Warren Buffett (Berkshire Hathaway) Corporate Debt Purchases – Update

– Warren Buffet’s Berkshire Hathaway Inc (BRK.A / BRK.B) has been busy this month, largely in regards to preferred shares and the purchasing of corporate debt.  This market environment has given him plenty of opportunities to make potential double digit returns by investing in corporate debt instruments.  As I mentioned at the end of my previous article (Investment & Economic Outlook 2009), corporate debt instruments such as preferred shares, bonds, subordinated notes, etc have dropped significantly in price (rarely happens on such a broad scale as they usually hold quite steady) giving them temporarily high yields.  Many of such yields are in double digits, and many corporate bonds are viewed as in junk bond territory (due diligence would suggest otherwise for specific companies).

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USG Corp (USG) & Goldman Sachs Group Inc. (GS):
– According to documents filed with the Securities and Exchange Commission (SEC) on Wednesday (2/11/2009), his company has the right to acquire more than 43M shares of Goldman Sachs Group Inc.  Back in September of 2007, Berkshire invested $5 billion in preferred shares of the investment bank paying with a yield of 10%.  Berkshire gained warrants to buy 43.5M common shares.
– Documents also reveal that it has the right to acquire more than 43M shares of USG Corp.  USG shareholders approved Berkshire’s right to convert its senior notes of about $300 million into common shares. Buffet’s Berkshire currently owns approximately 17M shares.  Converting all the notes would result in ownership of over 43.4M shares

SEC Filing related to Goldman Sachs Group Inc:
http://www.sec.gov/Archives/edgar/data/886982/000119312509025532/dsc13g.htm

SEC Filing related to USG Corp:
http://www.sec.gov/Archives/edgar/data/109694/000118143109008180/xslF345X03/rrd232358.xml
http://www.sec.gov/Archives/edgar/data/757011/000119312509025581/dsc13da.htm

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Vulcan Materials Company (VMC):
– This week Berkshire agreed to purchase notes from Vulcan Materials Company.  The sale of the notes were reported in January by Vulcan, but they did not identify the buyer at that time.  On Tuesday (2/10/2009) during their earnings call, it was revealed that Berkshire was the buyer.  It purchased $150M of notes paying a yield of 10 1/8% (due 2015) and $250M of notes with a yield of 10 3/8% (due 2018).

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Harley Davidson Inc (HOG):
– Last Tuesday (2/3/2009), Berkshire purchased $300 million of Harley Davidson’s notes paying 15%.

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Sealed Air Corp (SEE):
– Berkshire purchased $150 million of Sealed Air’s notes paying 12%.  Sealed Air announced it completed its $300 million private offering of the notes due 2014 on Monday (2/9/2009).  Davis Selected Advisers and Berkshire Hathaway subsidiaries purchased equal portions.

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What Does This Mean For Investors:

– Time and time again Buffet naysayers state that his methods are old and out of date, or that his strategies don’t work these days.  But time and time again they have proven to work.  It also reminds me of a section in the book about Buffet, The Snowball.  It describes a time when he went to a conference at the height of the tech bubble.  He gave a presentation to businessmen and investors.  He tried to gently warn them of what was about to happen and the principles behind why. The new tech czars and millionaires scoffed and snickered behind his back calling him a “dinosaur” whose thinking is outdated.  Unfortunately they missed what he was trying to say.  They got caught up and focused on the “technology” aspect of his presentation, rather than the timeless investment/economic/business principles he was illustrating.  They and other investors were also are very quick to predict the outcome of his strategies, forgetting that his strategies are long term and therefore take years to come to fruition.  Buffet has purchased corporate debt in past financial crisis situations when many of them were considered by other investors as junk bonds.  But his investment strategies will always work. Why?  Because the investment principles behind his strategy are valid ones and are not dependent on what decade it is.  It is dependent on financial & economic information.  People always get caught up and focus on the times and forget the financials.

So how does he do this? Its simple.  To generalize, he finds a potential bargain that gives high potential return, which exists because other investors fled (they aren’t sure of its stability, i.e. potentially high risk).  Buffet does his homework and based on that he finds that the actual risks are low and makes the purchase.  He only does this when the opportunities are there, usually during market turmoil and financial crisis.  When times are good he barely does any deals.  A simple strategy, maybe even lame to some people.  But this strategy works time and time again.  All it requires is patience (waiting until the opportunities show up), due diligence in performing proper assessment & homework, confidence to execute based on result of the due diligence (going with what the analysis tells you rather than with the crowd)

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Now before you get all hyped up and ready to purchase some corporate debt instruments, learn about them first.  There are many different names and types – preferred shares, subordinate notes, interest paying notes, corporate bonds, etc.  For each issue, they have different conditions, options, and terms (redemption dates, cumulative/non-cumulative, rate, deferral options, conversion, etc.).  Perform due diligence on the issuing corporation and the security itself to analyze the business and investment risks.  Also assess whether it is a suitable instrument and tool in your plan.

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Although we can easily follow and copy Warren Buffet’s moves, it is much better to start learning his thought process and criteria.  One of the criteria is the concept of value.  Buffet’s teacher/mentor Benjamin Graham’s classic book The Intelligent Investor is available online from Amazon.ca/com. Its a good starting point. I have placed a link to the specific version/edition that I recommend below. There are a few editions out, but this one has the Introduction and Appendix written by Warren Buffet (informative extra commentary). Chapters/Indigo is sold out at the moment but I added a link to the audiobook. However, I find having it in textual format is better for referencing. This book is a must read for followers of Warren Buffet, and the best investment book I ever read.  It is a great starting point for stock investing.

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Feel free to post questions, comments, or topic suggestions.

Thanks & Happy Investing!
The Investment Blogger!


Amazon.com
The Intelligent Investor: A Book of Practical Counsel

Amazon.ca
The Intelligent Investor: A Book of Practical Counsel

Chapters.ca (CD audiobook)

Author: The Investment Blogger

I’m a private investor, who developed the “function-centric investing” paradigm. I am an investor who blogs a little here and there, rather than a blogger who invests a little here and there. I'm passionate about investing and sharing investment knowledge!

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