Best investment adviser Richard Losch's blog

Berkshire Hathaway Chairman’s Letter 2007

Berkshire Hathaway’s Annual Report. Berkshire Hathaway’s 2006 earnings were spectacular. For the year net earnings were $11 billion or $7,144 per share. This was up 29% from last years $5,538 per share. It was up from $4,753 per share in 2004 and $2,795 per share in 2002 for a 4 year annual growth rate of per share earnings of 26.4%.

Steel Dynamics

Steel Dynamics is an eleven year old company that claims to have the most modern steel operation in the United States. Until last year’s acquisition of West Virginia Steel (part of Roanoke Electric) was completely non-union. Beginning with production of flat roll steel in Butler Indiana in 1996 the Steel Dynamics added a fabricating operation at the same site in 2000, a structural and rail division in Columbia City Indiana in 2003, a bar products division in Pittsboro in 2004, and another fabricating plant in Lake City, Florida in 2005. In the six years since 2000 the Steel Dynamics company has increased its earnings from $54 million to today's $397 million which is a somewhat startling rate of increase (for a steel company) in earnings of 39% per year.

2006 Investment year results

For 2006 investment year Losch Investment Management Company's average account was up 16.9%, this was almost exactly 3% better than the Wilshire 5000 index, an acceptable but not great investment result. Considering that Losch Investment Management Company spent the year with a very low risk profile (massively overweight Berkshire Hathaway, and 20% to 30% in cash most of the time) 16.9% looks even better.

New Investment Positions

In spite of our skepticism in relation to the overall market, we have recently been able to find a few interesting stocks. These are companies with strong earnings, and very solid balance sheets. These are stocks that will benefit from weakness in the dollar, either because they are basic materials stocks, or because they are companies that manufacture things in the United States. They are small companies with market capitalization that runs from $100 million (Core Molding) to $3.5 billion (Mechel OAO and Minas Buenaventura SA).


Also helping to push Berkshire Hathaway’s stock north was the recent announcement of a $15 billion deal with Equitas a trust formed by Lloyds of London to handle their asbestos and environment liabilities. This is a huge deal that will provide $9 billion in new insurance float when the deal closes, and maybe as much as $7 billion more over the life of the contract. This float comes from asbestos claims that will eventually have to be paid.

Berkshire Hathaway's Third Quarter 2006

Using this guess (let me, as investment manager, emphasize the word guess) we arrive at a pre tax operating profit of $4.111 billion for the insurance and the non-insurance operating companies. Estimating a tax rate of 36% would deduct $1.5 billion and leave us with an after-tax operating profit of 2.6 billion of the third quarter compared to $2.05 billion in the Second quarter, $1.8 billion in the first quarter of 2006 and $100 million in the third quarter of last year.

Hurricane Synergy

This I suspect is part of what we will call Buffett's hurricane synergy, the idea that if Berkshire Hathaway can buy enough companies in the building materials, construction, and a manufactured housing industries. Then, when its the insurance companies are paying insurance claims for catastrophic damage due to hurricanes and earthquakes, Berkshire Hathaway as a company will just be transferring money from one pocket to another.

Berkshire Hathaway's Second Quarter 2006

Warren Buffett says that lumpy earnings do not brother him, and it’s a good thing because Berkshire Hathaway’s earnings are lumpier than a sack full of cats. While this is not a problem for Warren Buffett it clearly is a problem for Mr. Market. This poor soul, obviously to busy to read Berkshire Hathaway’s financial statements, has no clue, earnings are up or earnings are down but what does it mean? With all those lumps?

Fat Pitch

With rates approaching low earth orbit and risk coverage down dramatically it would seem like this would be a market Warren Buffett would love, it looks like a big high floater hung out over the center of the plate. Think junk bonds in 2001.

Perfectly Obvious

"We’re not saying that we do things better, but rather that this is us. We want people with a lifetime commitment to their business. To underscore the values that we have, everything we do is consistent with Berkshire Hathaway’s culture. Everything they see hear, and read from the company should be consistent ... Homes have cultures. Companies have cultures. Countries have Cultures at Berkshire Hathaway's people buy into it and see that it works. This kind of thing doesn’t require mentoring. Managers see consistency in how Charlie and I act." Warren Buffett.


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