$5 billion in preferred shares

According to CNN/Money/Fortune (“What Buffett deal says about Goldman Sachs,” March 28, 2013), “Goldman handed over $5 billion in preferred shares and a warrant that would allow Buffett to purchase an additional $5 billion shares at a price of $115, even though the shares were trading at $125 at the time.”

Buffett was “in the money” right from the start.

Warren Buffett reportedly took a $3.2 profit on a four-and-a-half-year investment in Goldman Sachs

But there’s more …

Goldman agreed to pay Berkshire a yearly 10% dividend on the preferred stock. The preferred stock also carried an option, allowing Goldman to buy back the stock at any time for a 10% premium over what Berkshire had paid. Goldman exercised that option, according to CNN/Money/Fortune, in April 2011 for $5.5 billion.

“Linus Wilson, a finance professor at the University of Louisiana at Lafayette, who has looked at the Goldman deal, puts the dividends at $1.3 billion. So that gives Berkshire a total return of $1.8 billion on the preferreds,” states the CNN/Money/Fortune article.

Now come the warrants …

Buffett closed the deal with Goldman on March 26. Here’s the kicker …

“Buffett’s firm won’t have to put up the $5 billion to buy the 43.5 million shares it has a right to purchase, which would be worth roughly $6.4 billion today,” reports CNN/Money/Fortune. “Instead, Goldman is going to give Buffett the difference in stock at the time of the deal. Buffett’s return is the same, but he’s left with a much smaller stake in Goldman.”

The end result is Buffet received 9.2 million shares or a 2 percent stake making him the ninth largest investor in Goldman, according to Reuters. Based on the $144.76 closing price of GS on 4/25/2013, those shares are worth $1.346 billion. Berkshire also receives annual income of $18,600,000 based on Goldman’s $2.00 dividend.

A return of 64% in four-and-a-half years …

How did the investment in Goldman turn out? How did Berkshire shareholders fair in 2008 and on, just when the financial industry crumbled and the government began bailing out financial firms?

Buffett took “a $3.2 billion profit on his four-and-a-half-year-old investment in Goldman, for a return of 64%,” says the CNN/Money/Fortune article. “A classic value investor move. Swoop in when others are selling, and pick up dollars for pennies. Buffett’s legend is secure.”

This time, I’ll share a few of Buffett’s ideas on energy and transportation. Afterward, we can take a look at Wooden’s “Pyramid of Success.”

Warren Buffett: An Energy and Transportation Mogul

I like the subject of energy. The sector includes the big oil companies — ExxonMobile, BP, Chevron, Marathon Oil and ConocoPhillips, to name a few. And in my opinion, the sector has a resilience to it, a kind of staying power.

Warren Buffett, Chairman, Berkshire Hathaway Inc.

Bear in mind that I’m not trying to steer you toward buying oil stocks. This article is meant to be a simple discussion to illustrate some investing points. Having said that, I can sum up the energy sector with one word: demand.

The world is in the midst of a large and important green movement to help preserve our planet. Even so, I believe along with others that the demand for energy worldwide will continue to grow.

Note this point from ExxonMobile’s 2012 Summary Annual Report:

“By 2040, demand for transportation fuel is expected to increase by more than 40 percent versus 2010. Relatively flat demand in developed markets is expected to be overshadowed by growth in developing markets, such as China, India, and Latin America.”

The tie-in with Warren Buffett and his partner Charlie Munger is this: Through Berkshire Hathaway, they own MidAmerican Energy. In writing to Berkshire Hathaway shareholders this year, Buffett notes that MidAmerican has “recession-resistant earnings” and has a “great diversity of earnings streams.” In other words, Buffett and Munger have confidence in this investment.

“Our confidence is justified both by our past experience and by the knowledge that society will forever need massive investment in both transportation and energy.” — Berkshire Hathaway Inc. letter to shareholders.

MidAmerican now represents 6% of the country’s wind generation capacity. When several solar projects are completed, MidAmerican will own about 14% of the U.S. solar-generation capacity, states Buffett to Berkshire shareholders.

On the transportation front, Buffett’s play has been BNSF Railway. The company handles about 15% of all inter-city freight, when measured by ton-miles, according to his Berkshire letter to shareholders. The 15% share of ton-miles includes all carriers — truck, rail, water, air and pipeline. Buffett adds that BNSF “moves it’s cargo in an extraordinarily fuel-efficient and environmentally friendly way carrying a ton of freight about 500 miles on a single gallon of diesel fuel.”

Now, here’s my take on energy and transportation. They’re good sectors. By good I mean that the companies tend to be established. They often pay regular dividends, and I believe that most companies in these sectors turn a profit. I haven’t researched every individual energy and transportation stock, but of those I have I’m impressed with their strong balance sheets. These companies tend to maintain healthy cash positions.

I’d also say that many of these companies have established a track record of raising their dividend payouts. Most also have been repurchasing their outstanding stock, and when they do that helps to keep the stock price up. Stock buy-back programs reduce the number of outstanding shares, leaving fewer shares to pay dividends on. That usually means that dividends per share will increase.

Buffett is on to something good, in my opinion. He believes the energy and transportation sectors will continue to deliver good results, and the sectors meet the criteria he likes. Enormous sums of capital are required for new projects, and he expects those projects to generate long-term streams of increasing income. My advice to you: Stay on the train.

Buffett has pumped $13 billion into the energy sector, according to his letter to shareholders. I get the sense Buffett will make additional investments in energy and transportation and likely turn a profit. I think it’s been a shrewd investment for Buffett, and one few other individuals saw ahead of him.

John Wooden: The Pyramid of Success

Ten-time NCAA champion basketball coach John Wooden built his success and the success of his teams by adhering to several important principles. Over time, he developed what he called his “Pyramid of Success.” He viewed the Pyramid as a way to articulate key principles to others.

John Wooden, UCLA’s legendary basketball coach.

The Pyramid is comprised of several building blocks. The blocks represent fundamental personal qualities. Wooden identified 17 qualities that he felt were critical to achieving success in life. They include industriousness, friendship, loyalty, cooperation, enthusiasm, among others.

“I decided that the individual blocks of the Pyramid would consist of those personal qualities necessary for achieving success according to my definitions: peace of mind that is the direct result of self-satisfaction in knowing you did your best to become the best you are capable of becoming.” — Wooden: A Lifetime of Observations and Reflections On and Off the Court.

It’s not my intent, nor my place, to reproduce Wooden’s Pyramid here. You’ll find The Pyramid presented in many books and online. What I’d like to say is that Wooden was onto something: A successful pursuit requires laying a solid foundation.

How does this relate to investing?

You: Focus on Smart Opportunities

We can, of course, define success in investing in many ways. As an advisor, I look to clients to decided what they would like to achieve. Goal-setting is important. Common goals include pursuing lifestyle dreams, leaving a financial legacy or inheritance, being able to travel, and pursing a variety of personal interests. All of them require starting with a foundation — a well-thought-out, wealth management plan.

So, here’s the take-away from Wooden: Never deviate from your plan. Wooden never deviated from pursuing qualities, such as industriousness, friendship, loyalty, cooperation and enthusiasm.

Buffett is the same. He, too, never deviates from investing according to a solid plan. His plan includes investing in things he’s comfortable pursuing. Since energy companies continue to do what has worked well in the past, he’s willing to apply resources to the sector. He’s also willing to look far into the future. This perspective allows him to give his investments time to develop.

I’m not trying to make it seem like investing is easy. Investing has risks. The stock market comes with downturns and disappointments. But a good game plan can go a long way. We can help you manage your risks by staying diversified, by reviewing your portfolio regularly and by staying focused on well-managed companies and smart investment opportunities.

Call my office if you’d like help getting tickets to the Berkshire Hathaway annual meeting to be held Saturday, May 4th, at the CenturyLink Center in Omaha.

P.S.: Many of you enjoyed seeing my recent family photos and reading about our recent activities. If you missed that email, please take a look.

Nonessential Luxuries Are Not Worth 401(k) Penalties

With the price of food and gas on the rise, are you tempted to tap a 401(k) balance to pay for larger, nonessential expenses such as buying a new car, new furniture or taking a family vacation? My advice: Don’t do it.

Consider the implications

While many 401(k) plans offer loan options to account holders, the costs associated with doing so are steep. Consider the implications of borrowing money from your 401(k) …

• Risk: You may not be able to pay the loan back because of disability or loss of your job.
• Under-performance: You would lose out on future investment gains and compounding opportunities by taking that money out of play now.
• Taxes: You will be borrowing pre-tax dollars and repaying the loan with after-tax dollars, so you will have to work more hours to replace the same amount of money.
• Fees: You may have to pay fees, which your plan may impose on such loans, such as asset liquidation fees.

There’s a reason they call it a “hardship” withdrawal. Those words should factor into any decision you, your adult child or another family member makes to tap retirement savings for anything other than retirement.

$60 billion being penalized

A recent Financial Advisor article reported loans taken against 401(k) savings are down — below their 22 percent peak in 2010. However, many firms still estimate between 13 to 18 percent of retirement accounts have a 401(k) loan. More than 25 percent of the $294 billion deposited into 401(k) funds annually is being used for non-retirement purposes including mortgage payments, credit cards or other bills.

Time reported penalized withdrawals from 401(k) plans increased to more than $60 billion in 2010, up from $36 billion in 2004.

Budgeted, not borrowed

Vacations, new cars, going back to school for a second (or third) degree and even buying a home are not hardships. These are expenditure decisions that should be worked into your budget — not borrowed from your future.

If you or a family member is considering a 401(k) early withdrawal, hardship withdrawal or loan, please call our office for help in considering all the implications.

At the same time, I’ve been reading Warren Buffett’s most recent letter to Berkshire Hathaway shareholders. Like Wooden, Buffett rolls up his sleeves and works hard, always trying to advance his performance.

Had anyone ever compared in the same article the thinking and points of view of these two outstanding men? I wondered if I might be the first.

John Wooden

John Wooden’s UCLA teams won 10 NCAA basketball championships in 12 years, including seven national championships in a row from 1967 to 1973. Wooden says the key to his teams’ successes involved thorough preparation.

John Wooden, UCLA’s legendary basketball coach.

“There were many, many games that gave me as much pleasure as any of the ten national championship games we won, simply because we prepared fully and played near our highest level of ability.” — Wooden: A Lifetime of Observations and Reflections On and Off the Court.

For Wooden, practice sessions were critical. He made full use of them to prepare for games.

“I would spend almost as much time planning a practice as conducting it,” he wrote in Wooden. “Everything was listed on three-by-five cards down to the very last detail.”

UCLA team practices were less than two hours long. However, Wooden and his coaches would often invest more than two hours per practice organizing them. The assistant coaches knew each session’s drills and plays down to the minute. They knew when a drill needed two basketballs at one end of the court and when it needed five basketballs at midcourt.

“The pressure I created during practices may have exceeded that which opponents produced [in actual games],” Wooden wrote.

Everything was planned. Nothing was left to chance. Players’ decision-making was rehearsed well in advance of live game play. Players learned to respond to the dynamics of the game, rather than react to it with poor judgment.

I believe that something can happen with smart financial planning. We can set financial goals, put plans in place and make many decisions in advance of investment “game time.” This way, emotions can be minimized when market turmoil challenges one’s investment program. While a specific investment performance can never be guaranteed — just as the outcome of a particular basketball game can never be predicted — many smart decisions can be made upfront, so long as an individual is helped to know their investment preferences and has a solid financial plan in place.

“It all began with attention to, and perfection of, details,” Wooden wrote. “Details. Details.”

Warren Buffett

The annual percentage gain in per-share book value of Berkshire Hathaway from 1964-2012 was 586,817%, compared to 7,433% for the S&P 500 (dividends included) over the same period. That 48-year record of investment performance is simply astounding.

Warren Buffett, Chairman, Berkshire Hathaway Inc.

“More than 50 years ago, Charlie [Munger] told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price.” — Berkshire Hathaway Inc. letter to shareholders.

Buffett believes that you have to keep working hard, keep investing and keep thinking of the long-term. I think this simple point of view often leads Buffett and his partner Charlie Munger to see investment opportunities often before others do. But, they won’t do something just to do something. (Though disappointed, Buffett made no major acquisitions during 2012.)

Yes, Buffett and Munger stay focused. They do their homework — I mean, they really make thorough investigations before making investment decisions. And logic and rationale backs what they do.

Take newspapers. Who would have thought that newspapers in the 21st century could be a worthy long-term investment? Aren’t they getting creamed by all the “free” news sites on the Internet? Aren’t many folks canceling their print subscriptions? Isn’t print advertising down?

I personally don’t know the answers to those questions, but here’s what Buffett wrote to shareholders …

“Charlie and I believe that papers delivering comprehensive and reliable information to tightly-bound communities and having a sensible Internet strategy will remain viable for a long time.”

In the past 15 months, Berkshire acquired 28 daily newspapers at a cost of $344 million. Included among the purchases was the Omaha World-Herald. Why the investment?

“News, to put it simply, is what people don’t know that they want to know,” Buffett wrote.

Buffett argues that newspapers “continue to reign supreme” in the delivery of local news. That is, if you want to know what’s going on with the mayor, taxes or high school football in your hometown, you need to take the local paper (or, subscribe to the local paper’s online edition … or, subscribe to them both). Fundamentally, people need their local news. It’s a service many will pay for.

You have to admit that Buffet and Munger have an interesting premise and that they think long-term. And that’s important. I’m not here arguing for investment in newspapers. I’m arguing here for investment in you — you 10, 15, 20 years from now.

You

You can’t control the direction of the stock market, but you can sit down and work on a wealth plan for the long haul.

Lately, the Dow and the S&P have seen some big movements upward. Will they continue going up? Or, will there be a correction? Some investors have the stock market sell-offs of 2008 and 2009 still fresh in their minds. Let me assure you. No one knows which way the markets are heading. But we might ask: What would Warren Buffett do? What would John Wooden have to say?

Buffett: “Charlie and I believe it’s a terrible mistake to try to dance in and out of it [the stock market] based upon the turn of tarot cards, the prediction of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

Wooden: “I liked to think that by game time my work was virtually done, that I could almost go up into the stands and watch the game without saying a word because my team was so well prepared. … I was so comfortable before most games that I could take a nap if I wanted to.”

Call my office if you’d like help getting tickets to the Berkshire Hathaway annual meeting to be held Saturday, May 4th, at the CenturyLink Center in Omaha.

Following his speech, Wooden provided me with copy of the book, Wooden, which I have been quoting in this article. Copies can be found on Amazon.

In “The Coach and The Oracle — Part 2,” which I plan to publish in April, I’ll share more lessons from Warren Buffett and John Wooden, including some insights on the energy and transportation sectors and more on coaching, teaching and leading.

P.S.: Many of you enjoyed seeing my recent family photos and reading about our recent activities. If you missed that email, please take a look at it.

Retirement is a big life transition that changes the way you and your family take on the world. But just because you reach the age when you are allowed to withdraw retirement money without penalties, or the age when you can begin receiving Social Security, doesn’t mean you have to start doing so.

You should have an understanding of what drives you. All too often, people choose to retire without examining their motivations.

Here are 5 questions:

1. How might you feel to not have a purpose for getting up each day?
2. How might you or your spouse miss your title/perks?
3. How might not having other people come to you asking for advice make you feel?
4. How will the loss of structured time affect you?
5. How will retirement affect friendships and connections you have made in the workplace?

As you begin to think about what work does for you, you can begin to understand why retiring can leave you unsettled. Leaving full or part-time work can be a major life transition.

Also, some financial decisions made in retirement can have lasting consequences. For example, I have seen many people roll over their retirement plans into IRAs, which in retirement they can access without penalties. At first, they see this large pile of money and begin thinking of all they have wanted to do. In my opinion, they start making some financial mistakes. They upsize and remodel their homes, when probably downsizing would be the smarter move. They buy new cars. They reach out financially to aid family members. They go on vacation after vacation.

To be prepared for retirement life, try this test. Try to live for one year completely within your projected retirement budget. Watch your checkbook closely. Live for a year as a retiree. It can be a great reality-check and help you to plan accordingly.

We want your retirement experience to be the one you’ve always dreamed of. If you are worried about whether you are ready to retire, or if retirement isn’t what you expected, contact our office today. We can help you evaluate all the aspects related to your retirement years and create a comprehensive and personalized plan especially for you.

Please contact my firm at your earliest convenience to schedule an appointment.

Some investors panicked when the stock market dropped in 2008 and 2009, but clearly long-term investors have been rewarded for their staying the course. Generally, those who reinvested their dividends and continued to buy stocks have seen gains. Since diviends have tended to inrease the past few years, investors who took their dividend income have seen their income increase.

Lately, there has been some positive economic news. The unemployment rate has continued to drop, and the housing sector seems to be gaining steam. If the economy continues to improve, interest rates and inflation may have a tendency to rise. We’ll keep on eye on that potential impact.

If stocks begin to look overpriced, we may recommend adjustments for clients. We’ll be watching company earnings, cash reserves and other indicators to make assessments of market performance and what this may mean for our clients’ portfolios with an eye on their long-term goals and risk tolerance.

Like you, I’m looking forward to spring.

Below are some of the activities we did as a family this winter.

Ice Skating

This is one of my favorite activities – skating. I grew up skating, having started at age 3. So, I love to get the kids out to the rinks whenever possible. Here Claire and Jake skate over Holiday break at the Moylan Iceplex at Tranquility Park in Omaha.

Skiing

My wife, Susie, loves to ski. Having gone to school at Colorado State in Fort Collins, Colorado, she skied whenever possible. Here she took the kids skiing at Mt. Crescent in Iowa, on a holiday break from school.

Holidays

Jake and our dog, Penny, pose on Christmas Eve 2012.

Soccer

Claire loves soccer. Here she is at soccer practice with the Omaha FC Academy Program.

Basketball

Susie and I catch a Creighton basketball game. While neither of us attended CU, we love going to the games and rooting for the team.

As always, it’s a pleasure doing business together.

Income-tax rates: These remain the same for individuals earning less than $400,000 and couples earning less than $450,000. Income above those levels will now be taxed at 39.6%.

Capital gains and dividends: Still taxed at 15%, except for filers above $400,000/$450,000, whose rate will increase to 20%. Without this agreement, capital gains would have been taxed at 20% for most filers, but dividends would have been taxed as ordinary income. So this is a huge win for most investors.

Estate tax: Set permanently at a top rate of 40% on estates valued at more than $5 million ($10 million for couples). It will be adjusted annually for inflation.

The Alternative Minimum Tax: “Patched” permanently, preventing a significant tax increase on an estimated 30 million taxpayers this filing season.

Muni bonds: Income earned from municipal bonds will remain tax-exempt.

Exception: Payroll tax increase. Employees’ share of Social Security taxes will return to 6.2%.

Health care reform surtax of 3.8%: This is imposed on the unearned income—capital gains, dividends, interest, royalties, rent, etc.—of individuals earning more than $200,000 and couples earning more than $250,000. That provision was not part of the fiscal cliff negotiations, and it took effect as anticipated on Jan. 1.

There certainly are more details in Congress’s fiscal cliff agreement. Please call our office for assistance. While we are not tax advisors, we can point you in the right direction to get questions answered.

Read my article, which ran in the January/February issue of Omaha Magazine, If you have a copy of the magazine, you’ll find it on page 38. Or click on the image below to open it.

The White House

January 21 is the Inauguration Day for President Barak Obama, a Democrat. Will his second term in office have an effect on the performance of the stock market? Sort of.

Since 1928, 4 Democratic presidents are among the top 5 Presidents whose terms have had the best S&P 500 stock index performance. Among the 5 presidential terms associated with a cumulative loss in the S&P 500, 4 occurred under Republican Presidents.

On a median basis, however, the performance of the S&P 500 during the terms of the two parties runs neck and neck.

Presidential Term
S&P 500 Performance, 1928 to Date

S&P Price Return*

162% Franklin D. Roosevelt (first term)
79.2 Bill Clinton (first term)
77.8 Barack Obama
72.9 Bill Clinton (second term)
69.9 Dwight D. Eisenhower (first term)

68.6 Harry S. Truman (full term)
63.6 Ronald Reagan (second term)
51.2 George H.W. Bush
35.0 Dwight D. Eisenhower (second term)
33.1 Ronald Reagan (first term)

27.9 Jimmy Carter
27.5 Franklin D. Roosevelt (third term)
27.3 Gerald Ford (partial term)
24.4 Lyndon B. Johnson (partial term)
17.4 Lyndon B. Johnson (full term)

16.2 Richard M. Nixon (first term)
16.1 John F. Kennedy (partial term)
10.3 Harry S. Truman (partial term)
5.2. Franklin D. Roosevelt (fourth term, partial)

-12.5 George W. Bush (first term)
-31.5 George W. Bush (second term)
-31.6 Richard M. Nixon (partial term)
-41.3 Franklin D. Roosevelt (second term)
-73.3 Herbert Hoover

27.5 Median for Democrats
27.3 Median for Republicans
27.4 Median for all terms

Source: Rep magazine (October 2012, p. 24)

*Return measured from inauguration days, except for those ended by death or resignation.

Only ¼ of what’s needed

According to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for the 2/19/11 Journal article, many boomers will not be able to maintain their household’s standard of living in retirement. The median 401(k) account balance is less than ¼ of what’s needed. The analysis assumed people need 85 percent of their working income after they retire to maintain their standard of living.

“The 401(k) generation is beginning to retire, and it isn’t a pretty sight,” concluded the article’s writer, E.S. Browning.

2013 contribution limits

The ultimate goal would be to contribute the maximum amount allowed by the Internal Revenue Service.

• For 2013, contribution limits for 401(k)s will increase to $17,500, up from $17,000 in 2012, according to the IRS.
• Catch-up contribution limits for those ages 50 and over will remain $5,500.

Click the image or this link to learn more: 2013 Retirement Plan Contribution Limits.

New: Contribute 15% of your salary

The Journal article noted that Vanguard Group, one of the biggest providers of 401(k) plans, has changed its advice on how much people should save:

• Vanguard long advised people to put 9% to 12% of their salaries – including the employer contribution – in their 401(k) plans. The current median amount that people contribute is 9%, counting the employer contribution, Vanguard says.

• Now Vanguard urges people to increase their contributions up to 15% of their salaries, including the employer contribution, because of the stock market’s weak returns and uncertainty about the future of Social Security and Medicare.

I have long stressed the importance of having a 401(k) or other defined contribution plans to an individual’s overall retirement plan. This latest analysis suggests it would be good to meet with a qualified advisor to see how your retirement plan is doing.