Warren Buffett Is Not Infallible

Why bother writing this? I am a fan of Buffett's investing philosophy and long term returns. However, before anyone starts to deify him, its worth noting that Buffett is very human, fallible like the rest of us. To identify the "oops" by Buffett is not to shame him but to give clarity to him as a person. He is very normal and is open to make mistakes. Not a saintly investor as some might try to opine but a flawed one who is possibly the best investor for the past 50 years.



The Sokol Incident: Sokol basically bought a few million shares of Lubrizol Corp for himself, and shortly after recommended Buffett and Berkshire to buy the company. Berkshire did buy in the end. Initially Buffett insisted that Sokol did nothing wrong, although later a Berkshire committee said the opposite in "a scathing report". Now Buffet is done defending Sokol. During the meeting, he said he should have probed more deeply when Sokol first revealed in January that he owned Lubrizol stock. "I obviously made a big mistake by not saying, 'Well when did you buy it,'" said Buffett. He called the Sokol situation "inexplicable and inexcusable." Apart from openly stating that Sokol violated the rules, Buffet also said he regretted the lack of initial outrage over the matter.

Coca-Cola: Buffett was on the audit committee for Coca-Cola, and an investor, when the SEC found that the company had misled investors about its earnings through the 1990s. The buck stops with the audit committee.

Moody's Corp: This one really irked me no end. Buffett has plenty to say about the market's exuberence and ponied up many reasons for the global subprime crisis. But never did he admit anything wrong about the ratings agencies in general. Why? Because Buffett is a substantial shareholder of Moody's. We are not talking of hundreds of ratings companies here, the top 3, namely Moody's, S&P and Fitch are responsible for giving AAA to so many CDOs, which led many investors to blindly rely on the strength and integrity of those papers. The silence by Buffett on this was deafening. The CEO of Berkshire Hathaway has said very little about his 13% stake in the rating firm, which has come under heavy fire for its role in the financial crisis. You know the complaints by now: That Moody’s and rivals S&P and Fitch negligently inflated ratings on mortgage securities, as they grew ever keener to win business from Wall Street banks and other underwriters.

Deloitte & Touche Incident: Berkshire kept D&T as its outside auditors AFTER learning that Deloitte's vice chairman had been trading in and out of Berkshire shares while he was on Berkshire's audit committee. That caused D&T and Berkshire to violate SEC's auditor-independence rules.

Munger, Family & Sons: If we can criticise Singapore Inc for this kind of transgressions, Buffett and Berkshire committed the same mistakes. Berkshire's VIP investing partner and vice chairman is Charlie Munger. How the hell can Berkshire still send so much legal fees to Munger's old law firm of Munger, Tolles & Olson. Very weak transparency and corporate governance here.

Buffett's Mclean Incident: If you happen to lost bucket loads of money buying and selling Mclean or any of the Chinese footwear companies, don't worry, you are in good company. Buffett also reveals that he spent $244 million for shares of two Irish banks that "appeared cheap" to him. At the end of the year, they were written down to their market price of $27 million, for a loss of 89 percent, and they've continued to drop.

Do What I Say, Not Do What I Did: He railed against derivatives as weapons of mass destruction, and now turns out to have been sitting on a $68 billion pile of credit default swaps and exotic put options on various stock market indexes. And having vowed never again to become entangled in a big Wall Street investment bank, he has gone and sunk $10 billion into Goldman Sachs, a virtual re-enactment of his investment in Salomon Brothers--cash for reputation.

Tax Them, Don't Tax Me: Buffett's views on taxation, especially those on estate taxes, have been pathetic. There is a sordid irony if not an artificiality or phoniness about urging the continuity of high estate taxes and concomitantly avoiding the situation through setting up trusts and foundations. Evidence of avoiding income taxes is evident throughout Berkshire's life, as the company and Buffett have always used the IRS Tax Code to their advantage. There is clearly nothing wrong with that but similarly, it is somewhat disingenuous to urge higher taxes after a career of avoiding them.

Buffett and Yu Make Their Best Investment Decision

When its good, one should not question their motivations or persuasions, but applaud them.

NYT: Warren Buffett, the chairman of Berkshire Hathaway Inc. and one of the world's wealthiest men, plans to donate the bulk of his $44 billion fortune to the Bill & Melinda Gates Foundation and four other philanthropies starting in July. The donations, outlined in a series of letters that Mr. Buffett released yesterday and will execute today, represent a singular and historic act of charitable giving that vaults him into the top tier of industrialists and entrepreneurs like Andrew Carnegie, John D. Rockefeller Sr., Henry Ford, J. Paul Getty, W. K. Kellogg and Mr. Gates himself, all men whose fortunes have endowed some of the world's richest private foundations.
Mr. Buffett plans to give away 85 percent of his fortune, or about $37.4 billion, all in Berkshire stock. Of that amount, he will channel the greatest share, about $31 billion, into the Gates Foundation. The Gates Foundation, dedicated to improving health and education, especially in poor nations, is already the United States' largest grant-making foundation, with current assets of almost $30 billion. Mr. Buffett's huge contribution may permanently solidify that philanthropy's standing as the biggest and most influential organization of its kind. Mr. Buffett will join Mr. and Mrs. Gates as a trustee of their foundation. The immense size of the assets at the disposal of the Gates Foundation as a result of the partnership is apparent when compared with the United Nations Educational, Scientific and Cultural Organization, or UNESCO, which had a budget of $610 million for 2004-05. The Gates Foundation made $1.36 billion in grant payments in 2005; at a minimum, Mr. Buffett's contribution may eventually allow the foundation to more than double that amount annually once he transfers all of his stock.

Mr. Buffett's contribution will not be made all at once, but rather in smaller annual increments. Moreover, the distribution could change in an as-yet unspecified way if Mr. Buffett dies before the entire sum is paid. The terms of the donation also require the continued active participation of at least one of the Gateses for the payments to continue.

The second-largest charitable foundation in the country is the Ford Foundation, with an endowment of $11.6 billion.

Mr. Buffett, 75, and Mr. Gates, 50, have become extremely close business associates and confidants since they met in 1991, and the linking of their fortunes and their legacies through the Gates Foundation marks the latest twist in their friendship. In addition to traveling together and regularly playing online bridge games, the two men routinely seek out each other's advice on personal and business matters.

Mr. Gates, who announced about two weeks ago that he planned to devote less of his time to his role as Microsoft chairman starting in 2008 so he could focus on his foundation, joined Berkshire's board of directors last year. Mr. Buffett is a Microsoft investor through Berkshire, and Mr. Gates said early last year that he personally owned about $300 million worth of Berkshire stock.

Mr. Buffett had insisted that he would wait until his death to make a sizable charitable bequest, but he told Fortune that the death of his wife, Susan, in 2004, his admiration for the Gateses and his certainty about how to dispose of his wealth had caused him to "get going" now.

The donation from Mr. Buffett "continues to increase the size of the Gates Foundation and the size and scope of the projects they can undertake," Mr. Tempel said. "They will have organizational challenges in determining how they manage that, how they create the kind of partnerships and staffing that can carry out the work."

The other charities that Mr. Buffett will divide about $6 billion in stock among are the Susan Thompson Buffett Foundation, which is named after Mr. Buffett's wife and emphasizes family planning, abortion rights and anti-nuclear proliferation issues; the Howard G. Buffett Foundation, which is named after and run by one of Mr. Buffett's two sons and focuses on environmental and conservation issues; the Susan A. Buffett Foundation, which is named after and run by Mr. Buffett's daughter and supports educational opportunities for low-income children; and the NoVo Foundation, which is run by Mr. Buffett's other son, Peter Buffett, and has focused on education and human rights.

Over the last four decades, Mr. Buffett has built Berkshire, which is based in Omaha, into one of the world's largest and most successful insurers. Along the way, he has also assembled a stable of holdings in well-known media, consumer products and energy concerns; navigated the stock market with legendary prowess; and offered folksy, astute guidelines for proper corporate governance and investment savvy.

One of his companies, the General Re Corporation, is the subject of a continuing federal investigation into possible financial crimes. Mr. Buffett has not been accused of any wrongdoing in the matter.

In his letters yesterday to the Gates Foundation and the four other beneficiaries, Mr. Buffett said that he had talented managers waiting to succeed him and that the Berkshire shares were "an ideal asset to underpin the long-term well-being of a foundation" because his company had "a multitude of diversified and powerful streams of earnings, Gibraltar-like financial strength, and a deeply-imbedded culture of acting in the best interests of shareholders."

Fred P. Hochberg, dean of the Milano School for Management and Urban Policy at the New School, which has a large nonprofit-management department, said Mr. Buffett's historic contribution to the Gates Foundation was in character.

"It's egoless," he said. "Warren's name is not on the door."

Chinese philanthropist donates it all

Eccentric developer from humble roots shocks nation by leaving offspring nothing

Mark MacKinnon
Shenzhen, China — From Saturday's Globe and Mail

Published on Friday, Jul. 23, 2010 8:46PM EDTLast updated on Tuesday, Jul. 27, 2010 1:31AM EDT

Yu Pengnian’s journey from poor street hawker to Hong Kong real-estate magnate was already a remarkable one. Then the 88-year-old did something even rarer that shocked many in increasingly materialistic China: He gave it all away.

Saying he hoped to set an example for other wealthy Chinese, Mr. Yu called a press conference in April to announce he was donating his last 3.2 billion yuan (about $500-million) to a foundation he established five years earlier to aid his pet causes – student scholarships, reconstruction after the 2008 Sichuan earthquake, and paying for operations for those like him who suffer from cataracts.

“This will be my last donation,” he announced. “I have nothing more to give away.”

With that endowment, Mr. Yu became the first Chinese national to give more than $1-billion to charity, now having contributed almost $1.3-billion in cash and real estate to the Yu Pengnian Foundation.

In a stunned China, the question came quickly: Wouldn’t his children be angry that he had given their inheritance away? “They didn’t oppose this idea, at least not in public,” the eccentric Mr. Yu says, laughing, when asked the question again during an interview at his foundation’s office atop the 57-storey Penglin Hotel in the southern Chinese city of Shenzhen.

“If my children are competent, they don’t need my money,” Mr. Yu explained. “If they’re not, leaving them a lot of money is only doing them harm.”

To make sure that didn’t happen, he appointed HSBC as his foundation’s trustee and stipulated that none of its holdings could be inherited, sold or invested.

In a society where capitalism is just 30 years old, and charitable giving an even younger concept, Mr. Yu says one of his primary goals in making a show out of giving his money away was to set an example to other rich Chinese. “Everybody has a different view of money. Some do good things with it, some rich people do nothing with it. …My goal is to be a leader, a pioneer who encourages rich people, inside and outside of China, to do something charitable.”

The charitable eccentric

It would be easy to characterize Mr. Yu as an oddball. His hair is dyed jet black and held up in a bouffant. He regularly wears white Mao suits and matching white shoes at which his Western-educated grandchildren quietly cringe. His desk, which sits in the middle of an office he shares with half a dozen of the foundation’s staff, is covered with such oddities as a bowl of plastic fruit, a money-counting machine, and a pair of duelling model fighter planes, one Chinese, one American.

He displays little of his wealth – he lives in the Penglin Hotel and eats most of his meals in the buffet restaurant – but sits beneath a giant smiling portrait of himself. Another giant dinner plate emblazoned with a picture of Mr. Yu sits propped up on his desk, gazing directly at anyone who pulls up a chair across from him.

As offbeat as he may be, it’s hard to question his generosity. Mr. Yu, who is ranked the 432nd richest person in mainland China, has topped the Hurun Report lists of the country’s top philanthropists four years running – and will certainly do so again this year – leading by example as the idea of large-scale giving has quietly taken hold among a growing number of China’s superwealthy.

Rags to riches

Mr. Yu says his passion for charity is a result of his own humble beginnings. Born in a small village in China’s southern Hunan province, he travelled to Shanghai in his youth hoping to find his fortune. Instead, he found himself pulling rickshaws and hawking trinkets on the streets until he was arrested in 1954 – on the false accusation that he came from a family of wealthy landlords – and sentenced to three years in a “thought correction centre.”

After his release, he finally caught a gust of good fortune when he was granted rare permission to travel to Hong Kong. He found a job as a cleaner at a large firm, and even though he spoke no English or Cantonese, slowly impressed his way up into a junior management position, saving everything he earned along the way.

In the 1960s, Mr. Yu and some friends pooled their money together and bought their first property, the beginning of a new career that would see him make millions through shrewd purchases that he would sometimes later sell at 20 or more times the original price. As his holdings grew, he became notorious in Hong Kong as the “Love Hotel King” – a name he detests – because many of the properties he owned were rented by operators of hotels catering to hourly stays. He also won fame for buying the last home that kung-fu star Bruce Lee lived in before his death, a property Mr. Yu later donated back to the Hong Kong government as a museum.

Hard lessons in giving

But in rural China, particularly his native Hunan province, Mr. Yu was developing a very different reputation. When he returned to his hometown of Lou De each year for the Spring Festival holiday, he handed out red envelopes stuffed with cash to the elderly and poor.

Those trips taught him an early lesson about the perils of charitable giving. One year, he enlisted the help of local government officials to help him stuff each envelope with 400 yuan. He found out later that much of the cash had been pocketed by the corrupt bureaucrats, and to this day he insists that the money he donates go directly to the recipients without going through any other charities or government agencies. “In China, I do charity only with my own eyes and hands. I don’t trust others,” he says.

Mr. Yu’s initial foray into wider-scale philanthropy came after he developed cataracts and had a successful operation to repair his eyes in 2000. When he researched the disease afterwards, he found that 400,000 Chinese developed cataracts every year, and many sufferers couldn’t afford the required surgery.

He was deeply moved and decided to spend $10-million annually on mobile cataract clinics that drive to the most remote parts of China to perform surgeries paid for by Mr. Yu. His own oversized photograph – his eyes clear of cataracts – is on the side of the “Bright Eyes” vans, which have carried out more than 150,000 cataract operations around the country since 2003.

Mr. Yu says his latest passion is education. He says he wants the bulk of the money from his most recent endowment, as well as the profits from the hotels and other properties he has donated to the Yu Pengnian Foundation, to go to scholarships. “Some for poor students, others for talented students I want to encourage, including foreign students who want to study in China,” he said. “Education is very important for a country, very closely related to its prosperity and standard of living.”

A legacy project

Mr. Yu is proud to hear his name mentioned alongside such famous Western philanthropists as Bill Gates and George Soros – as well as Hong Kong’s Li Kashing, Asia's most famous philanthropist who has given away $1.4-billion of his estimated $21-billion – but likes to point out that he’s gone a step further than they have by giving away all his money. However, he admits he wasn’t ready to go back to the hard life he lived as a young man.

“I’m not poor, not yet. I still have a credit card – an American credit card – and I take a VIP room in this hotel. And I take business-class flights. I allow myself this,” he says, smiling.

As Mr. Yu speaks, his grandson, Dennis Pang, watches with obvious respect and affection. As someone who was in line to inherit some of the fortune, Mr. Pang admits that he was initially bewildered by his grandfather’s insistence on giving away what he had earned. But then he took a job as his grandfather’s personal assistant, and saw first-hand the good the Yu Pengnian Foundation was doing.

“Before I came here, I was a little confused. But now when I see the people that he helps, I understand that it’s special,” Mr. Pang said. My. Yu’s two sons, both in their 60s, sit on the foundation’s board of directors.

Mr. Yu is pleased to have his family’s support, but says he would have gone ahead with his philanthropy with or without their approval. “I don’t care what others think. It makes me happy to give my money away. I used to be poor.”

Buffett Made $1 Billion In Paper Profit From BYD

There are a lot of benefits when you are Warren Buffett, a lot more people want you to invest in their companies. Of course, you have to achieve a lot before you get to where Buffett is. It is true that when you have "made it" the money making will get a lot easier. To be fair to Buffett, he has a lot of bankers showing him deals or alerting him on interesting companies all the time. Plus he has the capital to do things immediately, I remember being shown deals that I thought would be more than decent but would have had to go around trying to convince people with money to invest in them - its a drag. By the time you line up some interest, there will be issues on how to get the commission and then who gets what and among how many people - its really a drag.

Back to BYD, it probably took a lot of foresight and guts to invests in BYD because no matter how good the battery is, there are plenty of competitors out there. The technology could be surpassed in the blink of an eye. Even when you have a great product, you still have the bigger hurdle of latching onto the genuine critical mass buyers, i.e. the Chinese government or any of the major automakers, bearing in mind that most of the carmakers also have been developing their own specialised battery product. Not an investment for the faint hearted.

Battery and electric car producer BYD Co plans to list itself on the Shenzhen Stock Exchange next year with a 100 million share issue to raise funds for its new energy vehicle projects, according to a senior company official.

The Hong Kong-listed company, partly owned by US billionaire Warren Buffet, got the necessary shareholder approval for the public float at the annual general meeting held in Shenzhen on Tuesday.

"We expect to complete the entire listing procedure before Sept 7 next year," Wang Jianjun, deputy general manager of BYD Auto Sales Co Ltd, told China Daily.

The company had last year toyed with the idea of a mainland public float of 58.5 million shares on the Shenzhen or Shanghai bourse. The present plan to raise funds is a revival of that proposal which was put on hold after China suspended IPO approvals for nearly a year due to the global financial crisis.Proceeds from the issue would mainly be used for funding the company's lithium-ion battery production, automobile research and development, expansion of products and parts, as well as a solar battery program, with the rest to be used for working capital needs, said Wang.

"BYD will focus on the development of electric cars in the next few years and would make further efforts to lower costs and improve the performance of BYD electric vehicles, to popularize it among Chinese consumers," he said.

BYD will also start selling its F3DM plug-in hybrid cars to individual consumers from next month.

The hybrid model also figures in the first batch of new-energy vehicles that have got regulatory approval for production and sale from the Ministry of Industry and Information Technology.

"We are applying for the government subsidy for our F3DM, which qualifies for the highest level of as much as 50,000 yuan per unit," said Wang. "The subsidy will help promote the sales of clean vehicles."

BYD's Chairman Wang Chuanfu said earlier this month that billionaire Buffett is contemplating increasing his 10 percent stake in the company. Buffett had acquired the 10 percent stake for $230 million last September.

Since the deal was announced, the automaker jumped fivefold in Hong Kong trading helped by Buffett's investment and rising demand for fuel-efficient vehicles. Buffett's Berkshire Hathaway Inc has also earned a $1 billion paper profit from its investment.

BYD aims to more than double vehicle sales this year to 400,000 units. First-half sales more than doubled to 176,814, helped by demand for the F3, China's fourth bestselling car, according to the China Association of Automobile Manufacturers.

Current PE Ratios Comparison & Buffett's Latest Interview

In a recent interview with Warren Buffett:

On whether he will cash out of Goldman Sachs:

No, no, no. I will keep those Goldman warrants right through their full -- they've got four and a quarter years or so to run. But I think we'll make a lot of money out of those.

On the possibility of the United States losing its AAA Rating:

As long as you're issuing money and you're issuing debt in your own currency, you can print money. The U.S. -- no, I think we will have a AAA for not only as long as I live, but as long as you live, which is more important.

On whether unemployment will continue to rise:

It’s going higher—business has not bounced back. We have not come off the bottom yet. It will work out in the end. Since 1776 it’s been a mistake to bet against America . America solves its problems. How soon, nobody knows. But we have not come off the bottom yet. And it will work out in the end.

On inflation in the United States :

What we’re doing raises the probability significantly of very significant inflation down the road—not this year or next year or the year after that, but we’ve taken actions and they were appropriate actions… it will have consequences and nobody knows exactly what they will be and how effective we will be at draining a system we’ve been flooding, but the probability of significant inflation has gone up.

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Bespoke came up with the current P/E ratios for these countries. Please note that its current ratios and not forward ratios. Below is a chart showing these valuations. As shown, Russia currently has the lowest P/E ratio at 6, followed by Italy (10) and France (11). At 14, the US is more attractive based on its P/E ratio than most countries. Taiwan has the highest P/E at 60, and the UK is surprisingly bad at 34. It's valuation is worse than China's. Germany also has a very high P/E ratio at 27. Malaysia's is at a fair 18x.

p/s photos: Reon Kadena

Insiders' Selling & Beating Warren Buffett At His Own Game

There are plenty of investors who monitor the buying and selling by company insiders, i.e. senior management and substantial shareholders. There were two major waves of buying by insiders, in November last year and March this year, and they have proven to be very astute in timing the markets. Now insiders have been net sellers for 14 consecutive weeks. That might not be as bearish an indicator because the length of time is a lot longer than usual, indicating that this time the insiders could be wrong. Secondly, the fact that the net selling is so prolonged may hint at more long term institutional and private funds are re-entering the markets. Even insiders cannot always be right.

By Steven Russolillo (WSJ)

Insiders are selling their company shares at a pace not seen in two years, providing further evidence that the recent stock-market rally may be coming to an end.

Insiders of S&P 500 companies have now been net sellers for 14 consecutive weeks, according to research firm InsiderScore.com. That marks the longest stretch since June 2007, which was just a few months before credit markets started shutting down and a bear market for U.S. stocks began.

Stock purchases by highly placed executives, such as chief executives and chief financial officers, has been a bullish metric in the past, suggesting a broad market rally was imminent. A wave of buying last November and early March each came right before more than a month’s worth of stock-market rallies.

But company executives have shifted from buying binges to selling splurges, suggesting insiders are questioning the recent three-month rally that has seen major indexes increase at least 30%. Insiders are collectively making a valuation call that their stocks have become too expensive compared to earnings expectations as the second quarter comes to an end, according to Ben Silverman, director of research at InsiderScore.com.

“Certainly within the insider community there’s some questioning of whether evaluations have peaked and whether this bull run is going to come to an end,” Silverman said.

Stocks experienced broad-based selling on Monday as the Dow Jones Industrial Average was recently down 169 points at 8371, adding to last week’s 3% drop.

With less than two weeks left in the quarter, Silverman said insider activity should start slowing down as companies generally close trading windows approximately a week before the quarter ends.

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This article is even more interesting. You can actually beat Warren Buffett at his own game. How? Well, some of his stock picks are now much much cheaper than at the time when Buffett bought them. He is still holding onto them, indicating that he still likes them. His views echoed his belief in his picks. He does not seem to be cutting any of his positions anytime soon. You can buy Conoco Phillips at HALF the price Buffett paid for.

You can buy Johnson & Johnson at $55 or 12% lower than Buffett's entry price of $65. How about US Bancorp, which Buffett paid $31, you can buy today and boast over lunch that you got in some 45% cheaper. ... And get this, Buffett is still adding to the positions mentioned above even as we speak... that means they are still good.

Of course I jest, Buffett is never a market timer, he could not care less whether he bought at the low or near the lows. All he is concerned is that he bought at value, and he knows that it will be worth a lot more sometime into the future.

By Matt Phillips (WSJ)

Bloomberg

Can you beat Warren Buffett at his own game? Despite the recent equities rally, some of Buffett’s favorite issues look pretty affordable at the moment:

Mr. Buffett liked oil giant ConocoPhillips (COP) enough to invest $7 billion in the stock through the end of last year, at an average price of $82.55, according to the Berkshire Hathaway annual report. Anyone buying today can get it for about $41.

Mr. Buffett has conceded an “unforced error” in buying this oil stock when oil prices were booming. But that doesn’t mean he has given up on it. In his last comments on the subject a few months ago, he reiterated his belief that demand for energy would remain strong. At current prices ConocoPhillips is about 13 times this year’s forecast earnings, but analysts predict that will drop to a cheap 7 times in 2010. That’s because they believe oil and gas prices will rebound.

He bought Johnson & Johnson at about $62 a share: It’s now about $55, or 12 times likely earnings, yielding 3.5%. He had also invested about $4.3 billion in food company Kraft, at around $33 a share. It’s now around $25, 13 times likely earnings and boosting a hefty 4.7% yield. He had also invested $2.3 billion in US Bancorp at an average price of about $31. Today’s it’s $17. (Mr. Buffett has added to his positions in both Johnson & Johnson and U.S. Bancorp since.)

p/s photos: Kama

Why Ken Heebner Is Better Than Buffett

The best mutual fund manager around is Ken Heebner of Capital Growth Management. The statement above is a big one. Everyone worships Warren Buffett, I am not saying he isn't good, Buffett is very very good, right at the top. Unfortunately, Ken beats him in a poker heads-up match.

Fortune: Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500. Focus, which has $7.4 billion in assets, is already up 15% in 2008 (as of May 19), but it is 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500. "I told Ken it was like he was walking between the raindrops," says CGM president Bob Kemp, who oversees sales and marketing at the firm, of the year Heebner had in 2007. "It amazes even us." Last year marked the fourth time since 2000 that the fund returned 45% or better. And it's not as if Heebner has needed the big years to make up for a lot of losses: Launched in late 1997, Focus has had only one money-losing calendar year (2002).

Peter Lynch's 14-year tenure at Fidelity Magellan has long been the gold standard for mutual fund excellence. During Lynch's best ten years - August 1977 to August 1987 - Magellan recorded an average annual return of 36%, according to fund tracker Morningstar. It's a remarkable achievement, but even Lynch acknowledges that he was backed by a strong tailwind. The S&P 500 returned 19% a year over the same period. In other words, Lynch beat the market by 17 percentage points a year during his heyday. Ken Heebner has beaten the market by 20 points a year during his.

And Focus isn't the only Heebner-managed fund that's excelling. CGM Realty (a sector fund), CGM Mutual (a balanced fund that owns stocks and bonds), and CGM Capital Development (closed to new investors since 1969 and soon to be merged into Focus) have been standouts too. Realty boasts a 22% annualized return for the past ten years, sixth-best in the mutual fund universe, according to Morningstar. It's also the only fund in its category that's been bucking the real estate slump. Realty's one-year total return: 34%, vs. 6% for its nearest rival.

In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. The stocks went on a tear, and by 2004, Heebner's stake in the sector accounted for 19% of assets in Focus and 79% in Realty. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005 - mere months before the industry started to collapse - Heebner had sold off every homebuilder share he owned. Heebner used his homebuilder profits to load up on oil and coal stocks, positions he'd started to establish in 2004.

In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper - and of copper stocks - doubled in a little over a year.

In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled.

In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8. By then, Heebner had short positions in three more drain-circling mortgage lenders: BankUnited, IndyMac, and FirstFed Financial.

Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks: Bear Stearns, Citigroup, Goldman Sachs, Lehman Brothers, and Merrill Lynch. The holdings could have proved disastrous, but by June - before the credit crisis really snowballed - he was out. "How do you explain genius?" muses Douglas Pratt, a former Invesco fund manager who was an analyst at Loomis. "Ken just sees things others don't."

For better or for worse, the hyperactive trading has always been one of Heebner's calling cards. The turnover rate in CGM Focus, which typically holds 20 to 30 stocks at a time, was a whopping 384% last year, which in theory means he traded enough to buy and sell the entire portfolio nearly four times.

To be fair, we still have to see how Ken's funds performed over the critical Sep-Nov 2008 period. I checked and the fund was down about 1/3 since June 2008, its bad but not that bad. Fair is fair, even Buffett's stock is down, though not by as much. Its not fair to take a 3 or 6 month window to assess someone's performance. Ken's track record is proven over 11 years, and has ridden out the LTCM shit, the internet implosion, the Enron combustion, and now this.

Why Heebner is better than Buffett:

a) Warren Buffett is a pure buy-and-hold kind of person. He uses time to his advantage. Not that its bad, its just not as savvy and pure like Heebner.

b) Ken Heebner not only pick stocks and sectors, he maxes the bets by timing as well. Everybody knows that to pick a good sector or a good stock is easy, market timing is near impossible. Ken has been able to get them right probably 4 out of 5 times and usually within a 6 month time frame.

According to a significant article in WSJ, Buffett did spectacularly well in stock picking in his first 20 years. However, that magic wand seems a bit deflated since then. Much of the outperformance had been due to his "brand name" and its ability to negotiate super-duper deals ala the recent Goldman Sachs and General Electric deals.

WSJ: For the first two decades of his career, Mr. Buffett built the bulk of his fortune through his investing prowess, producing one of the best long-term track records of any money manager in history. More recently, however, Mr. Buffett has succeeded not through investing prowess alone, but also through exclusive deals that have come to him because of it.

Only a part of Mr. Buffett's market-beating performance has come from stock-picking. Even more of his edge has been generated by the operating subsidiaries of his Berkshire Hathaway Inc., like Benjamin Moore paint and Geico insurance. "There's no question about it," Mr. Buffett told me during the week. "Certainly over the last decade at least," the earnings of Berkshire's operating businesses "have grown at a much faster rate than the [value of the] marketable securities per share."

It is a lot harder than it used to be to measure just how good a stock-picker Mr. Buffett is. When I asked him if he knew how well Berkshire's stock portfolio has done in recent years, he answered: "I've no idea what the rate of return would be. But, knowing myself how hard it would be to do the calculations right, I'm suspicious of anybody's numbers."

An outsider, then, can barely get in the ballpark. Since the end of 1988, Berkshire's stock portfolio has grown from $3.56 billion to $69.51 billion. That is a spectacular average annual increase of 16.5%, far surpassing the 10.5% annualized return of the Standard & Poor's 500-stock index. Of course, this calculation is only a crude approximation, since it ignores the cash that Mr. Buffett added in -- and moved out -- along the way.

Over the same period, the growth in Berkshire's book value per share, which reflects all of Mr. Buffett's activities, not just his stock-picking, was 19.9%.

In other words, Mr. Buffett's skill at picking publicly traded stocks pales alongside the value he has added to the company through other means.

As recently as 1995, 73.5% of Berkshire's total assets consisted of a portfolio of publicly traded stocks that (at least in theory) any investor could have replicated. As of June 30, though, Berkshire's stockholdings made up just 25% of its total assets.

Mr. Buffett's stock picks used to drive the train; lately, they are more like the caboose. He has been buying private firms outright and landing "sweetheart" deals in public companies.

Since the beginning of 2006, Berkshire has spent nearly $17 billion buying private companies lock, stock and barrel, including an Israeli cutting-tool maker and a distributor of electronic components.

Meanwhile, on the sweetheart front, in 2008 alone Mr. Buffett has sunk $5 billion into Goldman Sachs, $3 billion into General Electric Co., $3 billion into Dow Chemical Co. and $6.5 billion into the merger of Mars Inc. with Wm. Wrigley Jr. Co. -- all with preferential terms.

Twenty years ago, Mr. Buffett struck similar bargains with companies whose quality ranged from purebred Gillette to mutts like Champion International, Salomon Brothers and USAir Group. His results were mixed. The lesson here is that even Mr. Buffett learns lessons. In his latest round of sweetheart deals, he gets a generous upside and virtually eliminates any downside, a "heads I win, tails I win" structure that other investors can only dream about.

Whether he buys stocks in what he calls the "auction market" or private businesses in the "negotiated market," Mr. Buffett tries to secure a margin of safety. That term, defined by his mentor Benjamin Graham, means that the price is so far below a business's underlying value that severe loss is improbable.

"We do try to buy our businesses like we buy our stocks," Mr. Buffett told me, "and buy our stocks like we buy our businesses." By that he means, among other things, that he wants to understand how the enterprise generates cash, how well-managed it is and whether its customers would stay loyal even if it raised the prices of its goods or services. Note carefully: None of these factors are contingent on the current price of the stock.

"Being a businessman makes me a better investor and being an investor makes me a better businessman," Mr. Buffett explained. "Most businessmen limit themselves to their own field, and most investors don't really think about businesses. And many businessmen are semi-oblivious to the yardsticks other people use outside that field. I'm always comparing everything to everything else. The question I want to answer is. 'Where do we get the most for our money in something we can understand?'"

"I prefer, and [Berkshire Vice Chairman] Charlie [Munger] prefers, the permanent ownership of [private] businesses," Mr. Buffett added. "That's been my focus for well over 20 years. But it's just that sometimes, marketable securities are so much more compelling." Mr. Buffett didn't say whether he thinks now is one of those times, but he did state publicly earlier this month that "I've been buying American stocks."

Any investor who picks stocks can try to think like Mr. Buffett and, as he pointed out, "the individual actually has an advantage over us, because their costs of buying and selling [stocks] are a helluva lot less than ours." But that advantage applies only if you actually can think like Mr. Buffett. Above all, there is much more to his success than stock-picking alone. Throughout Mr. Buffett's long career, he has changed tack repeatedly. At this point, he is on a course most investors will no longer be able to follow.

p/s photos: Warattaya Nikulha

Buffett Likes The Mess The US Is In

SMH: Warren Buffett, the world's richest man in the Forbes magazine list, said in a newspaper commentary yesterday that he is buying US stocks even though the American economy is in a "mess".

Mr Buffett, 78, who became known as the Oracle of Omaha because of his fortune-building skills, said he has been buying into US companies even as "fear spreads".

"The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy and the leaks are now turning into a gusher," the head of the Berkshire Hathaway Inc conglomerate wrote in The New York Times.

"In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

"I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy). If prices keep looking attractive, my non-Berkshire net worth will soon be 100 per cent in United States equities."

The reason, he said, is a key maxim in his outlook: "A simple rule dictates my buying: be fearful when others are greedy and be greedy when others are fearful.

"Most certainly, fear is now widespread, gripping even seasoned investors. But fears regarding the long-term prosperity of the nation's many sound companies make no sense," Mr Buffett said.

"These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now."

Mr Buffett stressed he could not predict how the market would ride out its roller-coaster days in the short-term. "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up."

Mr Buffett has supported Democrat Barack Obama in the race for the White House, but both Senator Obama and his Republican rival, John McCain, say they agree he would make a good treasury secretary.

Mr Buffett, who is noted for his personal frugality despite his huge fortune, has said in the past he believes the financial markets should be more tightly regulated.

Forbes's annual wealth list published in March, shows Mr Buffett's wealth jumped from $US52 billion ($75 billion) last year to $US62 billion, pushing Microsoft co-founder Bill Gates out of first place.

p/s photos: Angelica Lee Sin Je (this is what I meant by Malaysian girls' sweetness and unassuming beauty)

The World According To Buffett

What can you say about the man.. look at his forays over the last couple of weeks while the rest of the financial world were biting their finger nails.

Warren Buffett literally swooped in to buy Constellation Energy Group for $4.7 billion. At the beginning of the year, Constellation traded for over $100 and now its shares had slumped below $25 prior to Buffett’s acquisition announcement. At a $26.50 take-over price, Buffett is paying about an $11.5 billion price tag for Constellation, including net debt and retirement obligation. EBITDA: $1,925 million, which means Buffett paid less than 6 times EBITDA for Constellation. By the way, property, plant and equipment [PPE] are worth $10.4 billion alone.

When we say cash is king, its pretty useless not to deploy the cash when valuations get out of whack. The cash is not really king, because you did not deploy them at the right time. To be fair, the trouble is most of us do not know when the right time is. Maybe we all can follow Buffett. Mathematically alone, he has been through more crisis, booms and busts. The funny thing is that Buffett can roll a six 9 out of 10 times, but even now when he starts to buy, most investors still fear jumping along with him. Fear still over-rides sensible deduction.

The other deal was Goldman Sach. That deal is not as "committed" as it appears. The $5 billion deal involves two parts:
1) $5 billion in preferred stock These preferred shares are senior to common stock and pay a 10% annual dividend. Think of them as unsecured bonds paying 10% interest. He is not buying common shares with the initial $5 billion. If Goldman ever wants to retire these preferred shares, the company has to pay Buffett a 10% premium to their face value. That would further boost the yield on those papers. Buffett got a wonderful deal because these papers are usually callable at par and not at a premium.
2) Warrants to buy $5 billion of common stock at $115 per share Buffett has the option to buy $5 billion of common stock at $115 per share at any time over the next five years. There is absolutely no risk for Buffett on these warrants, the option cost him nothing. Buffett earns a profit of $43 million for every dollar GS stock trades above $115 per share.

The only thing Buffett is confident on is that Goldman Sachs will be around 5 years from now, and that he has a very good chance to get back his money plus a high yield. His equity interest in Goldman Sach cost him zilch, what a wonderful deal (for him).

Berkshire Hathaway also disclosed that it has doubled its stake in Conoco Phillips to 17.9M shares and picked up new positions in General Electric totalling 7.8 million shares, and a smallish stake in United Parcel Service (1.4 million shares).

General Electric is getting $3 billion in new capital from Buffett's Berkshire Hathaway. GE is "the backbone of the American industry," Buffett said. "They're going to be around five or 10 or 100 years from now." Buffett's deal is very similar to the one he got when he bought into Goldman Sachs last week and very, very different from what the normal investor would get.

Buffett is getting $3 billion in perpetual preferred stock offering a dividend of 10 percent. It is callable, at a premium of 10 percent, in three years. He also got warrants to buy $3 billion in common shares at $22.25 over three years.

Both the GE and Goldman deals does not present big risk to Buffett, but the moves send a very strong signal to all with capital that is it OK to start injecting capital into troubled firms. Buffett has also mentioned a few important points during his CNBC interview last night. One, that he would have liked to take up 1% or $7bn in the bailout fund as he believes that the fund will make good money within a few years. Two, he also reiterated that the fund is very likely to be crucial for the American economy and should make money in the end, thus an important view to the politicians who later voted the bailout plan through.

Will other investors get such a good deal like Buffett? Probably not, the SWFs and PE firms are probably gnashing their teeth on the wonderful deals struck by Buffett. But Buffett is bringing more than just cash to the table. When he invests, he brings with it a "seal of approval" on the company's fundamentals, valuations and prospects relative to its price. That seal of approval is from years of proven track record. When Buffett buys, it basically means your company is more than OK. Its a great premium to pay to Buffett by GE and Goldman as the premium is a very cheap way to restore confidence in yoru stock, boost employees' morale, and even get banks to trust your company and give out generous lines of credit.

Its not just in the US, Buffett has started to buy in Asia as well. On Monday, a subsidiary of Warren Buffett's Berkshire Hathaway spent $230 million on a 10% stake in Chinese rechargeable battery manufacturer BYD Company. Interesting indeed.

To Buffett, its time to get back in.

p/s photos: Shama Sikander