Investments

Readers of this blog will have noted my fascination with Warren Buffett and not least so lately in such dire times of market collapses and faltering economies.

I came across this brilliant article  on Fool.com (The Motley Fool  as they are known remains one of my favourite financial sites and blogs), written by Anand Chokkavelu who intelligently questions Mr Buffett’s decisions and investment sanity of late.

Here follows some of the highlights from the same article  which puts Buffett’s investment strategies and future in perspective :

Anand starts by asking provocative questions about Buffett’s acumen of late :

Has Warren Buffett just been lucky all these years? 

It feels like sacrilege, but in light of recent events, I have to ask the question. After all …

• His company, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), has reported $10 billion in writedowns on its equity put options — i.e., derivatives.
• His hefty positions in financial stocks, including Wells Fargo (NYSE: WFC), US Bancorp, and American Express (NYSE: AXP), have been absolutely throttled in this banking crisis.
• He loaded up on shares of oil titan ConocoPhillips at the height of the oil bubble last summer — a mistake for which he expresses regret in his letter to shareholders.

I’m not the only one questioning the Oracle of Omaha’s investing prowess. One of the ratings agencies took away Berkshire’s pristine AAA debt rating. The price of Berkshire credit-default swaps (which are basically insurance against Berkshire defaulting) is at levels more usually found with companies rated as junk. And finally, shares of Buffett’s holding company are trading at half of last fall’s prices.

Anand then goes on to ask the vital question of whether Buffett has just been extremely lucky through major risk-taking over the decades, or whether in fact he is sticking by his famous strategy that has made him one of the world’s most renowned investors and accumulators of capital :

Buffett’s entrance into derivatives, which he famously described as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal,” might lead you to believe he’s both hypocritical and risk-happy.

After all, since he made that claim in 2002, Berkshire has participated in four types of derivatives contracts, including taking $4.9 billion to write $37.1 billion worth of equity put options.

Still, believe it or not, Buffett’s not being hypocritical, he’s not being overly risky, and he hasn’t made terrible deals.

Unlike many investors (and investment banks), he uses derivatives very carefully. In the equity puts, for example, Buffett has bet that stock markets in the U.S., Europe, and Japan won’t utterly collapse over the long term. He gets the $4.9 billion up front, and he has to pay up only if the markets are lower when the various contracts expire between 2019 and 2028. But under mark-to-market accounting, he has to record those bets as losses because of the short-term plunge of the worldwide stock markets.

Buffett prices and monitors each contract himself. There are certainly risks involved, but those risks aren’t as dramatic as they seem. In the case of the $37.1 billion in equity put exposure, world markets would have to fall to zero for Berkshire to pay out the full amount — and the markets have between a decade and two decades to make up the $10 billion in paper losses. In the meantime, Buffett gets to invest and grow the $4.9 billion in premiums.

OK so Anand concludes he is not lucky or especially risk prone considering market facts and history etc - but he then moves on to question his recorded bad investment decisions of 2008 which cost Berkshire Hathaway  billions :

The carnage so far this year has likely continued that drop in book value, but remember that investing in the stock of public companies is only one facet of Berkshire’s operations. It also includes the core insurance business (including GEICO and its reinsurance businesses), its other subsidiaries like its utilities and Dairy Queen, and Buffett’s aforementioned derivatives contracts.

Many of Buffett’s stock positions are much worse off than they were just months ago, but it’s worth noting that Berkshire’s own stock-price drop has more than priced in these missteps. Furthermore, Buffett has been doubted often in his nearly half-century at the helm of Berkshire Hathaway — you’ll recall the assertions during the tech bubble that Buffett’s investing style was obsolete — only to be proven right time and time again.

Even here Anand is Ok with what has happened and remains unconcerned about Buffett’s empire’s future on those grounds, however, he is concerned about two factors in Buffett’s portfolio - the first of these being his diversion into the reinsurance business :

The first is Berkshire’s reinsurance business. Quite simply, Buffett and his trusted associates are in the business of pricing catastrophic events, which feature “very large transactions, incredible speed of execution, and a willingness to quote on policies that leave others scratching their heads.”

Yes, Berkshire pools this risk and generates very attractive rates for it, but a few mistakes could blow the whole operation. Just like GE Capital has crippled General Electric (NYSE: GE), adverse events in Berkshire’s insurance operations could take down the whole conglomerate.

And the second hitting home even closer to many of us, namely Warren Buffett’s own mortality and undisputed role as head and brains of Berkshire Hathaway :

The second problem is that, contrary to the hype, Buffett is mortal. Even more so than Steve Jobs at Apple (Nasdaq: AAPL), Buffett is Berkshire Hathaway. It may not seem like it at these prices, but there is a considerable premium baked into Berkshire stock because he’s the one running it.

One of Anand’s conclusions to his article is not only that Buffett most likely remains the guru and oracle he has earned himself a name as, give and take, but that we as investors, private orinstitutional, must at all times question everything and everyone around us before we make major decisions investment wise, regardless of the status of the entity we are investing with (The Madoff scandal is another good example of that !) :

Buffett remains the greatest allocator of capital on this planet, and he’s getting some great opportunities thrown his way. Down-on-their-luck companies from Goldman Sachs (NYSE: GS) to GE to Harley-Davidson have sought his financial help and reputation, at very, very favorable terms.

There is plenty of risk in Berkshire stock, but at current prices, I believe that Berkshire Hathaway is worth the risk. In fact, the recent price drops convinced me to put my money where my mouth is — I recently bought Berkshire Hathaway stock.

Read the full article here - it is worth it.

Equity Investment, Investment Company, Investment Fund, Investment Management Financial crisis, investment crisis, risk-taking, Warren Buffet

Warren Buffett

Times are hard and the markets are down again. Investors are gripped by fear of what 2009 will bring after a disastrous 2008 and most have bearish outlooks for major economies and markets alike. US job figures as of yesterday, which revealed that 693,000 people lost their jobs in the run up to Christmas, are making economists now expect Friday’s payroll figures to show that more than 700,000 people lost their jobs last month.

Obama has recently described the US economy as “very sick” and predicts the situation to worsen in 2009 and most agree with him.

One person, however, seems to be having the time of his life (at least since the 1970s when he was very gung-ho as well in the midst of a major economic global crisis) : He is not surprisingly Warren Buffett, Billionaire investor and chairman & CEO of  Berkshire Hathaway.

The shares of Berkshire Hathaway may have dropped 32 percent in 2008, making it the worst performance in more than three decades, but Mr Buffett has remained positive and very aggressive which one of his famous quotes also underlines :

“I will tell you how to become rich. … Be fearful when others are greedy. Be greedy when others are fearful.”

Yes stocks are cheap right now after their dismal performance in 2008 year and hence Buffett would argue that they offer a great buying opportunity, but others remain sceptical and see further losses and drops in stock prices.

So is Warren Buffett right to be in a buoyant buying mood ?

This posts looks into what others have to say about this.

Jim Mueller of Fool.comis impressed with Buffett’s track record and his ability to spot a good buying opportunity on the back of dismal market conditions:

Of course, past performance is no guarantee of future returns, but take another look at that quote above. Then read this one, also from Buffett, from his 1990 letter to shareholders:

“The most common cause of low prices is pessimism — some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.”

Were you one of those who checked the table above when I told you the date of that quote? The man knows what he’s talking about.

You demand proof? In October 1990, just as bearish sentiment was peaking at 48%, Buffett revealed that he had upped his position in Wells Fargo to just shy of 10% of the company. In the following 12 months, while the market returned a “mere” 29%, that one investment returned 123%. In the five years following that bearish peak, it returned 290% or 31.3% average per year! And that doesn’t even include the dividends. He still owns about 7% of the company.

Mueller  continues to emphasize that with today’s major bearish market and outlook, Buffett has yet again proven to be good to his word and started the year by buying major positions in integrated oil giant ConocoPhillips  and also upped his position in health-benefits manager WellPoint and he concludes on the same note:

Will those work out for him? Given his record, probably. However, the question you’ve got to ask yourself today isn’t “What is Warren doing?”

Rather, it’s “Am I going to be greedy?”

I hope you’ll answer “yes” to that question.

CNBC’s Alex Crippen has a story  on Morningstar StockInvestor and its editor Paul Larson who recently named Mr Buffett as their CEO of the year despite some rather controversial and bad timing decisions by Mr Buffett during the latter half of 2008 :

Morningstar StockInvestor editor Paul Larson recounts Buffett’s “perceived mistakes” of recent months, including Berkshire’s big put option contracts on stocks, investments in General Electric [GE  16.11    -0.75  (-4.45%)   ] and Goldman Sachs [GS  84.50    -4.21  (-4.75%)   ], and Buffett’s October call to buy U.S. stocks.  “With the market taking a sharp turn for the worse in late October and again in November, clearly the timing was not the best on these particular bullish actions.”

But, writes Larson, “We do not view these as any reason to lose confidence in Buffett’s abilities, either as an investor or corporate manager.”

He argues that worries about the option contracts are overblown and points out that even though the GE and Goldman warrants are underwater right now, Berkshire gets a 10 percent annual return on its $8 billion worth of preferred shares in the two companies, no matter what their common stocks do.

The article goes on to stress how impressed Larson is by Buffett’s gung-ho attitude and not least ability to steer Berkshire away from risky derivatives and excessive leverage :

“By practicing prudence and patience earlier in the decade, Berkshire was in a position to put large amounts of capital to work in 2008. In other words, rather than blowing its ammunition hunting squirrels a few years ago, Berkshire has been able to shoot the proverbial elephants now walking by.”

Morningstar’s bottom line:

“Beyond creating a company that treats common shareholders with the utmost fairness and respect, one needs only to look at the long-term value created at Berkshire Hathaway to see why Buffett deserves the award. Since taking the helm of the sleepy textile business 44 years ago and turning it into arguably the strongest conglomerate on the planet, Buffett and his managers have grown the book value per A share from $19 to just over $77,500, as of Sept. 30. This translates to a 20.7% annualized increase in book value since 1965, versus a mere 9.6% annualized return in the S&P 500 (including dividends) over the same time period.”

Seattle Times’ Hugh Son quotes  a senior investor for saying he does not believe that despite some recentquestionable investment decisions by Berkshire Hathaway that Mr Buffett has far from lost his magic touch:

“Buffett has the opportunity to do what he does best, which is acquire new companies at prices that have him licking his lips,” said Frank Betz, a partner at Carret Zane Capital Management, which holds Berkshire shares. “I don’t think Mr. Buffett is bummed out at all.”

This seems indeed to be the general sentiment of analysts and observers and despite his 78 years of age and a negative performance during 2008, one really should not write Buffett of as one of the most important and skilled investors of our time,  in fact it may be a very good idea to by into his Berkshire Hathaway now, that is if you can afford such a thing.

Finally, if you are interested to follow investment guru Warren Buffett here is a great site to bookmark - it also features all Buffett’s famous quotes in its headline so check it out - Warren Buffett Post

Equity Investment, Investment Company, Investment Management, Investment opportunities, US Investments Berkshire Hathaway, ConocoPhillips, Financial crisis, Stock markets, Warren Buffet

In recent years, well almost a decade now, leading economists and financial analysts from all over the world have been amazed by what has been termed by many as The Dubai Miracle which tells a story of a city’s explosive and phenomenal growth and expansion, real estate projects on a scale that would be large even by US or Chinese standards and announcements of further growth and developmentsthat make even the most gung-ho developers dizzy.

Recently many of us thought we had it wrong when reading about the latest plans in Dubai to have one of its prime beaches cooled down artificially for the benefit of the guests at the hotel (read the full story on this here) but then again we are talking about Dubai - a place where everything seems to be possible.

Lately, however, Dubai has started to feel the effects of the major world financial crisis, despite strong government and semi-government statements from as recent as November (click here to read Mr Mohammad Al Abbar’s statement from November) refusing to agree that Dubai would be sucked into this global financial turmoil.

There are now clear signs that Dubai is beginning to suffer too, not least in its major real estate sector where most of the major projects are focused but also its tourism sector, and there are now many voices of concern and unhappiness emerging from consumers and investors alike not to mention the financial institutions who are heavily exposed in this massive project called Dubai.

This blog looks into some of the signs and concerns that are now facing Dubai and asks the questions whether the Dubai Miracle is coming to an end or if in fact they will somehow come through this crisis stronger and better than before.

The Wall Street Journal tells a story about Dubai lenders beginning to feel the squeeze as mortgage defaults by overstretched borrowers is now becoming common:

Borrowers are being squeezed by higher interest rates and job cuts by major employers hurt by the global financial crisis. Property developers also were affected Sunday as tumbling oil prices hurt sentiment, leading the region’s stock markets lower.

As borrowers run into trouble, officials at HSBC Holdings PLC, the largest international bank by assets offering mortgages in Dubai, told Zawya Dow Jones that the lender has been contacted by a growing number of customers in the emirate struggling to pay their home finance.

At Emirates NBD, the Gulf’s largest lender by assets, an official said the bank has witnessed “significant defaults from the speculative community.” However, the official wouldn’t disclose if the bank itself has been experiencing defaults.

The same article from WSJ goes on to point out that even though banks and lenders have the right to re-possess properties from clients if they default, there is no precedence for foreclosures in Dubai which could lead to additional worries and problems for the financial institutions who are heavily exposed in the property market:

Although new mortgage laws say banks are entitled to repossess a property if a borrower defaults on a mortgage for more than 60 days, experts said foreclosure may be a lot more difficult in practice.

“There is a mechanism in place for foreclosures, but it’s never been tested before,” said Charcol’s Mr. Dommett. “In practice, the process could take a very long time, and banks could be left with property on their books that they’re unable to sell.”

Local Dubai-based newspaper, Gulf News, tells a story on how several companies are now struggling for finance and credit and how they are trying to raise cash from investors:

Dubai-based property developer Union Properties said Monday that it wanted to issue up to Dh2.5 billion of convertible bonds, as securing project financing from banks had become difficult during the financial crisis. Convertible bonds allow investors who have lent money to companies to change the debt into shares in the business.

Also, Shuaa Capital, a leading regional investment bank said on Monday it would seek shareholder approval next month to extend the maturity of its convertible bonds.

“The signal is that they need cash. Banks will not give you cash now or they will do it with too many conditions. Selling bonds is a tool to get money and the strategic investor is entitled to an interest dividend of 6 or 7 per cent,” said Hamood Abdullah Al Yasi, general manager at Emirates International Securities on Monday.

 Meanwhile, and perhaps rather surprisingly amidst the majority of observers being quite possimistic about Dubai’s economic outlook, Swiss banking giant Credit Suisse has reiterated a positive outlook for Dubai’s troubled real estate sector as business daily Emirates Buisness 24/7 reports:

Swiss bank Credit Suisse has reiterated a positive outlook for the UAE property sector, as it believes that real estate market will recover quickly from the current turmoil due to the country’s solid macroeconomic fundamentals.

“As a result of a slowdown in economic growth and liquidity challenges in the GCC region, we downgrade our target prices for most real estate stocks in the UAE. However, we stay overweight on the sector as we believe the UAE real estate market will recover quickly from the current turmoil thanks to its solid macroeconomic fundamentals,” the bank said in a report titled “Emea Real Estate Outlook 2009.”

The article goes on to quote Credit Suisse for predicting that both the Dubai and Abu Dhabi governments will have the biggest effect on the future of the real estate sector:

The bank believes that there are three potential catalysts that should be monitored in the short term: Oil prices, which have a strong effect on the UAE’s liquidity and hence the real estate market. Any sign of upside in oil prices would be viewed as positive news; bringing the real estate sector under the umbrella of the federal government, which is dominated by Abu Dhabi, thus ensuring the availability of liquidity; and positive news about the condition of the real estate market in Dubai.

“We believe that the market is discounting most of the negative newsflow about the lack of funding, shortage of mortgage availability and the fact that Dubai is a highly leveraged market in a global credit crisis. In our view, it even assigns a zero value for some projects in the pipeline for some UAE developers. We expect that developers will cut supply as demand deteriorates as a result of negative sentiment and the shortage of liquidity, which will in turn affect their forward NAV as they sell fewer units than expected.”

The article goes on to quote Credit Suisse for saying that the governments must control and also cut the supply of real estate projects in order to avoid a collapse and get back on track:

Credit Suisse believe that cutting supply to keep a sustainable level of demand will not be enough without an effective solution for financing problems in the UAE, especially on the demand side.

“We think that the UAE federal government (through sovereign funds) will have to play an active role in providing financing for both home buyers and developers, as the financing situation, especially in Dubai, is currently under pressure.”

The old question of whether Abu Dhabi, which is where the Federal Government sits and also where 90%+ of all UAE’s oil revenue stems from, is truly committed to financing and underwrite Dubai’s massive real estate expansion, is also highlighted by Credit Suisse as a key factor to the recovery:

“We are confident that the Abu Dhabi government is still committed to financing development projects in the emirate and will provide the required support for those projects. However, we think the most important question is, will the federal government, which is dominated by Abu Dhabi, provide financial assistance to the real estate market in Dubai?

“We believe it is in the interests of the UAE that the Dubai market remains sustainable and think the federal government may step in to make sure that the real estate market in Dubai doesn’t go into a deep slump because of the current shortage in liquidity. However, it is difficult to determine the form of this involvement. We also believe that there is likely to be some sort of consolidation among developers in both emirates, thus bringing the sector under the umbrella of the federal government in the future,” Credit Suisse said.

What the next chapters in the Story of Dubai have to reveal only time will tell but it goes without saying that Dubai’s growth and expansion till date as spearheaded by its visionary ruler Sheikh Mohammed Bin Rashid Al Maktoum has been a truly amazing story to follow and whilst many analysts and economists now remain cautious if not pessimistic about Dubai’s future and ability to come through this current and deepening crisis unscathed, this author would not put it past Dubai to come out on top - once again.

This blog will continue to follow the ups and downs of Dubai to see where it all ends - or as it may be begins again.

Investment News, Investment opportunities, Middle East Business, Real Estate Investment Abu Dhabi, Credit Suisse, Dubai, Dubai real estate, Financial crisis, UAE

China’s sovereign wealth fund said it wouldn’t “dare” invest in foreign financial firms after losing $6 billion on stakes in Morgan Stanley and Blackstone Group LP.

“I don’t dare to invest in financial institutions now,” Lou Jiwei, chairman of China Investment Corp., said today at a conference in Hong Kong. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

Reaction from one of China’s largest investment houses - read the full story from Bloomberg here !

Asian Investments, Investment News China, China Investment Corp., Financial crisis

Check out Charlie Rose’s latest face-to-face with the troubled head of Citigroup !

Video Charlie Rose, Citigroup, Financial crisis, Vikram Pandit