At the Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) annual meeting on May 5, 2012, Warren Buffett stated that Berkshire has not bought an IPO in 30 years. IPOs come to the market when the sellers want to sell. He added that it makes no sense to spend five seconds on a new issue: "The idea that a new issue is going to be the cheapest thing to buy among thousands of stocks is crazy."
This sage advice provided a clear warning to potential investors in the highly publicized Facebook (FB) IPO on May 18. Facebook has declined 25% from its IPO price of $38.00 to its closing price on June 14 of $28.29.
With respect to U.S. banks in general, and JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) in particular, Buffett made several comments at the Berkshire annual meeting. He noted that U.S. banks are in far better position than they were a few years ago. They have taken many of their abnormal losses and buttressed capital in a big way. The U.S. banking system "is in fine shape," he said. By contrast, the European banking system "is gasping for air." Overall, the TARP policy was very sound for the U.S. "The Federal Reserve and Treasury acted very responsibly," he said.
Previously, Warren Buffett had mentioned that he owned shares of JPMorgan in his own account, but it was not part of Berkshire's portfolio. When asked to explain this distinction at the annual meeting, Buffett replied that he likes Wells Fargo more than JPMorgan. But since Berkshire owns shares in Wells Fargo, he cannot buy it for his own account. So, he bought shares of JP Morgan as a second choice.
His "best ideas are held by Berkshire." He likes JPMorgan, but he knows Wells Fargo better and thinks it is easier to understand. Berkshire added to its Wells Fargo holding during the first quarter, last year, and in many recent years. Berkshire has invested in Wells Fargo for over 20 years, and Wells Fargo currently represents Berkshire's second largest holding, with a value of $12.5 billion.
Just five days after the Berkshire annual meeting, on May 10, Jamie Dimon, JPMorgan's highly regarded CEO, revealed the loss of at least $2 billion as a result of an unsuccessful hedging strategy. JPMorgan's shares have declined from $40.74 prior to this announcement, to $34.65 (closing price on June 14), a decline of 15%. By contrast, the S&P 500 has declined by only 2% over this time period. Warren Buffett also noted at this meeting that "The CEO should be the chief risk officer," a statement that in retrospect would clearly apply to Jamie Dimon.
As a result of Warren Buffett's prescient statements relating to IPOs and JPMorgan, it is no wonder that Berkshire Hathaway has performed so well under his stewardship over the past 47 years. As he mentioned at the Economic Club of Washington on June 5, 2012, $10,000 invested in the Buffett Partnership in 1956 would be worth $500 million today. That represents a compounded rate of return of 21.3% over the past 56 years.
By contrast, $10,000 invested in the S&P 500 at the same time would have resulted in a current value of $2 million (compounded rate of return of approximately 10% with dividends included).
Warren Buffett mentioned on several occasions at the annual meeting that he would repurchase shares of Berkshire if they were priced below 1.1 times book value. With these shares currently trading at less than 1.2 times book value, they are attractively priced. He stated both at the annual meeting and at the Economic Club of Washington that the intrinsic value of Berkshire is well above its book value.
About the author:
Tyser Teaching Fellow, Department of Finance
Ph.D., Harvard University
Robert H. Smith School of Business
4412 Van Munching Hall
University of Maryland
College Park, MD 20742-1815
Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, Maryland Public Television, Business News Network TV (Canada), and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.