(B)(N) The Buffett Franchise

The Buffett Franchise

Drama. Berkshire Hathaway has a lot of cash on its balance sheet, about $90 billion, which ought to be upsetting to the shareholders because the net worth is $283 billion on total assets of $621 billion and a third of it is in cash and not working very hard as anything other than dry powder (liquidity) for some bang-up event yet to be determined.

On top of that, the current market value is $410 billion for which the investors are paying $249,000 per share (Class A) and $166 per share (Class B) which have never paid a dividend and just a quarter of that cash ($20 billion of $90 billion) would give them a current dividend yield of 5% and an income this year.

Moreover, the earnings return on the shareholders equity (the ownership) was only 8.5% ($24 billion last year) which is mediocre by most standards and the current [P/E]-multiple is only 17× in a market that has gotten used to paying 24× and even a lot more and the investors in these stocks can’t make any money except by selling the stocks to each other which are up only 5.9% so far this year.

And so with all of that cash and no extra income to speak of, we turn the page to Warren Buffet’s Wish List (Bloomberg, May 4, 2017) and preference for buying “large yet simple businesses that he can grasp, with consistent earning power, good returns on equity and little or no debt” which may now be valued in the multi-tens of billions because he’s got a lot of cash to spend.

Our correspondent (ibid Bloomberg) has come up with twenty-eight such wonder stocks that might be on Mr. Buffett’s short list (but, of course, we don’t know anything about that and Berkshire Hathaway didn’t make the cut) and we’ve added PSX Phillips 66 in which he acquired a 15% stake last year and might want to buy even more at today’s lower prices which are off about (-10%) so far this year.

We can buy our interest in this portfolio (please see below) for $1.4 million today or about 6 Class A Shares in Berkshire Hathaway but we could have bought it for only $370,000 and only 3 Class A Shares in 2012 and we would still have $270,000 of surplus cash to spend today and it’s very easy to scale those numbers depending on our budget; for example, $37 billion in 2012 and less than 5% of the market and $140 billion and 7% of the market today with 100% liquidity as good as cash and no capital risk at all.

Obviously, we need to mend our spendthrift and merely hopeful ways for a better future and more money to spend because neither the companies nor the investors are going to be all that different tomorrow or this year; please see below for more of these disheartening facts and the proactive solution that we call the (B)-Class Portfolio (and click on the charts and again to make them larger as required).

The Wish List

Any one of the companies could perform better or worse than today at least for a time and, therefore, we’re running a portfolio of the more or less equal and aggregate numbers which are churning out a dividend yield of 2.1% on a market value of $1.9 trillion and a return on the shareholders equity of 33%, or 54% if weighted by their market values, and better than 10% on their total assets of $1 trillion:

Exhibit 1: The Wish List (B)-Class Portfolio

For more examples of the (B)-class portfolio in difficult markets, please see our recent Posts on”The “W” Syndrome“, Steel,  Green Energy, UFOs and the High Flying Techs, and The Coal War which is heating-up again now; and the Canadian Mines have also taken-off – please see our recent Post “(B)(N) Extreme Economics – The (New) Canadian Mines” for a heads-up on that as well as The Great Rotation & Twenty Hot Canadians 2017.

And for more information and examples of the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.

And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.

And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.

And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.

And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”). The Canada Pension Bond®™, The Medina Bond®™, The Barometer®™, the Free Market Yield®™ and Extreme Economics®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.