Buy Stocks says Warren Buffett -- He's right

Warren Buffett believes there's a sale at the stock exchange. Who can doubt him? What changed after Standard & Poors lowered the credit rating of the US? What changed after the Fed promised to hold rates at near-zero level for the next two years? At the company level, nothing changed.

Perhaps prospects are slightly less promising in light of S&P's belief that US government debt will increase more than the government has estimated. But that's hardly a sufficient reason to send the market down 633 points one and up 420 points on another, for a net decline of 175 points for the full week. Buffett sees these moments, when the market drops, as great buying opportuntiies.

Buffett: The lower stocks go, the more I buy
August 11, 2011

Warren Buffett discusses the lowered outlook for Berkshire Hathaway debt, why some of his businesses aren't hiring, and why U.S. debt remains triple-A rated in his mind.

By Andy Serwer, managing editor

Warren Buffett sees buying opportunities

FORTUNE -- "There is no comparison between fear and greed," Warren Buffett is telling me over the phone from Omaha. "Fear is instant, pervasive and intense. Greed is slower. Fear hits," he exclaims. It's Tuesday August 9th, a little less than an hour after the Federal Reserve announced it would hold interest rates at close to zero for two more years and the stock market has gone into yet another major spasm—up at that moment between two hugely down days.

For us mere mortals, this summer's stock market meltdown has a grinding, Groundhog Day feel to it, as in: 'Oh no, not again…" But for Buffett it's invigorating.

Today he's his usual chipper self, saying he's "never been better." And why not? As Buffett reminds me, "The lower things go, the more I buy. We are in the business of buying," [both securities and, if he can find them, big companies.] (And no, he won't tell me what he's picking up on the cheap.)

Buffett always makes his job sound so easy, but of course it isn't. All you need is a multi-billion dollar war chest, nerves of titanium, and a brilliant, analytical mind. Not a very big group there.

I'm calling Buffett to ask him about his company's businesses, because as a diversified conglomerate or holding company, Berkshire Hathaway (BRKA) is a fairly reflective proxy of the overall economy. But first I had to ask him about S&P lowering the outlook for Berkshire Hathaway debt (which is rated AA+) from stable to negative in the wake of the credit down grade of U.S. Treasuries.

So what about it Mr. B?

"They said some time ago that if they changed the ratings on governments they would lower the outlook on certain insurance companies because they own a lot of governments. [Buffett reportedly said that Berkshire holds more than $40 billion of its cash in short term Treasuries.] So as a derivative move I understand it, but I don't agree with it because I don't agree with the Treasury downgrade. U.S. Treasuries are still triple-A in that there is no question that we will repay the interest and the principal. Every contract will be repaid. So our bonds are triple-A. Our currency, the dollar, is not triple-A. Our bonds are."

So what about the health of his businesses?

"Up until right now, all of our businesses have been coming back---even Europe isn't doing that badly---except for businesses relating to home construction which is on its rear end. [Importantly Buffett did say that if events continue like the last few weeks it will change things.] Business has been coming back steadily, even more than the mood of the public."

Of course, some of this talk may be Buffett trying to jawbone that public mood, but remember Buffett is a voracious consumer of his businesses' numbers and wouldn't be one to misrepresent them.

Two examples: A Berkshire subsidiary based in Israel, Iscar, which makes cutting tools for machines, is showing growth, "quarter after quarter," Buffett says, adding that this isn't because of market share gains. "It means that the machines are operating more."

Buffett has another company, TTI, which sells tiny electronic parts. "It's like selling jelly beans, but we sell billions of dollars of them and it is up."

And there's more too: "NetJets' miles flown by customers are up. Rolex watches -- we are the largest seller of Rolexes in the U.S. -- are up 27% this year," he says.

Ah, but is Berkshire hiring anyone? We hear so much about businesses being in good shape because they are so productive. Here things are mixed. Every business looks for productivity gains every year, Buffett notes.

Shaw, Berkshire's carpet manufacturer, let 400 people go over the last month or so, and is down some 6,000 employees overall, Buffett says. Shaw's business, of course, is closely tied to the beleaguered homebuilding business. "But when that business comes back, we will add thousands of employees some day."

On the flip side, Berkshire's giant railroad, Burlington Northern is adding some 3,500 jobs this year as business has picked up. And insurance company GEICO has added 700 jobs, "but we're gaining [market] share there," he says.

So the insurance business is good, I ask Buffett? Not exactly.

"Auto has been good, but catastrophes have been bad. International hit us in the first quarter, and domestic in the second." By that Buffett means the tragedy in Japan and earthquakes in New Zealand, in particular the second Christchurch quake which cased as much damage relative to New Zealand's GDP as ten Hurricane Katrina's.

"We set up a reserve of $40 million for death related losses in the first quarter, $5 million for New Zealand and $35 million for Japan. Natural catastrophes that produce life insurance losses of this order are very unusual," Buffett says.

The domestic debacles were the worst tornado season in history, which included the storms in Alabama and Joplin, Missouri. And Buffett says the elements continue to be most unkind: A freak hailstorm on Long Island, NY on August 1st, led to 15,000 claims worth $60 million, just in auto claims.

And so what does Buffett think about the Fed's move to hold rates low that has the market all in a tizzy that Tuesday? "I don't really think about things like that," he reminds me. I ask him if he sees anything in his data stream that is giving him cause to worry about another downturn. "Not yet, but it would take a little while to show up."

In the meantime, Buffett is looking to buy stocks -- oh, and apparently to sell Berkshire bonds too. Berkshire is reportedly taking advantage of record low rates and issuing bonds to raise dirt-cheap capital. For Buffett right now at least, this is not a time for fear. This is a time for action.

Well Oiled Machine

The latest Buffett acquisition looks like another great deal for Berkshire and its shareholders. Maybe it's time to create an ETF built around the companies he's most likely to buy.

Buffett Still Gets Lubrizol at Lehman-Bust Price After 183% Gain: Real M&A

March 14 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Lubrizol Corp., the world’s largest producer of lubricant additives, for about $9 billion in the cash-flush investor’s second-biggest acquisition in the past five years. Berkshire will pay $135 a share in cash, 28 percent more than Lubrizol’s closing share price on March 11, the Omaha, Nebraska-based company said in a statement today.

Warren Buffett is still getting the same discount for his takeover of Lubrizol Corp. (LZ) even after the maker of engine lubricant almost tripled since the billionaire investor said it was time to start buying U.S. equities.

Berkshire Hathaway Inc. (BRK/A) will pay about $9 billion for Lubrizol in its second-largest purchase since Buffett said in October 2008 he was staking his personal fortune to American stocks. While Lubrizol surged 183 percent over that span, its equity and net debt was valued at 5.8 times earnings before interest, taxes, depreciation and amortization prior to yesterday’s announcement, according to data compiled by Bloomberg. That compares with 5.7 times when Buffett made his comments a month after Lehman Brothers Holdings Inc. collapsed.

Even with a 24 percent premium, the Ebitda multiple that Buffett is paying for Wickliffe, Ohio-based Lubrizol is still the cheapest for a specialty chemicals company in 12 years, data compiled by Bloomberg show. Lubrizol has doubled earnings and its operating margin in the past two years and controls 35 percent of sales in an industry dominated by four companies.

“Being an excellent investor means you don’t overpay,” said Brian Barish, Denver-based president of Cambiar Investors LLC, which oversees $7 billion. “It’s a pretty good deal for Buffett in terms of the kind of stuff that he tends to gravitate towards.”

Barish’s $1.44 billion Cambiar Opportunity Fund (CAMOX) has outperformed 99 percent of rival funds over the past year.

‘Major Acquisitions’

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer. Julie Young, a spokeswoman for Lubrizol, didn’t respond to a telephone call and e-mail.

The Lubrizol deal comes two weeks after the billionaire said in his annual letter to shareholders on Feb. 26 that he was looking for “more major acquisitions,” a year after spending $26.5 billion to buy Burlington Northern Santa Fe railroad in his largest purchase.

Buffett said Omaha, Nebraska-based Berkshire, whose cash rose to a three-year high of $38.2 billion, needed more buyouts and that his “trigger finger is itchy.”

Lubrizol, the world’s largest producer of lubricant additives, was one of more than 40 companies that Bloomberg identified this month that fit criteria listed in his letter.

Buffett typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt, according to his report. His takeover strategy has shifted as Berkshire has grown to focus on “capital intensive businesses,” such as power producers and railroads, which require consistent investment in infrastructure and equipment.

Relative Value

Lubrizol’s capital expenses in the past 12 months accounted for 15 percent of net fixed assets, and its average price- earnings ratio over five years was 11.9, data compiled by Bloomberg show.

The maker of engine lubricant posted a return on equity of 34 percent last year, the highest for a company taken over in the specialty chemicals industry in a deal worth more than $1 billion since Inspec Group Plc in 1998, the data show.

Lubrizol also makes plastics used in pipes, auto parts and electronics; Carbopol polymer for personal-care products such as hair gel; and acrylic resins and other materials for coatings.

Berkshire is acquiring Lubrizol after its stock reached a high of $114.81 on Oct. 25, 2010. The shares climbed 183 percent from Buffett’s comments in October 2008 to $105.44 on March 11, the last day of trading before the deal was announced. Lubrizol fell 72 cents to $133.96 at 9:48 a.m. on the New York Stock Exchange after surging 28 percent yesterday.

‘Got Good Value’

“The stock has gone up a lot,” said John Carey, a Boston- based money manager at Pioneer Investments, which oversees about $250 billion. “He’s not getting it at as cheap a price as he might have. He evidently feels that it’s still got good value.”

Lubrizol’s trailing 12-month Ebitda doubled during the same period to $1.26 billion, keeping the company’s enterprise value -- or the sum of its equity and debt minus cash -- to Ebitda multiple little changed, data compiled by Bloomberg show.

Buffett wrote in the New York Times on Oct. 17, 2008, that exaggerated concern about the long-term prosperity of financially secure U.S. companies was foolish, and most would be setting profit records in years to come. A month earlier, New York-based Lehman had filed for the largest bankruptcy in history, deepening a global credit crisis and the worst American recession since the Great Depression.

‘Run the Math’

The $135-a-share price for Lubrizol represented a premium of 24.2 percent over the 20-day trading average. That’s in line with the 24.8 percent average for Berkshire takeovers, according to data compiled by Bloomberg.

“I don’t even need to run the math,” said Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., which manages $341.3 billion. “I’m completely confident that he has established the normal parameters of his valuation disciplines.”

The agreement to buy Lubrizol at 7.3 times Ebitda is the cheapest takeover of a specialty chemicals company greater than $500 million since Imerys SA (NK) in Paris paid 5.4 times for English China Clays in 1999, according to data compiled by Bloomberg.

The bid is even lower at 6.7 times estimated 2011 Ebitda of $1.38 billion, according to the average of analysts’ estimates compiled by Bloomberg.

“Berkshire is getting an attractive valuation,” said Laurence Alexander, a New York-based analyst at Jefferies Group Inc. who recommends buying the shares. “The deal suggests Berkshire is more upbeat about the sustainability of margins.”

‘Worry About’

Lubrizol has the largest share in the lubricant additives industry, where more than 90 percent of sales are controlled by four companies, said Michael Sison, a Cleveland-based analyst at KeyBanc Capital Markets. They have been able to raise prices to recoup oil-based raw materials costs and limit capacity additions, he said.

“Pricing power seems to be something that this company does not have to worry about,” Dmitry Silversteyn, an analyst at Longbow Research in Independence, Ohio, said of Lubrizol.

Lubrizol’s operating margin, or the amount of income retained for each dollar of sales, climbed to 20 percent last year from 9.1 percent in 2008.

The company’s lubricant additives business brought in $3.9 billion, or 72 percent of revenue last year, while advanced materials made up 28 percent of sales.

‘American Industry’

“It’s a relatively easy business to understand and one that Buffett can really get his arms around at a decent price,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion and owned Lubrizol shares as of Dec. 31. “Future growth prospects are rather predictable. It’s a Buffett bet on industrial growth, on the growth of American industry.”

The Lubrizol acquisition now leaves Buffett with about $29 billion in cash, data compiled by Bloomberg show.

With Berkshire generating almost $1 billion in free cash flow a month and near zero percent interest rates limiting returns in fixed-income markets, Buffett will probably be eyeing more takeovers, Cambiar’s Barish said.

Excluding Lubrizol, there are still 34 companies with market values from $4 billion to $20 billion that have capital expenses accounting for at least 5 percent of their net fixed assets; a return on equity exceeding 10 percent; profit growth in the past five years that ranked in the top 50 percent; and an average price-earnings ratio in that span that was less than the median in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg.

Buffett’s Criteria

The list includes discount retailer Dollar Tree Inc. (DLTR) of Chesapeake, Virginia; Hormel Foods Corp. (HRL), the Austin, Minnesota- based maker of Spam luncheon meat; and Joy Global Inc. (JOYG), the Milwaukee-based mining-equipment maker that sells drills and shovels.

“It sounds like he does intend to buy more stuff,” said Cambiar’s Barish. “He really does want to get cash to work in good businesses that are durable franchises that will benefit from economic strength. That’s clearly what he’s trying to do.”

Overall, there have been 4,604 deals announced globally this year, totaling $457.7 billion, a 13 percent increase from the $403.6 billion in the same period in 2010, according to data compiled by Bloomberg.

Smooth Move by Buffett

Once again Warren Buffett makes an interesting purchase.

Berkshire Hathaway Will Acquire Lubrizol for About $9 Billion

Warren Buffett’s Berkshire Hathaway Inc. agreed to buy Lubrizol Corp., the world’s largest producer of lubricant additives, for about $9 billion in the cash-flush investor’s second-biggest acquisition in the past five years.

Berkshire will pay $135 a share in cash, 28 percent more than Lubrizol’s closing price on March 11, Omaha, Nebraska-based Berkshire said in a statement today. The purchase includes an additional $700 million of net debt.

Buffett is using his almost $40 billion pile of cash to pursue bigger acquisitions after Berkshire generated about $1 billion in free cash flow a month last year and as interest rates near zero percent limited returns in fixed-income markets. The 80-year-old told investors last month that his “elephant gun has been reloaded, and my trigger finger is itchy.” The purchase is Buffett’s second-largest since 2006 after his agreement in 2009 to buy Burlington Northern Santa Fe railroad, according to data compiled by Bloomberg.

“Lubrizol is exactly the sort of company with which we love to partner -- the global leader in several market applications run by a talented chief executive officer, James Hambrick,” Buffett said in the statement.

The purchase will generate profits for Berkshire for decades, though returns will be limited because Lubrizol shares have already more than quadrupled from their 2009 lows, said hedge-fund manager Jeff Matthews.

‘Around Forever’

“It’s going to be around forever because you need this stuff to run the world,” said Matthews, who wrote “Pilgrimage to Warren Buffett’s Omaha” and invests in Berkshire. “He’s not stealing it.”

In his annual report to shareholders last month, Buffett said he prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earnings power, and “good” returns on equity while employing little or no debt.

Lubrizol was one of about 40 companies with market capitalization between $4 billion and $40 billion that had capital expenses accounting for at least 5 percent of their net fixed assets; a return on equity exceeding 10 percent; profit growth in the past five years that ranked in the top 50 percent; and an average price-earnings ratio in that span that was less than the median in the Standard & Poor’s 500 Index, data compiled by Bloomberg show.

Berkshire and Lubrizol said they expect the purchase to be completed in the third quarter. Lubrizol will operate as a subsidiary of Berkshire and remain based in Wickliffe, Ohio. Lubrizol had revenue of $1.32 billion in the fourth quarter and adjusted earnings per share in the period of $2.45, the company said last month.

Wisdom of Warren Buffett

Little needs saying after Buffett lets investors and other concerned Americans know that our economy is still the remarkable engine that it's been for many decades.

Five Investing Tips From Warren Buffett

What does Warren Buffett's message to stockholders mean for you and your money?

Every year Mr. Buffett, the world's third-richest man and arguably the most successful stock-market investor in history, writes a letter to stockholders in his investment company Berkshire Hathaway. The latest came out this weekend. There are usually some nuggets for all those who haven't invested in Berkshire, and this year's letter was no exception. Here are five:

1. Watch out for stock-market valuations.

Mr. Buffett's company is now sitting on a cash hoard of $38 billion. "That's among the highest levels it's ever been," says Stifel Nicolas analyst Meyer Shields. While Mr. Buffett says he is looking for a big acquisition, and has his "elephant gun loaded," the high cash pile also suggests he's having a challenge finding really good deals. If Mr. Buffett is cautious, investors might want to take note: It's another sign that many valuations on the stock market may be looking a little stretched.

Mr. Buffett's company is now sitting on a cash hoard of $38 billion. "That's among the highest levels it's ever been," says Stifel Nicolas analyst Meyer Shields. While Mr. Buffett says he is looking for a big acquisition, and has his "elephant gun loaded," the high cash pile also suggests he's having a challenge finding really good deals. If Mr. Buffett is cautious, investors might want to take note: It's another sign that many valuations on the stock market may be looking a little stretched.


2. Coke is it.

Mr. Buffett rarely makes predictions, but in the case of Coca-Cola —a long-term holding—he issues a remarkable one: Dividends will probably "double ... within ten years," he writes. That would take them from last year's $1.76 to $3.52 per share. If Coca-Cola stock didn't move over that period, it would raise the dividend yield from 2.5% today to above 5%. Berkshire owns 8.6% of Coca-Cola stock.


3. Some of his favorite stocks are still cheap.

While the stock market overall has boomed, and it's a battle to find cheap stocks, one thing does stand out: Many of Warren Buffett's favorite stocks remain at, or around, the prices he paid for them. As Mr. Buffett only likes to buy stocks for a lot less than he thinks they are really worth, this suggests you can get a bargain or two—although, as always, there are no guarantees.

They include French drug maker Sanofi-Aventis. Berkshire Hathaway has accumulated about $1.8 billion worth of the stock. Sanofi's share price has come under pressure lately as a result of its acquisition of biotech giant Genzyme. At $35, its American Depositary Receipts are now about 12% below the average price Mr. Buffett paid.

Or look at Kraft Foods. Mr. Buffett owns 97 million shares, a hefty 5.6% of the company, for which he paid an average of $33 each. Today the stock is just $32. It has been held back, in part, by the costs of the takeover of Britain's Cadbury. But the stock yields a decent 3.7%. It is a reasonable 14 times forecast earnings, and just over 1.1 times annual revenues.

Mr. Buffett also owns 45 million shares in health-care behemoth Johnson & Johnson, a stake valued at about $2.7 billion. He paid about $61 for the stock: It's now $60, 12 times forecast earnings, yielding 3.6%. A cheap stock.

And what about Wal-Mart Stores? It's tumbled in recent weeks to $52. That's just 12 times forecast earnings. And the dividend yield, 2.3%, may not be huge, but it's the highest it's ever been. Today's price is just a few dollars a share more than Warren Buffett paid: Berkshire Hathaway accumulated a $2 billion stake at an average of about $48.50.


4. Berkshire stock isn't expensive, by Mr. Buffett's own calculations.

No one knows exactly what a share in Berkshire Hathaway is really worth. Mr. Buffett himself told investors over the weekend that if you ask him and his veteran co-manager Charlie Munger to calculate the intrinsic value of the stock, "you will get two different answers. Precision just isn't possible."

However, he says, "book," or net asset, value is his preferred "understated proxy for intrinsic value." Mr. Buffett writes, "To be sure, some of our businesses are worth far more than their carrying value on our books.... But since that premium seldom swings wildly from year to year, book value can serve as a reasonable device for tracking how we are doing."

So it's intriguing that Berkshire Hathaway stock today trades at $128,000, or just 1.3 times that book value. Stifel's Mr. Shields says the historic average is about 1.6 times. If the "premium" between book value and the intrinsic value doesn't swing that much from year to year, one might conclude that Berkshire is looking a little cheap.

Naturally, as a big company, it has a lot less growth ahead of it. And as Mr. Buffett is 80, his years of producing spectacular investment returns are nearer the end than the beginning. Nonetheless, in a market where so many investments seem to be trading at lofty valuations, it is notable that Berkshire is below its average.

For those who wish to invest, and who don't have $128,000 in spare cash, the economy-class "B" shares trade for $85.


5. Get ready for a dividend hike at Wells Fargo.

Mr. Buffett's favorite bank, San Francisco-based Wells Fargo, has had its dividend levels held back by the Federal Reserve, along with other banks, during the financial crisis. "At some point, probably soon, the Fed's restrictions will cease," he writes. "Wells Fargo can then reinstate the rational dividend policy that its owners deserve. At that time, we would expect our annual dividends from just this one security to increase by several hundreds of millions of dollars annually."

Berkshire Hathaway owns about $11 billion worth of Wells Fargo stock. It added a small amount in the fourth quarter. At $32, Wells Fargo is just 11 times forecast earnings, and less than one and a half times book value—compared to nearly three times book value five years ago. The dividend yield under the current regime is a paltry 0.6%. Five years ago it was around 3%.

Buffett says pricing power is king. Thus, the question becomes -- Who's Got it? Utilities? Any other companies? Maybe those that deal with the government? How about Pitney Bowes? Without Pitney Bowes, the Post Office would probably collapse. Is there a chance Pitney will become a de facto government agency? Will it ever become the Post Office?

Will the day arrive when the Post Office no longer delivers mail to every home? Once there were milk-men and paper boys going house to house. Once doctors made house calls. No more. Perhaps the Post Office should move mail for free, but charge for home delivery.

Pricing Power? A rare power. Electronics? Nope. Computers and everything related to them see regular price declines. Food? Clothes? Housing? What about services? Like insurance? There's an area where prices can rise without too much opposition.

Buffett Says Pricing Power Beats Good Management When Evaluating Companies

Feb 18, 2011

Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway Inc., said he rates businesses on their ability to raise prices and sometimes doesn’t even consider the people in charge.

“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Buffett, 80, accumulated the world’s third-largest personal fortune through a career of stock picks and takeovers. He has bought companies such as railroads and electricity producers, whose pricing power stems from a dearth of competitive options available to clients. Buffett has also built stakes in firms like Coca-Cola Co. and Kraft Foods Inc., which rely on the appeal of their brands to attract and keep customers.

“The extraordinary business does not require good management,” Buffett said in the interview, which was conducted on May 26 in Omaha, Nebraska.

The FCIC investigators focused on Buffett’s investment in Moody’s Corp., the bond-ratings firm blamed by lawmakers for handing out inflated credit grades during the housing boom. Buffett said he held stock in Moody’s because the company’s leading market share, along with that of rival Standard & Poor’s, a subsidiary of McGraw-Hill Cos., gave the two firms flexibility in setting prices.

Pricing Power
“I knew nothing about the management of Moody’s,” said Buffett. “If you own the only newspaper in town, up until the last five years or so, you had pricing power and you didn’t have to go to the office.”

A dominant position can’t prevent a bad manager from destroying a company over time, said Benjamin E. Hermalin, a professor of economics at the University of California, Berkeley’s Haas School of Business.

“If you have a really dominant position you can survive for quite a long time with bad management but eventually it will catch up to you,” said Hermalin. “In the short run I would agree with Buffett but in the longer-run perspective there is something to be said for having a good manager.”

Burlington Northern Santa Fe, the railroad Buffett bought last year for $26.5 billion, owns more than 30,000 miles of track across the U.S. West connecting producers and distributors of coal, grain and consumer goods. Omaha-based Berkshire’s power company, MidAmerican Energy Holdings Co., sells electricity to homes in the Great Plains and transports natural gas from Wyoming to California.

Praise From Buffett
Buffett routinely singles out and praises managers from Berkshire’s more than 70 operating companies. MidAmerican Chairman David Sokol and Gregory Abel, the unit’s CEO, are “two terrific managers,” Buffett said last year in his letter to shareholders. The acquisition of Burlington Northern had the “additional virtue” of bringing the railroad’s CEO, Matthew Rose, to Berkshire, Buffett said.

Buffett criticized Kraft Chief Executive Officer Irene Rosenfeld last year for her takeover of Cadbury Plc and the sale of the foodmaker’s pizza brands. “Both deals were dumb,” Buffett told Berkshire investors in May. Berkshire is the biggest shareholder of Kraft with a stake valued at $3.3 billion at the end of December.

“In the short run, good management can make a stock pop but I follow what Warren’s saying, especially because his point of view looks at the fundamentals,” said Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco, and a former managing director at Salomon Brothers. “Good management can’t do anything with a bad case.”

Buffett Bets on America

Warren Buffett cuts to the heart of the matter. Despite current troubles, he's sure the economy is heading for a recovery, and no doubt he's right. However, it's too bad for America that Obama is the president in charge during these rough times.

Buffett to taxpayers: Get over your anger

Bloomberg News

Taxpayer anger against President Barack Obama and Congress is counterproductive because policy makers took measures including deficit spending to stimulate the economy, billionaire investor Warren Buffett told CNBC.

“Sentiment has turned very sour in the last three or four or five months,” the chairman and CEO of Omaha-based Berkshire Hathaway Inc. said in an interview broadcast Thursday.

“I hope we get over it pretty soon, because it’s not productive,’’ Buffett said. “We will come back regardless of how people feel about Washington, but it is not helpful to have people as unhappy as they are about what’s going on in Washington.”

More than three-quarters of U.S. investors view Obama as anti-business and are pessimistic about his policies, a Bloomberg survey this month indicated.

The U.S. unemployment rate is 9.6 percent, even after an $814 billion stimulus measure enacted last year and other government actions.

The Federal Reserve has kept the benchmark overnight lending rate target close to zero and said this week that it was prepared to ease policy further.

“The truth is we’re running a federal deficit that’s 9 percent of gross domestic product,” Buffett said. “That’s stimulative as all get out. It’s more stimulative than any policy we’ve followed since World War II.”

Buffett also said that the economy remains in a recession, by his definition, because most people and businesses still aren’t doing as well as they were before the financial crisis.

Buffett’s assessment of the economy contradicts the view of experts who announced this week that the recession officially ended in June 2009.

Buffett said he uses a common sense standard to evaluate the economy. Buffett gets insight into the health of the economy through the performance of Berkshire’s many subsidiaries.

Investing -- Better Safe than Sorry

Klarman Tops Griffin as Investors Hunt for ‘Margin of Safety’

June 11 (Bloomberg) -- Seth Klarman almost doubled his hedge fund’s assets to $22 billion in the past two years as the industry shrank by sticking with the off-the-beaten-path investments he’s pursued since starting out in 1983.

Unlike John Paulson, who made $15 billion by betting against home mortgages, Klarman didn’t see one big trade that would profit as markets began to collapse. The founder of Baupost Group LLC focused on corporate bonds he calculated would yield solid returns even if the economy got worse.

“We didn’t have the degree of conviction Paulson had,” said Klarman, whose views are so closely watched by investors that his out-of-print book, “The Margin of Safety,” is offered on Amazon.com for more than $1,700. “We don’t deal in absolutes. We deal in probabilities,” he said in an interview at his Boston office.

While Klarman didn’t post the gains that made Paulson famous, he was able to raise almost $4 billion in 2008 when firms including D.B. Zwirn & Co. and Peloton Partners LLP liquidated funds. Baupost was the ninth-largest hedge-fund firm as of Jan. 1, according to AR magazine, Pensions & Investments magazine and data compiled by Bloomberg. He oversees more money than better-known managers such as Ken Griffin and Steven Cohen.

A value investor who looks for securities he considers underpriced, Klarman, 53, said he’s best at “complicated” situations where fewer investors compete for assets. Over the years, Baupost has invested in Parisian office buildings, Russian oil companies and real estate that the U.S. government disposed of following the savings and loan crisis of the early 1990s, said Thomas Russo, a partner in the Lancaster, Pennsylvania-based investment firm of Gardner Russo and Gardner.

‘Complex Assets’

“He specializes in illiquid, complex assets,” said Russo, who has known Klarman since 1984.

Baupost gained an average of 17 percent annually in the 10 years ended in December, a period in which the Standard & Poor’s 500 Index fell 1 percent a year. The hedge fund has returned 19 percent a year since it was started, even as it held more than 40 percent of its assets in cash at times.

In February 2008, when Baupost accepted new investors after being closed for eight years, Klarman bought distressed corporate and mortgage debt. The fund lost 12 percent that year, its second annual decline since inception, because it bought some of the debt too early, Klarman said. It returned 23 percent in 2009 and was up 4.4 percent through April.

“It was a wonderful time to put money to work,” said Klarman.

Hedge funds on average lost 19 percent in 2008, gained 20 percent in 2009 and were up 3.6 percent through April, according to data from Chicago-based Hedge Fund Research Inc.

JPMorgan, CIT

Among the money-making bonds Baupost purchased, according to an October 2008 shareholder letter, was debt issued by Washington Mutual Inc., whose bank unit failed in 2008 and was bought by New York-based JPMorgan Chase & Co. Baupost also acquired bonds of CIT Group Inc., a New York-based lender that emerged from bankruptcy in 2009. The fund was part of a group of creditors that made a $3 billion loan to CIT in July 2009.

Klarman, in a May 18 talk to financial advisers in Boston, cited another Baupost purchase during the crisis to illustrate the way he thinks about investing. In a series of “what if” exercises, the firm calculated how much bonds of Ford Motor Credit Co. would be worth under different scenarios, including an economic depression in which loan defaults rose eightfold. The conclusion: the bonds, then selling for about 40 cents on a dollar, would still be worth 60 cents.

Real Estate

Ford Credit had net income of $1.3 billion in 2009, compared with a $1.5 billion loss in 2008. Some of its bonds have more than doubled in price since reaching lows in March 2009, Bloomberg data show.

More recently, the fund has been looking to buy privately held commercial real estate. While the fundamentals for much of that property are “terrible,” Klarman said, such investments may pay off for those willing to wait long enough.

Prices of publicly traded real estate securities have run up too far, he said in the interview. If the firm can’t come up with enough opportunities, it may return cash to investors, Klarman said.

“At this point, the clients don’t seem to want their money back,” he added. Baupost, whose investors are wealthy individuals and institutions such as Harvard University’s endowment, currently has about 30 percent of its assets in cash.

Graham and Dodd

Klarman is a disciple of Benjamin Graham and David Dodd, whose 1934 book, “Security Analysis,” is considered the bible for value investors. Graham taught finance at New York’s Columbia University where Berkshire Hathaway Inc. Chairman Warren Buffett was his student.

Klarman wrote the preface to the sixth edition of “Security Analysis,” which was published in 2008. His own book, subtitled ‘Risk-Averse Value Investing Strategies for the Thoughtful Investor,” has become a collector’s item.

Chris Ely, portfolio manager at Nichols Asset Management LLC in Boston, tried to get the book through his suburban library system. He was the 18th person on the waiting list and after six months still hadn’t gotten a copy, he said in a telephone interview.

“Seth writes about investing better than anyone ever has, bar none,” Michael Price, the longtime value investor, said in a telephone interview. Price, who sold his former firm, Heine Securities Corp., to Franklin Resources Inc. of San Mateo, California, in 1996 for more than $600 million, is now managing partner of New York-based MFP Investors LLC.

Red Sox Partner

Klarman, who was born in New York and grew up in Baltimore, worked for Price before and after graduating in 1979 from Cornell University in Ithaca, New York. He later earned a master of business administration at Harvard Business School in Boston.

Klarman is a limited partner of Major League Baseball’s Boston Red Sox, whose principal owner is commodities fund trader John Henry. He is chairman of the board of Facing History and Ourselves, a nonprofit that encourages the study of racism and anti-Semitism in schools.

As early as January 2006, Klarman warned in a letter to shareholders about “tremendous leverage,” “untested” products such as credit derivatives, low interest rates and “a housing bubble that is starting to burst.”

‘Perennially Bearish’

Today, Klarman says he worries that the dollar could lose value and interest rates and inflation may rise. Stocks will probably provide poor returns for the next 10 years, he said.

“We are perennially on the bearish side of things,” he said in the interview.

Baupost held $1.7 billion of U.S. listed stocks at the end of March, according to its latest filing with the Securities and Exchange Commission.

“We are not against owning stocks,” Klarman said in the interview. The problem, he said, is that except for a brief time in March 2009, “stocks haven’t been at bargain prices for most of the last two decades.” U.S. stocks reached a 12-year low in March 2009.

Klarman’s views on the U.S. stock market echo those of Jeremy Grantham, chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., who recommended investors buy stocks in March 2009 after more than a decade of saying they were overvalued. Grantham’s latest forecast, posted on the firm’s website, predicted U.S. large cap stocks would return 0.3 percent a year, adjusted for inflation, over the next seven years.

Klarman called Grantham “a very smart person” whose forecasts he watches carefully. In an e-mail, Grantham called Klarman “just about the smartest guy around.”

Credit-Default Swaps

Klarman buys put options and credit-default swaps, which he calls “cheap insurance,” to protect Baupost against risks such as a steep fall in the stock market or a surge in inflation. He currently has a put, or an option to sell a set amount of a security by a specific date, that will pay off only if interest rates go dramatically higher, he said in his Boston speech. In an October 2008 letter to shareholders the firm said it benefited from credit-default swaps, without saying what the swaps were meant to protect against.

When Klarman can’t find investments he likes, he holds cash. “We prefer the risk of lost opportunity to that of lost capital,” he wrote in his 2004 yearend letter to shareholders. In 2007, Baupost gained more than 50 percent, even as it held more than 40 percent of its assets in cash.

Bruce Berkowitz, named Morningstar Inc.’s domestic stock manager of the decade and a contributor to the latest edition of the Graham and Dodd book, said Klarman stands out among fund managers because he’s able to make money while holding cash and avoiding leverage.

“If he isn’t Elvis, he’s pretty close,” Berkowitz said.

Time to End the Corporate Income Tax

If there is one thing we know about profitable corporations, it is that any taxes they pay, they collect from customers. So why should the government take steps to raise prices of goods and services and decrease total jobs if it's possible to take a simple step that will put tax-paying people to work without sacrificing overall tax revenue?

Moreover, if the corporate income tax were eliminated, the contrived concept of depreciation would lose all meaning. Capital investments would occur as needed, rather than on a tax-accounting basis. Meanwhile, ending the corporate income tax is a way to encourage more companies to locate themselves in the US. So what are we waiting for?

Time to Junk the Corporate Tax
Nobel Laureate Robert Lucas says reform would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen.'

MICHAEL J. BOSKIN

President Obama has put tax reform on the agenda, but surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income tax. Reducing or eliminating the corporate tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America's global competitiveness, and raise future wages.

The U.S. has the second-highest corporate income tax rate of any advanced economy (39% including state taxes, 50% higher than the OECD average). Many major competitors, Germany and Canada among them, have reduced their corporate tax rate, rendering American companies less competitive globally.

Of course, various credits and deductions—such as for depreciation and interest—reduce the effective corporate tax rate. But netting everything, our corporate tax severely retards and misaligns investment, problems that will only get worse as more and more capital becomes internationally mobile. Corporate income is taxed a second time at the personal level as dividends or those capital gains attributable to reinvestment of the retained earnings of the corporation. Between the new taxes in the health reform law and the expiration of the Bush tax cuts, these rates are soon set to explode.

This complex array of taxes on corporate income produces a series of biases and distortions. The most important is the bias against capital formation, decreasing the overall level of investment and therefore future labor productivity and wages. Also important are the biases among types of investments, depending on the speed of tax vs. true economic depreciation, against corporate (vs. noncorporate) investment, and in favor of highly leveraged assets and industries. These biases assure that overall capital formation runs steeply uphill, while some investments run more, some less uphill. It would be comical if the deleterious consequences weren't so severe.

Of course, the corporation is a legal entity; only people pay taxes. In a static economy with no international trade, the tax is likely borne by shareholders. The U.S. economy is neither static nor closed to trade, and taxes tend to be borne by the least mobile factor of production. Capital is much more mobile globally than labor, and the part of the corporate tax that is well above that of our lowest tax competitors will eventually be borne by workers. In a growing economy, the lower investment slows productivity growth and future wages.

There is considerable evidence that high corporate taxes are economically dangerous. In a 2008 working paper entitled "Taxation and Economic Growth," the Organization for Economic Cooperation and Development concluded that "Corporate taxes are found to be most harmful for growth, followed by personal income taxes and then consumption taxes." Virtually every major tax reform proposal in recent decades has centered on lowering taxes on capital income and moving toward a broad-based, low-rate tax on consumption. This could be accomplished by junking the separate corporate income tax, integrating it with the personal income tax (e.g., attributing corporate income and taxes to shareholders or eliminating personal taxes on corporate distributions), and/or allowing an immediate tax deduction (expensing) for investment (which cancels the tax at the margin on new investment and hence is the priority of most economists). The Hall-Rabushka Flat Tax, the Bradford progressive consumption tax, a value-added Tax (VAT), the FairTax retail sales tax, four decades of Treasury proposals and the 2005 President's Tax Commission proposals would all move in this direction.

Reducing or eliminating the negative effects of the corporate tax on investment would increase real GDP and future wages significantly. Junking both the corporate and personal income taxes and replacing them with a broad revenue-neutral consumption tax would produce even larger gains. Nobel Laureate Robert Lucas concluded that implementing such reforms would deliver great benefits at little cost, making it "the largest genuinely true free lunch I have seen."

Reducing taxes on new investment could help strengthen what is a historically slow recovery from such a deep recession. It would also strengthen the economy long-term. American workers would benefit from more jobs in the short run and higher wages in the long run.

However, if a new tax device is used to grow government substantially, it will seriously erode our long-run standard of living. The VAT has served that purpose in Europe and, while better than still-higher income taxes, the larger-size governments it has enabled there are the prime reason European living standards are 30% lower than ours. Trading a good tax reform for a much larger government is beyond foolish. No tax reform can offset losses that large. Hence, a VAT should only be on the table if it is not only revenue-neutral but accompanied by serious spending control.

Further, the fraction of Americans paying no income taxes is approaching 50%. That sets up a dangerous political dynamic of voting ever-rising taxes to pay for ever-rising spending. We need more people with a stake in controlling spending. Replacing corporate and personal income taxes with a broad-based consumption tax could increase the number of those with "skin in the game." But some reforms, for example a VAT, might be much less transparent and may not serve this purpose.

Congresses (and presidents) seem unable to avoid continually tinkering with the tax code. A tax reform that is quickly riddled with special features would lose much of its economic benefit. We need a stable tax system that changes much less frequently, so families and firms can more reliably plan their future. Current fiscal policy, loaded with immense deficits, ever-growing debt, and the prospect of higher future taxes, is the biggest threat to such stability. To balance proposed spending in Mr. Obama's budget in 2015, his Deficit Commission's target year, will require at least a 43% increase in everyone's income tax. Thus, spending control is vital to tax stability.

American companies and their workers compete in the global marketplace saddled with a costly, anachronistic corporate tax system. To compete successfully in the 21st century, we will need to reform corporate taxation. There are several paths to doing so, each with its advantages. Unfortunately, tax policy is headed in exactly the wrong direction, raising taxes on corporate source income. Business investment is growing again after the collapse in the recession, which is usual in a cyclical recovery with very low interest rates. But eventually structural drags, from our antiquated tax code to massive public debt, will impede investment and economic growth.

Mutual Savings Bank Conversions Likely to Increase

Ben Bernanke is concerned about small banks. He sees capital shortages ahead. That means mutual savings banks may demutualize and once again sell stock to depositors and other interested investors. Sounds like great news to me.

In addition to an increase in mutual-to-stock conversions, pressure on small banks is likely to result in more mergers and acquisitions. Of the many possible take-overs, there is the possible union of NewAlliance Bank (symbol NAB) and Patriot National Bank (symbol PNBK).

NAB is one of Connecticut's larger banks. Meanwhile, PNBK is much smaller and its operations are conducted mostly in Fairfield County. However, PNBK, like many small banks, blundered into some problematic real estate loans. Recently a financial investor stepped in and provided capital of about $50 million, which amounted to buying stock for roughly $1.50 a share. The stock now trades over $2.00. But the big question is the buyout price PNBK deserves. How much might NAB pay?

Meanwhile, in Massachusetts there are still about 140 mutual savings banks. Therefore, thrift conversion investors should do what they can to open accounts in those banks.

Bernanke Warns of Small-Bank Risks

Small U.S. banks will likely have to raise capital in the coming years, while bigger institutions are doing much better than a year ago, Federal Reserve Chairman Ben Bernanke said Thursday.

Regional and community banks face tough challenges, especially in residential mortgages and commercial real estate loans, Mr. Bernanke told a bankers conference in Chicago in prepared remarks a year after the Fed tested the resilience of the 19 largest U.S. banks in so-called stress tests.

Given the large number and diversity of smaller banks, Mr. Bernanke said the Fed hadn't even tried to conduct simultaneous stress tests of smaller banks. But the central bank has been working with them on an individual basis to assess their capital needs.

"Although the results vary considerably across institutions, prospective losses are such that many of these organizations may need additional capital over the next few years," the Fed chief said.

"Also, with credit demand tepid and the economy still under stress, profitable lending opportunities have been relatively scarce for many of these banks," he added.

Mr. Bernanke said the Fed has continued to receive numerous proposals from private equity investors to take stakes in regional and community banks. Over the past two years, the Fed has approved many of these proposals, including some that bring both new capital and management to the organization and some that provide new capital through minority investments, the Fed chairman said.

Mr. Bernanke noted how smaller banks generally have fewer alternatives than large banks for raising fresh capital and thus tend to rely on retained earnings for capital growth.

Meantime, Mr. Bernanke said that a year after the stress tests, the earnings and loan losses of the 19 biggest U.S. big banks looked "encouraging."

In the stress tests released in May 2009, the Fed designed dire economic scenarios and measured the resilience of big banks against those scenarios. The exercise has become a model for supervision, and some economists believe the tests and related capital-raising by banks played a key role in the economy's recovery.

The Fed last year concluded that Bank of America Corp., Citigroup Inc., Wells Fargo & Co., GMAC LLC, Morgan Stanley, Regions Financial Corp., Fifth Third Bancorp, KeyCorp, PNC Financial Services Group Inc. and SunTrust Banks Inc. required around $75 billion to bolster their capital. The other nine banks were considered sound enough.

Though the biggest banks drew the most attention during the stress tests last April and May, Fed officials also worried about large regional ones, especially in the Southeast, the scene of many bank failures.

Some Fed officials have been calling for bank stress tests to be conducted periodically and for their results to be disclosed. Although mr. Bernanke didn't embrace this view, he said the central bank was continuing to monitor large banks closely.

"Now we are working with banks to ensure they improve their risk-measurement and risk management as well as strengthen their liquidity and capital levels while also providing the credit that households and businesses need," Mr. Bernanke said.

Although bank credit remains tight, Mr. Bernanke said the strengthening economy gave reasons for some optimism.

Ally Financial? Phoenix is more like it

Recovery. Buffett is right, the recovery has started, but we are still a long way from where we were. Nevertheless, as Buffett has said many times, betting against the American economy is a good way to go broke.

Buffett is great story-teller. He likes to talk about the rise of the auto industry and how many car companies have come and gone while the fleet of cars on US roads has steadily grown. However, he says, with respect to investing, auto companies have returned very little. On the other hand, he said that during the 20th century, the horse population declined from 17 million to 5 million. In other words, the money-making play was to short horses.

GMAC to rename itself Ally Financial

The move comes as the financial services company posts its first quarterly profit in more than a year.

Posted: Tuesday, May. 04, 2010

NEW YORK GMAC Financial Services on Monday posted its first quarterly profit in more than a year and announced plans to rename itself Ally Financial Inc., as the consumer lender aims to put a failed foray into the mortgage business behind it.

The Detroit-based company reported first-quarter earnings of $162 million compared with a year-ago loss of $675 million as its mortgage unit swung to a pretax profit and its core automotive business posted its fifth straight profitable quarter. Revenue rose 7 percent to $1.86 billion.

CEO Michael Carpenter called the quarter a "key milestone" for the company.

"Our premier auto finance franchise continued to expand, the capital markets reopened to GMAC debt, we have reduced expenses and we took several additional steps to contain and reduce risk in the mortgage business," Carpenter said in a statement.

GMAC has a corporate center in Charlotte based in a new uptown office building topped by a purple Ally sign.

In December, GMAC said it had about 470 people in Charlotte, but that was before the announcement of 115 layoffs. Former GMAC chief executive Al de Molina built up the bank's Charlotte presence before being replaced by Carpenter last year.

The switch to the Ally Financial name, which takes effect May 10, reflects the recent strength of Ally Bank, its consumer banking unit. Ally Bank has been a major focus of GMAC's marketing efforts and has benefited from rising deposits thanks in part to the relatively high interest rates it offers. Retail deposits at Ally Bank rose 4 percent to $17.7 billion between the fourth and first quarters, GMAC said.

The name change also marks a final break from the company's heritage as a subsidiary of General Motors Co. Although GM sold GMAC in 2006, the lender retained its original name, which formerly stood for General Motors Acceptance Corporation. While GM remains a key customer of GMAC, the lender has been expanding its business to other vehicle manufacturers and is now the primary lender for Chrysler Group LLC, Suzuki and recreational vehicle maker Thor Industries Inc.

In addition, the license to the GMAC name from GM expires in 2016.

"We need to move on from that name," Carpenter said. "We are moving on to use the Ally brand, which has gained significant momentum."

GMAC, which is 56 percent owned by the federal government, has been hit hard by the dual collapse of the housing and automotive markets. Its mortgage unit, Residential Capital LLC, or ResCap, was heavily involved in the subprime housing boom and later became saddled with bad loans when that market imploded.

It also was stung by last year's weakening auto sales and subsequent bankruptcy reorganization of GM. The company lost $10.3 billion in 2009.

GMAC has been trying to shed its mortgage business, which Carpenter has called "millstone around the company's neck." Last month, the company took a step closer to that goal after GMAC struck a deal to sell its European mortgage operations to New York hedge fund Fortress Investment Group LLC.

During the first quarter, GMAC's mortgage operations posted a pretax profit of $175 million versus a loss of $995 million last year. The improvement reflects restructuring efforts during the fourth quarter last year, the company said, which included the decision to sell certain mortgage assets that resulted in huge losses during that quarter.

Performance in its automotive segment remained a bright spot.

Global automotive operations reported a pretax profit of $846 million, including $653 million from North America, due to improvements in its insurance and international automotive finance businesses. Automotive profit totaled $660 million last year.

GMAC has received $16.3 billion in loans from the federal government, which views the lender as crucial to the success of bailed-out automakers General Motors Co. and Chrysler Group LLC. But a government watchdog this year criticized the GMAC bailout, calling it "baffling" and saying the government stands to lose billions of dollars.

Buffett -- The Future is East

As if we did not know. As great as Buffett believes America to be, he also knows there is much greatness to tap in China. However, his excursion through the industrial world of China is to be guided by his Israeli ally, Eitan Wertheimer. Undoubtedly there is more prosperity ahead for those two and those who follow them.

Buffett’s Iscar Lured to China in Bid to Take Sandvik’s Lead

April 22 (Bloomberg) -- Iscar Metalworking Cos., the Israeli machinery maker owned by Warren Buffett, said it wants to make acquisitions abroad, with China the most likely market because of a lack of antitrust issues.

Iscar, the world’s second-biggest maker of metal-cutting tools, has ambitions to overtake global market leader Sandvik AB, Chairman Eitan Wertheimer said in an interview. A purchase “above a certain size” may prompt regulatory challenges in much of the world, though “China might be open,” and the takeover candidate would have to fit into strategy, he said.

Buffett’s self-described “travel agent,” Wertheimer, 58, plans a trip to the Far East with the Berkshire Hathaway Inc. chairman later this year to visit Japanese unit Tungaloy, a manufacturer of automotive and aerospace tools that Iscar bought in 2008 and is reorganizing. The purchase added capacity in Asia, where Iscar also has Chinese and South Korean plants.

“We are dying to buy, but there is very little variety around, and it has to be the right price,” Wertheimer said at his office in Herzliya, just north of Tel Aviv. An acquisition’s match with the company is important because “I don’t want to be big and stupid. I enjoy a lot to be the number two and be the smart guy. I want to be the Einstein of the field.”

Iscar, which has its headquarters in the northern Israeli town of Tefen, was founded by Eitan’s father Stef Wertheimer in 1952. It makes machine tools for the car-manufacturing and planemaking industries, and customers include Toyota Motor Corp. Berkshire paid $4 billion in 2006 for an 80 percent stake in Iscar, with Wertheimer’s family owning the remaining 20 percent.

Sales Recovering

The Israeli company’s sales are recovering, approaching the level of before the global recession started, with China, India and Korea leading the way and Europe lagging behind, Wertheimer said in the April 18 interview, declining to disclose details.

Gross domestic product in China rose 11.9 percent from a year earlier in the first quarter, according to the country’s statistics bureau. India’s economy in the year through March probably expanded 7.2 percent, the country’s Finance Ministry estimates. That compares with a 5 percent GDP contraction in 2009 for Germany, Europe’s biggest economy.

The recession led Iscar to shift to a four-day workweek for four or five months last year, allowing it to avoid firing any of its 10,000 employees, Wertheimer said. “We had to play for time to keep the people,” he said.

Wertheimer said he’s looking forward to “schmoozing” with Buffett about the planned visit to the revamped Tungaloy while attending Berkshire’s annual meeting on May 1 in Omaha, Nebraska. The Japanese trip would be the third that Wertheimer has helped arrange for Buffett, following a visits to China and South Korea in October 2007 and to Germany, Switzerland, Spain and Italy in May 2008.

Iscar is in a good position to expand through acquisitions, with the “combination of Eitan Wertheimer’s skill with Warren Buffett’s checkbook,” while industry earnings are below average levels, says Shai Dardashti, managing partner of New York-based Dardashti Capital Management, a Berkshire Hathaway investor.

The Simple Brilliance of Warren Buffett

He makes it look so easy. How does he do it? He had to conquer his emotions and act rationally. Based on his net worth, his way works. No one else is even close. Except Bill Gates. But Gates' wealth is built on a single idea. Buffett's wealth is built on a dispassionate understanding of how things work.

The Oracle's Tips for the Rest of Us

Every few years, critics say Warren Buffett has lost his touch. He's too old and too old-fashioned, they claim. He doesn't get it anymore. This time he's wrong.

It happened during the dotcom bubble, when Mr. Buffett was mocked for refusing to join the party. And it happened again last year. As the Dow tumbled below 7,000, Mr. Buffett came under fire for having jumped into the crisis too early and too boldly, making big bets on Goldman Sachs and General Electric during the fall of 2008, and urging the public to plunge into shares.

Now it's time for those critics to sit down for their traditional three course meal: humble pie, their own words and crow.

On Saturday, Mr. Buffett's Berkshire Hathaway reported that net earnings rocketed 61% last year to $5,193 per share, while book value jumped 20% to a record high. Berkshire's Class A shares, which slumped to nearly $70,000 last year, have rebounded to $120,000.

Those bets on GE and Goldman? They've made billions so far. And anyone who took Mr. Buffett's advice and invested in the stock market in October 2008, even through a simple index fund, is up about 25%.

This is nothing new, of course. Anyone who held a $10,000 stake in Berkshire Hathaway at the start of 1965 has about $80 million today.

How does he do it? Mr. Buffett explained his beliefs to new investors in his letter to stockholders Saturday:

Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend ... . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Mr. Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.

Value, value, value. "In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market -- and what that business earns in the succeeding decade or two."

Don't get suckered by big growth stories. Mr. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be."

Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?

Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Mr. Buffett wrote.

"We want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it's one that follows policies with which they concur."

Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue." All timely advice from Mr. Buffett for turbulent times.