A New 'Cover-Up' at Berkshire Hathaway

A new 'cover-up' at Berkshire Hathaway... Why is Buffett ignoring his own advice again?... An urgent announcement from Dave Lashmet... 'This stock will double in the next 18 months'...

Regular Digest readers know we've been critical of legendary investor Warren Buffett and his firm Berkshire Hathaway (BRK) of late...

As Porter explained in the March 2 Digest, we believe both he and Berkshire have lost their way...

Buffett is the ultimate American business icon... His firm, Berkshire Hathaway, has made a tremendous amount of money for an incredibly long time. America loves a winner. And even more than that, Buffett has turned his plain-spoken, "folksy" public persona into a bulletproof public brand... a brand that nothing can stain. As good as Buffett is at investing, he's even better at PR.

And that's why no one has noticed... Berkshire Hathaway is being badly mismanaged.

The strategies, structure, and brilliance that created capitalism's most perfect business have been abandoned, forgotten, or lost... The heart of Berkshire still beats – it owns a collection of the world's best insurance companies. But this incredible asset is being overwhelmed by a series of disastrous investments, the damage from something which is being hidden from shareholders.

In short, over the past 15 years, Buffett has quietly moved away from the formula that made him a billionaire to begin with...

Investing the massive profits from Berkshire's well-run insurance businesses into high-quality, "capital efficient" businesses. The shift began in 2003, when Buffett acquired MidAmerican Energy. More from that Digest...

Rather than focusing on owning parts of the best businesses in America or buying all of world-class smaller companies, Berkshire began to invest in firms that required enormous amounts of capital, were highly regulated, and that featured "commodity" economics.

These investments broke the formula. They've resulted in a tremendous decrease in Berkshire's ability to compound wealth. As a result, for the first time in Buffett's career, he no longer routinely beats the S&P 500.

And even worse, rather than owning up to these mistakes, Buffett has been actively trying to cover them up... even engaging in behaviors he had routinely criticized in the past. As Porter noted...

For decades, Buffett has maintained the same stance... He has said that if Berkshire's book value didn't grow faster than the S&P 500 for any five-year period, he should relinquish control of the firm's capital and begin paying a dividend.

But when that happened in 2014, Buffett simply "moved the goalposts." He ignored all of his previous statements and changed the measuring period to six years or longer. He has long criticized other CEOs for this type of behavior. Worse, he has made the decision to stop discussing the results of his massive investments in energy and railroads.

This week, we learned that Buffett has apparently had another change of heart...

You see, for years, Buffett has been an outspoken critic of the vast majority of corporate share repurchases (or stock buybacks, as they're more commonly known). Like us, Buffett has been adamant that they only add value for investors under the right conditions. As he explained in his 2012 Letter to Berkshire shareholders (emphasis added)...

[Berkshire Vice Chairman Charlie Munger] and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated.

We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course, infractions – even serious ones – are innocent; many CEOs never stop believing their stock is cheap. In other instances, a less benign conclusion seems warranted. It doesn't suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value.

The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another.

In his 2016 letter to shareholders, Buffett went even further...

He noted that responsible management teams should maintain a clear and disciplined price "ceiling" for all buyback activity (emphasis added)...

The question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.

It is puzzling, therefore, that corporate repurchase announcements almost never refer to a price above which repurchases will be eschewed. That certainly wouldn't be the case if a management was buying an outside business... There, price would always factor into a buy-or-pass decision.

When CEOs or boards are buying a small part of their own company, though, they all too often seem oblivious to price.

That's exactly how Buffett has run Berkshire...

For years, the firm has maintained a strict policy that it will only buy back shares when they trade for less than 1.2 times the firm's book value. More from Buffett's 2016 letter (again, emphasis added)...

To recap Berkshire's own repurchase policy: I am authorized to buy large amounts of Berkshire shares at 120% or less of book value because our Board has concluded that purchases at that level clearly bring an instant and material benefit to continuing shareholders.

By our estimate, a 120%-of-book price is a significant discount to Berkshire's intrinsic value, a spread that is appropriate because calculations of intrinsic value can't be precise.

Until this week, that is. As news service Reuters reported Tuesday evening...

Berkshire Hathaway on Tuesday eliminated a restriction on its ability to buy back its own stock, a change that could help billionaire Chairman Warren Buffett deploy more of the conglomerate's cash.

The new policy approved by Berkshire's board lets Buffett and Vice Chairman Charlie Munger authorize buybacks when both believe the repurchase price is "below Berkshire's intrinsic value," a determination that would be made "conservatively"...

The new policy is a major change for Berkshire, where Buffett has faced pressure to deploy more than $108 billion of cash and equivalents.

Berkshire Hathaway shares surged 5% following the news on Wednesday...

At today's prices, shares are trading for nearly 1.5 times book.

Now, perhaps Buffett has suddenly discovered a more precise way to calculate his firm's intrinsic value, and is satisfied shares are still trading at a discount. It's possible.

But we can't help but wonder if "Uncle Warren" isn't looking to partake in a little "financial engineering" to juice Berkshire's suddenly stagnant returns.

We'll end today's Digest with a brief announcement…

Longtime readers know our colleague Dave Lashmet – editor of our elite Stansberry Venture Technology advisory – has racked up one of the most incredible track records in our industry...

Since we relaunched this service nearly four years ago, Dave has made 42 recommendations. So far, 13 have soared 100% or more.

In other words, Stansberry Venture Technology subscribers have doubled their money or better on nearly one out of every three recommendations so far.

This is an unheard-of rate of success... And it's even more impressive when you consider he focuses almost exclusively on biotech, one of the most difficult sectors to navigate successfully.

But Dave's success isn't a fluke... And it has nothing to do with luck. You see, Dave – along with his research analyst John Engel – literally travels the world in search of these opportunities.

He's on the road for months every year, meeting with doctors, researchers, and industry experts... visiting labs... and attending dozens of conferences. And when he's not traveling, he's constantly scouring medical journals, research papers, and trial data to learn even more.

In short, we know of no other analyst that is as knowledgeable and "plugged in" to the sector as Dave... And clearly, he has the track record to back it up.

Today, Dave says he has identified his next triple-digit winner...

He has been following a tiny biotech firm closely for the past four years. And he believes all his hard work is about to pay off.

You see, this firm will soon announce trial data for an experimental new treatment... a treatment aimed at the No. 1 cause of death in the U.S. today... a disease that currently accounts for one out of every four deaths each year.

Based on Dave's extensive research, he believes this announcement will lead to nationwide approval for this treatment... giving new hope to tens of millions of Americans, and making this tiny firm's patents among the most valuable in the world virtually overnight.

But if you're interested in learning more, you must act quickly...

That's because this tiny company is expected to release the first round of data as soon as next month, followed by a final round in September. Which means if Dave's research is correct, Stansberry Venture Technology subscribers could see their next "double" before October.

In fact, Dave is so confident in this opportunity, he's willing to guarantee it: If this tiny stock doesn't soar 100% or more in the next 18 months, he'll give you full credit for every single penny of your subscription cost.

This special offer is limited to only the first 500 readers. Click here for all the details.

New 52-week highs (as of 7/18/18): AllianceBernstein (AB), American Express (AXP), CBRE Group (CBRE), First Trust Nasdaq Cybersecurity Fund (CIBR), and ETFMG Prime Mobile Payments Fund (IPAY).

Another busy day in the mailbag: Thoughts on "FANG bonds"... a subscriber buys a discounted bond for the first time... and notes of praise and disappointment. What's on your mind? Let us know at feedback@stansberryresearch.com.

"Wall Street will never cease to amaze me in their ability to take a very liquid product, in this case the underlying equity of the FANGs, cut them up in pieces, create an illiquid security, then charge you more for them. Do you remember when TIPS were first called 'total illiquid pieces of s***' on the bond trading floor? CBO's, CLO's, CBO's squared. When do these folks go to jail?!?" – Paid-up subscriber Mike O.

"I have studied [Stansberry's] Credit Opportunities since its inception. The lack of funds restricted me. [That] has changed and I purchased my first bond yesterday. It was not difficult. But I must say the TD Ameritrade bond desk made me feel like I didn't know what I was doing. I had my Credit Opps notes in front of me as I answered his questions. I started with a small conservative position size. Just like selling options has opened a new world for me, now buying distressed bonds (with your help) is opening another new world for me... A person who 4 1/2 yrs ago had never bought a stock! Thanks." – Paid-up subscriber Tim B.

"Dear Porter, I believe like you do, that at some point a major reckoning and reset of our entire monetary system is inevitable. However, I have bought in to your continuous innuendo of the sky is falling mantra for the past several years and have lost so much money investing in 'hedges' that have continued to dwindle in value that I have seen no financial benefit from the massive investment that I have made in your lifetime subscription. And of course, there is no refund of my subscription costs at this point.

"As a public safety employee, with huge dreams of not being a slave, I feel like I have become even more of a slave since investing a large portion of my life savings in my 'education' with your company. Too bad I don't have any more money to lose while I'm waiting for $10k gold, or puts on overly indebted companies to finally become profitable." – Paid-up subscriber Ryan R.

Porter comment: Ryan, I regret that your results have not been better.

The Total Portfolio, which provides complete allocation information, did very well last year (up 16% for the year ended December 31), and continues to perform well this year, too (relative to the market). In other words, the way we recommended implementing our hedging strategies has worked out fine.

I hope that you'll stick with it. Perhaps your education just isn't complete yet.

"Hi Porter, knowing that you read every feedback email, I find it worthwhile to spend a few minutes to write you and your colleagues some words of thanks. Stansberry Research is the most useful Facebook ad click I've ever made (for The American Jubilee), which shortly led to subscriptions to [Stansberry's Investment Advisory], True Wealth, Ten Stock Trader, and Retirement Millionaire (so far!).

"I am 25 and have been living within my means for 4 years since graduating college and joining the working world as a software engineer. But before stumbling upon Stansberry Research in January of this year, I kept all my savings in checking/savings accounts. I never learned about financial markets or investing and didn't pay much attention to economics or politics – until now.

"The amount I've learned from Stansberry Research in these areas in just six months is incredible. I wake up every day excited to learn something new from DailyWealth or the Digest, and I have my calendar marked for the monthly issues of my subscriptions.

"I'm a little bummed to have found out that I'm starting my personal investing at the tail end of a ten-year bull market, but I'm confident you, Steve, Doc, Greg, etc. will help me navigate the rough waters ahead.

"In short, thank you for providing such useful information to those of us who never learned about investing, writing in such a way that is easy to understand for beginners, and for going about your business with integrity and honesty. I already know that my seemingly-random ad click for Stansberry Research was life-changing. Keep up the great work!" – Paid-up subscriber Brian A.

Porter comment: Brian, thanks for your note. I can only promise you that we will continue to do our best to educate, entertain, and enrich our subscribers. We genuinely appreciate the support of our subscribers: You've given us a career we love, doing meaningful work.

Regards,

Justin Brill Baltimore, Maryland July 19, 2018