This is my favorite speech from Warren Buffett. I can memorise most of it...
Following is part one. You can go to Youtube to watch the other parts.
Tuesday, March 23, 2010
Case Study - QBE
Key points
1. Large international insurance operation with diverse geographic and product spread – scale and diversification is essential to produce consistent operating result in insurance business.
2. Strong track record in underwriting result – 2009 is the fifth year in succession QBE have reported combined operating ratio (COR) of less than 90%. Based on A.M. Best company result, the industry average COR from 05-09 was close to 100%.
3. Strong stable management team with long tenure – top 13 executives have been with QBE for an average of 16.5 years.
4. Track record in business acquisition and integration – opportunity to grow in both domestic and international markets.
5. Valuation is low with P/E at 11 and dividend yield at 6%.
QBE versus Warren Buffett’s Berkshire
Both Warren Buffett and Charlie Munger think highly of Berkshire’s insurance operation. Warren wrote in the recent 2009 Berkshire annual report: “Berkshire has the best large insurance operation in the world.”
However QBE’s underwriting result is much better than Berkshire’s, which was 95% in 2008 and 98% in 2009.
Why Warren likes his insurance operation so much? The answer lies in how the investment portfolio within the insurance operation is managed. Berkshire’s insurance investment portfolio allocated nearly half to equities, which tends to have higher return and play with the strength of Oracle of Omaha. In contrast, QBE is not confident in the equity space and only allocated 6.6% of its $23.4 billion investment portfolio to equities.
| Dec 09 | Berkshire Insurance | QBE | Total Investments | U$118billion | A$23.4billion | Equity Portion | U$56.5billion | A$1.55billion | Equity% | 47.9% | 6.6% |
If QBE’s underwriting result can be combined with Warren Buffett’s investment expertise, that will be a dream insurance business!!
Key Risks
QBE is a high quality insurance operation as demonstrated by the excellent technical result. The company is confident to produce a COR less than 89% in 2010.
The key risk for the A$ denominated share price will be the currency movement. Generally the currency contribution to the company valuation tends to be negligible in the long term. However the short-term fluctuation can be very significant. QBE has over ¾ gross premium in foreign currencies. Hence the volatile A$ can heavily influence its reported result. The company is considering to use US$ as representing currency in future financial reports.
Thursday, March 18, 2010
Advice from Bruce Berkowitz
1. Follow your passion;
2. Find a good mentor;
3. Marry well!
Bruce Berkowitz is the manager of the Fairholme fund, a well known value investor. I recently read an article in Graham and Doddsville newsletter with Bruce and I found the following career/life advice from Bruce particularly insightful.
"The world is so competitive; you have to do what you like. There is no way you can go out for eight to 10 hours a day, five to seven days a week otherwise. It is impossible. You’d just kill yourself. It is also important to find a decent, successful person to mentor you. If you work with the right people and do what you like to do, the you’ve got it made. The work has to be in the category of a hobby. You would want to do it even if you weren’t getting paid for it. If you are lucky enough to find something, whatever it is, you should do it, because you will eventually achieve what you want to do. The best plumber in the world probably ends up owning the largest plumbing company in the world after just being a good plumber for a while. Those are the only two points I have been able to figure out so far. Also, it is important whom you marry. The right person will be beyond-words helpful and the wrong person will destroy everything in your life."
2. Find a good mentor;
3. Marry well!
Bruce Berkowitz is the manager of the Fairholme fund, a well known value investor. I recently read an article in Graham and Doddsville newsletter with Bruce and I found the following career/life advice from Bruce particularly insightful.
"The world is so competitive; you have to do what you like. There is no way you can go out for eight to 10 hours a day, five to seven days a week otherwise. It is impossible. You’d just kill yourself. It is also important to find a decent, successful person to mentor you. If you work with the right people and do what you like to do, the you’ve got it made. The work has to be in the category of a hobby. You would want to do it even if you weren’t getting paid for it. If you are lucky enough to find something, whatever it is, you should do it, because you will eventually achieve what you want to do. The best plumber in the world probably ends up owning the largest plumbing company in the world after just being a good plumber for a while. Those are the only two points I have been able to figure out so far. Also, it is important whom you marry. The right person will be beyond-words helpful and the wrong person will destroy everything in your life."
Wednesday, March 17, 2010
Bull and Bear on China
19 Century belongs to UK;
20 Century belongs to US;
21 Century belongs to China?!
It is generally a consensus among most economic and political obeservers that China will become the dominant force in the 21st Century. China's 8-10 percent economic growth is widely expected to continue in the foreseeable future. However the rise of China is not without sceptics. Main point argued is the inherent inefficiency and instability of central command economy. Below are two excellent pieces from Vitaliy Katsenelson and James Chanos highlighting the bubble nature of Chinese economy. Both are well-articulated and well-researched. My humble view is that there is no crystal ball to tell how China' story will evolve. It is something Buffett categorized "important but unknowable".
China - The Mother of All Black Swans - By Vitaliy Katsenelson
James Chanos See "Overheating and Overindulgence" in China
20 Century belongs to US;
21 Century belongs to China?!
It is generally a consensus among most economic and political obeservers that China will become the dominant force in the 21st Century. China's 8-10 percent economic growth is widely expected to continue in the foreseeable future. However the rise of China is not without sceptics. Main point argued is the inherent inefficiency and instability of central command economy. Below are two excellent pieces from Vitaliy Katsenelson and James Chanos highlighting the bubble nature of Chinese economy. Both are well-articulated and well-researched. My humble view is that there is no crystal ball to tell how China' story will evolve. It is something Buffett categorized "important but unknowable".
China - The Mother of All Black Swans - By Vitaliy Katsenelson
James Chanos See "Overheating and Overindulgence" in China
Tuesday, March 16, 2010
Case Study - Harvey Norman
Key Points:
- Market leader in the electrical and furniture retailing in Australia & NZ with total sale over 5bn (excluding overseas sale $1bn).
- Strong brand awareness.
- Unique integrated property, franchising and retailing system, which has proved track record.
- Gerry Harvey is the founder and the charismatic leader with nearly 30% shareholding. All directors of the company holds nearly 50%.
- Forecast FY10 EBIT yield around 10% with underlying operating profit near $300m.
- Potential upside from Ireland business turnaround and further international expansion (test of reinvestment opportunity)
- Underrepresented by institutions. Only Ausbil Dexia has 6% holding.
Valuation/Financials
1. EBIT/Enterprise Value
FY09 underlying operating profit was $250million. Assuming 30% tax rate and $34million annual interest expense, the underlying EBIT was 250*1.4+34 = 384m.
Net debt = interesting bearing loan 575m – cash 150m = 525m.
At $4 share price, the market cap of HVN is $4.24b and enterprise value is $4.76 and this translates into EBIT yield of 8%.
The company achieved 40% profit increase in the first half. This will increase the EBIT yield to 11% if the business maintain the momentum.
2. Retail + Property sum of parts valuation
Franchise operating margin (before tax) is around 6%, similar to JBH’s margin. $300m franchise operating result in FY09 capitalised at 10% means the business is worth at least $3bn.
NZ generate 650m sales and 44m before tax result (6.7% margin). The business should worth at least $440m.
Property value is $1.8bn (net $1.3bn after subtracting the debt). Therefore the market basically values NZ/Asia and Irish business at zero.
Key Risks
- Further hiccup in Ireland and other offshore businesses. The risk of reinvestment (mainly offshore market is high). If the management bite the bullet and withdraw, the stock will ex-growth and become a purely yield play albeit with a very good yield.
- Protracted economic recovery phase and possiblity of double-dip recession – global economy is in the early phase of recovery.
- Succession. Gerry Harvey aged 70 should still has 10 years to be at the helm.
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