Tag Archives: Buffett

Warren Buffett Says Building This One Skill Is the Easiest Way Increase Your Worth By At Least 50%
December 11, 2018 12:01 pm|Comments (0)

Warren Buffett is like that old E.F. Hutton commercial (and I’m dating myself here)–when he talks, people listen. And they listen because he talks and writes, quite well. Which brings us to his latest gem of advice.

“Invest in yourself. One easy way to become worth 50 percent more than you are now at least is to hone your communication skills. If you can’t communicate, it’s like winking at a girl in the dark, nothing happens. You can have all the brain power in the world but you’ve got to be able to transmit it.”

It’s almost like Buffett consulted me first before answering (which I can assure you he did not). In my over 25 years of corporate experience, without question, the most common trait I saw among those leaders who performed the best and rose the fastest through the ranks was that they had superior communication skills.

Buffett has even said that he doesn’t hang his college or graduate school diplomas on his office walls, but he hangs his certificate from when he completed the Dale Carnegie communication course– because it changed his life. Before overtly working on his communication skills, Buffett said, “I was terrified of public speaking when I was in high school and college. I couldn’t do it. I mean I would throw up and everything.”

So how can you be included in the group of fast-rising, non-vomitous leaders?

In case you’re not ready to sign up for a full-on course, here are two powerful ways you can get started immediately:

Make “clear and concise” your mantra.

When I was doing research for my first book, Make It Matter, a survey of over 1,000 executives revealed the No. 1 problem in communication is a lack of clarity and precision. I offer an acronym to help you cut to the chase and keep your communications SHARP:

  • Start by thinking, not talking. “I think out loud” is the enemy of clear and concise.
  • Hone in on the main idea quickly. Don’t wander, or they’ll wonder what your point is.
  • Add details sparingly. Don’t over-explain. Give just as much context as is necessary.
  • Relate to the audience. Think through who you are talking to and why, and tailor your approach accordingly.
  • Prepare. “Winging it” and clarity are like the snake and the mongoose (mortal enemies).

Be a non-verbal ninja.

So much of our communication is unspoken. It’s critical to be tuned into non-verbal communication–which you can practice. I use this reminder to keep non-verbal cues top of mind and avoid letting poor non-verbal skills FESTER:

  • Facial expressions–watch for them.
  • Eye contact–maintain it (without being creepy).
  • Space–keep the appropriate amount between you and others.
  • Tones–listen carefully for the tone in someone’s voice.
  • Expressive motions–be alert for cues like fist pounding or fingers excitedly wagging.
  • Real frame of mind–as seen in their posture.

So whether your goal is to raise your net worth or just your relatability, make 2019 the year you brought your communication skills to the next level. Maybe eye level. Like the diplomas on my office wall.

Published on: Dec 11, 2018

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No, Buffett Is Not Buying GE
March 29, 2018 6:01 pm|Comments (0)

Yesterday, rumors began swirling that General Electric (GE) might be of interest as a significant investment, or even as a takeover candidate, from none other than Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B). So enthusiastic were investors that GE might finally catch a break that shares went up as much as 6.5% – no small sum that represents over half a billion in market capitalization.

Unfortunately, dreamers that bought GE are likely to be disappointed. Here’s why.

Buffett’s past with GE

Ten years ago, the Oracle of Omaha famously invested $ 3 billion in GE preferred stock at the height (or perhaps in the depths?) of the Great Recession. The preferred shares, superior in dividend preference to common stock but inferior to debt, came at a high price for ‘The General’: 10% interest per year in perpetuity. If GE wanted out, it could repurchase Buffett’s preferred stock at a 10% premium (which it did for a total of $ 4.1 billion, including dividends, in late 2011). As icing on the cake, Buffett’s Berkshire received warrants to purchase nearly 135,000 shares of GE’s stock at $ 22.25 per share.

If this sounds like a sweet deal for Buffett, you’re right – it borders on usurious. It’s good to be The Oracle, after all.

A struggling giant

Now, a decade later, GE is faced with a different problem. Macroeconomic storms have given away to microeconomic travails:

General Electric Selected Financial Results

FY 2015

FY 2016

FY 2017

Total Revenue

$ 117.4 billion

$ 123.7 billion

$ 122.09 billion

Gross Profit

$ 32.09 billion

$ 33.4 billion

$ 17.99 billion

SGA Expenses

$ 21.9 billion

$ 19.36 billion

$ 20.44 billion

Operating Income ( Loss)

$ 11.65 billion

$ 14.05 billion

($ 3.9 billion)

Net Income

($ 6.12 billion)

$ 8.83 billion

(5.8 billion)

Free Cash Flow

$ 12.58 billion

(7.44 billion)

$ 3 billion

Data Sources: General Electric, Scout Finance.

The winding down of GE Capital, as well as other “one-time items” has distorted GE’s net income. But, as Buffett’s teacher Benjamin Graham pointed out in The Intelligent Investor, why ignore such costs in valuing a business? Graham knew that a company of any reasonable size (and especially enterprises of GE’s scale) will ALWAYS have expenses like this crop up.

The more reliable figure for a quick-and-dirty analysis, free cash flow, is flashing an alarm bell (Fun fact: GE’s free cash flow, according to our friends at Scout Finance, came in at a whopping $ 15.12 billion in 2013 and a staggering $ 20.6 billion in FY 2014.) What a difference a few years makes.

Buffett knows this, and he will inevitably look to each division’s results for signs that the ship can be righted. Unfortunately, the prognosis here is not good:

GE Segment Revenues

Source: General Electric FY 2017 10-K.

General Electric Segment Profit

Source: General Electric FY 2017 10-K.

By shedding GE Capital, ‘The General’ was getting back to its industrial roots. Unfortunately, its industrial roots aren’t exactly growth businesses these days (save for Renewable Energy, but even that represents a small portion of the whole). Any buyout of GE means you get the whole thing – and the whole is not thriving.

John Flannery now leads the company, acknowledged to be a smart company man and touted as the man who turned around GE Healthcare. Alas, Healthcare’s performance over the past three years, the approximate period Flannery was at the helm, was not anything to write home about (see above).

Flannery seems to have the situation in hand (which unfortunately forced him to cut GE’s dividend and plan large cost cuts). The problem is that the situation is an extremely tough one and almost certainly not something Buffett would want to dive into. That is unless GE is willing to part with one of its top performing divisions, of course.

Buffett’s Cash Won’t Fix GE

Arguably, Buffett made his first millions as a distressed investor and turnaround artist. Anyone who has read just one of the numerous biographies of the man has no doubt heard the tale of Dempster Mill Manufacturing, GEICO, and even a New England textile manufacturer named Berkshire Hathaway.

But those days are over. Buffett wants to buy great businesses at fair prices – low stress is the name of the game.

Not only that but Buffett’s other well-known “opportune” investments in national brands (made at a time of distress) all had one of two characteristics: (1) The source of trouble is immediately solved with capital. The simple need for cash was the case with Buffett’s 1970s investment in GEICO when the company needed cash to survive, but the fundamental business of providing low-cost insurance to government employees remained intact. Once the capital infusion occurred, the insurance regulators backed off. Or (2), the business itself is excellent, but the company has a dark cloud over it. This was the case with Buffett’s investment in American Express (AXP) in the 1960s.

General Electric is different.

A pile of money won’t solve its woes (although that wouldn’t hurt given the company’s debt load) and most of its businesses are barely growing – if that. So, no, Buffett won’t be buying a massive stake in GE nor will be gobbling up the whole thing.

What you need to know

Buffett will not be riding in to rescue GE on a white horse.

Could I be wrong? Absolutely. Buffett has unmatched insights and access to information (how often do you suppose he and Flannery have talked in the past few months?). Combining any one of GE’s businesses with Berkshire’s could lead to significant cost savings – a potential source of upside that few possess. Or perhaps he could call up his friends over at 3G Capital for some good old fashioned zero-based budgeting magic.

But I doubt it.

It SOUNDS like the cap to a fantastic investing career. But it wouldn’t be Buffett. If anything, he’s talking to Flannery at the time of this writing about acquiring one of GE’s better performing industrial businesses. I can only hope Mr. Flannery takes a pass. The worst thing one can do in a crisis is make a deal on onerous terms, a lesson I can only hope GE learned in its previous dealings with Mr. Buffett.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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You May Not Want To Follow Buffett Out Of Phillips 66
February 19, 2018 6:00 am|Comments (0)

Over the past couple of days, Berkshire Hathaway (BRK.A) (BRK.B) surprised investors with a number of developments. Between increasing its stake in Apple (AAPL) by 23.3%, dumping nearly all of its shares in International Business Machines (IBM), and buying $ 358 million worth of Teva Pharmaceutical Industries (TEVA), there’s a lot to discuss, but as an investor heavily involved in the energy space, what drew me most was Warren Buffett’s decision to part ways with a sizable stake in Phillips 66 (PSX). With shares having risen and Buffett reducing his company’s ownership in the refinery and energy wholesaler by nearly half, investors might think that now is the time to bail on Phillips, but the picture isn’t quite that simple. Despite Buffett’s move away from the firm, there could still be attractive upside for investors over the long haul.

A look at the deal

Berkshire first reported a large stake in Phillips, from what I could trace back, to September of 2014 when the firm stated in a Form SC 13G that it owned 57.98 million shares, or roughly 10.8% of the business’ outstanding stock. In February of 2016, Berkshire increased its stake in the firm by 3.51 million shares, representing 11.5% of Phillips’ outstanding units, and in February of 2017 it announced the addition of a further 19.20 million shares. This brought Berkshire’s total ownership in Phillips to 80.69 million shares, or about 15.5% of the shares outstanding at the time. Due to corporate decisions within Phillips that led to a reduction in share count, Berkshire’s stake eventually rose to 16.1%.

*Taken from Phillips 66

Over the past several years, the management team at Phillips has done well to allocate its capital toward growth endeavors. As you can see in the image above, the firm, between 2013 and 2017, spent approximately $ 16 billion toward capital expenditures. It should be noted that some of this was not from Phillips itself, but instead from Phillips 66 Partners (PSXP). In 2018, the company expects consolidated capex to be around $ 2.3 billion, up from last year’s $ 1.8 billion. Now, in the image below, you can see how cumulative distributions have changed over time.

*Taken from Phillips 66

During the same few years ending in 2017, management spent $ 16.4 billion toward distributions to shareholders (which includes buybacks mostly, but also dividends). This means that just over half of spending was put toward its distributions. In the three years ending in 2017, though, we saw a bit of a change. While the longer timeframe looked at involved a similar reinvestment into the business as what was paid out in the form of distributions, the past three years have seen a 60/40 split in favor of reinvestment.

The end result has been positive for shareholders. As Phillips saw its distribution grow from $ 1.33 per share to $ 2.73 per share during this timeframe, shares have soared. Since Berkshire reported its 10.8% stake in the firm in 2015, shares of the business have skyrocketed 30.2%. Most of this growth, accounting for appreciation for units of 21.1%, has come in just over the past 12 months as energy markets have rebounded and as the stock market has jumped.

Likely to realize some of this value, Berkshire was able to strike a deal with Phillips wherein Phillips could make a single, large transaction in order to reduce share count. The end result was the agreement that, in exchange for 35 million shares, priced at a modest premium from February 15th’s closing price, Berkshire would receive a cash payment of $ 3.3 billion. This translates into a per-share purchase price on the stock of $ 93.725.

Following this move, Berkshire will still own an impressive 45.7 million shares, valued at approximately $ 4.24 billion. Given the number of Phillips shares currently outstanding, 501.5 million, and the retirement of the 35 million units the firm is acquiring, Berkshire’s ownership in the business will shrink to 9.8%.

This is not a sign to sell

It’s legitimate to believe that Buffett has partially cashed out to benefit from the upside experienced in Phillips’ shares over the past few years. However, this doesn’t mean that owning a stake in the business is now a bad idea. If anything, now might be an attractive time to consider buying into the business. To illustrate why, all I need to do is point you to the chart below.

*Created by Author. Note: $ are in Millions

As you can see, net income and operating cash flow generated by Phillips has done well in recent years. Yes, due to fluctuations in various parts of its business, such as margins tied to the 3:2:1 crack spread, the business’ profits and cash flows have been volatile. However, in the five years starting with 2013 and ending in 2017, cumulative net income for the firm totaled $ 19.38 billion, and operating cash flow totaled $ 21.88 billion. Due in part to increased borrowings in order to fuel growth, the firm’s book value of equity (including Phillips 66 Partners) has expanded 22.5% from $ 22.39 billion to $ 27.43 billion as well.

Using 2017’s figures, shares in Phillips look quite attractive compared to the broader market. Assuming that shares remain unchanged in price following the completion of the stock purchase from Berkshire, 2017’s operating cash flow of $ 3.65 billion places a price/operating cash flow multiple on the business of 11.9 on it. Using the five-year average operating cash flow, the multiple stands slightly lower at 11.2. If, instead, we use 2017’s net income of $ 5.11 billion, the multiple on the business is 8.5, or 9.9 using the five-year average earnings. At these levels, I wouldn’t call Phillips a deep value play by any measure, but it’s certainly low enough to draw my attention.

Buffett seems to understand the business’ potential, probably better than anybody on this planet. In a statement regarding the transaction, he said the following: “Phillips 66 is a great company with a diversified downstream portfolio and a strong management team. This transaction was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10 percent. We remain one of Phillips 66’s largest shareholders and plan to continue to hold the stock for the long term.”

This doesn’t mean, though, that owning shares in Phillips will be smooth sailing. As you can see in the image below, there are a lot of moving parts that can affect the profitability of the business in any given year. In particular, even a $ 1 change per barrel in gasoline margins would affect income by $ 260 million for 2018, while an identical change in distillate margins would impact results by $ 230 million. Seeing the volatility experienced in energy markets since 2014, it’s impossible to know what kind of profits and cash flow will be generated by the firm this year, let alone over the long run. However, with a strong, solid asset base, and a history of attractive performance, results should even out over any long period of time.

*Taken from Phillips 66

Takeaway

Warren Buffett’s decision to divest of nearly half of Berkshire’s stake in Phillips is not unreasonable. Given the huge run-up in share price, combined with the reduced regulatory burden Berkshire will have to deal with, it’s okay to take some cash off the table. What matters is that Berkshire continues to own a sizable chunk of Phillips and, absent a deterioration in the business, intends to keep it that way. With how affordable shares are, this could also be an attractive time for investors who don’t currently own any of the business to consider a stake as well.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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