Compounding Life

Burlington Northern Santa Fe has been getting some attention because Buffet has been steadily increasing his position. This past week another  purchase of approximately 4 million shares was reported:

NATIONAL INDEMNITY CO  10% owner 1,800,000 $62.19 $1.11946E8 7.1889E7

NATIONAL INDEMNITY CO  10% owner 681,000        $63.43 $4.31969E7 7.257E7

NATIONAL INDEMNITY CO  10% owner 1,882,000 $61.65 $1.16031E8 7.4452E7

It should be noted that National Indemnity is a Berkshire Hathaway company.  It’s an Omaha based insurance company that Buffet purchased on behalf of Berkshire. If memory serves correct I believe this was one of first insurance companies he purchased and hence the beginning of his “float”  investing career.  The story of Buffett and National Indemnity is covered in some detail in “The Snowball” which I would highly reccomend reading.

The only reason I bring this up is because when reading information about insider purchases and sales you have to keep in mind that it might not always be clear who is purchasing the stock. In this case someone not familiar with Berkshire and it’s history of  buying BNI stock might not realize who is actually making the purchase.  As far as insider information goes InsiderCrow is the best site I have found so far for that info but please let me know if you have any others you use. Insider filings are available from the SEC site, but the search functionality on InsiderCrow is far better.

Back to BNI. Well I think there are two major things to consider:

1. Rail is the cheapest way to move goods across the country. When people start spending money again and gas prices work their way back up (both of which will happen eventually, nay sayers be damned) railroads will be in high demand.

2. Moat. This is a no brainer. When it come to moats railroads have it locked down. The threat to their competitive advantage (Moat) is that a cheaper way to move goods comes along.  

Riding on Coattails

Warren Buffett has talked about “riding on coattails”. Well here is a situation where it may be possible to ride on his.  We know what Berkshire has paid for all of its BNI stock.  So we can come up with an idea of what he considers to be a “fair” price. One thing to keep in mind is that in some cases he bought the stock on “puts” which means he collected a premium for taking on the obligation to buy the stock at a certain price.  In these cases he technically paid less than the price reported because that does not reflect the discount for the premium. 

With recent purchases its obvious he thinks its a good deal in the low 60′s and coincidentally it has also recently hit its 52 week low. But am I saying mimic what he does blindly? No.

 The thing I like about this situation is that I can research BNI on my own, come up with my own valuation for the stock, my own opinion and then compare it to someone elses. This someone else just happens to be far more knowledgable then I am. I am not saying buy a stock just because Buffet buys it.

In alot of cases Buffet gets deals that we can’t. With GE and GS he got high interest perferred shares with lots of consequences in his favor. Those are unique and should not be read as “Buffet is buying GE stock!”. While he is technically buying GE stock he is getting alot more reward and protection than anyone buying their common stock. In this case he is buying BNI common stock without any special deals.  

Risks and other thoughts

There are some things to take in consideration when looking at BNI from the perspective of a personal investor:

1. Buffett has to make large investments. There are great companies selling for great prices right now, alot that will probably make you more money than BNI but they are too small for large investors. This is where you have an advantage over Buffet. BNI is a good long term play but for someone who is not managing billions of dollars there are probably better oportunities. 

2. Buyout. It is possible that Buffett is working his way to a complete purchase of BNI for Berkshire Hathaway. If this happens sooner rather than later you will not get the same return and if it were to happen within a year of your purchase date you could pay higher taxes on your gains. Keep in mind there has been no talk of a buyout, but I think its something to consider. 

Personal thoughts

As I mentioned in a previous post, I look at investing as far more than a vehicle for income. I personally like BNI because I live in South Seattle close to alot of rail activity so I constantly get a personal real life view of my holdings and I derive much joy from that.

Alot of people look at investing primarily as a vehicle for making money.  I on the other hand enjoy researching companies and finding stocks to buy its an interesting activity that also has the potential for financial reward. Having a passionate interest in stocks and companies is key to investing in my opinion. If you don’t posses that then you are probably better off buying an index fund or sticking your money in a safe interest earning account.  Buying something on a tip from a friend or based on market trends to make some easy money is like walking into a casino. You have no knowledge about where your money is really going, you are just interested in turning a profit.  Furthermore without this passionate interest I feel that you will be less likely to learn anything from investing mistakes and hence you will be condemed to repeat them.

My interest in companies and the market is the key motivator behind my investments. The financial pay off is almost secondary but I won’t lie making money is part of the game.  I don’t invest to lose money  However there are some investments I make purely because I want to own a small piece of certain companies . I like being somewhere and seeing there products or signs and thinking “I own a little chunk of that”.  So the point of this post is to describe how I currently buy little pieces of companies just for the sake of having a position and not nessecarily for financial reward.

Currently I use a Sharebuilder account for that.  I mention them not as a promotion but to describe how I use them because their service is somewhat unique.  Primarily with scheduled investments they only charge a $4 commision, you can invest an even dollar amount once a week and you can get fractional shares. 

Let’s take MVL (Marvel Entertainment) as an example. When I first saw that Marvel was publicly traded I thought that it would be really cool to own a piece of the comic book and movie industry. It spoke to the little kid in me. However I know little about those industries. I know very little about Marvel as a company and even after doing some research I might find it does not meet my criteria for buying stocks. But it is still a good company and the fact remains that I want to own it

That is where sharebuilder comes in.  A basic sharebuilder account is free and with the right promo code they will give you $50 4-6 weeks after your first transaction. So you open a free account make one purchase and you get $50, sweet. On top of that for the first month you can try their premium subscription free of charge which gives you 6 free scheduled investments, even better. To top it off you can schedule the premium trial to end at the end of the month so you don’t have to worry about forgetting to end the trial and then getting charged the re-occuring monthly fee. 

For the cost of eating out one night I can buy a share or two of Marvel paying a very low or in the case of a new account free comission and relish in the thought that I own part of a comic book company.

For my normal larger more researched investments I use a full featured online broker with standard comissions and real time trades. I use Sharebuilder to satisfy my desire to own little pieces of America that don’t always satsify my standard investing criteria. 

This is by no means a recomendation to follow my lead.  I am sure some people might think that buying a stock just for the sake of owning that company even in tiny positions is a bad idea. These are all personal preferences and you should always think for yourself when looking at any investment option regardless of the dollar amount.

A few other things worth noting about Sharebuilder:

1. You can setup dividend re-investment (I believe its turned on by default).

2. Scheduled investments happen every Tuesday morning and must be scheduled by the Monday before at 5pm. So you the price you pay for share is not known when you schedule the purchase.

3. Sharebuilder sells fractional shares. So if a stock you want to own is a little out of your price range, for example a Berkshire Hathaway (BRK.B) B share you can purchase a fraction of this share and add to your position over time eventually getting an entire share.

So there has not been a lot of news on the PSD merger lately. This has some people thinking the deal will not go through, these thoughts are reflected in the stock price which has remained around $27.30-$27.50 for a couple of days now.

In my opinion no news is good news. There really should not be much to report unless something goes wrong, so they silence has me quite content that share holders will be getting their $30 per share sometime this month.

One interesting thing to note though is that PSD annouced its quarterly dividend to shareholders on record as of January 21st 2009.  This is a nice added bonus if we end up getting the dividend for this quarter and the buyout share price. 

For more details on the PSD deal read the posts at Oldschoolvalue.

I am unabashed fan of Warren Buffett and I really enjoyed watching this video of him speaking to a MBA class at University of Florida.  Its a little over an hour but its time well spent.  

The video is from 2000, but like all of his advice its timeless. One the things mentioned in the talk that really stuck out in my mind is the following in reference to the failure of Long Term Capital:

 

 

To make money they didnt have and didnt need they risked what they did have and what they did need.

 

He goes on to make an example with someone who has 100 million dollars. If this person can earn 10% a year on his 100 million dollars without leverage at almost no risk, or take some risk and leverage his 100 million dollars to make a 20% return this person would be crazy to risk losing their 100 million for an additional 10%. Especially because they already have 100 million bucks, how is the additional 10% going to make their life that much better? It isn’t it. But the downside if they loose is obvious, they no longer have any money.

The google video link above is for the whole 1 hour talk, its also on youtube broken up in smaller chunks.

Other Warren Buffett videos:

Warren Buffett talks Business

Charlie Rose Interview 

I have been considering starting a blog that is investment oriented, so today when I thought of a good name for it, I decided to run with the motivation and start setting up another word press instance for this site. 

The title “Compounding Life” is a reference to compound interest. I think the idea of compounding can be applied to everything in life; friendships, love etc… So while this blog will be investment focused it is but a small part of interest that ends up getting compounded into my life overall.  I am not really sure of how much interest the topics will be to my immediates friends but I guess we will find out.