Issue #15

Berkeshire Hathaway. Study the life of Warren Buffett, and you will learn a lot about investing. If you want to become wealthy, then adhere to the tenets of Warren Buffett, and you will have a good chance of achieving your goal. For a summary of Buffett’s amazing life, look him up at www.wikipedia.org.

What I like most about Warren is his ability to use humor to explain business, investments and common sense. I am not sure where he got it, and I am not a Buffett disciple, but I know Buffett took a Dale Carnegie class on public speaking when he was about 21 he taught a night class on investing to people twice his age at the University of Nebraska. Hmm, I read Carnegie’s book when I was about the same age, but it failed to have the same affect on my own presentation abilities, oh well, the Buffett standard is a tough one to match.

Seriously, read the Berkeshire Hathaway annual report. It’s literally worth reading, or at least skimming the first 20 pages, since Warren’s wit abounds through every page. 2006 was a good year says Warren: “our most important business, insurance, benefited from a large does of luck: Mother Nature, bless her heart, went on vacation. After hammering us with hurricanes in 2004 and 2005 – storms that caused us to lose a bundle on super-cat insurance (super-cat insurance is catastrophe re-insurance where Berkeshire insures the insurance companies so that they don’t go broke when a Katrina disaster occurs)… Last year, the red ink from this activity turned black – very black.”

Here’s an example of the business productivity that are a part of the Berkeshire Hathaway empire. Between 2003 and 2006 GEICO insurance productivity per employee increased 47%, as the number of employees decline by 3.5% while the number of policies increased from 5.7 million to 8.1 million.

With such business acumen, the 2006 operating results for Berkeshire Hathaway included an increase of per-share book value of 18.4%, a gain of $16.9 billion. Berkeshire’s stock gained roughly 17% in 2006 so asset basis Berkeshire became 2% less expensive, relative to the S&P 500. That’s why it isn’t crazy to hold B shares of Berkeshire selling for $3600 a piece, they are well diversified, tax efficient, and getting cheaper relative to other securities.

1st Quarter Review and 2nd Quarter Outlook
So what happened in the first quarter of 2007 and what can we expect for the rest of quarter? Well, with a crystal ball, perhaps I could best Buffett, but I wouldn’t bet on it. The Dow Jones Industrial Average is headed for 13,000 and 14,000, and large cap stocks are beginning to outperform small cap stocks. After finishing the first quarter at close to even, stocks have enjoyed a strong sprint this month, gaining 5% or more to flirt with the 13,000 level. The dollar is weakening substantially, flirting close to the edge of its all-time low’s of 80 on the dollar index.

Some of you became very bearish on the dollar in early 2006, following the dollar’s stunning 10-20% collapse in 2005. Well markets, being the nature they are, did a rope-a-dope, as the dollar performed rallied more than 10% in early 2006. For 15 months through 2006 and into 2007 the dollar climbed higher in a zigzag fashion, before returning to its longer-term downward trend that it established 2001-2005.

Large capitalization stocks are the primary beneficiary of a declining dollar. That is so, because a large amount of their revenues and profits are denominated in foreign currencies. When the dollar index declines, the earnings per share of most America’s largest companies goes up, because these companies repatriate their international profits into a larger number of dollars, due to the lower price of each dollar, as denominated in Euros, Yen, Yuan, Canadian Dollars, etc.

Barnes Capital took advantage of these long-term trends with investments in large capitalization stocks, energy and gold. These asset classes have performed well while the dollar has meandered through is long-term decline in the same period. Barnes Capital is protecting client’s accumulated savings through investments in assets that we believe provide a hedge to inflation and a declining dollar index.

In our next issue we will delve into some new, yet to be determined material. Check in next week for the launch of www.barnescapital.com. The current website, www.barnescap.com will be ceremoniously put to rest and linked to the new website. It served us well, but it did not describe our new service offerings of Wealth Counsel and Business Services for families and business owners.

We are happy you all made it through tax-season, and look forward to serving you for the rest of 2007. Spring is here, remember to take notice, its beauty is all around you.

Blessings,
Daniel A. Barnes, CFA

Barnes Capital is a Registered Investment Advisor located at in downtown Lafayette. With RB Capital Management, Barnes Capital develops custom tailored portfolios for its clients. Specialized in retirement income portfolios, financial planning in an integral part of our process. Call 925-284-3503.

This entry was posted on Tuesday, April 24th, 2007 at 1:51 pm and is filed under Insight Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.