Beijing Halts Construction of BYD Auto Plant

BEIJING—China's central government ordered BYD Co. to surrender land in a zoning dispute, a decision that is likely to slow the Chinese battery and auto maker's push to expand in the nation's growing auto market.
China's Ministry of Land and Resources also hit BYD with a 2.95 million yuan ($442,000) fine, the ministry said on its website Wednesday. The ministry confiscated 121 acres of land in the central Chinese city of Xian, where BYD executives said the company has been building a car assembly plant. BYD had hoped to start production at the complex as early as next year.
The ministry said zoning for the land was "illegally adjusted" to industrial use from agricultural use but didn't elaborate. The decision comes as some government officials have shown concern about excess capacity in the auto industry.

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• BYD's Sales Fell in August 9/7/10
• Buffett Visits China Auto Maker BYD 9/27/10
• Daimler, BYD Plan Electric Car 5/28/10

The land ministry also disciplined about a dozen government officials in Xian, the capital of Shaanxi province. Lu Yong, director of the planning department of the Shaanxi land and resources office, was removed from his post.
The Xian site was part of BYD's five-billion-yuan expansion to roughly double its car-production capacity in China, where executives said the company is capable of manufacturing 700,000 cars a year. In addition to Xian, where BYD has two existing plants, the company is increasing output in Shenzhen and adding a production complex in the central Chinese city of Changsha.
The company is "duly accepting the ministry's decision," said BYD spokesman Paul Lin. He said, however, that the move was "not likely to have material impact" on BYD's business, though he declined to elaborate.

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Associated Press

BYD Chairman Wang Chuanfu, left, at a celebration last month in Shenzhen city with Berkshire Hathaway's Charles Munger, center, and Warren Buffett.

Still, an individual close to BYD said the company, one of China's top-tier car brands, might have to look for a different site in Xian to build a third assembly plant and explore other options. Each existing plant in the city can produce 200,000 cars a year.
It wasn't immediately clear how much BYD spent to acquire the Xian site or how much it has invested at the location, which was to have production capacity of 200,000 cars a year. Mid American Energy Holdings Co., a unit of Warren Buffett's Berkshire Hathaway Inc., owns 10% of BYD.
The Chinese government's move adds to a series of setbacks for BYD this year. With demand slowing for its cars in China, BYD in August slashed its 2010 sales outlook by 25% to 600,000 vehicles. It also delayed plans to sell all-electric cars in California by year-end, although BYD executives have said the company plans to introduce its electric car, the e6, in the near future.
BYD said Wednesday that its car sales in China last month fell 25% from a year earlier to 33,085 cars, even as China's overall vehicle sales rose 19%.
Given the diminishing outlook for BYD's car business, Yale Zhang, an independent auto analyst in Shanghai, said the ministry's move "shouldn't be that damaging" for now. "It's not as if BYD's lacking capacity for auto production right now."
MidAmerican bought its stake in BYD two years ago after Mr. Buffett's longtime business partner, Charles Munger, learned of the company and its lithium-battery technology from hedge-fund manager Lu Li. Mr. Munger asked MidAmerican Chairman David Sokol to investigate.
Mr. Buffett said earlier this year that MidAmerican's initial $231 million investment is now worth about $1.5 billion. Mr. Li now is considered a leading candidate to run a chunk of Berkshire's investment portfolio. Mr. Sokol, a member of BYD's board since last year, is widely thought to be the leading candidate to succeed Mr. Buffett as Berkshire's chief executive.
—Sue Feng and Erik Holm contributed to this article.

Natural gas elbows its way to center stage

Jonathan Fahey, AP Energy Writer, On Wednesday October 13, 2010, 1:57 pm EDT

NEW YORK (AP) -- By unlocking decades' worth of natural-gas deposits deep underground across the United States, drillers have ensured that natural gas will be cheap and plentiful for the foreseeable future. It's a reversal from a few years ago that is transforming the energy industry.
The sudden abundance of natural gas has been a boon to homeowners who use it for heat, local economies in gas-rich regions, manufacturers that use it to power factories and companies that rely on it as a raw material for plastic, carpet and other everyday products. But it has upended the ambitious growth plans of companies that produce power from wind, nuclear energy and coal. Those plans were based on the assumption that supplies of natural gas would be tight, and prices high.
Billions of dollars' worth of plans to build wind farms and nuclear reactors have been delayed or scuttled, including Constellation Energy's Calvert Cliffs nuclear project in Maryland. The company signaled this week it was in peril because of higher-than-expected financing costs.
And coal power, already struggling under tighter environmental regulations, is now under even more pressure. Natural gas emits fewer dangerous chemicals and about half as much carbon dioxide as coal.
The new natural gas discoveries, mostly beneath states in the East, South and Midwest, have kept prices remarkably low, even as demand has begun to come back since the end of the recession.
"We once thought we could face gas shortages and (electricity) brownouts. Now we are facing an enormous oversupply of natural gas," said Fadel Gheit, senior oil and gas analyst at Oppenheimer and Co. "We have not scratched the surface of potential of gas in the U.S. and across the world."
The U.S. uses natural gas to produce 21 percent of its electricity. Coal is the dominant fuel, accounting for 48 percent of the electricity mix. By 2015 natural gas is predicted to reach 25 percent while coal is expected to fall to 44 percent.
In the middle of the last decade, natural gas looked to be in short supply. Production in the U.S. was slowing, imports from Canada were rising and plans for importing liquefied natural gas from the Middle East and elsewhere were drawn up.
Natural gas, which had traded at about $2 per 1,000 cubic feet in the 1990s, hit nearly $15 in 2005. It is now about $3.50, driven lower by reduced industrial power demand and rising production by drillers who are learning to make a profit from shale gas at ever lower prices.
Starting in about 2006, after decades of work, natural gas drillers like Devon Energy, EOG Resources and XTO Energy, now owned by ExxonMobil, perfected methods first tried in 1981 that now allow them to cheaply drill down and then horizontally into gas trapped in formations of shale never before thought accessible.
To release the trapped gas, drillers inject a slurry of water, sand and hazardous chemicals deep into the ground to break up rock and create small escape channels, a process known as hydraulic fracturing, or "fracking."
There is a fear that fluids or wastewater from fracking could contaminate drinking water supplies. Congress has asked the Environmental Protection Agency to study the issue.
But in just a few years, a number of shale gas fields around the country are suddenly producing gas, including the Barnett field in Texas, the Fayetteville field in Arkansas, the Haynesville field in Louisiana and the massive Marcellus field that stretches from Western New York through Pennsylvania, Eastern Ohio and West Virginia.
While these developments are almost certain to boost U.S. gas production for years to come, they will have little effect on imports of foreign oil, at least in the short term. There are proposals to use more natural gas as a transportation fuel, but it is now used mainly to generate electricity, heat homes, and as an industrial feedstock.
A recent study by the Massachusetts Institute of Technology on the future of natural gas found that 80 years' worth of global natural gas consumption could be developed profitably with a gas price of $4 or below.
Plans for nuclear plants and wind farms were made under the assumption that gas prices would average $7 to $9. At that level, electricity prices would be high enough to make wind and nuclear power look affordable. Now many of these projects suddenly look too expensive.
Plans for three dozen new nuclear plants were drawn up in the middle of the last decade, and the nuclear industry hailed what it called a renaissance. Lawmakers, aiming to help stave off high electricity prices, authorized an $18.5 billion loan guarantee program to help the nuclear industry begin building new plants after two decades of inactivity.
Now almost all of those plans have been delayed or shelved. Even companies that are finalists for federal loan guarantees, NRG Energy and Constellation Energy, announced recently that they have nearly stopped spending on their projects.
Constellation announced last week that it was giving up on its loan guarantee application because the federal government's terms were too restrictive. Analysts say low natural gas prices are making the project uneconomic. NRG chief executive David Crane said he will not pursue the company's two-reactor project in South Texas if gas prices stay low, even if his project is offered a loan guarantee.
"Clearly $4 gas challenges the economics of just about every other form of electricity generation," says Richard Myers, vice president for policy development at the Nuclear Energy Institute, an industry group. "If you take a snapshot, today, it looks bleak."
The wind industry is also suffering. Antonio Mexia, chief executive of the Portuguese utility EDP, which is the third-largest wind power producer in the world and owner of Houston-based Horizon wind, said in a recent interview that the company plans to reduce wind investments by 75 percent in the U.S. between this year and next.
Nationwide, the wind industry installed enough wind turbines to supply electricity to 2.6 million homes in 2009, a record. This year wind turbine construction will likely fall 40 percent, and next year Mexia predicts that it could fall again, by as much as half. Federal subsidies for renewable energy projects reduce costs by some 30 percent, but that is not enough to help the wind-power industry compete with natural gas these days, he says.
In much of the country it is still cheaper to produce power by burning coal than natural gas, but coal, too, is being threatened. Coal power is becoming more expensive because environmental regulations are forcing utilities to install new emission control equipment.
With natural gas so cheap, in many cases it will be less expensive to switch to gas than it will to install new emission equipment and continue to burn coal. Dan Eggers, an analyst at Credit Suisse, wrote in a recent report that 60 gigawatts of coal-fired plants -- enough to power 35 million homes -- will likely be shut down between 2013 and 2017.
Meanwhile, natural gas drillers are spending money and adding jobs. A recent report by Pennsylvania State University, commissioned by a natural gas industry group, predicts that in 2010 drilling in Pennsylvania's shale formations will add 89,000 jobs and inject $8 billion in spending into the state.
And consumers of natural gas are welcoming low prices. Analysts predict heating bills this winter could be as low or lower than last year and sharply lower than in recent years. Through the first six months of 2010, average residential gas prices were 9 percent lower than for the same period in 2009 and 18 percent lower than in 2008, according to the Energy Information Administration.
While most signs now point to low and stable natural gas prices for years to come, it is not a sure thing.
If regulations tighten or drilling methods are forced to change over environmental concerns, prices could rise.
Also, when the economy recovers to pre-recession strength, gas demand may rise enough to send prices higher, some analysts say.
"We have plenty of gas," says George Shiau, a partner and energy expert at the hedge fund Copia Capital. "We've yet to test what happens when demand spikes."
And though burning natural gas for power is far cleaner than burning coal, burning it still produces carbon dioxide. Alternatively, wind and nuclear power generation are carbon-free.
"We don't want natural gas to become our next big climate problem," said Ashok Gupta, Senior Energy Economist at the Natural Resources Defense Council.

Buffett Says Euro Faces `Real Challenge' After Currency's Rally

Billionaire Warren Buffett, who last month called himself “a huge bull” on the U.S., said the euro faces “a real challenge” after the currency posted its biggest quarterly gain in eight years.
“This is a test, and I would say the test has not yet been passed,” Buffett said in previously recorded remarks presented yesterday at a conference outside Tel Aviv. “I’d rather watch it from afar than nearby.”
The euro gained 11 percent in the three months ended Sept. 30 as the European Union addressed the region’s fiscal crisis with a 750 billion euro ($1.04 trillion) rescue fund. That bailout may not resolve the problems posed by differences among the 16-nation currency bloc, said Buffett, Berkshire Hathaway Inc.’s chief executive officer.
“There’s a real challenge when you try to get a large group of countries with different cultures, different attitudes toward fiscal policy, to share a common currency,” Buffett, 80, said. “I think it’s going to be an interesting one to watch.”
Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.
The third-quarter rally in the euro partly reversed declines that started in early 2010 as investors speculated that Greece and other euro-zone countries could default on their debts. Investors have returned to the currency, which dropped as low as $1.1877 on June 7, as default concerns subsided and the U.S. economy slowed. The euro slipped 0.21 cents to $1.3867 yesterday.
Currency Risks
Buffett, who has previously bet against the dollar, warned investors at Berkshire’s annual meeting in May about the risks of common currencies. Buffett said then that countries run a higher risk of defaulting when they give up the ability to set monetary policy. “You don’t default when you can print your own” money, Buffett said in May. The European Central Bank, based in Frankfurt, sets the policy for the euro.
“Warren Buffett’s perspective tends to be much, much longer term -- it’s clear that the strategic problems in the euro zone have not been resolved,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “The danger still very much exists that the fiscal crisis in the periphery could definitely come back to haunt the euro.”
Europe’s sovereign debt crisis took hold at the end of 2009 after a new government in Greece said the budget deficit was twice as big as the previous administration disclosed. Germany contributed the biggest share of Europe’s rescue package, driving 53 percent of its citizens to regard the euro as a “bad thing,” according to a June poll by the German Marshall Fund of the U.S.
Dollar Dividends
Berkshire, which Buffett built through four decades of stock picks and takeovers, generates revenue in dollars from units including Fruit of the Loom, Clayton Homes and Geico Corp. The company also gets dollar-denominated dividends from its U.S. equity portfolio of more than $40 billion. Buffett made what he called an “all-in wager” on the U.S. with the $27 billion purchase of railroad Burlington Northern Santa Fe in February.
In 2005 and 2006, Buffett unwound bets against the dollar that he had called a “very long-term” position. Berkshire’s so-called foreign-currency forward contracts fell to $1.1 billion at the end of the September 2006 from $21.5 billion in June 2005. The contracts allowed for the purchase of foreign currencies on a future date at a preset price.
“We might see him doing currencies again,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “He may think that the euro’s gotten too strong and there’s more than likely only one way to go.”
Derivative Contracts
Foreign currency contracts, which produced gains of $1.84 billion for Berkshire in 2004 and losses of $955 million in 2005, weren’t disclosed in a derivative table in the company’s last annual report. Berkshire, which holds derivatives tied to equity indexes and the creditworthiness of companies, posted gains of $122 million last year on what it called “other” derivative contracts.
In this year’s second quarter, Berkshire became the biggest shareholder of Munich Re, the world’s biggest reinsurer. Buffett’s firm held a stake of the Munich-based company valued at about 1.67 billion euros as of June 22, according to Bloomberg data.

Irene Rosenfeld Vs. Warren Buffett: A Winner Emerges

The most important role of a leader is to set a clear direction, be transparent about how to get there and to stay the course.....Irene Rosenfeld, Kraft CEO

Buffett Shuns Buyout Funds, Says `They Don't Know the Business'

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. Photographer: Leslie E. Kossoff/Pool via Bloomberg

 

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Oct. 8 (Bloomberg) -- Bloomberg's Deirdre Bolton reports on major newsmakers in today's Movers & Shakers. (Source: Bloomberg)

Warren Buffett, Berkshire Hathaway Inc.’s billionaire chairman, said he avoids acquiring companies from leveraged-buyout firms because they focus on “exit strategy.”
“We have an entrance strategy,” he said in pre-recorded remarks broadcast yesterday at a San Francisco conference for the International Corporate Governance Network, a London-based nonprofit whose members include institutional investors. Buyout firms “don’t know the business,” he said.
Buffett, 80, built Omaha, Nebraska-based Berkshire into a $205 billion provider of insurance, energy and consumer goods through four decades of stock picks and takeovers. He looks for companies with durable competitive advantages and leaves their managers in charge. He said he prefers to retain former owners after acquisitions, and let them run the business, because they have a “passion” for the company and “know it well.”
“I look in their eyes and see if they love the money or love the business,” Buffett said. “Everyone likes money,” he said. “We count on people loving the business.”
Buffett oversees chief executive officers running more than 70 Berkshire units, including car insurer Geico Corp., power producer MidAmerican Energy Holdings Co. and underwear maker Fruit of the Loom. Buffett, who doesn’t enforce a mandatory retirement age at Berkshire, says he avoids interfering with his managers.
“I give them their own paint brush,” Buffett said.
No Deals With Buyout Firms
Buffett spent $27 billion buying railroad Burlington Northern Santa Fe this year, telling Charlie Rose in an interview in November that Berkshire would hold the firm for a century. Buffett told employees of CTB Inc., the farm-products provider he bought in 2002, that Berkshire would own the unit “forever.”
Private-equity firms pool investor money to take over companies, financing the purchases mostly with debt, with the intention of selling them later for a profit. Blackstone Group LP, led by Chairman Stephen Schwarzman, 63, is the biggest private equity firm, followed by Carlyle Group.
“We haven’t bought a single company from an LBO operator,” Buffett said.
KKR, Goldman Deal
Berkshire and Leucadia National Corp. teamed up last year to buy a loan-servicing and mortgage business from a bankrupt lender partly owned by private equity firm KKR & Co. and Goldman Sachs Group Inc. The joint venture, Berkadia Commercial Mortgage LLC, agreed to pay more than $400 million for the assets of Capmark Financial Group Inc.
“We are impressed by the existing management team,” Buffett said in a December statement announcing the completion of the Capmark deal. “We are optimistic about the prospects for these businesses.”
KKR, Goldman Sachs, Dune Capital Management LP and Five Mile Capital Partners LLC bought 78 percent of Capmark, then called GMAC Commercial Mortgage, in 2006 for $1.5 billion in cash and the repayment of $7.3 billion of debt.
Buffett, who also serves as Berkshire’s CEO, typically shuns debt and funds his takeovers with cash or stock. Berkshire has the second-highest credit rating at Standard & Poor’s and the third-highest at Moody’s Investors Service.
Buffett’s remarks at the conference were recorded within the last four to six weeks, according to Tina Chande, head of events for ICGN. He was interviewed by Nell Minow, co-founder of the Portland, Maine-based Corporate Library, which researches governance issues.
‘Embarrass’ Directors
Buffett urged shareholders to challenge directors when companies perform poorly. His annual letters to Berkshire shareholders often contain musings on corporate governance and accounting best practices. He has said public-company boards too often defer to CEOs and fail to provide adequate oversight.
“The best way to affect the behavior of board members is to embarrass them,” Buffett said. “If boards aren’t performing their function, then a few major shareholders holding them accountable will help.”

Warren Buffett's Complete CNBC Interview: Video and Transcript (1 of 2) - CNBC

Warren Buffett's Complete CNBC Interview: Video and Transcript (1 of 2) - CNBC

THE SUPERINVESTORS

Is the Graham and Dodd "look for values with a significant margin of safety relative to prices" approach to security analysis out of date? Many of the professors who write textbooks today say yes. They argue that the stock market is efficient; that is, that stock prices reflect everything that is known about a company's prospects and about the state of the economy. There are no undervalued stocks, these theorists argue, because there are smart security analysts who utilize all available information to ensure unfailingly appropriate prices. Investors who seem to beat the market year after year are just lucky. "If prices fully reflect available information, this sort of investment adeptness is ruled out," writes one of today's textbook authors.
Well, maybe. But I want to present to you a group of investors who have, year in and year out, beaten the Standard & Poor's 500 stock index. The hypothesis that they do this by pure chance is at least worth examining. Crucial to this examination is the fact that these winners were all well known to me and pre-identified as superior investors, the most recent identification occurring over fifteen years ago. Absent this condition - that is, if I had just recently searched among thousands of records to select a few names for you this morning -- I would advise you to stop reading right here. I should add that all of these records have been audited. And I should further add that I have known many of those who have invested with these managers, and the checks received by those participants over the years have matched the stated records.
Before we begin this examination, I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.
Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.
Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.
By then, this group will really lose their heads. They will probably write books on "How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, " If it can't be done, why are there 215 of us?"
By then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same - 215 egotistical orangutans with 20 straight winning flips.
I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were on to something. So you would probably go out and ask the zookeeper about what he's feeding them, whether they had special exercises, what books they read, and who knows what else. That is, if you found any really extraordinary concentrations of success, you might want to see if you could identify concentrations of unusual characteristics that might be causal factors.
Scientific inquiry naturally follows such a pattern. If you were trying to analyze possible causes of a rare type of cancer -- with, say, 1,500 cases a year in the United States -- and you found that 400 of them occurred in some little mining town in Montana, you would get very interested in the water there, or the occupation of those afflicted, or other variables. You know it's not random chance that 400 come from a small area. You would not necessarily know the causal factors, but you would know where to search.
I submit to you that there are ways of defining an origin other than geography. In addition to geographical origins, there can be what I call an intellectual origin. I think you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village that could be called Graham-and-Doddsville. A concentration of winners that simply cannot be explained by chance can be traced to this particular intellectual village.
Conditions could exist that would make even that concentration unimportant. Perhaps 100 people were simply imitating the coin-flipping call of some terribly persuasive personality. When he called heads, 100 followers automatically called that coin the same way. If the leader was part of the 215 left at the end, the fact that 100 came from the same intellectual origin would mean nothing. You would simply be identifying one case as a hundred cases. Similarly, let's assume that you lived in a strongly patriarchal society and every family in the United States conveniently consisted of ten members. Further assume that the patriarchal culture was so strong that, when the 225 million people went out the first day, every member of the family identified with the father's call. Now, at the end of the 20-day period, you would have 215 winners, and you would find that they came from only 21.5 families. Some naive types might say that this indicates an enormous hereditary factor as an explanation of successful coin-flipping. But, of course, it would have no significance at all because it would simply mean that you didn't have 215 individual winners, but rather 21.5 randomly distributed families who were winners.
In this group of successful investors that I want to consider, there has been a common intellectual patriarch, Ben Graham. But the children who left the house of this intellectual patriarch have called their "flips" in very different ways. They have gone to different places and bought and sold different stocks and companies, yet they have had a combined record that simply cannot be explained by the fact that they are all calling flips identically because a leader is signaling the calls for them to make. The patriarch has merely set forth the intellectual theory for making coin-calling decisions, but each student has decided on his own manner of applying the theory.
The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the efficient market theorist's concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc. Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.
I always find it extraordinary that so many studies are made of price and volume behavior, the stuff of chartists. Can you imagine buying an entire business simply because the price of the business had been marked up substantially last week and the week before? Of course, the reason a lot of studies are made of these price and volume variables is that now, in the age of computers, there are almost endless data available about them. It isn't necessarily because such studies have any utility; it's simply that the data are there and academicians have [worked] hard to learn the mathematical skills needed to manipulate them. Once these skills are acquired, it seems sinful not to use them, even if the usage has no utility or negative utility. As a friend said, to a man with a hammer, everything looks like a nail.
I think the group that we have identified by a common intellectual home is worthy of study. Incidentally, despite all the academic studies of the influence of such variables as price, volume, seasonality, capitalization size, etc., upon stock performance, no interest has been evidenced in studying the methods of this unusual concentration of value-oriented winners.
I begin this study of results by going back to a group of four of us who worked at Graham-Newman Corporation from 1954 through 1956. There were only four -- I have not selected these names from among thousands. I offered to go to work at Graham-Newman for nothing after I took Ben Graham's class, but he turned me down as overvalued. He took this value stuff very seriously! After much pestering he finally hired me. There were three partners and four of us as the "peasant" level. All four left between 1955 and 1957 when the firm was wound up, and it's possible to trace the record of three.
The first example (see Table 1) is that of Walter Schloss. Walter never went to college, but took a course from Ben Graham at night at the New York Institute of Finance. Walter left Graham-Newman in 1955 and achieved the record shown here over 28 years. Here is what "Adam Smith" -- after I told him about Walter -- wrote about him in Supermoney (1972):

He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that's about it.
In introducing me to (Schloss) Warren had also, to my mind, described himself. "He never forgets that he is handling other people's money, and this reinforces his normal strong aversion to loss." He has total integrity and a realistic picture of himself. Money is real to him and stocks are real -- and from this flows an attraction to the "margin of safety" principle.

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that's all he does. He doesn't worry about whether it it's January, he doesn't worry about whether it's Monday, he doesn't worry about whether it's an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do -- and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him.
The second case is Tom Knapp, who also worked at Graham-Newman with me. Tom was a chemistry major at Princeton before the war; when he came back from the war, he was a beach bum. And then one day he read that Dave Dodd was giving a night course in investments at Columbia. Tom took it on a noncredit basis, and he got so interested in the subject from taking that course that he came up and enrolled at Columbia Business School, where he got the MBA degree. He took Dodd's course again, and took Ben Graham's course. Incidentally, 35 years later I called Tom to ascertain some of the facts involved here and I found him on the beach again. The only difference is that now he owns the beach!
In 1968, Tom Knapp and Ed Anderson, also a Graham disciple, along with one or two other fellows of similar persuasion, formed Tweedy, Browne Partners, and their investment results appear in Table 2. Tweedy, Browne built that record with very wide diversification. They occasionally bought control of businesses, but the record of the passive investments is equal to the record of the control investments.
Table 3 describes the third member of the group who formed Buffett Partnership in 1957. The best thing he did was to quit in 1969. Since then, in a sense, Berkshire Hathaway has been a continuation of the partnership in some respects. There is no single index I can give you that I would feel would be a fair test of investment management at Berkshire. But I think that any way you figure it, it has been satisfactory.
Table 4 shows the record of the Sequoia Fund, which is managed by a man whom I met in 1951 in Ben Graham's class, Bill Ruane. After getting out of Harvard Business School, he went to Wall Street. Then he realized that he needed to get a real business education so he came up to take Ben's course at Columbia, where we met in early 1951. Bill's record from 1951 to 1970, working with relatively small sums, was far better than average. When I wound up Buffett Partnership I asked Bill if he would set up a fund to handle all our partners, so he set up the Sequoia Fund. He set it up at a terrible time, just when I was quitting. He went right into the two-tier market and all the difficulties that made for comparative performance for value-oriented investors. I am happy to say that my partners, to an amazing degree, not only stayed with him but added money, with the happy result shown here.
There's no hindsight involved here. Bill was the only person I recommended to my partners, and I said at the time that if he achieved a four-point-per-annum advantage over the Standard & Poor's, that would be solid performance. Bill has achieved well over that, working with progressively larger sums of money. That makes things much more difficult. Size is the anchor of performance. There is no question about it. It doesn't mean you can't do better than average when you get larger, but the margin shrinks. And if you ever get so you're managing two trillion dollars, and that happens to be the amount of the total equity valuation in the economy, don't think that you'll do better than average!
I should add that in the records we've looked at so far, throughout this whole period there was practically no duplication in these portfolios. These are men who select securities based on discrepancies between price and value, but they make their selections very differently. Walter's largest holdings have been such stalwarts as Hudson Pulp & Paper and Jeddo Highland Coal and New York Trap Rock Company and all those other names that come instantly to mind to even a casual reader of the business pages. Tweedy Browne's selections have sunk even well below that level in terms of name recognition. On the other hand, Bill has worked with big companies. The overlap among these portfolios has been very, very low. These records do not reflect one guy calling the flip and fifty people yelling out the same thing after him.
Table 5 is the record of a friend of mine who is a Harvard Law graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was fine as a hobby but he could do better. He set up a partnership quite the opposite of Walter's. His portfolio was concentrated in very few securities and therefore his record was much more volatile but it was based on the same discount-from-value approach. He was willing to accept greater peaks and valleys of performance, and he happens to be a fellow whose whole psyche goes toward concentration, with the results shown. Incidentally, this record belongs to Charlie Munger, my partner for a long time in the operation of Berkshire Hathaway. When he ran his partnership, however, his portfolio holdings were almost completely different from mine and the other fellows mentioned earlier.
Table 6 is the record of a fellow who was a pal of Charlie Munger's -- another non-business school type -- who was a math major at USC. He went to work for IBM after graduation and was an IBM salesman for a while. After I got to Charlie, Charlie got to him. This happens to be the record of Rick Guerin. Rick, from 1965 to 1983, against a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which probably because he lacks a business school education, he regards as statistically significant.
One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately to people or it doesn't take at all. It's like an inoculation. If it doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference. They just don't seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he's applying it five minutes later. I've never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn't seem to be a matter of IQ or academic training. It's instant recognition, or it is nothing.
Table 7 is the record of Stan Perlmeter. Stan was a liberal arts major at the University of Michigan who was a partner in the advertising agency of Bozell & Jacobs. We happened to be in the same building in Omaha. In 1965 he figured out I had a better business than he did, so he left advertising. Again, it took five minutes for Stan to embrace the value approach.
Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth?
Table 8 and Table 9 are the records of two pension funds I've been involved in. They are not selected from dozens of pension funds with which I have had involvement; they are the only two I have influenced. In both cases I have steered them toward value-oriented managers. Very, very few pension funds are managed from a value standpoint. Table 8 is the Washington Post Company's Pension Fund. It was with a large bank some years ago, and I suggested that they would do well to select managers who had a value orientation.
As you can see, overall they have been in the top percentile ever since they made the change. The Post told the managers to keep at least 25 percent of these funds in bonds, which would not have been necessarily the choice of these managers. So I've included the bond performance simply to illustrate that this group has no particular expertise about bonds. They wouldn't have said they did. Even with this drag of 25 percent of their fund in an area that was not their game, they were in the top percentile of fund management. The Washington Post experience does not cover a terribly long period but it does represent many investment decisions by three managers who were not identified retroactively.
Table 9 is the record of the FMC Corporation fund. I don't manage a dime of it myself but I did, in 1974, influence their decision to select value-oriented managers. Prior to that time they had selected managers much the same way as most larger companies. They now rank number one in the Becker survey of pension funds for their size over the period of time subsequent to this "conversion" to the value approach. Last year they had eight equity managers of any duration beyond a year. Seven of them had a cumulative record better than the S&P. The net difference now between a median performance and the actual performance of the FMC fund over this period is $243 million. FMC attributes this to the mindset given to them about the selection of managers. Those managers are not the managers I would necessarily select but they have the common denominators of selecting securities based on value.
So these are nine records of "coin-flippers" from Graham-and-Doddsville. I haven't selected them with hindsight from among thousands. It's not like I am reciting to you the names of a bunch of lottery winners -- people I had never heard of before they won the lottery. I selected these men years ago based upon their framework for investment decision-making. I knew what they had been taught and additionally I had some personal knowledge of their intellect, character, and temperament. It's very important to understand that this group has assumed far less risk than average; note their record in years when the general market was weak. While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock. A few of them sometimes buy whole businesses. Far more often they simply buy small pieces of businesses. Their attitude, whether buying all or a tiny piece of a business, is the same. Some of them hold portfolios with dozens of stocks; others concentrate on a handful. But all exploit the difference between the market price of a business and its intrinsic value.
I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.
I would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion. If someone were to say to me, "I have here a six-shooter and I have slipped one cartridge into it. Why don't you just spin it and pull it once? If you survive, I will give you $1 million." I would decline -- perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice -- now that would be a positive correlation between risk and reward!
The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is.
One quick example: The Washington Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the Post, Newsweek, plus several television stations in major markets. Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.
Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people that think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it's riskier to buy $400 million worth of properties for $40 million than $80 million. And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles of $8 million each. Since you don't have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that's not a difficult job.
You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don't try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.
In conclusion, some of the more commercially minded among you may wonder why I am writing this article. Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.