With $38 billion cash, Warren Buffett looking for deals

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#1
By Ben Berkowitz

NEW YORK - Warren Buffett is looking for acquisitions as an outlet to deploy his $38 billion cash pile, the legendary investor said in his annual letter to Berkshire Hathaway Inc shareholders on Saturday.

Buffett gave an aggressive earnings forecast for Berkshire's collection of businesses, said the company would engage in record capital spending and forecast a recovery in the housing market would start within a year.

Foremost, though, was his acknowledgment of the need for Berkshire to expand its non-insurance businesses, a broad collection that most prominently includes the railroad Burlington Northern and the electric utility MidAmerican.

"Our elephant gun has been reloaded, and my trigger finger is itchy," Buffett said. The letter was released just before 8 a.m. EST Saturday, as it is in most years -- and many large investors say they get up early that day to read it the moment it comes online.

The so-called "Oracle of Omaha" said Berkshire will need "more major acquisitions" -- with an italicized emphasis on major -- to meet its goal.

One long-time Berkshire investor described the letter as "punchy" and "confidently American," among other things.

"I would say as an investor, I think it's a very upbeat letter, it's one that celebrates his courage on behalf of investors of going into the marketplace when the world was most fearful," said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, who is one of the 15 largest holders of Berkshire Class A shares.

SUCCESSION

Buffett addressed the hot-button succession issue in the 26-page letter, something investors had anticipated given his age, 80, and the lack of a clear replacement.

Investment manager Todd Combs, hired late last year, will manage an initial portfolio of $1 billion to $3 billion, Buffett said, and Berkshire may add another one or two managers over time alongside him.

But Buffett said he will continue to manage the bulk of the portfolio while he is CEO. Berkshire's equity holdings topped $52 billion at year-end.

He said less in the letter about who might follow him as chief executive of the company, though he said there were a number of good candidates. The most frequently tipped is David Sokol, chairman of MidAmerican and private jet service NetJets, who Buffett praised.

Buffett tends to give an economic outlook in his letter and this year's was no exception.

"A housing recovery will probably begin within a year or so," he noted, which has led Berkshire to ramp up spending and acquisitions at its housing-related businesses.

He was less bullish on interest rates, which have been low enough to earn the company a "pittance" on its cash in recent times. Buffett said rates will eventually rise enough to contribute more normal growth to the company's investment income, but it was "unlikely to come soon."

INVESTMENTS

Another hit to the investment portfolio will come from the redemption of crisis-era preferred investments in Goldman Sachs and General Electric. Buffett said both are likely to be gone by year-end. The Goldman investment in particular famously pays Berkshire $15 every second.

All things being equal, Buffett forecast Berkshire's "normal" earnings power at about $12 billion a year after-tax.

Some of that will come from dividends, particularly in large holdings like drinks giant Coca-Cola Co and bank Wells Fargo.

Wells has been hamstrung on its dividend payouts by post-crisis regulatory oversight, but Buffett said that should ease soon, leading to an increase of "several hundreds of millions of dollars" a year in dividend payments.

He forecast Coke would pay Berkshire dividends of $376 million this year, and he predicted that would double within another 10 years.

In the meantime, Buffett is spending on growth. He said Berkshire would make a record $8 billion in capital spending this year, with the $2 billion growth over last year to be spent entirely in the United States.

"Berkshire has created within itself its own outlet to redeploy capital," Russo said. "The best thing about that is when you can by that spending create additional competitive advantage."
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#2
Thanks! You guys should read his latest shareholder letter. Very nicely written as usual and it made me smile. Smile

Especially the part about Life and Debt. He really is an old-fashioned guy, but it works! Big Grin

http://www.berkshirehathaway.com/letters/2010ltr.pdf
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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#3
Legendary recount of GEICO!!!!!!!!

Agree with musicwhiz........a must read for Investors......
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#4
A good read, thank you for the link. It is interesting that he doesn't pay dividend, based on that Berkshire would not meet the criteria of many investors.

"Furthermore, not a dime of cash has left Berkshire for dividends or share repurchases during the past
40 years. Instead, we have retained all of our earnings to strengthen our business, a reinforcement now running
about $1 billion per month."
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#5
If i have a company to sell and buffet is the one who want to buy, why it makes sense for me to proceed with the sale ?

Just my Diary
corylogics.blogspot.com/


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#6
with Buffet, it may grow. with you, it might not grow.

just like with Steven Jobs, apple becomes what it is today. without him, apple could be gone already.

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#7
Think the question should be extended to..........if you are DIY investing...why havent you invested with buffett.......
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