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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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