual returns compared to 8.00% annual returns from the S&P 500.

Warren Buffett created the fiction of thinking about twenty punch cards that investors are permitted to … Read the rest of this article!