Wednesday, February 4, 2009

Buffett Invests in Harley Davidson

As many of you know, I'm an avid Warren Buffett follower, so I was interested to read that Buffett agreed to buy $300 million of debt issued by Harley Davidson (NYSE: HOG) yesterday.

(Note: many people use Buffett and Berkshire interchangably, as if he makes every decision at the company he runs. While I am sure this is not true, I often use the two interchangably as well, so whenever you see me mentioning Buffett and Berkshire in the same entry, assume I'm referring to Berkshire Hathaway in all cases unless I specify otherwise. I promise to try to be more precise in the future.)

Harley announced that it was selling $600 million of senior unsecured debt to two investors: Berkshire Hathaway (Buffett's company), and Davis Advisors, LP, which is Harley's biggest shareholder. According to an article I read, Buffett hasn't invested any other money in Harley besides this purchase. The notes are a pretty sweet deal. Though unsecured, they are senior in the capital structure which means they get paid pretty quickly if the company goes bankrupt. I am not sure what Harley's capital structure looks like, but being that Berkshire bought the notes, I'm willing to bet that Buffett or someone at BRK took a good look at it and feels there is a good chance the notes will be repaid when they mature in 2014. The best part of the deal? They pay FIFTEEN PERCENT INTEREST. So for lending Harley $300 million now, Buffett will collect a check for $45 million each year for the next five years. That's a total of $225 million in interest, plus the return of his original principal.

Harley plans to use the money for its consumer lending unit, ie to lend money to people so that they can afford to buy its motorcycles. I don't follow the company too closely, but apparently it is in the midst of a turnaround plan.

The stock jumped something like 15% yesterday on the news that Buffett was "investing" in the company. I noticed it fell about 7% today. I think it's pretty crazy when people view Berkshire buying preferred stock (as he did recently with Goldman Sachs) or loaning money via a debt purchase as some kind of an endorsement from Buffett that the company's equity is undervalued. If he thought Harley was undervalued, he could have bought the entire company, which has a market cap of only about $3 billion compared with Berkshire's $30 billion pile of cash. But he didn't. Instead he chose to lend them money for a relatively short period of time at a high interest rate. Being one of the few people with $30B cash in hand during a financial crisis helps Buffett to get some very favorable investment opportunities. 

I noticed that Moody's poured icewater on the announcement by immediately downgrading Harley Davidson Funding Corp., which is the fundraising arm of Harley's consumer finance unit. This will make it more expensive for the unit to raise money, which is not a good thing. Though Moody's does not directly come out and say it, it appears that the new $600M of debt was the catalyst for the downgrade.

In any event, I assume Buffett did his homework on this one and in the end he will get his 15% per year. 

Monday, February 2, 2009

Is now a good time to buy stocks?

I get this question a lot: "Is now a good time to buy stocks?"

It's actually pretty easy to answer this right now. But first you have to ask yourself a few questions: 

1) Do I need the money I would be using to buy stocks? Your answer should be no. If you are planning on using this money for a down payment on a house in less than 5 years, then you should not be buying stocks with it. If you need to live off this money and couldn't afford to live your life without it, then you should not be buying stocks with it. Stocks are risky and you could lose every cent you put into them (not the most likely scenario, but a possibility that you can't completely ignore). Another way to phrase this question would be "Do I have a long time horizon of 20-30 years?"

2) Do I understand the difference between investing and speculating? Most people do not. If you want a good explanation, read The Intelligent Investor by Benjamin Graham. (I actually own this version of the book, which is hardcover and will hold up better over time, but the one I linked to first is cheaper.)

3) Do I have the time and skill to research individual stocks? If your answer here is "no", this does not rule out stocks as a whole but to me it would rule out purchasing anything but a small amount of individual stocks. Instead, I would personally invest in index funds and look for the lowest fees possible.

You'll notice I didn't mention anything about the market. This is because I don't know if it is high or low right now as compared to where it will be in a couple of months or years from now. I do know that equity investments look more attractive to me (and to Warren Buffett and Scott Adams) than they did a year ago, but I'm not going to make any forecasts.

And yes, the rumors are true: you have me to thank for the recent market declines. One of my 2006 year-end wishes was for lower stock prices in 2007 and although it took until 2008 for the market to fully grant it, my wish was fulfilled. Thank you, Mr. Market. You really helped my retirement years by allowing me to buy your shares so cheaply in 08 and hopefully for the next couple of years as well.

Please invest responsibly.

Oh, and for the majority of my readers who rely on a salary like me, you should worry more about your job than where you invest your money. Now is not the time to be slacking off at work trading stocks when you should be working to dodge the next round of layoffs. That said, there are some great bargains out there.

Sunday, February 1, 2009

CEO Compensation

So we all know that CEOs are paid ridiculous amounts of money. I've often thought that if I spent a week or 2 as CEO of a major corporation, I'd be set for life. I would be able to pay cash for a pretty nice house and then only work to pay my basic bills every year. Not only would one paycheck be more than I make in a few years, but I'd also get the nice golden parachute to boot.

Our new president is very public about his disdain for CEO salaries, and as I read in today's Wall St. Journal, Sen. Claire McCaskill (D., Mo.) has now introduced a bill to limit CEO salary to no more than what the president earns: $400k a year. The next sentence was a classic and I applaud the authors of the story for putting it in there: "In 2007, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein earned that much in about two days."

Two days!

I gotta get me one of them jobs.