Capital investment into privately owned businesses

I have come across the idea in the popular media that when organizations such as Berkshire Hathaway buy a company in its entirety, they starve the business from any further capital investment. I always thought that that claim was without basis and probably makes no financial sense.

On December 21, 2009, Burlington Northern Santa Fe Corporation (BNSF) posted on its intranet a video of CEO Matt Rose interviewing Warren Buffett, CEO of Berkshire Hathaway Inc. on matters related to the acquisition by Berkshire Hathaway of BNSF.

MKR: Okay. The next question came from our finance group. Will there be a significant, will there be significant BNSF asset sales to pay down the eight-billion-dollar acquisition debt?
WB: Not a dime. Not a dime.
MKR: Next question. Will Berkshire continue to invest the capital needed to maintain the BNSF infrastructure?
WB: Well, it’d be crazy if we didn’t. You know, we’re not going to, we’re not going to buy a business and starve it. You got where you are because you were willing to make the investments ahead of time to pay it off 3, 5, 10 years down the road, and that’s, that’s part of the railroad business, and it’ll stay part of the railroad business.

Happy Holidays

Dear Readers;
The obtuse investor, yours truly, will be in holiday mode until the end of the year.

I am not away on vacation, but will definitely use this opportunity to take a break from watching the antics of the market. As of this writing, market, in general, is in fully valued territory (based on a per book or per normalized earnings) basis. I suspect that this will last at least until January.

I will certainly post if something "interesting" happens.

Cheers!

Inflating away foreign debt

This is self explanatory...

As the US debt-to-GDP ratio rises towards 100%, policymakers will be tempted to inflate away the debt. This column examines that option and suggests that it is not far-fetched. US inflation of 6% for four years would reduce the debt-to-GDP ratio by 20%, a scenario similar to what happened following WWII.

Complete article available at www.voxeu.org.

Is Chinese market well into bubble territory?

An IPO of an average business at 30 times forward earnings, is a sign of extreme exuberance to me.

CHINA’S biggest producer of wind power, China Longyuan Power, is in essence a staid regulated utility. It buys turbines, erects them and sells the electricity they generate to China’s power distributors at prices fixed by the state. So why is its initial public offering next week on the Hong Kong Stock Exchange generating such excitement?

The offering is likely to value the firm, the former research arm of the ministry of energy, at nearly 30 times next year’s projected profits. Despite this heady figure, the tranche of shares being marketed to institutional investors is over eight times oversubscribed; the one for individuals, almost 30 times. The firm plans to sell 30% of its shares, but could, if it wanted, offload far more.

Complete Article is available here.

Increasing mispricing of micro and small cap US stocks

Is there a growing opportunity for the value investor in the overlooked small to micro cap market in America? According to this article, there is a decade long trend that would answer a "yes" to that question.

The “high-frequency” traders who have come to dominate stockmarkets with their computer-driven strategies pay less attention to small firms, preferring to jump in and out of larger, more liquid shares. Institutional investors, wary of being stuck in an illiquid part of the market, are increasingly following them.

Another factor is the near-evaporation of research on small firms, which has been undone by the rise of passive index investing and by rules that banned the use of investment-banking revenues to subsidise analysts. With less funding to go around, analysts are increasingly concentrating on large, frequently traded shares, says Larry Tabb of TABB Group, a consultancy.

If this is true, there should be more and more mispricing visible in the micro to small cap market. This would, of course, go on as long as someone will declare that the beat the market solely investing in micro and small cap-- and then Mr. Market would start paying attention to this overlooked chunk of the market.