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Warren Buffett Way 13

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									Warren Buffett Way 13
Warren Buffett Way 13
??Bonds

??????????Washington Public Power Supply System
????July 25, 1983, Washington Public Power Supply Systems announced
unable to pay for nuclear power projects 4 and 5 of the building and
issued 2.25 billion of municipal bonds. Bad faith because the local
electricity authorities, who had promised Washington Public Power
Supply System from the purchase of electricity, but later that do not.
Although the company to court, but the state court ruling, the local
electricity authorities have not Washington Public Power Supply
Systems to the payment obligations. Court's decision led to one of the
biggest in U.S. history, municipal bonds default. The default size and
the ensuing chaos led to public power bonds slump in the market for
several years. Investors dumped bonds in the hands of utilities,
public utilities has led to sharp fall in bond prices, a corresponding
increase in short-term rate of return on these bonds.

????Washington Public Power Supply System on items 4 and 5, shrouded
in clouds to the project health, and 2,3 brings ominous. However,
Buffett believes, projects and project Wei 4,5, 2,3 in terms of debt
financing and debt service obligations has significant differences.
The first 2 projects have been put into operation, and by government
agencies - a Boneiweier Power Authority directly responsible for debt
obligations. Of course, power management Boneiweier own credit rating
may also be a result of items 4 and 5, the problem is serious and
weakened.

????Buffett's assessment of the investment Washington Public Power
Supply System Project l, 2,3 the risk of municipal bonds. Clearly, the
project workers, 2,3 the existence of municipal bond default and the
risk of deferred payment of interest for a long time. In addition, the
bond prices is limited. Even at face value to buy a discounted price,
but the value of bonds at maturity is determined.
????Items 4 and 5, shortly after the debt default, Standard &
Poor's assessment of the company suspended the project work 1,2,3
municipal bond rating. Project 1,2,3 municipal bonds, the interest on
bonds the lowest price per $ 1 face value of only forty cents, pre-tax
yield to maturity as high as 5% and 17%; interest on the bonds the
highest dollar per par satellite market value is only eighty cents. IO
January 1983 to June 1984, Buffett bought one after another of the
Washington Public Power Supply System Project 1,2,3 bonds, with a
total investment of $ 139,000,000, par value $ 205,000,000.

????Buffett explained that in the Washington Public Power Supply
System bonds available each year the investment equivalent of a $
22,700,000 after-tax income (the total value of annual interest bonds)
and cash payment transactions. Buffett pointed out that this bond,
while the investment is almost impossible to buy sold at a discount to
book value, no debt burden and after-tax profits reached 16.3% of the
enterprises. Warren Buffett, according to estimates, when the purchase
of ~ a after-tax profit to $ 22,700,000 and no financial leverage of
enterprises, the need to spend 250 million to 300 million U.S.
dollars. If this is the one he was very understanding, love and the
strength of the business, he would be happy to come up with the money.
But he spent only half the price to buy Washington Public Power Supply
System bonds could achieve the same benefits.

????Buffett believes that Washington Public Power Supply System bonds
to purchase the actual results are even better than he expected. In
fact, the gains to buy this bond than most other investments in 1983
to be higher. Buffett later sold the Washington Public Power Supply
System for low-interest bonds. The face value of his bonds to buy a
larger discount bonds, each year Beike Xia. Hasi Wei company to 15% ~
17% of the after-tax rate of return, while its price has doubled in
the bond market . But Buffett still said, "Investment Washington
Public Power Supply System bond yields though pleasant, but will not
change our long-term bond investments held by the negative attitude.
We just want to have the opportunity to use that there is some trouble
bonds, because the market for these bonds in trouble had an obvious
bias valuations. "
?
??????????RJR Nabisike corporate bonds

????Eighties, the emergence of a new financial market investment tools
- high-yield bonds. Buffett believes that high-yield bonds and before
that the "flying angel" - a metaphor that due to bad timing,
Warren Buffett, investment grade by rating agencies underestimated the
bond are very different. Washington Public Power Supply System bonds
are "flying angel." But these trendy high-yield bonds (also
known as junk bonds) is the 'fake flying angel. "Buffett's words,
with these high-yield bonds issued prior to that garbage.

????Distribution of their securities business on Wall Street early
survey results are cited to promote the legalization of junk bonds.
The survey shows that higher interest rates to compensate investors
may be subject to default risk. But Buffett countered that the issue
of early statistics on default c meaningless because those data and
conclusions are based on some junk bonds is now a completely different
issue bonds based on the derived. Buffett criticized the junk bond
equivalent to the "flying angel" is illogical. Buffett
reminds us that "in the financial field, special care should be
based on past experience that the evidence and conclusions drawn. If
the book is the gateway to the rich history of the key, then,"
Forbes "magazine top 400 richest man in the the library's
curator. "

????The late eighties, the proliferation of high-yield bonds and
became a real issue because of "junk." By Buffett's argument
that "piles of junk bonds, not by those who care about this
person who sold to those who do not use their brains - not lack of
financial markets are always two types of people." In stock and
junk bond frenzy during the peak period, Buffett predicted that issued
junk bonds when those companies were struggling to pay high interest
rates and the time will certainly lead to some companies into
bankruptcy. Right on cue, in 1989, the South? Mac and integrated
resource company declared insolvent. Even Ken Piou company, junk bonds
used to create a U.S. retail Kingdom, also announced it difficult to
repay. October 13, 1989, United Airlines - a union by the company
management and the preparation of high yield bonds to finance 6.8
billion takeover target, announced the huge amounts of money can not
raise money. Speculative arbitrage have held the hands of United
Airlines to sell common stock, resulting in the day channel? Jones
Industrial Index fell 190 points.

????United Airlines incident brought tears of mourning, with the
South? Mark Resources Inc. and Consolidated losses, many investors the
value of high-yield bonds had a doubt. Portfolio managers of
start-dumping junk bonds held by the hands. Because very few buyers,
high-yield bond prices plummeted. Before the end of 1989, junk bonds
from the market.

????In 1988, KKR Company - by Ke Page, Robert Klas and three partners
established specializes in leveraged acquisitions of investment
management company, through bank loans and junk bonds issued to
successfully price of 250 billion acquisition of RJR Nabisike company.
Nabisike company by RJ? Reynolds in 1875 created the current U.S. food
and tobacco industry giant, second only to tobacco production and
distribution scale production of Marlboro cigarettes, Philip. Morris
cigarette brands including Camel, Salem, cloud Silk Cotton. Although
RJR Nabisike company in 1989 to 1990, debt service obligations in the
normal performance, but because of the collapse of the junk bond
market, and the gates of fire, affecting fish pond, RJR Nabisco by the
market price of bonds implicated also, like other junk bonds dropped
sharply. Buffett has bought in the meantime a lot of RJR Nabisike
corporate bonds.

????During this period, most of the junk bonds still look
unattractive. However, Buffett believes, RJR Na Bisi River being
unfairly punished. The company generated sales stable enough cash flow
to pay debt. Moreover, RJR Na Bisi any company has been very favorable
prices to successfully sell some of its business, and thus lower the
debt ratio. Buffett's investment in RJR Nabisco analysis of the risk
of corporate bonds, after that, the company's credit than those who
sell securities investors of the company known to be higher. RJR
Nabisco investors receive 14.4% of the revenue bonds (equivalent to an
enterprise level of profitability), and its low price but also
provides a potential capital gains.

????1989 and 1990, two years, Buffett's price below the par value of
bonds purchased RJR Nabisike the company 440 million U.S. dollars in
junk bonds. The spring of 1991, RJR announced Nabi Si River will
redeem the face value of most bonds junk bonds. The announcement to
bond prices rose 34%, Ba Feite derive 1.5 billion of capital income.

????????????????????Arbitrage

????Buffett sometimes mid-exempt bonds held as cash alternatives. He
realized that in order to invest tax-free bonds mid-term (bonds, local
government bonds or municipal bonds) instead of short-term Treasury
bills, forced to bear the appropriate time to sell and bring the risk
of loss of principal, but the ratio of these bonds provide tax-free
Treasuries higher after-tax income. Therefore, the increase in income
to offset the possible losses. However, the Ba Feite that the
medium-term tax-free Treasury bonds is not the only benefit of
investing in alternative instruments. Faced with more cash rather than
investing ideas, Warren Buffett occasionally arbitrage. Arbitrage, in
short, is a market to purchase a security while in another market to
sell the same securities. Purpose of the price difference from the two
markets to earn profits. For example, if a company's shares are quoted
on the London market, $ 20 per share, in the Tokyo market for $ 20.01,
arbitrageurs can buy the London market by the company while the stock
market in Tokyo The company sold the same number of shares and profit.
In this case, there is no arbitrage activities, the risk of capital
loss. Arbitrage between markets just because of lack of efficiency and
profit. It is also known as risk-free arbitrage. Another type of
arbitrage is risk arbitrage, that is the purpose of sale of a security
announcement is expected from the value of some benefit.
?????
???Risk arbitrage is the most common way to purchase a discount
relative to its future value in the state of stocks. The future value
of the ordinary to the company merger, liquidation, tender offer or
restructuring as a basis for valuation. Arbitrageurs face is the
future of the stock price can not claim that the risk of cash. Buffett
believes that, in order to estimate the risk arbitrage opportunities,
we must clear the four basic questions: "(1) commitment to the
possibility of an event does occur how? (2) funds will be frozen for
how long? (3) What are good events occur?, for example, by competitive
tender offer. (4) If these events or financial difficulties because of
antitrust laws, what happens when abortion? "

??????
???To help shareholders understand the advantages of arbitrage,
Buffett describes his company using Akata arbitrage story. In 1981,
the company agreed to sell Akata KKR. Akata company at the time,
including forest products and printing businesses. In addition, in
1978, the U.S. government Zengyi forced the price of $ 98,000,000
purchased from Akata more than 10,000 acres of red fir forests of
Sequoia National Park to expand. $ 98,000,000 paid in installments
Akata company owed simple interest at 6% interest payments. Akata
companies protested that the government pays too low, 6% simple
interest is also low. In 1981, Akata company to court, asking the
Government to be compensated. Akata value of the company for its
business with a potential government compensation payments. KKR
companies to $ 37 per share plus payment of compensation the
Government may 2 / 3 of the bid Akata company.
?????
???His own analysis of the KKR acquisition of Akata. He pointed out
that, KKR acquisition financing in the history has been good, even if
the KKR abandoned the deal, Akata company will find another acquirer,
as Akata board has decided to sell the company. Finally, a more
difficult question to answer some of which the Government took away
from the Akata company value in the end the red fir forests of how
much? Buffett believes that because of the involvement of government
departments, to make a reasonable estimate is very difficult.

????Buffett began to fall in 1981 of approximately $ 33.5 per share
purchase price of Akata stock. As of November 30, already holds 40
million shares of company stock Akata, Akata roughly 5% of the total
shares. January 1982, Buffett Youyi about $ 38 per share price of 25.5
million shares of Akata again bought shares. At this point, Akata
officially signed with the KKR acquisition agreement. While the
transaction process is complex, but Buffett is still willing to pay
more than 37 dollars per share, KKR's higher prices, the company that
he believes arcata redwood forest asked the Government to compensate
for additional action is valuable.
?????????
???A few weeks after the start of the sale grew out looks. First,
contrary to expected Buffett, KKR acquisition of funds in raising the
difficulties encountered. Akata company in general meeting postponed
to April. KKR can not raise the entire purchase money, decided to
purchase price down to $ 33.5 per share. The board rejected the KKR
arcata new offer. Before the end of March. Akata company received
another company's proposed $ 37.50 per share, plus potential
government compensation for the value of 1 / 2, actually standard.
Buffett Akata 2,290 million investment company profits $ 1,700,000,
15% satisfactory rate of return.

???A few years later, Buffett invested in Akata arbitrage company also
received another long-awaited return. In Akata companies and
government litigation process, the two court-appointed mission, one
for red fir forests of valuation, a determine the appropriate interest
rate. January 1987, the first mission announced that the value of the
red fir forest than $ 97,900,000, but should be $ 275,700,000; then
announced the second mission, the appropriate interest rate should be
set at 14% compound interest rather than 6% simple interest. Court
ruling that the government should pay the company 600 million U.S.
dollars to arcata. Although the government appealed, but the end
result is still determined to be 519 million. Buffett's $ 19,300,000
profit, income per share Akata a $ 29.48 stock.

????Arbitrage Buffett has decades of history. However, most
arbitrageurs fifty times a year or more may be involved in arbitrage
trading, but only for a number of large transactions Buffett. He
participates in the activities of limited arbitrage in the open,
friendly transaction, the acquirer does not reject or clear signs of
fraudulent transactions for speculative arbitrage. Buffett has never
been an exact count of the arbitrage performance over the years, but
he estimated that about 25% of average earnings. Although Buffett
often carry short-term Treasury bonds as an investment alternative,
but Buffett's interest arbitrage with Beike Xia. Hasi Wei company's
cash reserves of the ups and downs. He explained that arbitrage can
prevent him from relaxing the strict control of long-term bond
investments.

????As Bei Kexia. Hasi Wei in arbitrage trading was a success, they do
not understand why Buffett's shareholders to give up the arbitrage
strategy. We all know, Buffett's investment rate of return more often
than he expected to be high, but after 1989, the carry trade situation
has changed. LBO boom brought about the formation of a financial
overheating is driven by passion, uncontrollable environment. Buffett
is not clear when the borrowers and buyers will get back their
feelings, but his reckless decisions of others are often cautious
action. United Airlines setback even before the acquisition, Buffett
carry trade has been withdrawn. The appearance of the convertible
preferred stock Buffett can more easily withdrawn from the arbitrage
trading.

????????????????Convertible preferred stock

????Convertible preferred stock is both common stock and bond
characteristics of hybrid securities. Generally speaking, the
preference for short-term investors a higher income than common stock.
This high yield fell to protect the investors from risk. If the prices
of ordinary shares, convertible preferred stock and common high-yield
stocks to prevent it falling to as low. In theory, the price of
convertible preferred stock will drop to the same level of short-term
gains, credit and non-convertible bonds due date roughly the same
price level. Convertible preference shares back from investors the
potential value of ordinary shares in the profit opportunities.
Because it can be converted into ordinary shares, ordinary shares when
prices are rising, the price of convertible preferred stock will rise.
Convertible Preferred Stock as to provide a high income and capital
gains potential opportunities, which conversion price is usually
higher than the current common stock price, known as premium. A
typical conversion premium of approximately 20% to 30%, which means
that the conversion process to the loss of value is not subject to the
conversion, the common stock prices should rise at least 20% to 30%.

????Buffett started to invest in convertible preference shares, which
confused many people, Buffett's behavior is to issue convertible
preference shares whether the company's business development needs, or
just as his own to protect these companies against hostile M &
attacked a reward? Because every piece of Buffett investment in
convertible preference shares, the investment companies such as
Salomon, Gillette, winning international and U.S. Airways Group and so
are the challenges of a hostile takeover. Solomon, who took over the
company's potential to revo Lung Group, Ronald. Puli Man, The Gillette
Company is being Coyne Princeton's attacks, and American Airlines are
subject to Mitchell? Stern Hart's takeover threat, although not
winning international companies feel the burn of the hostile takeover
into jeopardy, but by the Ba Feite Issue 3 billion in convertible
preferred stock, to prevent a potential takeover. Buffett's hostile
takeover of these companies were from a violation of rescue
operations, it is called the line the narrow sense of justice of the
"white knight."

????????????Salomon (Salomon)

????In the October 1987 stock market crash in New York recently,
Buffett announced that he has invested 700 million U.S. dollars to buy
Salomon Inc. (the world's leading investment banking and transaction
brokers) dividend yield of newly issued convertible preferred 9%
shares, convertible preferred stock this year after 38 U.S. dollars
per share conversion price of Salomon's common stock. Salomon can be
in October 1995 after 5 years to redemption. At that time, Solomon's
common stock price per share of approximately 33 United States None.
The convertible preferred stock 115% of face value issued at a
premium. Buffett's investment in order not to loss of money, you can
convert preferred shares into common stock, Salomon's common share
price must rise by at least 15%.
?????????
????In 1987, Ronald. Puli Man attempts to take over Salomon. President
John. Stuttgart Flanders that the sale of the company is an effective
way to Puli Man. As a result, Stuttgart Flanders turned to Buffett for
help. Buffett and the Stuttgart Flanders have known each other for
several years. 1976, Stuttgart Flanders to help the Government
Employees Insurance Company from the brink of bankruptcy to recovery.
Since then, Buffett noted on numerous occasions, Stuttgart Flanders
insisted the interests of customers first, at the company profitable
but abandoned those transactions detrimental to the interests of
customers. Buffett commented that these acts of Flanders Stuttgart is
unusual on Wall Street. Stuttgart Flanders trust and respect of his
people.

?????Buffett eyes of Salomon convertible preferred stock is a
medium-term fixed income securities. As we all know, Buffett is no
investment banking business to be not in-depth research, investment
banking companies in predicting future cash flows have no grasp.
Buffett explained that, precisely because of this can not be
predictable, he was investment in Salomon convertible preferred rather
than common stock. He believes that over time, Salomon, "leading
the financing, and efficient technology and management decision-making
rights and interests will have a good return on capital. Conversion
rights will ultimately prove to be valuable."

?????In 1986, Salomon's common stock market price was as high as $ 59,
Bibafeite held Salomon convertible preferred stock conversion right
price higher than 55%. If the price of ordinary shares of Salomon
convertible preferred stock within three years after the release of
high value to achieve this once again, the Buffett at Salomon
convertible preferred stock investment in the total income (including
dividend income prior to the conversion and conversion income) will
reach 88%, an annualized yield of 29%; if Salomon's common stock price
could reach $ 59 five years later, its convertible preferred stock of
the annual rate of return is 17.6%.
?
????Although 17% of the annual return rate of less than Buffett's
common stock portfolio returns, but significantly higher than most
commercial enterprises, and almost double the long-term bond yields.
Buffett has always maintained that, although the convertible preferred
stock with conversion potential, but most of its value lies in its
fixed income characteristics. It is this feature to Buffett
convertible preferred stock in Salomon's investment was not aware of
from two to disaster rescue.

?????Buffett bought Salomon convertible preferred stock less than a
month after that in October 1987, the New York stock market crash,
there were events.
Salomon stock price fell to $ 16, if Buffett's investment in the
company's common stock, would lose half of the investment. End of
1987, Salomon efforts to make the stock price back up to 19 dollars,
but in order to achieve the normal conversion Buffett, Salomon's stock
price needs to rise twice. In 1988, Salomon's stock has increased by
23% at the end to 24 U.S. dollars. In the October 13, 1989 before the
market downturn from happening again slowly rising to 29 dollars,
recession and then fell to 23 dollars. Salomon's stock price more than
once convertible preferred stock conversion price (33 U.S. dollars per
share), has been that, in 1991. In August 1991 the company violated
the rules regarding the sale of U.S. Treasury bonds shortly before the
disclosure, the stock reached $ 37. After that happened more shows
Buffett's management skills, rather than his investment in Salomon.
Buffett recalls: '1991 morning on August 16 at 6:45, I received a call
from senior management of Salomon's phone, told me that they were
prepared to resign. "
?
???A week ago, Salomon has publicly acknowledged that it issued in
May, the tender-year note, the control 95% of the total scale, in
violation of Treasury auction rules. Treasury auction rules clearly
stipulates that any company buying at an auction in the amount not
exceed 35% of the total sale amount. Salomon is not only one that
greatly exceeds the limit, but also to conceal the illegal acts of the
authorities for several months. Stuttgart Flanders notice in the event
that the company after the breach. He and other senior managers, like
failing to timely inform the authorities and blamed. Accused rather
harsh, Stuttgart have no choice but to resign Flanders.

????Buffett quipped that Solomon's incident is only a small problem.
Because the scale of the liabilities of Salomon after Citigroup, than
any other U.S. company has more. Moreover, half of which debt will
expire in a few weeks. If Salomon went out to the United States on the
financial impact will be Buffett's Beike Xia. Hasi Wei as the
company's impact is huge. Buffett see, in addition to government
agencies, politicians, shareholders and customers should be retained
Salomon sure, there is no other way to save Salomon. Buffett
volunteered willing to resolve the crisis Solomon previously served as
the interim Chairman of the Board of Directors. No exaggeration to say
that Buffett was interviewed during the Salomon demonstrated unique
leadership style to prevent the collapse of Salomon.

????The next ten months, Buffett named Delk. Mao Han served as
Chairman and CEO of Salomon Brothers, Salomon Brothers, Salomon's
investment banking division under the company. Delk. Mao Han Prior to
this, in charge of Salomon in Tokyo, the Far East rather profitable
business. Then the door Getuo Terrace Buffett also appointed a partner
at law firm Olsen Robert? Dunham, Solomon's chief lawyer. Dunham,
along with Warren Buffett to the company bid $ 290,000,000 illegal
settlement of federal authorities to negotiate. Finally, Buffett
reorganized the management of Salomon, incentives and performance
evaluation system. June 1992, Buffett termination of the provisional
presidency, he nominated Robert. Dunham, Solomon served as chairman.

Salomon after the disclosure of the illegal operation of the event,
the company stock price fell to $ 16, back to the October 1987 stock
market crash after the price level. From September 1991 the company
began Buffett Management Solomon, Solomon's stock price steadily
rising. December 1993, that is, violations of 28 months of exposure,
the company's stock price rose 193% to $ 47. Despite this recovery
surprising, but Salomon convertible preferred stock's performance
relative disappointment. Since 1987, Salomon's common share price is
not only clumsy Standard & Poor's 500 stock index, but also lag
behind other brokerage firms. Buffett's investment in Salomon
convertible preferred stock, including dividend and conversion before
the conversion proceeds, including, in the past 6 years the average
return rate of only 13%, lower than the average yield of commercial
enterprises, but higher than Other medium-term fixed income
securities.

????Obviously, the reason why Solomon's below average performance,
management behavior is largely the reason. This is the first time,
Buffett's investment company, senior director for the illegal acts of
losses. If we say that when Buffett made mistakes in evaluating the
business case, he thought he was due to his portfolio companies to
understand the future economic situation of wrong results, not the
company's management staff acts with moral issues. Buffy to be
concluded, "in the evaluation of individuals, the study should
focus on three characteristics: integrity, wisdom and vitality. If you
do not have the first point, then the last two will harm you."
From a financial aspect to the analysis is difficult to predict
Solomon's management. Buffett believes that Salomon must be a priority
to protect the interests of shareholders as chairman of non-executive
management, this will help the company's future problems are handled
promptly and openly.

????February 3, 1994 to March 4, 1994, Buffett bought 5,519,800 shares
of Salomon common stock, plus in November 1993 bought 495,200 shares,
Buffett held a total of Salomon has 6,015,000 shares of common stock
and 700,000 shares of preferred stock. Buffett became common
shareholders of Solomon, the significantly increased confidence in the
company. But still, a Salomon brokerage company, therefore, the
inevitable volatility of earnings. However, the profits of Heath candy
store is also volatile. Excellent business during the Christmas
season, and in July is woefully inadequate. Buffett pointed out that
"all roads lead to Rome."

???Warren Buffett on the growth of Salomon confidence placed in there
from his new management team and control mechanisms. Delk. Mao Han
bonus and investment bank Salomon Brothers return on equity are
closely related. If the company is well run, shareholders really
satisfied, Mao Han bonus will be increased significantly. If
shareholders are not satisfied, the high gross salary of the Han can
not. Buffett, chairman of Robert Solomon. Dunham, is very satisfied.
Buffett said, "Solomon is not a company like Gillette or
Coca-Cola people can rest assured that business, but we have a number
of outstanding talents in the business Salomon."

								
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