Berkshire's buyback program...
Yesterday, Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett said the company's board of directors had approved a share repurchase program. The company will buy back its own stock when it trades for less than 1.1 times book value.
The stock is trading around 1.1 times book value today, so it's a moot point for now. The same thing happened in 2000, the last time Buffett said he'd repurchase shares. The stock price surged back so fast, Berkshire didn't have a chance to buy back a single share. I suspect the market will now view 1.1 times book value as dirt-cheap (which it is). So I expect from here on, it'll rarely trade at or below that level.
Buffett has said he'd never use buybacks as a means of supporting a falling share price... But as it turns out, he's as full of it as anyone in the financial world. He's certainly using the buyback as support for the stock price. But I will say this for his buyback plans... If Berkshire is able to buy back a large chunk of shares at less than 1.1 times book value, it'll be great for Berkshire shareholders. It'd be a massive, highly beneficial wealth transfer from former shareholders to remaining ones.
Another good thing Buffett did is limit the price at which a buyback can take place. That should be imitated by all of corporate America. Many buybacks destroy shareholder value because the companies pay too high a price. Price limits would prevent that destruction… or at least reduce it.
Perhaps Buffett's buyback is taken as a sign that the overall market is cheap. The big stock indexes moved up yesterday and are moving up again today. And once again, the news media is concerned with that one meaningless detail…
"Dow Surges 200 Points," read the Wall Street Journal's top headline when I logged onto the website this morning.
That's useless information. I don't blame the financial news media for publishing it. It sells the stuff it thinks people will read/watch. That's its job (and its only job). It knows its customers well...
Most so-called investors are more concerned with the market's ups and downs than with anything else. They feel good and buy stocks when the market goes up. They feel bad and sell stocks when the market goes down.
Just remember, downward and sideways trends in securities prices are the long-term investor's friend. Upward trends often make securities too expensive to produce adequate long-term returns. Everybody likes higher stock prices, but higher stock prices make lower future returns more certain.
When share prices of the world's best businesses are flat or falling, and the valuations are cheap… THAT is when you should be buying them. You can't pick the bottom, and neither can anyone else. Trying to do so is a waste of time. As long as the world's greatest businesses are cheap enough to produce good returns, you should buy them.
Right now, patient investors can earn 50% more income than they can on the 10-year U.S. Treasury note – by owning a security that's 10 times safer than the 10-year U.S. Treasury note. Most important of all, unlike Treasury notes, this income stream is growing 25% a year...
The security I'm talking about is Microsoft. Here's what I told Extreme Value readers about Microsoft in yesterday's Weekly Update:
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Last Thursday, [Microsoft raised its] dividend 25%. The dividend still needs to be higher, but a 25% raise is still an excellent outcome... |
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Now the quarterly dividend is $0.20 per share. That's $0.80 a share per year. As a percentage of the Friday's closing share price, that's an annual yield of approximately 3.2%. |
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The 10-year U.S. Treasury note yields less than 2%. The U.S. government is in terrible financial shape, with tens of trillions of obligations, including $14 trillion or so of outstanding debt. Microsoft is in pristine financial condition, with over $50 billion in cash and short-term investments, and less than $12 billion in debt. Microsoft has enough liquidity to pay all its debt four times over. The government can only pay its bills by increasing its debt. The U.S. government spends more than twice what it earns. Microsoft spends about 61% of what it earns, generating an enormously thick 39% operating profit margin. |
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Microsoft's stock is safer – and provides about 50% more income – than the 10-year U.S. Treasury obligation. |
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And of course, Treasury coupons don't grow the way Microsoft's dividend payment does. If Microsoft's dividend keeps growing at its current pace, you'll find yourself earning a double-digit income over your original purchase price in just a few years. Imagine making a double-digit yield over cost on a stock like Microsoft. It has one of the strongest, safest balance sheets and one of the greatest businesses on earth. Earning a double-digit cash dividend yield on a stock like that is perhaps the most you can ever ask from the stock market. And it'll make you plenty of money, especially if you reinvest your dividends. |
I cover stocks like Microsoft in Extreme Value and also in our monthly income letter, The 12% Letter. In The 12% Letter, I've got a whole list of stocks as safe and cheap as Microsoft, all growing their dividends at similarly rapid rates. I call them World Dominating Dividend Growers.
I promise you, 10 years from now… after the stock market has gone absolutely nowhere… you'll wish you'd bought Microsoft today and reinvested the dividends along the way. If it keeps up the current pace of dividend growth, you'll earn about 13% per year. It's tough finding investments that offer high potential returns with such low risk right now.
World Dominating Dividend Growers like Microsoft will likely outperform the majority of stocks over the next decade as the market lurches up and down. Investors who live and die on the market's day-to-day moves will get whipsawed. But you'll make lots of safe money if you stick with the World Dominating Dividend Growers.
If you want to know more about World Dominating Dividend Grower stocks, click here for access to The 12% Letter.
When I start talking about World Dominating Dividend Grower stocks, the conversation often turns to retirement...
How much money do you need to live a comfortable retirement? Most conventional retirement "experts" say you need hundreds of thousands of dollars in the bank. But our own Dr. David Eifrig (a former derivatives trader at Goldman Sachs) says that if you meet some simple requirements – and you're willing to take an unconventional approach – you can live a rich retirement with as little as $10,000 in savings. He says you need to take just five simple steps. To learn more about Eifrig's five-step plan, click here...
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New highs: V.F. Corp (NYSE: VFC), Dominion Resources (NYSE: D), Hershey (NYSE: HSY).
Do you believe higher stock prices are your friend? If so, write us and tell us why. If you prefer lower stock prices, I'd like to hear from you as well. Send us an e-mail at feedback@stansberryresearch.com.
"To those people who say you are proud and accuse you of puffing yourself up, I would say what Elizabeth Bennett said to the her father when he said Mr. Darcy was proud in Jane Austin's Pride and Prejudice: 'He has no improper pride.' You have given me a new understanding of solar energy and a greater appreciation for the thermodynamics that I found so difficult in grad school. Please continue.
"I've also learned to buy and sell options, and when I hear financial news now, I think, 'Yes, Porter said it would be like that and here it is.' Your writing scares me, but it also is helping me to prepare. Thank you." – Paid-up subscriber D.H.
"I've been a subscriber of the newsletter for about a year now... and basically... I was just looking for some recommendations on how to learn all the basics. Books, courses, etc.
"I'd also like a recommendation on how to actually get started investing. I already started putting a little money into silver, but next year I'll have a bunch more money to invest so I'd like to invest some in silver/gold and the rest in... something else. (This year is 'get rid of all debt' year)
"A little about me... I'm a 25 year old making roughly $150,000–$175,000 per year as a freelance copywriter... and after my wife and I buy a house next year, I'm going to start investing heavily. I like to get involved, but not have it consume my life. Maybe like 1-2 hours per week to start.
"So my questions are this...
"1) What books/courses would you recommend to first understand the BASICS of investing?
"2) What programs do you have that I can get involved in next year or later this year that you think would fit what I'm looking for?
"Feel free to add any affiliate links to any courses. Just please be honest and don't send me the most expensive just because it's the most expensive. Thanks! – Paid-up subscriber J.R.
Ferris comment: Anyone interested in getting started as an investor should read the following first…
- The Little Book That Still Beats the Market, by Joel Greenblatt
- The Intelligent Investor (Chapters 8 and 20), by Benjamin Graham
- One Up On Wall Street, by Peter Lynch
Start with those three. Read them three times each. Read them once for the feel of it, a second time slowly to understand them more deeply, and a third time to cement the ideas in your mind. I read Chapter 20 of the Graham book once a month. It's that important.
As for courses I'd recommend, the only thing comparable to an investing course is the Value Investing Congress. Anyone who attends it twice a year (in the fall and spring) will garner quite an education after a few years. The Congress offers a one-day workshop and a two-day investment conference, both of which are very educational.
As for how to get started, that's easy. Prove you have the discipline to be an investor by saving at least 10% of your income every year. If you can save, you can become a decent investor. If you can't save, you're virtually guaranteed to become a lousy investor. Saving comes first. And for that reason, it is more important than investing. (Too bad giving that advice is far less lucrative for me!)
Anyone getting started should behave as though he's a couple years away from investing anything. Don't rush. Rushing will lose you money. Learn first.
Also, subscribers buying silver should know this: Silver bullion is savings, not investment. Subscribers shouldn't buy it with the idea that they'll sell it when the price goes up. Buying bullion coins with dollars is just a way of preserving the purchasing power of your money over time. It's not investment. Investment is when you keep your principal safe and get a return on your money.
The first stocks beginning investors should focus on are the World Dominating Dividend Growers I described earlier.
"Your staff recommend many stocks which we should hold, but some of those companies I dislike. I know I should not let my personal likes and dislikes dictate to my investment portfolio, but human nature being what it is, that happens.
"You love Google and Apple, both companies I dislike, as well as Wal-Mart (Sam Walton would be turning over in his grave if he saw how the company is running to China now). I dislike Wal-Mart for several reasons, the biggest however is its almost total commitment on Chinese goods in the store. Very few American made/manufactured goods in the store, we even check the labels on the fruit/vegetables to make sure they are grown here, many times they are not, so I then question the safety factor of foreign grown items.
"Apple has a closed architecture, for those not IT trained, you have to take the thing to an Apple store for most any upgrade, or hardware replacement. PCs (Intel- & Microsoft-based systems) are open, which means anyone with a remote understanding of computers can fix them or even replace hardware if necessary, and that is the real reason they are dominate in the industry.
"This is not to say the iPhone, iPad, etc are not good devices, they might be, but I will be dammed if I'm going to pay apple for the right to use them each month, hence I don't own the stock, nor any of their products. However, they learned the marketing idea from the printer people, sell the devices cheap, stick it to them on the consumables, which in this case is not quite how they do it, they charge you big bucks for the devices and suck you in on the .99c songs for them. Since I prefer my music on CD so I can put the whole thing on my PC, I don't like mp3s as a rule.
"Google is the world's largest search engine, and many times I use it, but like Microsoft years ago, they have become predatory and so I use Bing for my search results, which works just as well.
"Lately, none of the recommendations you have made had done any good for me, even my gold/silver has cost me money, but I won't discount your advice based on world conditions and people running scared because they will return to silver/gold soon and I will make all that money back. What I want to know is when?
"I appreciate your advice, and like the way you/your staff presents the information to me. I deeply appreciate the Friday newsletter the most, as you have one of the best descriptive ways of presenting a subject I have ever read. Even a dummy like me can understand you, and that is saying something. Thank you." – Paid-up subscriber M.B.
Ferris comment: Apple (APPL), Google (GOOG), Intel (INTC), and Microsoft (MSFT) are all good businesses. If you're concerned with anything but whether it's a great business, you're wasting time and energy… And you'll probably lose money. Investing is about making money and keeping your money safe, nothing else. Don't get your emotions involved.
I hate to seem obnoxious… But the more you hate these great businesses, the more I like them. Enough hatred directed at a great business tends to help the business' share price get really cheap. This works best with the world's largest businesses. Often (like with European banks right now), total revulsion is the appropriate view.
"Dan, your weekly update is once again, dead on. Why is it that people celebrate when prices come down on everything else they buy, none of which will make them money, but moan when prices come down on profit making businesses? Prices go up and they get excited. I think most people confuse the balances in their bank account with the price of a share of a business as reported on their brokerage statement. Two very different things, but both liquid, and both reported in dollars. You can trade one for the other, but they are very different animals." – Paid-up subscriber MM
Ferris comment: Thanks. It does my heart good to hear that the message is received… and well-received at that.
Regards,
Dan Ferris
Medford, Oregon
September 27, 2011
Berkshire's buyback program... 'Dow surges 200 points' and other useless information... Microsoft vs. 10-year Treasurys... Doc's five-step retirement program...