The Baby Boomer Investment Theme = Buy Berkshire? (BRKB)

If you believe, as I do, that a major successful investing theme over the coming years is going to be, "follow the baby boomers", there are a lot of ways to invest.

I've talked about some of them before:

Boomers are going to bring a population boom in urologists' offices, so invest in Intuitive Surgical for the coming wave of prostate surgery.

Boomers will need to pay close attention to their money and manage their own retirement income, so invest in asset managers like Legg Mason.

But one that hasn't yet come to mind popped into my head today as I was reading Warren Buffett's annual letter to shareholders (link is a pdf file):

Boomer business owners are going to have to deal with major issues in cross-generational transfers of family businesses, so that will mean great opportunities for Buffett and we should buy Berkshire Hathaway, Inc..

Why is that? Well, Warren Buffett has often noted, when talking about his relatively recent focus on acquiring control of operating businesses instead of buying shares of public companies, that Berkshire Hathaway has become the "buyer of choice" for private US companies.

This is true for a couple reasons, but the main reason that Berkshire is the "buyer of choice" is that business owners can sell to Berkshire but still continue to manage the businesses they've nurtured -- and in most cases, manage them exactly how they have always done, with the only real difference being that the income not needed for business expansion flows to Berkshire to be invested by Buffett. And of course, Berkshire pays cash.

See, Warren Buffett doesn't really want to manage your business or tell you how to do things -- he just wants you to continue making money for him. In his words, Berkshire teams up (this quote relates to the Iscar deal) "with extraordinarily talented managers who could be trusted to run the business after a sale with all of the energy and dedication that they had exhibited previously."

So for baby boomer mini-oligarchs who are nearing retirement and worried about how to pass on the business to their no-good, lazy kids without wrecking it, there's now a better option: See if Warren wants to buy it, and give the kids a bucket of cash instead.

The latest large Berkshire acquisition is no different, though it relates to the Israeli company Iscar instead of to a US firm: Berkshire bought 80% of the company and left the family with 20%, so the family still has a firm stake in their continued success but now also has much more financial flexibility as the generations turn.

So if you're a baby boomer, maybe running about 60 years old and thinking about slowing down, what do you do with your business? (Assuming you've managed to build it up to be worth at least $5 billion, which is Buffett's sweet spot, or built it in an area where Berkshire managers could consider you an add-on acquisition, like construction materials or intimate apparel or pipeline management or, of course, insurance) Maybe you've accumulated a few (or a few thousand) employees and are worried about their futures ... maybe you're not sure how to split the company up among your family ... maybe you need to take some cash out of your business to build a retirement nest egg, but don't want to give up managing the business just yet.

Berkshire Hathaway is the answer for the lucky ones whose businesses have appeal for Buffett and the gang -- they may not pay you what an IPO or a buyout firm would give you, but they'll make a deal in a one-hour meeting and won't strangle you with bankers' fees or drown your pride and joy in silly debt, and they'll let you continue to run the company the way you like ... and they probably won't try to financially engineer all your employees out of a job.

I think that's a pretty compelling argument for the relatively large family-owned companies of the world -- even discounting any estate tax that might threaten the breakup of the company, there is plenty of hassle involved with moving assets from one generation to the next, especially operating businesses, so kind papa Warren, who can turn your business into money without turning you out on your behind, might be just the ticket.

I don't really know if this will mean signifivantly more success for Berkshire Hathaway as the generations turn -- they've already had plenty and probably don't need a tailwind like this to succeed -- but it can't hurt. The more companies Warren Buffett has to choose from in his remaining years at the helm, the better the future looks for Berkshire Hathaway shareholders.

Full disclosure: I own B shares in Berkshire Hathaway, and have no plans to sell. I don't own any companies that Warren Buffett might like to buy, unfortunately.

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Markel now more Berkshire-like than ever (MKL)

I've often noted that I think of Markel (MKL), the specialty line insurer, as having the potential to become a junior version of Warren Buffett's Berkshire Hathaway. And now, the similarities have gotten just a little bit stronger.

The last time I made this argument, it was based not only on the fact that Thomas Gayner, who runs the investments for Markel, invests in a very Buffett-like fashion, or on the fact that Markel actually owns a big chunk of Berkshire shares (among other value-oriented holdings, listed here on Stockpickr), or on the fact that Markel has begun cautiously diversifying away from straight stock market investing with their investments in First Market Bank and a bakery equipment business.

No, perhaps as importantly it was based on the fact that Markel's releases read like Berkshire Hathaway releases -- or put differently, the Markels and Thomas Gayner sound a bit like Warren Buffett.

And now, they're following in his footsteps in another small way, too. Thomas Gayner was just last week appointed to the board (and the audit committee) of the Washington Post Co. (WPO), one of the bedrock holdings of Berkshire Hathaway and a company that Warren Buffett has served as a board member for more than 20 years (albeit not sequentially). It's an interesting board and a great company, though I've unfortunately been too timid about their local TV and newspaper holdings to ever invest and reap the rewards of their Kaplan division and the surprisingly strong performance of the washingtonpost.com division (the rest of the board is listed here, FYI).

So does this add fuel to the fire for speculation that Markel will turn out to be as great an investment as Berkshire Hathaway was a couple decades ago? Well, maybe a little, but it's just a board seat -- I consider it just another tiny indication that Gayner is moving in the right company, but that's really all.

More importantly, Markel releases their earnings report tomorrow morning -- and for someone who's been waiting a long time for the shares to dip so I could buy some more, I'm having trouble making a decision about what to do. Should I buy additional shares this afternoon before the earnings report, or wait until after they report and hope the shares will dip then?

It's a tough call -- Markel has solidly beaten the estimates several times in the past year (and missed them once), but their earnings are notoriously hard for analysts to estimate. One thing everyone agrees on is that this past year was exceptional for Markel, thanks largely to the lack of any big insured losses (as they had with the hurricane season of 2005) combined with the higher rates they were able to charge following those hurricanes, and some great investment returns. So all the estimates have Markel's sales increasing slightly for the coming year, but earnings dipping a bit from 2006 levels.

Will the company downplay future performance on the conference call, and emphasize that the huge upswing in 2006 really was a bit of a fluke ... or will they seem optimistic about 2007? It's pretty impossible to tell, and they usually keep their cards pretty close to their vest.

But with the company's ability to grow book value consistently over time, I'm sorely tempted to buy more -- whether I do so before or after the earnings release, or both, I'll let you know.

4pm update: I did end up buying a little bit more MKL today, I purchased additional shares with a limit order that was executed at $490.68 right before the market close. Ideally, I'd like to own a few more shares and may make an additional purchase if we see a dip following the earnings ... otherwise, I'll wait.

full disclosure: I own shares of Berkshire Hathaway and Markel and may purchase more Markel in the near future. I also partner with the Washington Post/Newsweek Interactive Blogroll for advertising purposes.

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Looking into Asset Managers (LM, RJF, AGE)

I sold my only big investment bank holding recently in UBS, and I've been thinking that, although I have a lot of holdings in insurance companies (in Markel and Berkshire Hathaway), I think it makes sense to own a US asset manager.

The primary argument for this is demographic -- with the retirement of the baby boomers looming, and the massive intergenerational transfer of wealth taking off in the decades to come, I think the companies that can offer simple solutions for asset management should do well for many years. Berkshire may get some benefit from this eventually, since they do sell some annuity products, but it certainly wouldn't move the needle of their performance numbers.

There are a few different ways to go.

I could invest in one of the big brokerage houses, but their shares have climbed so dramatically and they are so dependent on their own proprietary trading and on M&A fee activity that I'm not entirely confident that the demographic shift is going to be of huge additional benefit to Goldman Sachs, Merrill Lynch, etc. (though I do have some LEAP call options on Goldman Sachs, just in case they're able to keep this growth going).

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Or I could invest in one of the smaller regional brokerage/investment advisors -- this would include Raymond James (RJF), or AG Edwards (AGE). I think these might actually be good buys, and I think AG Edwards is often overlooked as an investment, so that's a strong possibility if I can get my head around which one of these companies is likely to be able to grow their footprint as well as take advantage of the growing assets of their near-retirement clients.

And finally, I could look at a company that primarily manages mutual funds. There are tons of these as well, and many of them are public -- two that have caught my eye in the past are Legg Mason (LM) and Affiliated Managers Group (AMG), which is the umbrella holding company for lots of excellent firms like Third Avenue. Most of these companies also manage private accounts in some fashion, and some also offer brokerage services. I think the AMG stable of funds is one of the finest ones in the industry, but I don't like the valuation of the company very much right here.

Legg Mason, however, really appeals to me. Being generally a long term investor, I am very intrigued by the huge fall the shares have had this year for what I consider to be short term problems -- they've had several hiccups in integrating their massive asset swap, the big deal everyone probably heard about when they swapped their brokerage for Citigroup asset management business, and they've gotten some negative attention over the past six months as it appears Bill Miller, their biggest fund managing star, is going to finally lose out to the S&P for the first time in 15 or so years.

LM might still run into trouble as they continue integrating their new funds and clients, and it's possible that a serious market correction could bring prices lower, but at the moment this company is at the top of my list as I search for investments that might benefit from the baby boomer retirement years. I'll let you know if I decide to actually purchase shares.

full disclosure: I own Berkshire Hathaway and Markel shares, and LEAP call options on Goldman Sachs, and I have money in several Third Avenue mutual funds.

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The Next Berkshire Hathaway? (MKL, SHLD, BRKB, WTM, FFH, LUK, BAM)

There are few things more entertaining or evergreen in stock investing than the search for the next Berkshire Hathaway (BRKB) and the next Warren Buffett -- with Berkshire having a nice renaissance in the last few months (up 20% or so) as they make headlines for breaking the $100,000 mark, I decided to check in on the search again.

Jim Cramer thinks he's found the next Warren (though he's far from the first to say so) in hedge fund whiz-kid turned Sears Holdings (SHLD) Chairman Eddie Lampert ... and many folks have identified other candidates, from Prem Watsa (at one time known as the "Canadian Warren Buffett") up at Fairfax Financial (FFH), to the guys at Markel (MKL). I've argued that Markel seems very Berkshire-like in the way they do business and conduct their conference calls (though having such a call is not very Berkshire-like), but they're definitely not the only ones.

Cramer is friends with Eddie Lampert and has talked about him for years, which may be coloring his assessment, but it's also a pretty nice, tidy argument to make. Warren Buffett started with a successful investment portfolio of moderate size, took over a failing company in Berkshire (a textile mill, if I remember correctly), diversified into a high-cash flow business (insurance -- most profitably GEICO), and figured out how to use insurance float and a contrarian bent to magnify his investing acumen.

Just as an aside, Cramer has also argued that Google and Goldman Sachs are good "next Berkshire" companies -- though presumably more for their high-dollar price points and growth potential than for any likelihood that they'll become investing conglomerates or holding companies.

Eddie Lampert is certainly, for a young man, a dramatically successful investor -- his ESL Investments hedge fund is generally admired for tremendous returns, and he certainly does follow some of the same contrarian investing principles as Buffett, though he has tended to be an activist investor rather than a buyer of entire companies ... and in my opinion, he has focused more on financial efficiency and on unlocking value than on building companies with great operating performance. To be fair, that's something like what Buffett did in his not-entirely-friendly takeover of Berkshire in the first place, so maybe my opinion is colored more by Buffett the friendly billionaire philanthropist than Buffett the aggressive young takeover investor, who probably shared many more of Eddie Lampert's current qualities.

I expect Lampert would need to focus on either ESL or Sears Holdings as his investment vehicle -- his hedge fund already has big investors like Michael Dell and David Geffen, and while SHLD probably makes up at least 2/3 of ESL Investments' holdings, it's not as if the two are the same. Buffett ended up having to drop his Buffett Partners investment vehicle to focus on Berkshire -- will Lampert do the same, or does he need to?

No one really knows what he'll do next, though speculation remains rampant that Lampert will be looking for acquisitions now that Sears appears to be stabilized (though the actual department store chain is still an awful business, as far as I can tell). As an outsider (though I did own Sears shares for a while and regrettably sold them well before the recent runup), I lke that Lampert's SHLD doesn't issue guidance and seems to be focused on the long term, but I don't like the fact that the companies he has worked with generally focus on improving near term profitability, arguably without an eye on long term business success. I think Sears will probably continue to spin out a lot of cash that Lampert may use effectively, but I question the staying power of the Sears stores and wonder if he's just milking a dying cow. I could easily be wrong on that.

Markel (MKL), as I've written before, seems to be following a very similar tack to Berkshire Hathaway -- albeit skipping the first few steps of buying the failing textile mill, etc., and instead moving straight into the lucrative insurance business. One of the things that stands out for me, aside from the great performance from their insurance lines during this nice rebound year for the insurers, is that management really SOUNDS like Warren Buffett in their corporate releases. And with their investment in the local First Market Bank in their local VA stomping grounds, there's some speculation that they're starting to spread their wings, investment-wise, and begin investing some of their prodigious cash flow outside the stock market (even as Thomas Gayner, who runs the investments for Markel, focuses on a lot of the same conservative, boring criteria as Buffett has in making hugely successful stock investment decisions).

What are some of the other companies that might look a little like a young Berkshire?

White Mountains Insurance (WTM) comes up with some regularity, not least because Buffett has owned shares for ages. Another insurance conglomerate, with a strong investment portfolio but without the Berkshire focus on buying operating companies in other industries, White Mountains may be a great investment -- and certainly an underlooked one, with shares trading well above $500 according to the Buffett anti-split preferences. But with the aging insurance legend Jack Byrne at the helm this feels more like a current Berkshire Hathaway, Junior than a company that's likely to take it to the next level in the coming decades.

Leucadia (LUK) wins for having the most Berkshire-like website (just compare http://www.leucadia.com to http://www.berkshirehathaway.com). It's a relatively small company for all the investments and properties they own, and I'm sure there's a significant "conglomerate discount" built into these shares to compensate for the fact that anyone buying LUK shares has to understand operations as diverse as wineries, timber, telecom, and manufacturing. I believe Leucadia started as a financial company, but is no longer significantly exposed to insurance or banking as far as I can tell -- this is certainly an intriguing company for further research.

Prem Watsa at FFH seems to be too much of a lightning rod at this point for my taste -- I'd rather not buy into a company with so much legal risk, even if he has shown some promise in building an insurance holding company in Canada (and the shares may have more volatility than any other pretender to the Berkshire throne, which some folks like).

Also up North -- the former Brascan, now Brookfield Asset Management (BAM), has been hugely successful both in managing money for institutions and in building up a collection of hard assets in, among other areas, real estate, timber, and power generation, and may be able to use the recent Canadian Trust tax law changes to buy up some valuable trust assets on the cheap, not unlike Buffett's investment in MidAmerican Energy back when pipelines seemed boring ... but while the conglomerate is growing and I'm intrigued by the opportunity ahead for this company to potentially build itself into the Macquarie of North America, there's no hint of the kind of quiet under-the-radar wealth building that early Berkshire investors enjoyed.

Others that have done a great job of building conglomerates and becoming bazillionaires? The Rales brothers who built Danaher (DHR) come to mind, and I used to own shares in that company -- but given their extremely hands-on management style and focus on manufacturing this is really more like GE Junior than Berkshire Junior.

The search goes far and wide. A Motley Fool author argued that Joel Greenblatt is investing like Warren Buffett, though he doesn't run a public company that we can invest in -- so that's not exactly the same kettle of fish.

And smaller companies with intriguing holdings or misunderstood book value often get compared to Berkshire -- including PICO holdings, described here by Cheap Stocks.

There's even a small Chinese holding company that likes to say that it has a "Berkshire Hathaway model" for China (I don't know anything about this company, they seem to be some sort of a venture investment group).

But maybe we're missing the real story -- is Buffett really just the next William Jardine? Jardine Matheson (JMHLY.PK or Jardine Strategic at JSHLY.PK, both are difficult to trade) is an international conglomerate that owns pieces of everything from the Mandarin Oriental hotels to Hong Kong Land to Astra ... and some big insurance operations.

I'm still nervous about Sears Holdings, with so many people buying it because they want to ride along as Eddie Lampert invests the Sears cash flow into other companies -- but maybe that's like being nervous about Warren Buffett buying a suffering textile mill, perhaps I just need to see through my hangups about Sears and trust in Cramer and Lampert.

For my taste, right now an investment in Markel feels much more solid -- I know I'm getting a company that focuses on profitability and growth in book value while ignoring their stock price, and I know they have the built-in insurance company advantage that Buffett had of investing with other peoples' money. Leucadia is very tempting for me if I find time to really delve into their operations, but I like the potential of Markel, and Berkshire itself (especially if they become a massive dividender following Buffett's demise, as I think is quite possible), more than that of White Mountains right now.

It's a fun game, but of course we're as likely to find the next Warren Buffett today as our parents were forty years ago -- and the brilliance of Buffett was certainly not taken as gospel even back in the 1980s, when you could have bought A shares for well under $1,000. If the next Buffett is out there right now, getting his business started, we'll probably overlook him -- after all, he'll probably be a boring, small-town businessman in a cheap suit, running a snoozy business and flying under the radar.

If you're lucky enough to find a small company with steady and ethical management, a contrarian bent, a focus on building cash flow, and a distaste for quarterly stock market performance metrics, it may be worth a shot -- especially if no one is calling it the next Berkshire Hathaway, and especially if your broker thinks you're crazy for asking about it.

Disclosure: as of this writing I own shares in Markel and Berkshire Hathaway.

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Best Management?

A reader emailed today to ask what I think about Berkshire Hathaway, and, more generall, which management teams most impress me. I thought I'd answer for everyone in case anyone else is interested.

Berkshire Hathaway is still in my portfolio, and has been for about a year and a half ... but it's at roughly the same price today as it was when I bought it. I have the utmost respect for Warren Buffett, and I'm pleased that they have further clarified the Berkshire succession plan.

I like Berkshire because Buffett has done more with "free money" than anyone else -- his use of the "float" to fund long term investments has clearly been brilliant, as evidenced by his trouncing of the S&P 500 over the last several decades. My position on Berkshire is that I expect it to continue to plod along, acquiring solid companies and using their clout to be the insurer of last resort for many high risk enterprises, at significant profit. But I don't expect any rapid growth -- my fear is that Berkshire will end up so large that it effectively works as an index fund with cheap leverage from the insurance float, and even that is a fine scenario. With new money today, however, I'd be more tempted to put additional funds into Markel, as they have the kind of potential growth ahead of them that Berkshire had 25 years ago, assuming they make the right decisions ... Berkshire just can't grow that fast anymore.

And as for management -- perhaps it would be simplest to just list some of the things I like about some of the managers I trust the most:

In terms of trusting someone to make investment decisions for you, I do think it's hard to go wrong with Warren Buffett -- but if I ever sold my Berkshire shares and wanted a similar value-investing exposure in my portfolio I would have no qualms about giving the money to the investment team at Dodge and Cox Stock, which I already have some retirement money invested in, or with Martin Whitman at Third Avenue Value, who I would consider the single smartest long term stock picker available right now (but he's nearing retirement, too, I expect).

In terms of sharing information fully with investors, and making small investors feel they are on the same page as the management team, I'd trust the Oliveira family, controlling shareholders of Gol Linhas Aereas Inteligentes. Without playing a self-serving game with analysts to lowball and then beat their projections, they manage to clearly open up the books and explain their business, including monthly updates on their business performance -- it's rare for an American company to do that with such enthusiasm, and it's rarer still for what most would consider to be a risky emerging market investment.

Another thing I like to see from management is insider buying -- it always encourages me when executives put their own money, not options, into the company they know best. Of course, they know that, too, so it can be self serving ... but when executives aggressively purchase their own stock I think we'd be wise to follow. On this point, it's worth taking a look at Chesapeake Energy, of which I own preferred shares, and see CEO Aubrey McClendon buying up well over a million shares on the open market in the last couple of months at prices right around where it stands today (mostly higher, in fact). Add to that the fact that he has led the company to make strategic natural gas acquisitions now, when prices are relatively low and pessimism high, and I think you have the makings of a manager who's looking out for the long term interests of shareholders.

There are others who I like as well, for some good reasons. I am a big fan of Selim Bassoul at Middleby, who has shown a real talent for bringing focus and drive to a small company that was too diversified ... and then being aggressive about making acquisitions to shore up their core business in commercial kitchen equipment with Nu-Vu and, perhaps, Enodis if they stay in the bidding for that company.

And if you're looking for a management team that is relentless customer-focused, continuing to bring out product lines that their core consumers will buy and treating those customers like royalty, you need look no further than Chico's -- the shares are taking a beating lately, but I'd trust this management team more than any other in retail to recover from their merchandising hiccup and continue delighting customers. I don't think any other CEO cares as much about the soft side of customer service as Scott Edmonds does at Chico's, and their focus on their "lifetime passport members" and on personally writing to their best customers clearly creates some fiercely loyal consumers. I'm tempted to buy more here, now that it's on clearance.

On a more strictly financial point, I also should mention John Fredriksen, whose right-hand-man Tor Olav Troim heads SeaDrill. Often described as a viking raider, Fredriksen is not someone I'd probably like, and I don't know that he's the person I'd want managing my business if it was something I wanted to hold forever, but as a controlling shareholder he has a track record of being extremely aggressive in unlocking value in high priced assets and returning cash flow directly to shareholders ... including himself, of course. Sometimes his massive dividending out of cash might not be the best long term move for the companies he owns, but it certainly benefits shareholders immensely when he times it right, as he did with Frontline a couple years ago ... and as I hope he'll do with SeaDrill over the next two or three years.

Those are just a few things I like about management -- a focus on investing your money wisely, a propensity for insider buying, eagerness to share information with investor without trying to manipulate them with pointless press releases, a strong focus on their customers and a track record of pleasing them, and a desire to return cash to shareholders. It's not often, if ever, that I find all those things in one company ... but even one of those things, if the story fits well enough, can be enough to get me interested,

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Buffett makes a buy

I'm traveling this week unexpectedly so won't be posting much, but I didnote that Berkshire Hathaway made an acquisition today that caught my eyewhen they bought the closely held Business Wire.

Business Wire isone of a few companies that issue all those thousands of press releases forinvestors that we all see every day. What I found especially interestingwas that Warren Buffett, who seemingly has issued fewer than ten press releasesin his entire life, is now owner of a company that thrives on those veryreleases. I guess he can see where the money is, even if he disagrees withthe system.

I don't expect this little business will make much impactto the bottom line of Berkshire, but it's interesting to see nonetheless-- and it's certainly an easy to understand business that makes money despitethe new technology impacting it's environment.

Have a great week, everyone. I'll be catching up on all the news and analysis soon, I hope.

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Annual Checkup -- BRKB

For the very good and very reassuring reason that there hasn't been anything important to say, I haven't written anything this year about my investment in Berkshire Hathaway (BRKB -- click to register for free RT streaming quote). Right now my holdings in Warren Buffett's holding company are roughly at the break-even point -- down one or two percent from my purchase back in March. I have no intention of ever selling my BRK shares -- I expect that the company will continue to be a large and steadying presence in my otherwise pretty volatile portfolio. I do think that the shares are likely to advance in the coming couple of years as utility deregulation gives Buffett more opportunity to leverage his investment in Mid-American Energy and his bets agains the US dollar yield some fruit (I'm just guessing that the dollar will decline further in the next couple years , but I could easily be wrong). BRK took a bit of a hit in the Katrina aftermath, but while they do have many liabilities to pay out in the Gulf they also will profit from the rebuilding through their several construction materials and prefab housing companies. I expect the worst thing that could happen to BRK would be Buffett's retirement or demise, but I think the value of the company's holdings (now carried on the books at a small fraction of their true value) will win out over time, and anything bad that happens to Buffett might be a good buying opportunity if we believe in the rest of his management team and his (top secret) succession plan. I'm certainly not going to sell, but I won't watch my BRK shares that closely this year either.

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