Ben Gersten: Legendary investor Warren Buffett appeared on CNBC’s Squawk Box Wednesday morning to answer the biggest questions regarding the global economy, stocks, Election 2012, and more.  Read more…

Back in February, I took a close look at Warren Buffett's $12 billion stake in Wells Fargo (NYSE: WFC).

Well, it's now more like a $10 billion position. He hasn't sold shares, but the bank's stock has been steadily dropping, giving the Oracle of Omaha a rare black eye. To understand Buffett's next move with this massive banking concern, you need to understand why shares are marching backward.

The long-term view
Buffett didn't simply start acquiring shares in recent quarters. He's been doing so for a number of years. But you could argue that his long-term bullishness has been a bit misplaced, or at least a bit premature. He steadily bought Wells Fargo shares in the middle of the last decade, despite signs the housing sector was starting to overheat. More recently, he bought a lot of stock last fall and winter on hopes the U.S. economy was on the cusp of a broad-based upturn. As a result, his buying binges in 2007 and again in late 2010 took place in the low $30s, above the current price.

Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) released its latest 13-F filing with the Securities and Exchange Commission (SEC) on Monday, May 16, to detail its stock portfolio holdings as of the end of the first quarter. The release is highly-anticipated each quarter and, though the first quarter ended more than six weeks ago, it offers the timeliest way to see which stocks Warren Buffett bought, sold or held during the 12-week period.

The latest twist at Berkshire is that Warren Buffett hired 39 year-old Todd Combs from CastlePoint Capital Management back in October 2010 to help him manage Berkshire's $53.6 billion portfolio. As such, this represented the first full quarter in which Combs' picks will be commingled with Buffett's. Previously, Lou Simpson from Berkshire insurance subsidiary Geico had picks that showed up in Berkshire's quarterly filing, but Simpson retired in August 2010 at the age of 73.

Only three stock trades took place during Berkshire's first quarter. The first consisted of a sale of integrated energy firm ConocoPhillips (NYSE: COP), which Buffett has been steadily selling off over since an admitted bad call on his part when he started acquiring shares in 2008, when oil hit all-time highs of more than $140 a barrel. Oil declined rapidly along with the explosion of the financial crisis, and many oil firms remain well off their 2008 highs. Conoco traded at more than $90 per share in June 2008 and can be had currently for close to $70 a share.

The second transaction could be significant, but there is simply no way for investors to find out. This is because the recent filing states that “confidential information has been omitted from the Form 13F and filed separately with the Commission.” Given Buffett's market-moving abilities, he has a unique and special arrangement with the SEC to keep certain positions close to his chest while he is building them.

The only purchase during the quarter consisted of credit card firm MasterCard (NYSE: MA). Berkshire acquired 216,000 shares at some point between January and March and ended the first quarter with a total position size of $54.4 million and average cost of close to $252 per share. The call has already proven a winner — the stock is up close to 11% from Berkshire's average purchase price.

The first thing that stands out is the position is quite a small, 0.1% of Berkshire's overall portfolio. This makes it likely that this represents what is likely Combs' first purchase for Berkshire, and is further supported by the fact that he held the stock in the portfolio he was managing while at CastlePoint. Investors are obviously in the early stages of getting comfortable with Comb's recommendations, but it's reasonable to conclude that the MasterCard purchase was approved by Buffett and discussed in detail while the position was being purchased. [My colleague David Sterman recently discussed Buffett's investment approach and what he has learned from the Oracle of Omaha's annual letter]

The MasterCard purchase was indeed timely, as industry uncertainty was high because the Dodd-Frank financial reform legislation that was enacted on July 21 contains a provision to regulate transaction fees that credit card companies charge retailers for the right to use their cards. MasterCard is the second-largest credit card brand in the world, with an estimated 31% of the market. This is behind archrival Visa (NYSE: V), at about 63%. Given they both control more than 90% of the market, they are the most likely to be adversely affected by restrictions on what credit card firms can charge their customers.

Government price control concerns have subsided for the time being, which explains a good part of the strong stock performance MasterCard has had so far this year. Based on sales of $5.7 billion during the past year, MasterCard can grow much faster than Visa, which reported sales of $8.6 billion during the same period. MasterCard's returns on invested capital (ROIC), an important metric that Buffett tracks, is more than 40% during the past 12 months, well above Visa's 13%.

You’ll recall that QE2 — the fancy name for the Fed’s market manipulations — ends June 30. There is no particular reason why that date should be anything special. It’s the official end of QE2. But the market will likely anticipate the end of QE2 before it actually ends.

As Barron’s put it recently:

“Just as risk markets began to rally months ahead of the actual start last November of the Federal Reserve’s program to purchase an additional $600 billion of Treasury securities, these same markets may be beginning to anticipate the end of the central bank’s buying.”

If this holds true, then the market ought to fall as QE peters out, all other things being equal (which they never are).

There are many ways to show how the Fed is turning the market into its own personal yo-yo. The easiest way to see how the market spins up and down with a jerk of the Fed’s massive balance sheet is to plot the two against each other. When the Fed expands its balance sheet (by buying stuff, thereby putting money out there), the market rises. When it contracts its balance sheet (by selling stuff, thereby taking in cash), the market sags. Here is a chart that shows the tight correlation since the March 2009 bottom:

Whatever happens, you can rely on the herd of investors to reliably do the wrong thing. Most investors sell near bottoms and buy near tops, though that is the exact opposite of what they should be doing.

The most arresting recent statistic on this front that I’ve seen comes from Thomson Reuters’ Lipper data, which tracks money flows into mutual funds. Many investors stayed away during 2009. Even in 2010, the trickle of money heading to stock mutual funds was hardly anything.

But this past February, after the market had doubled from its lows and gained 30% since August, investors finally decided it’s a good time to go back in the market. In one week in February, investors poured more money into funds than they had in all of 2010 — about $7 billion.

A recent issue of The Economist provided an excellent illustration of how most investors do exactly the wrong thing in their timing efforts. The financial magazine produced a chart showing how investors tend to chase after the mutual funds that have been doing well, and tend to sell the funds that have been doing poorly. In general, these mutual fund investors should have done the exact opposite.

As the Economist’s story details, the funds attracting the largest amounts of new investment tended to underperform after all the money arrived. By contrast, the funds that suffered the heaviest outflows tended to outperform after all the money left!

It’s a long-held fallacy that successful investors are great market timers. Many people think that successfully predicting where the market is going to go is an important part of doing well in markets. It isn’t.
As Warren Buffett says, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” He isn’t the only one to have come to this conclusion. The most successful investors I know and have studied don’t bother trying to predict the market.

In “Becoming Rich,” Mark Tier studied the investment habits of three great investors: George Soros, Warren Buffett and Carl Icahn. Tier concludes, “Successful investors don’t rely on predicting the market’s next move. Indeed, both Buffett and Soros would be the first to admit that if they relied on their market predictions, they’d go broke. Prediction is the bread and butter of investment newsletter and mutual fund marketing — not of successful investing.”

That’s why you don’t see me drawing charts with lines on them guessing where the market is headed next. Of course, it’s fun to guess what might happen, but realize these are guesses. When it comes to actually putting money to work, you ought to rely on something sterner, like good old-fashioned research on what you own.
When that process of digging around for stuff turns up fewer ideas, then you have to be willing to let the cash accumulate for a while. In my personal account, I’m up to 25% in cash. It’s just the natural outcome of my own bottom-up research.

I’ve issued a lot of “sell” recommendations this year in my investment letter, Capital & Crisis. And I haven’t added many new ideas so far. This is not a market call, but the end result of a process of buying what’s cheap and selling (or avoiding) what I think is expensive or unattractive.

So QE2 is background noise, something we have to recognize is distorting markets. But we still have to do the spadework of investing — digging around, thinking and digging around some more. Add to that a lot of patience.
One of my favorite investors was Phil Carret, who died in 1998 at the age of 101 and who worked at his art until almost the very end. He witnessed more than 30 bull markets and more than 30 bear markets over a lifetime of investing. Warren Buffett admired him, often inviting him to Berkshire’s annual meeting and calling Carret the “Lou Gehrig of investing.” (Gehrig was the “Iron Horse” of baseball, before his consecutive games played record fell to Baltimore’s Cal Ripken Jr.).

When asked on the Louis Rukeyser show in 1995 what was the single most important thing he had learned about investing over his long career, Carret had a one-word answer: “Patience.”

The Sinking of QE2 originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.

Read more here:
The Sinking of QE2

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Between 1970 and 1975, a quarter of companies in the U.S. railroad industry were forced to file for bankruptcy protection. There were simply too many competitors and they could not handle the high levels of government regulation, volatile fuel costs and the billions of dollars it took to maintain thousands of miles of track, locomotives and freight cars.

Since that time, the remaining competitors have steadily merged and there are only seven leading players today. The leading players now have the size and scale to justify high capital expenditure costs and can effectively compete with the trucking industry. A government report stated that railroads have seen productivity gains that have far exceeded the gains seen in other industries and the economy as a whole.

In perhaps the biggest vote of confidence the industry could ever receive, Warren Buffett announced he would spend $26 billion to acquire Burlington Northern Santa Fe, one of the largest companies in the space, in late 2009. Railroads have become great investments.

But I'm not interested in railroads as an investment. I'm more interested in the next sector to follow in their footsteps: the leading U.S. airlines.

This may seem strange, given the history of bankruptcy in the airline industry. Buffett himself once famously called airlines “lousy investments.” But the same could be said about the railroad companies at one time. I think some of the major airlines have turned over a new leaf, so contrarian investors who get in early before the crowd realizes it stand to make a lot of money.

Warren Buffett takes a seemingly cavalier approach to leadership succession plans. The 80-year-old investing legend likes to insist that when it comes time for him to step down from Berkshire Hathaway (NYSE: BRK-B), very little will change. After all, the Berkshire has a deep bench of executives, all of whom are well-schooled in the firm's winning investment philosophy.

In reality, a change in leadership at Berkshire brings significant risk. First, Buffett's unique intellectual skills can be hard to replicate. Simply mimicking his approach is not the same as thinking creatively, as he does. Second, even if such a successor were a very solid candidate, it will be hard to follow Buffett's plain-spoken folksy style that really connects with investors. A successor that lacks Buffett's charisma may not be able to retain the key relationship between Berkshire and its investors, turning the firm into just another anonymous mega-sized investment organization.

Since Warren Buffett dropped hints at a March 21 conference in India that Berkshire insider Ajit Jain could easily assume the reins, investors need to take a close look at his background and style. Could he really fill those giant shoes?

A deeper look
The 59-year old Jain is well-versed in all-things Buffett. He's been with the firm for more than 20 years, most recently running Berkshire's reinsurance group (which provides back-up insurance to insurance companies when major claims arise). Buffett has said that the Jain-led reinsurance group has delivered out-sized profits to Berkshire. That tells us Jain is an expert in this industry, where the ability to price risk policies can be the difference between big losses and big profits. (Just ask AIG (NYSE: AIG)). The fact that Berkshire's insurance divisions generate consistently stable and robust returns is a clear feather in Jain's cap.

Here's what Buffett wrote about Jain in a 2010 letter to shareholders:

“Ajit (Jain) insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most importantly, brains in a manner that is unique in the insurance business,” adding that “by his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.”

If I were looking to launch a reinsurance business from scratch, I would love to hire this guy. But if recent deal-making is any guide, Berkshire may be starting to diminish the role insurance plays in the Berkshire portfolio. In the past two years, the company has spent a collective $44 billion to acquire a railroad (Burlington Northern) and a specialty chemicals company (Lubrizol). Berkshire's investment team went “outside the box,” identifying a clear disconnect between current market value and the total value of future cash-flow streams. You need deep industry understanding of the transportation sector, for example, to know that railroads' cash flows won't be threatened by the trucking industry. Jain appears to know the insurance business well.

Of perhaps greater concern, Mr. Jain would be hard-pressed to be the inspiring face of the company. Admittedly, Berkshire is a deep, strong team and it's not just about Buffett. But he deserves major credit for establishing a loyal shareholder base though his strong track record and his folksy aphorisms.

Action to Take –> It's generally assumed that Berkshire Hathaway will continue to flourish long after Warren Buffett is gone. Is that really the case? Are his understudies just as savvy as he is? We can't know. Even if they are, some Berkshire investors are going to decide to move on when Buffett does, simply because he is the reason they hold shares.

So there is real risk in this transition. I'd be inclined to start selling into rallies as the Buffett era comes to a close. He may stick around for another five years or more, or may he look to retire very soon. When that happens, look for moderate shareholder churn as some investors book profits in what has been a great trade.

– David Sterman

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America's electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here's what's going on…

This article originally appeared on StreetAuthority
Author: David Sterman
Could this Man Replace Warren Buffett?

Read more here:
Could this Man Replace Warren Buffett?

Warren Buffett takes a seemingly cavalier approach to leadership succession plans. The 80-year-old investing legend likes to insist that when it comes time for him to step down from Berkshire Hathaway (NYSE: BRK-B), very little will change. After all, the Berkshire has a deep bench of executives, all of whom are well-schooled in the firm's winning investment philosophy.

In reality, a change in leadership at Berkshire brings significant risk. First, Buffett's unique intellectual skills can be hard to replicate. Simply mimicking his approach is not the same as thinking creatively, as he does. Second, even if such a successor were a very solid candidate, it will be hard to follow Buffett's plain-spoken folksy style that really connects with investors. A successor that lacks Buffett's charisma may not be able to retain the key relationship between Berkshire and its investors, turning the firm into just another anonymous mega-sized investment organization.

Since Warren Buffett dropped hints at a March 21 conference in India that Berkshire insider Ajit Jain could easily assume the reins, investors need to take a close look at his background and style. Could he really fill those giant shoes?

A deeper look
The 59-year old Jain is well-versed in all-things Buffett. He's been with the firm for more than 20 years, most recently running Berkshire's reinsurance group (which provides back-up insurance to insurance companies when major claims arise). Buffett has said that the Jain-led reinsurance group has delivered out-sized profits to Berkshire. That tells us Jain is an expert in this industry, where the ability to price risk policies can be the difference between big losses and big profits. (Just ask AIG (NYSE: AIG)). The fact that Berkshire's insurance divisions generate consistently stable and robust returns is a clear feather in Jain's cap.

Here's what Buffett wrote about Jain in a 2010 letter to shareholders:

“Ajit (Jain) insures risks that no one else has the desire or the capital to take on. His operation combines capacity, speed, decisiveness and, most importantly, brains in a manner that is unique in the insurance business,” adding that “by his accomplishments, he has added a great many billions of dollars to the value of Berkshire. Even kryptonite bounces off Ajit.”

If I were looking to launch a reinsurance business from scratch, I would love to hire this guy. But if recent deal-making is any guide, Berkshire may be starting to diminish the role insurance plays in the Berkshire portfolio. In the past two years, the company has spent a collective $44 billion to acquire a railroad (Burlington Northern) and a specialty chemicals company (Lubrizol). Berkshire's investment team went “outside the box,” identifying a clear disconnect between current market value and the total value of future cash-flow streams. You need deep industry understanding of the transportation sector, for example, to know that railroads' cash flows won't be threatened by the trucking industry. Jain appears to know the insurance business well.

Of perhaps greater concern, Mr. Jain would be hard-pressed to be the inspiring face of the company. Admittedly, Berkshire is a deep, strong team and it's not just about Buffett. But he deserves major credit for establishing a loyal shareholder base though his strong track record and his folksy aphorisms.

Action to Take –> It's generally assumed that Berkshire Hathaway will continue to flourish long after Warren Buffett is gone. Is that really the case? Are his understudies just as savvy as he is? We can't know. Even if they are, some Berkshire investors are going to decide to move on when Buffett does, simply because he is the reason they hold shares.

So there is real risk in this transition. I'd be inclined to start selling into rallies as the Buffett era comes to a close. He may stick around for another five years or more, or may he look to retire very soon. When that happens, look for moderate shareholder churn as some investors book profits in what has been a great trade.

– David Sterman

P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America's electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here's what's going on…

This article originally appeared on StreetAuthority
Author: David Sterman
Could this Man Replace Warren Buffett?

Read more here:
Could this Man Replace Warren Buffett?

After an extended period of 50%-plus annual growth, China recently surpassed the United States as the largest car market in the world. This is just the tip of the iceberg, as only 2% of the Chinese population owns cars. In other words, the market has vast potential to grow significantly bigger.

Given that the market is in its infancy, China has a unique opportunity to embrace newer and cleaner automotive technologies. This opening has not gone unnoticed by the Chinese government, which plans to fully seize on its ability to become a world leader in developing and growing the market for electric vehicles. Last August, it commissioned more than a dozen state-owned businesses to begin building electric vehicles and announced ambitious goals to have all public vehicles running on lithium-ion batteries or other non-gasoline sources within 10 years. All told, China plans to be the largest manufacturer of electric cars by the end of 2012.

The big winners from this initiative, aside from the Chinese environment, will be native Chinese firms, but the opportunity is so vast that leading automotive and vehicle companies around the world will get some of the spoils. U.S.-based Ener1 (NYSE: HEV) is one of them. The company develops lithium-ion batteries for vehicles and inked a deal with Wanxiang, one of the largest auto parts makers in China, in early January. The joint venture will produce batteries for heavy-duty vehicles, including public buses, semis and construction vehicles.

The government announced in June 2010 subsidies of about $9,000 for electric-powered taxi cabs and vehicles driven by local government authorities, along with billions in subsidies to help companies develop innovative technologies to bring production costs down, while increasing volume so that batteries and vehicles can be produced more cheaply.

At an investment conference I attended last week, Ener1 CEO Charles Gassenheimer described the electric-vehicle initiative in China as a $100 billion opportunity in the next decade. Gassenheimer said he believes the government is firmly committed to being No. 1 in terms of vehicles sold and possessing cutting-edge technologies.

Ener1 is also a big player in the U.S. electrical-vehicle market, as is A123 Systems (Nasdaq: AONE). In China, Wanxiang is privately held, but BYD Co. Ltd. (BYD.PK) is publicly traded in Hong Kong and specializes in rechargeable batteries, including nickel and lithium-ion batteries for mobile phones as well as automobiles. The fact that Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) — at the urging of Buffett's sidekick, Charlie Munger — is a large investor in BYD should provide yet another indication at how much upside potential exists by investing in the burgeoning market for electric vehicles in China. The move by Buffett, an investor who usually shuns technology and focuses on the U.S. market, further demonstrates the fact that the Chinese electric-vehicle market may be a once-in-a-lifetime investment opportunity.

After an extended period of 50%-plus annual growth, China recently surpassed the United States as the largest car market in the world. This is just the tip of the iceberg, as only 2% of the Chinese population owns cars. In other words, the market has vast potential to grow significantly bigger.

Given that the market is in its infancy, China has a unique opportunity to embrace newer and cleaner automotive technologies. This opening has not gone unnoticed by the Chinese government, which plans to fully seize on its ability to become a world leader in developing and growing the market for electric vehicles. Last August, it commissioned more than a dozen state-owned businesses to begin building electric vehicles and announced ambitious goals to have all public vehicles running on lithium-ion batteries or other non-gasoline sources within 10 years. All told, China plans to be the largest manufacturer of electric cars by the end of 2012.

The big winners from this initiative, aside from the Chinese environment, will be native Chinese firms, but the opportunity is so vast that leading automotive and vehicle companies around the world will get some of the spoils. U.S.-based Ener1 (NYSE: HEV) is one of them. The company develops lithium-ion batteries for vehicles and inked a deal with Wanxiang, one of the largest auto parts makers in China, in early January. The joint venture will produce batteries for heavy-duty vehicles, including public buses, semis and construction vehicles.

The government announced in June 2010 subsidies of about $9,000 for electric-powered taxi cabs and vehicles driven by local government authorities, along with billions in subsidies to help companies develop innovative technologies to bring production costs down, while increasing volume so that batteries and vehicles can be produced more cheaply.

At an investment conference I attended last week, Ener1 CEO Charles Gassenheimer described the electric-vehicle initiative in China as a $100 billion opportunity in the next decade. Gassenheimer said he believes the government is firmly committed to being No. 1 in terms of vehicles sold and possessing cutting-edge technologies.

Ener1 is also a big player in the U.S. electrical-vehicle market, as is A123 Systems (Nasdaq: AONE). In China, Wanxiang is privately held, but BYD Co. Ltd. (BYD.PK) is publicly traded in Hong Kong and specializes in rechargeable batteries, including nickel and lithium-ion batteries for mobile phones as well as automobiles. The fact that Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) — at the urging of Buffett's sidekick, Charlie Munger — is a large investor in BYD should provide yet another indication at how much upside potential exists by investing in the burgeoning market for electric vehicles in China. The move by Buffett, an investor who usually shuns technology and focuses on the U.S. market, further demonstrates the fact that the Chinese electric-vehicle market may be a once-in-a-lifetime investment opportunity.

He may be an American-investing icon, but Warren Buffett still owns a few foreign stocks. Why? The funny thing about a disciplined value-investing approach is that it works all over the world — not just in the United States. The bullish kicker for Buffett is how these stocks not only offer all the upside of long-term value names, but also offer a geographical diversity that simply can't be achieved with an all-U.S. portfolio.

My dad worked all the time when I was a kid. But early on Saturday mornings, he'd wake me while it was still dark and take me to the office with him.

And about once a month, we'd slip away to the farm where he grew up and there he worked just as hard, doing farm chores in blue jeans instead of business deals in a suit and tie. Other times we'd visit oil wells, look at farm properties or cattle. He liked to drive and talk, and sort things out.

Listening to my old man unwind was a phenomenal business education.

On one of these trips, Dad was talking about some rental property he and a partner were going to buy together. He explained the nuances of deal's financing and then he looked up at me.

“You know the best way to build equity, don't you, son?”

Bear in mind that I was maybe 7 years old, but I knew the difference between debt and equity. But as I pondered Dad's question, I came up short.

I shook my head. “I don't know, Dad,” I said.

He smiled my favorite smile, a sort of sideways, in-the-know, “gotcha” diabolical smile. “The best way to build equity, my boy,” Dad held forth, “is with someone else's money.”

His point was that, over time, the tenants would do the heavy lifting — paying the mortgage and expenses while he and his partner got some income, increased their equity and, potentially, also saw the value of their property rise.

A couple of years later, Dad took me on a trip to Nebraska. We went to a big conference hall where two old men sat at a table. They looked like every small-town banker I had ever met and, once they started, they talked non-stop for almost the whole day. Dad sat there and took notes. I was bored.

Finally, I heard the man talk about the investment portfolio. He kept using a word that would haunt me for days. Then I made my discovery.

“You know what he's doing, don't you?” I asked, waving a copy of the annual report.

“What who's doing,” my mother asked.

“That guy in Omaha. That Mr. Buffett!” I said. “He's building equity with other people's money!”

My old man smiled and nodded. He looked like he was about to burst with pride.

Other people's money
The word that haunted me was “float.” But it didn't describe the verb I found listed in the dictionary on my bookshelf. This float was a noun, a type of money. In an insurance context, “float” refers to money held for policyholders to cover their claims.

The purpose of an insurance company, from a customer's perspective, is to offer protection from financial loss. For this coverage, drivers pay premiums. But if it ended there, most insurance companies wouldn't make a profit – policyholder claims generally exceed premiums paid.

So to really understand insurance companies, you have to look at them from the board of directors' perspective. It's then that you see the purpose of an insurance company isn't to provide coverage, it's to borrow money and invest it — a lot of money.

After all, if you have 10 million policy holders paying $100 a month for car insurance, then that's $1 billion piling up every 30 days. That money is the “float.” Most, if not all, will eventually be paid out. The key word there is “eventually.” In the meantime, the insurance company is free to continue to collect premiums and invest the float for its own benefit.

The question, of course, is precisely where is all that money invested? When investing such a large sum, professionals spread it around and seek to profit from all sorts of investments.

As many of you know, I'm the editor of Fast-Track Millionaire. I'm always looking for those securities on the “fast-track” to triple, or quadruple-digit gains.

So knowing what stocks the big insurance houses are buying doesn't go far enough for me. A lot of what insurance companies are buying are large, stable companies that provide a relatively predictable rate of return.

What I'm looking for is the portion of each stock portfolio allocated to smaller companies with greater potential for exceptional returns. These picks have been vetted by some of the sharpest minds in finance — insurance companies hire top managers to tend to their trillions.

Action to Take –> Here's a small sample of what I found:

State Farm
State Farm has a roughly $40 billion stock portfolio that covers only 95 securities. This is a relatively narrow universe of picks for such a sum, so I'd say State Farm is willing to make some pretty bold picks. While its largest holdings are no surprise — Johnson & Johnson, ExxonMobil, IBM, Hewlett-Packard, Archer Daniels Midland — there was one company that looked promising: Medidata Systems (Nasdaq: MDSO).

Factory Mutual Insurance Co.
Factory Mutual is more commonly known as FM Global, and it's a go-to insurance provider for companies that need to cover major pieces of property. Its stock portfolio is worth $4 billion and covers about 160 securities. While nearly every one of these stocks is a mega-cap company, one small company has made the cut, Cadence Design Systems (Nasdaq: CDNS).

Allstate
Allstate's $1.6 billion portfolio is spread across more than 1,000 stocks. One gem that stuck out in this sea of small positions was Spansion (NYSE: CODE). [Note: Remember that no matter the broader market, there are always winning stocks to own. Click here to read the details of some of the biggest winners over the past decade... and a few opportunities I'm seeing now.]

In recent years, Warren Buffett seems to have drifted from his roots. The legendary investor was a pure disciple of Graham & Dodd, seeking out companies that possessed clear tangible value, either in the form of a rock-solid balance sheet or under-appreciated equity in its brand.

More recently, Buffett started to look like a lot of other portfolio managers, shifting into stocks that were in high-growth mode. More important, he no longer seemed inclined to hold stocks for the long haul, shuffling some positions with — for him — a high degree of frequency. And when he bought into risky but potentially lucrative special investments from the likes of Goldman Sachs (NYSE: GS) at the height of the financial crisis, the Buffett we once knew seemed to have truly changed his stripes. (That Goldman stake is now worth more than $5 billion and will likely be bought out by Goldman in coming quarters.)

You can't blame him. Value investing hasn't been as profitable as in decades past and Buffett simply learned to “beat the market at its own game.” Kudos to the elderly investor for showing the flexibility to adapt to changing market conditions.

But what are we to make of his latest moves and the latest annual message? A close read shows an investor who is still shifting gears as necessary, and just maybe, he's starting to think about his old value approach once again. The clearest sign of any concern that the recent go-go phase in the market may be troubling him: Buffett has been selling stocks but declining to re-invest those profits elsewhere. His firm, Berkshire Hathaway (NYSE: BRK-A) now has a hefty $38 billion in cash sitting idle (as of the end of 2010).

1. Bullish — but with limits
Make no mistake, Buffett remains bullish on the U.S. economy. He sees the nascent economic expansion just getting going. And in his annual message to investors, he notes that “money will always flow toward opportunity, and there is an abundance of that in America.” He's less concerned than others that the persistent trade and budget deficits will have ruinous consequences.

But that's not the same thing as saying the market looks attractive. After all, stocks have doubled from their March 2009 lows, and anyone that's been in the market for decades must be thinking about booking profits when the market stages a furious rally in a short time.

To be sure, Buffett has no desire to sell off any positions that still look like real value plays. And the companies that are 100% owned by Berkshire probably aren't going anywhere. Berkshire's ownership of GEICO, for example, is the investment that keeps on giving. Year after year, GEICO throws off massive cash flow, and it's hard to see how that will change, as GEICO operates in an oligopolistic industry that has major barriers to entry. Berkshire's ownership of GEICO will likely outlast Buffett's time on earth.

2. A post-Buffett world
Buffett turned 80 years old last August, and readers of his annual message are always looking for insight as to who will replace him as the head of Berkshire Hathaway. He's already said that his role will be split among several executives. Some have speculated that when he steps aside, shares of Berkshire Hathaway will lose their luster. There may indeed be a knee-jerk reaction, but such a move would be short-lived. That's because whoever succeeds Buffett will simply replicate the approach that he laid down a half-century ago. At this point, the “cult of Warren” has been institutionalized into the DNA of Berkshire Hathaway.

3. A massive nest egg and a 10,000-foot view
So what will he do with that $38 billion in cash sitting idle? He could wait for a big market pullback so that value plays again uncover themselves. Yet his bullishness on the U.S. economy means that he may not be expecting that to happen any time soon. Instead, he's likely to look for opportunities to find solid companies that are mispriced in relation to long-term cash flow. That was the logic behind his massive $26 billion investment in Burlington Northern Santa Fe Railroad in November 2009.

Burlington is already sharply boosting Berkshire's total cash flow, and will likely keep doing so for years to come. To be sure, fewer big fish are still around that offer really impressive cash flow yields, but look for Berkshire to find another Burlington in the next year or two. In his annual missive, Buffett coyly noted that Berkshire is on the prowl for another mega-deal. “Our elephant gun has been reloaded, and my trigger finger is itchy.”

Berkshire's move to acquire Burlington was based on analysis of industrial and economic trends. Buffett thinks railroads have an inherent advantage over truckers, and he thinks they will have a wide moat well into the future.

If you want to invest like Buffett, you need to look at other industries from a 10,000-foot view. It calls to mind the recent comments from ExxonMobil (NYSE: XOM) that natural gas has a very bright future, even though natural gas prices are in a deep slump right now. That's why ExxonMobil shelled out $41 billion to buy gas producer XTO Energy last June. The energy giant seeks to balance its exposure between oil and gas, so look for more deals in the future. Big long-term bets are their real value-creating approach.

Action to Take –> Buffett's investing approach may indeed be shifting back to his value roots. He noted in his annual report that he looks for simple-to-understand businesses that are debt-free and throw off huge and consistent amounts of cash flow. What he didn't mention in his report is that those types of opportunities could be easily had a few years ago when the market was slumping.

It will be interesting to assess his first-quarter moves to see what he's doing with all that cash. Will he re-deploy funds back into traditional stock investments? Or will he patiently wait for several quarters — or more — to hunt the big game that he increasingly prefers?

If you're a shareholder in Berkshire Hathaway, you may notice that the stock tends to lag robust market rallies. The asset base is ill-suited to compete with pure growth stocks. But you should be heartened by the fact that the company's portfolio consists of a healthy set of stable, cash-flow powerhouses. In light of ever-rising stock markets and still-uncertain economic prospects in the United States, that's a nice place to be.

– David Sterman

P.S. — There’s an interesting way to make money that’s getting a lot of attention lately. In short, a Texas man has figured out how to collect an extra $3,000 to $6,600 each and every month by simply owning shares of some of the safest stocks on the planet. If this sounds like something you’re interested in, keep reading…

This article originally appeared on StreetAuthority
Author: David Sterman
3 Things I Learned from Warren Buffett's Annual Letter

Read more here:
3 Things I Learned from Warren Buffett’s Annual Letter

In recent years, Warren Buffett seems to have drifted from his roots. The legendary investor was a pure disciple of Graham & Dodd, seeking out companies that possessed clear tangible value, either in the form of a rock-solid balance sheet or under-appreciated equity in its brand.

More recently, Buffett started to look like a lot of other portfolio managers, shifting into stocks that were in high-growth mode. More important, he no longer seemed inclined to hold stocks for the long haul, shuffling some positions with — for him — a high degree of frequency. And when he bought into risky but potentially lucrative special investments from the likes of Goldman Sachs (NYSE: GS) at the height of the financial crisis, the Buffett we once knew seemed to have truly changed his stripes. (That Goldman stake is now worth more than $5 billion and will likely be bought out by Goldman in coming quarters.)

You can't blame him. Value investing hasn't been as profitable as in decades past and Buffett simply learned to “beat the market at its own game.” Kudos to the elderly investor for showing the flexibility to adapt to changing market conditions.

But what are we to make of his latest moves and the latest annual message? A close read shows an investor who is still shifting gears as necessary, and just maybe, he's starting to think about his old value approach once again. The clearest sign of any concern that the recent go-go phase in the market may be troubling him: Buffett has been selling stocks but declining to re-invest those profits elsewhere. His firm, Berkshire Hathaway (NYSE: BRK-A) now has a hefty $38 billion in cash sitting idle (as of the end of 2010).

1. Bullish — but with limits
Make no mistake, Buffett remains bullish on the U.S. economy. He sees the nascent economic expansion just getting going. And in his annual message to investors, he notes that “money will always flow toward opportunity, and there is an abundance of that in America.” He's less concerned than others that the persistent trade and budget deficits will have ruinous consequences.

But that's not the same thing as saying the market looks attractive. After all, stocks have doubled from their March 2009 lows, and anyone that's been in the market for decades must be thinking about booking profits when the market stages a furious rally in a short time.

To be sure, Buffett has no desire to sell off any positions that still look like real value plays. And the companies that are 100% owned by Berkshire probably aren't going anywhere. Berkshire's ownership of GEICO, for example, is the investment that keeps on giving. Year after year, GEICO throws off massive cash flow, and it's hard to see how that will change, as GEICO operates in an oligopolistic industry that has major barriers to entry. Berkshire's ownership of GEICO will likely outlast Buffett's time on earth.

2. A post-Buffett world
Buffett turned 80 years old last August, and readers of his annual message are always looking for insight as to who will replace him as the head of Berkshire Hathaway. He's already said that his role will be split among several executives. Some have speculated that when he steps aside, shares of Berkshire Hathaway will lose their luster. There may indeed be a knee-jerk reaction, but such a move would be short-lived. That's because whoever succeeds Buffett will simply replicate the approach that he laid down a half-century ago. At this point, the “cult of Warren” has been institutionalized into the DNA of Berkshire Hathaway.

3. A massive nest egg and a 10,000-foot view
So what will he do with that $38 billion in cash sitting idle? He could wait for a big market pullback so that value plays again uncover themselves. Yet his bullishness on the U.S. economy means that he may not be expecting that to happen any time soon. Instead, he's likely to look for opportunities to find solid companies that are mispriced in relation to long-term cash flow. That was the logic behind his massive $26 billion investment in Burlington Northern Santa Fe Railroad in November 2009.

Burlington is already sharply boosting Berkshire's total cash flow, and will likely keep doing so for years to come. To be sure, fewer big fish are still around that offer really impressive cash flow yields, but look for Berkshire to find another Burlington in the next year or two. In his annual missive, Buffett coyly noted that Berkshire is on the prowl for another mega-deal. “Our elephant gun has been reloaded, and my trigger finger is itchy.”

Berkshire's move to acquire Burlington was based on analysis of industrial and economic trends. Buffett thinks railroads have an inherent advantage over truckers, and he thinks they will have a wide moat well into the future.

If you want to invest like Buffett, you need to look at other industries from a 10,000-foot view. It calls to mind the recent comments from ExxonMobil (NYSE: XOM) that natural gas has a very bright future, even though natural gas prices are in a deep slump right now. That's why ExxonMobil shelled out $41 billion to buy gas producer XTO Energy last June. The energy giant seeks to balance its exposure between oil and gas, so look for more deals in the future. Big long-term bets are their real value-creating approach.

Action to Take –> Buffett's investing approach may indeed be shifting back to his value roots. He noted in his annual report that he looks for simple-to-understand businesses that are debt-free and throw off huge and consistent amounts of cash flow. What he didn't mention in his report is that those types of opportunities could be easily had a few years ago when the market was slumping.

It will be interesting to assess his first-quarter moves to see what he's doing with all that cash. Will he re-deploy funds back into traditional stock investments? Or will he patiently wait for several quarters — or more — to hunt the big game that he increasingly prefers?

If you're a shareholder in Berkshire Hathaway, you may notice that the stock tends to lag robust market rallies. The asset base is ill-suited to compete with pure growth stocks. But you should be heartened by the fact that the company's portfolio consists of a healthy set of stable, cash-flow powerhouses. In light of ever-rising stock markets and still-uncertain economic prospects in the United States, that's a nice place to be.

– David Sterman

P.S. — There’s an interesting way to make money that’s getting a lot of attention lately. In short, a Texas man has figured out how to collect an extra $3,000 to $6,600 each and every month by simply owning shares of some of the safest stocks on the planet. If this sounds like something you’re interested in, keep reading…

This article originally appeared on StreetAuthority
Author: David Sterman
3 Things I Learned from Warren Buffett's Annual Letter

Read more here:
3 Things I Learned from Warren Buffett’s Annual Letter

The stock market has seen plenty of ups and downs in the past 25 years. Through it all, hedge fund Baupost Group's Seth Klarman has managed to stay on the right side of the ledger, racking up an average annual gain of about 20%.

As I recently discussed, the power of compounding can work magic with numbers like that. If you invested $10,000 with Klarman back in 1985, it would be worth about $950,000 today. Most impressively, he's bagged those returns with the relative safety of value stocks, eschewing the stomach-churning gyrations of growth stocks. And Klarman often holds lots of cash, making those returns even more stunning. Even if you're not one of Klarman's clients, you can still piggyback on his efforts by reading up on his latest moves.

A recently-released 13F report from the U.S. Securities and Exchange commission points to a pair of new names in Klarman's portfolio that look quite intriguing.

Aveo Pharma (Nasdaq: AVEO)
Despite his predilection for value stocks, Klarman likely sees a potential blockbuster with little-known Aveo Pharma. He bought 2 million shares last quarter, worth about $28 million. Aveo is developing a range of cancer-fighting drugs, led by tivozanib, which inhibits vascular endothelial growth factor (VEGF). VEGF allows for the creation of new blood cells that can provide a lifeline to cancer cells. Cut back on VEGF, and you can shrink or eliminate tumors.

Aveo has a ways to go before fulfilling its promise. Tivozanib showed very promising results in a Phase 1 clinical trial with the U.S. Food and Drug Administration, but the next two phases of testing will be far more rigorous. Even if everything goes according to plan, it will be several years before tivozanob hits the market, though Klarman may be betting on Aveo being acquired well before then. These days, any biotech firm with a potentially promising drug in development seems to be buyout bait for larger pharmaceutical companies facing costly patent expirations on their existing blockbuster drugs.

Klarman's play here is already on the move. Japan's Astellas said it will pay Aveo $575 million if tivonazib is approved, and potentially $780 million more if sales targets are met. After the news, Aveo's value rose more than $100 million to about $600 million on Thursday, Feb 17, well below the potential value created by the Astellas endorsement.

PDL BioPharma (Nasdaq: PDLI)
This biotech play has seen better days. Shares traded above $30 back in 2006, but now trade for less than $5. Klarman originally owned this stock back in 2008, but sold off his stake in the summer of 2009 at a loss. Shares have drifted yet lower since then, leading Klarman to jump back in, buying 5.6 million shares in the last quarter, which are currently worth about $30 million.

PDL holds the patent to a number of antibody technologies that are used by other drug companies with their drugs. Klarman's latest buy comes at a time when the company is pursuing a potentially large legal settlement. PDL is seeking unpaid royalties from Roche's Genentech division. Some suspect that Genentech may be liable for hundreds of millions in royalty payments if PDL prevails in a current lawsuit.

Besides this potentially big upside event, PDL typically generates $300 to $400 million a year in sales and earns roughly $1 a share. Not bad for a $5 stock. Shares are so cheap because PDL's key intellectual property rights will lose patent protection in 2014. To offset that cliff, the company is working on a range of new drugs that are currently undergoing clinical trials.

Shares are also being discounted after PDL agreed to pay AstraZeneca's (NYSE: AZN) MedImmune division $92.5 million to settle a royalty dispute regarding PDL's virus treatment Synagis. Klarman, who bought shares at slightly higher levels, may not have seen this coming as courts had ruled in MedImmune's favor last month — after Klarman bought into PDL. Some had seen the MedImmune dispute as an overhang to the stock, and with the bad news out of the way, shares may finally start to post the upside that Klarman envisions.

Beyond potential capital appreciation, Klarman and others see PDL as a near-term solid dividend play. PDL issued a pair of $0.50 dividends in 2010 (equating to a combined 18% dividend yield), and analysts think the company will issue at least $0.50 in dividends this year (equating to a 9% yield). That Genentech legal squabble — if resolved in favor of PDL — appears to represent the major upside for this stock. In its absence, the stock is only worth about $7, according to some analysts. Even that is a 40% upside from current levels.

Action to Take –> Seth Klarman may not be as well known as Warren Buffett or John Paulson. But he should be. He has an uncanny knack for picking winners, and these two new positions, though they are a small part of his portfolio, could help to fuel yet another strong year for one of the Street's most consistently winning investors.

– David Sterman

This article originally appeared on StreetAuthority
Author: David Sterman
2 Picks from an Investment Pro with 20% Annual Gains

Read more here:
2 Picks from an Investment Pro with 20% Annual Gains

The stock market has seen plenty of ups and downs in the past 25 years. Through it all, hedge fund Baupost Group's Seth Klarman has managed to stay on the right side of the ledger, racking up an average annual gain of about 20%.

As I recently discussed, the power of compounding can work magic with numbers like that. If you invested $10,000 with Klarman back in 1985, it would be worth about $950,000 today. Most impressively, he's bagged those returns with the relative safety of value stocks, eschewing the stomach-churning gyrations of growth stocks. And Klarman often holds lots of cash, making those returns even more stunning. Even if you're not one of Klarman's clients, you can still piggyback on his efforts by reading up on his latest moves.

A recently-released 13F report from the U.S. Securities and Exchange commission points to a pair of new names in Klarman's portfolio that look quite intriguing.

Aveo Pharma (Nasdaq: AVEO)
Despite his predilection for value stocks, Klarman likely sees a potential blockbuster with little-known Aveo Pharma. He bought 2 million shares last quarter, worth about $28 million. Aveo is developing a range of cancer-fighting drugs, led by tivozanib, which inhibits vascular endothelial growth factor (VEGF). VEGF allows for the creation of new blood cells that can provide a lifeline to cancer cells. Cut back on VEGF, and you can shrink or eliminate tumors.

Aveo has a ways to go before fulfilling its promise. Tivozanib showed very promising results in a Phase 1 clinical trial with the U.S. Food and Drug Administration, but the next two phases of testing will be far more rigorous. Even if everything goes according to plan, it will be several years before tivozanob hits the market, though Klarman may be betting on Aveo being acquired well before then. These days, any biotech firm with a potentially promising drug in development seems to be buyout bait for larger pharmaceutical companies facing costly patent expirations on their existing blockbuster drugs.

Klarman's play here is already on the move. Japan's Astellas said it will pay Aveo $575 million if tivonazib is approved, and potentially $780 million more if sales targets are met. After the news, Aveo's value rose more than $100 million to about $600 million on Thursday, Feb 17, well below the potential value created by the Astellas endorsement.

PDL BioPharma (Nasdaq: PDLI)
This biotech play has seen better days. Shares traded above $30 back in 2006, but now trade for less than $5. Klarman originally owned this stock back in 2008, but sold off his stake in the summer of 2009 at a loss. Shares have drifted yet lower since then, leading Klarman to jump back in, buying 5.6 million shares in the last quarter, which are currently worth about $30 million.

PDL holds the patent to a number of antibody technologies that are used by other drug companies with their drugs. Klarman's latest buy comes at a time when the company is pursuing a potentially large legal settlement. PDL is seeking unpaid royalties from Roche's Genentech division. Some suspect that Genentech may be liable for hundreds of millions in royalty payments if PDL prevails in a current lawsuit.

Besides this potentially big upside event, PDL typically generates $300 to $400 million a year in sales and earns roughly $1 a share. Not bad for a $5 stock. Shares are so cheap because PDL's key intellectual property rights will lose patent protection in 2014. To offset that cliff, the company is working on a range of new drugs that are currently undergoing clinical trials.

Shares are also being discounted after PDL agreed to pay AstraZeneca's (NYSE: AZN) MedImmune division $92.5 million to settle a royalty dispute regarding PDL's virus treatment Synagis. Klarman, who bought shares at slightly higher levels, may not have seen this coming as courts had ruled in MedImmune's favor last month — after Klarman bought into PDL. Some had seen the MedImmune dispute as an overhang to the stock, and with the bad news out of the way, shares may finally start to post the upside that Klarman envisions.

Beyond potential capital appreciation, Klarman and others see PDL as a near-term solid dividend play. PDL issued a pair of $0.50 dividends in 2010 (equating to a combined 18% dividend yield), and analysts think the company will issue at least $0.50 in dividends this year (equating to a 9% yield). That Genentech legal squabble — if resolved in favor of PDL — appears to represent the major upside for this stock. In its absence, the stock is only worth about $7, according to some analysts. Even that is a 40% upside from current levels.

Action to Take –> Seth Klarman may not be as well known as Warren Buffett or John Paulson. But he should be. He has an uncanny knack for picking winners, and these two new positions, though they are a small part of his portfolio, could help to fuel yet another strong year for one of the Street's most consistently winning investors.

– David Sterman

This article originally appeared on StreetAuthority
Author: David Sterman
2 Picks from an Investment Pro with 20% Annual Gains

Read more here:
2 Picks from an Investment Pro with 20% Annual Gains