Update: QXM Gets Much Awaited Catalyst, Jumps 40%

A month ago, we wrote an article highlighting Qiao Xing Mobile Communication (QXM), a small Chinese company which traded below its net cash value (QXM was the last stock added to the ValueHuntr Portfolio) At the time, we indicated our willingness to wait for a catalyst to unlock this value, as the company’s cash was worth between $4 and $5 per share, but the company was mysteriously trading at the depressing level of $2.6 per share. We referred to this as “an opportunity with asymmetric payoff with the odds of a positive return extremely tilted towards shareholders”. A month later, the much waited catalyst seems to have arrived in the form a private takeover proposal.

The company recently announced that it has received a proposal from its parent company, Qiao Xing Universal Resources, Inc. (Nasdaq: XING) regarding the acquisition of all outstanding ordinary shares of QXM that XING does not currently own. The proposed transaction, if completed, would result in QXM becoming a privately-held company. XING has proposed to offer 1.9 shares of its common stock plus US$0.80 in cash for each QXM share held by persons other than XING. XING filed its letter of intent with the Securities and Exchange Commission on Form 6-K on September 8, 2010. The letter of intent is available on the SEC’s website at: http://tinyurl.com/LOA-XING .

Strategically, this deal is headed for failure. Previously, XING was engaged in telecommunication terminal products business and changed its focus to the resources industry in 2007. The idea of a miner buying out a mobile handset business is a big warning sign to me. Therefore, taking profits at this level seems reasonable.

Francisco Parames To Speak at NYC Value Investing Congress

The Value Investing Congress has just announced that Francisco Paramès of Bestinver Asset Management will speak at the New York City Value Investing Congress scheduled for October 12 and 13.  According to John Schwartz, co-founder of the Value Investing Congress, Mr. Paramès has been called “The Warren Buffett of Spain” due to his impressive historical returns.  The following biographical information on Mr. Paramès is from the Value Investing Congress website:

Francisco Garcia Paramès is the CIO of Bestinver Asset Management ($4.6 Billion AUM). Mr Paramés joined Bestinver in 1989 as a stock analyst, but his passion for investing led him to the asset management area and soon after, he was named CIO.

Self-taught, his management style is based on the strict application of value investing principles, within a framework of a profound knowledge of the Austrian theory of economic cycles.

In 2009 Morningstar elected him as the Best European Manager in European Equities due to his historical returns (16.9% annualized in Spanish equities over the last 18 years and 9.7% annualized in global equities over the last 12 years) and consistency of his investment philosophy.

Mr. Parames has an Economics degree from the Universidad Complutense and holds an MBA from IESE Business School (Madrid – Spain).

ValueHuntr readers qualify for a Steep Discount for the Value Investing Congress.  Act quickly because the discount expires THIS MONDAY, September 13.

The Traders Who Skip Most of the Day

By Kristina Peterson (WSJ)

On the day the “flash crash” bludgeoned the stock market and chaos swept over the floor of the New York Stock Exchange, the founders of Briargate Trading were at the movies.

Rick Oscher and Steven Rubinstein weren’t playing hooky. Briargate, a proprietary-trading firm that the two former NYSE floor “specialist” traders started in 2008, is mostly active at the stock market’s open and close.

In between, when market activity typically drops, the Wall Street veterans play tennis in Central Park, take leisurely lunches, visit their children’s schools and work out at the gym. Dress shoes have been replaced with flip-flops, slacks with cargo shorts. Once during market hours, they walked about five miles and crossed the Brooklyn Bridge to try Grimaldi’s pizza.

“We actually planned on working a full day,” says Mr. Oscher, wearing a white polo shirt and blue-plaid shorts. “But from 11 to 2, the markets are pretty quiet—what’s the point? As a specialist, you have to stand in your spot all day and we did that for 20 years.”

Briargate—an anagram of “arbitrage”—isn’t the only firm taking an extended recess during the 6½-hour U.S. trading day. Trading has become increasingly concentrated in the first and last hours of the session.

Those two hours now make up more than half of the entire day’s trading volume, according to an analysis of data provided by Thomson Reuters. In August, the first and last hour generated nearly 58% of New York Stock Exchange primary volume, up from 45% in August 2005, the analysis shows. The rise of high-frequency trading, where algorithms are used to exploit small discrepancies in high-volume situations, amplifies the concentration of trading at the beginning and end of the day, analysts say.

Heavy trading in the first hour is largely due to the accumulation of orders placed by individual investors and their brokers after the previous day’s close, mutual-fund activity and new strategies deployed by institutional investors based on the latest research and overseas trading, says Adam Sussman, director of research at Tabb Group, a financial-markets research firm. Meanwhile, funds that track stock indexes often wait until the final hour to execute trades to better reflect the benchmark measures’ last prices.

Focusing trading on those times could limit gains, but Messrs. Oscher and Rubinstein are at peace with that. “Would you rather play tennis or make an extra $80? It’s a lifestyle question,” says Mr. Rubinstein, who sometimes works remotely from Florida. “I can go play 18 holes of golf and then come back and trade and that’s a workday.”

“If someone offered us three times what we make to do a real job, we wouldn’t do it,” Mr. Oscher says. “Money isn’t everything. Plus, we’d make terrible employees.”

The men, both 42 years old, met 12 years ago as specialists manning posts 10H and 11H for Van der Moolen Holding on the NYSE floor. They rose to oversee floor operations for the Dutch market-maker, but saw the writing on the wall as the era of specialists faded. Van der Moolen eventually sold its specialist arm to Lehman Brothers in late 2007 and filed for bankruptcy in 2009.

The advent of automated trade execution rendered people who could see and direct the order flow less crucial. There was a peak of nearly 50 specialist firms working the NYSE floor in 1990. That has dwindled to five now.

In 2008, the men joined forces with a programmer from Van Der Moolen and started Briargate. The five employees that now comprise Briargate work out of an apartment in a luxury-hotel and condominium complex on Wall Street.

Briargate trades mostly stocks, using computer algorithms that still require human decision-making. Sometimes the firm’s programmer is left in charge when the rest of the staff leaves the office.

Mr. Oscher said the firm, which trades only its own money, hedges its risks “so there isn’t any scenario that would move our profit and loss beyond boundaries of comfort.” Briargate says it didn’t sustain losses during the May 6 flash crash because it closes its books when the market tends to be volatile. “We actually had a pretty good day,” Mr. Oscher says.

While the firm declined to disclose their returns, Messrs. Rubinstein and Oscher say they make more than they did in their later, leaner years as specialists, though not as much as they did in the late 1990s before the industry started to consolidate.

Mr. Oscher says their compensation is “in line” with what they formerly made as specialists. Successful specialists could make upward of $500,000 at the industry’s peak, while partners could bring home more than $1 million.

Both feel their freedom is fragile, as trading invariably carries risks. Says Mr. Oscher: “We say all the time—these are the good old days.”

It’s Warren Buffett vs. Betty

By Dennis Berman (WSJ)

Try to imagine back to those Nixonian mists of 1973. A small Pasadena, Calif. savings and loan named Wesco Financial Corp. is about to merge with a local suitor. The deal alarms a duo of up-and-comers, 43-year-old Mr. Buffett and colleague Charles Munger, who think the $45 million offer is a rip-off.

They are invited by Elizabeth “Betty” Caspers Peters, the founder’s daughter, to break up the deal. They eventually take over Wesco themselves, accumulating an 80.1% stake.

“I liked Mr. Buffett enormously,” Ms. Peters said in an interview Monday. But Ms. Peters, who was 47 at the time of the deal, had one demand: that some Wesco shares continue to trade publicly.

Good move. Those few shares are up roughly 50-fold since early 1978, outpacing gains at both Berkshire Hathaway and the Dow Jones Industrial Average by more than three times. The old S&L is gone. Sleepy little Wesco, transformed into a collection of insurance, steel-processing and furniture rental businesses, is now worth $2.6 billion.

Today, Ms. Peters is 84 and still on the board. She is fiercely proud of Wesco, having taken it public in 1959, when, she reminds, few women ever stepped in a board room.

“Happily, I’ve been part of the ride,” she says of Berkshire.

Late last month, Mr. Buffett and Mr. Munger, Wesco’s chief executive, offered to buy out Wesco’s remaining 19.9% for roughly $500 million. Both men didn’t respond to requests for comment. Mr. Munger’s latest shareholder letter may have been the only time in history a CEO disparaged his company and its employees. “Business and human quality in place at Wesco continues to be not nearly as good as Berkshire,” he wrote.

They have priced their offer to Wesco’s 5,400 minority shareholders accordingly. They are willing only to pay Wesco’s book value, the basic calculation of a company’s assets minus liabilities.

Wesco has convened a committee of independent directors to evaluate the deal. They would be foolish to press for more, Mr. Buffett says, because they won’t get it. “No hard feelings” if directors won’t accept, he wrote.

Will Wesco ask for an improved offer, knowing that Berkshire could walk away? The answer will come in part from the woman who faced the same judgments back in 1973: Ms. Peters, now the pivotal player among the three-member independent committee. She holds about 5% of non-Berkshire shares, the third-largest bloc.

Thus sets up one of the most unlikely merger face-offs of 2010: Betty vs. Buffett.

Wesco is the oddest of ducks. It has no employees and virtually no public presence. Wesco’s primary appeal, it seems, is its annual meeting, where the cantankerous Mr. Munger holds forth on philosophy, and, occasionally, business. “We would pay to keep it public so we could continue to have an annual meeting,” says Glenn Tongue, managing partner at T2 Partners and a Wesco holder.

There is little room for sentiment in the work of special committees. They must determine whether shareholders are getting a fair, if not optimal, offer. Lawsuits await those who don’t.

Berkshire’s offer is based on Wesco’s book value when the deal closes. That value was $352 at the end of June. The stock traded at around $360 Friday, having hit $416 over the past year.

There is plenty to suggest that Wesco is indeed worth Berkshire’s offered book value. About $2 billion of Wesco’s $2.5 billion of assets is simply a pool of stocks and bonds; its main appeal is the management skill of 80-year-old Mr. Buffett and 86-year-old Mr. Munger. Wesco’s operating businesses perform meekly.

Unsatisfied shareholders will point out that Wesco has traded well above its book value at various times in the past two years. They might also argue that the company’s insurance operations, tightly aligned to Berkshire, might be better valued in line with its parent, which trades at 1.4 times book.

The market consensus is that Ms. Peters will take Berkshire’s offer. The price is “fair and appropriate,” says Mr. Tongue. “It’s not like you’re buying brand equity in this company. It has none.”

Ms. Peters won’t comment about the offer, only saying that “I believe I’m the best person on that board to represent the minority shareholders.”

So is she willing to get tough with the man whom she so admires? Politely, but firmly, she ends the phone call. She’s busy, she says, with grandchildren at her home in Napa Valley. “Right now we’re picking peaches.”

Bond Market Bubble to Burst Sooner or Later

The current bubble in fixed-income markets is set to burst at some point, and will surely drive funds into stocks. The market for U.S. Treasury bonds has become inflated as banks exploit benchmark borrowing costs near zero to boost purchases.

Although moving into bonds is a natural reaction to uncertain economic conditions, income from the Treasury market is low and real interest rates are negative so investors should look elsewhere to get more bang for their buck, particularly high-yielding companies with good growth prospects.

The threat of deflation, quantitative easing, and liability-driven investments by global pensions is also driving bond prices higher. Moreover, some pensions are leveraging up on bonds to meet their actuarial returns. And banks are borrowing at zero on the short end, purchasing bonds to make the easy spread and trading in higher yielding risk assets all around the world.

With hopes of a V-shaped recovery fading, income-generating bonds look like a smart play. However, as Jeremy Siegel writes in an op-ed published recently in the Wall Street Journal, that “those who are now crowding into bonds and bond funds are courting disaster”.

The Decline of the P/E Ratio

By Ben Levisohn (WSJ)

As investors fixate on the global forces whipsawing the markets, one fundamental measure of stock-market value, the price/earnings ratio, is shrinking in size and importance.

And the diminution might not stop for a while.

The P/E ratio, thrust into prominence during the 1930s by value investors Benjamin Graham and David Dodd, measures the amount of money investors are paying for a fcompany’s earnings. Typically, companies that post strong earnings growth enjoy richer stock prices and fatter P/E ratios than those that don’t.

But while U.S. companies announced record profits during the second quarter, and beat forecasts by a comfortable 10% margin, on average, the stock market has dropped 5% this month.

The stock market’s average price/earnings ratio, meanwhile, is in free fall, having plunged about 35% during the past year, the largest 12-month decline since 2003. It now stands at about 14.9, compared with 23.1 last September, based on trailing 12-month earnings results. Based on profit expectations over the next 12 months, the P/E ratio has fallen to 12.2 from about 14.5 in May.

So what explains the contraction? In short, economic uncertainty. A steady procession of bad news, from the European financial crisis to fears of deflation in the U.S., has prompted analysts to cut profit forecasts for 2011.

“The market is worrying not just about a slowdown, but worse,” said Tobias Levkovich, chief U.S. equity strategist at Citigroup Global Markets in New York. “People want clarity before they make a decision with their money.”

Three months ago, analysts expected the companies in the Standard & Poor’s 500-stock index to boost profits 18% in 2011. Now, they predict 15%. Mutual-fund, hedge-fund and other money managers put the increase at closer to 9%, according to a recent Citigroup survey, while Mr. Levkovich’s estimate is for 7% growth.

“The sustainability of earnings is in doubt,” said Howard Silverblatt, an index analyst at S&P in New York. “Estimates are still optimistic.”

Equally troublesome, analysts’ forecasts are becoming scattered. In May, the range between the highest and lowest analyst forecasts of S&P 500 earnings per share in 2011 was $12. Morgan Stanley predicted $85 a share, while UBS predicted $97 a share. Now, the spread is $15. Barclays said $80 a share; Deutsche Bank predicts $95.

When profit forecasts are tightly clustered, it signals to investors that there is consensus among prognosticators; when they diverge wildly, it shows a lack of clarity. The P/E ratio tends to fall as uncertainty rises, and vice versa.

“A stock is worth its future earnings, but that involves uncertainty,” said Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School. “The more uncertainty there is, the lower the P/E will be.”

Not only is the P/E ratio dropping, it also is in danger of losing some of its prominence as a market gauge.

That is because, with profit and economic forecasts becoming less reliable, investors are focusing more on global economic events as they make trading decisions, parsing everything from Japanese government-debt statistics to shipping patterns in the Baltic region.

To some extent this is in keeping with historical patterns. P/E ratios often shrink in size and significance during periods of uncertainty as investors focus on broader economic themes.

P/E ratios fell sharply during the Depression of the 1930s and again after World War II, bottoming at 5.90 in 1949. They plunged again during the 1970s, touching 6.97 in 1974 and 6.68 in 1980. During those periods, global events sometimes took precedence over company-specific valuation considerations in the minds of investors.

There have been periods when the P/E ratio was much more in vogue. A century ago, the buying and selling of stocks was widely considered to be a form of gambling. P/E ratios came about as a way to quantify the true value of a company’s shares. The creation of the Securities and Exchange Commission during the 1930s made financial information more available to investors, and P/E ratios gained widespread acceptance in the decades that followed.

But thanks to the recent shift toward rapid-fire stock trading, the P/E ratio may be losing its relevance. The emergence of exchange-traded funds in the past 10 years has allowed investors to make broad bets on entire baskets of stocks. And the ascendance of computer-driven trading is making macroeconomic data and trading patterns more important drivers of market action than fundamental analysis of individual companies, even during periods of relative calm.

So where is the P/E ratio headed in the short term? A few optimists think it could rise from here. If corporate borrowing costs remain at record lows and stock prices remain depressed, companies will start issuing debt to buy back shares, said David Bianco, chief U.S. equity strategist for Bank of America Merrill Lynch. As a result, earnings per share would increase, he said, even if profit growth remains sluggish, and P/E ratios could jump with them.

But today’s economic uncertainty argues against that scenario. Consider that while P/E ratios dropped during the inflationary 1970s, they also fell during the deflationary 1930s. The one common thread tying those two eras of falling P/E ratios: unpredictable economic performance.

“We’re looking at a more volatile U.S. economy than we experienced in the last 30 years,” said Doug Cliggott, U.S. equity strategist at Credit Suisse in Boston. “The pressure on multiples may be with us for quite some time.”

Investors Pull $7.1 Billion From Stock Funds Globally, Buy Emerging Bonds

By Shiyin Chen and David Yong (Bloomberg)

Investors withdrew a net $7.1 billion from equity funds tracked worldwide in the week to Aug. 25 and put some $5.2 billion into bonds amid concern economies in the U.S. and Europe are losing momentum, EPFR Global said.

A net $5.4 billion was redeemed from U.S. stock funds, while inflows into emerging markets were the lowest in 13 weeks, EPFR said in an e-mailed statement. Developing-nation bond funds took in $1 billion, on course for a record-setting year, while U.S. bond funds drew $2.5 billion, according to the Cambridge, Massachusetts-based research firm.

The MSCI AC World Index, tracking developed and emerging markets, has dropped 4.2 percent this month after government data signaled a slowdown in the U.S., China and Japan and Standard & Poor’s lowered Ireland’s credit rating. Concern the global rebound will falter is driving investors to the relative safety of bonds, sending yields on two-year treasuries and German 30-year government securities to a record low this week.

“The weaker the numbers come in, particularly in housing, the higher the probability becomes” for a second recession in the U.S., David Wyss, S&P’s chief economist, said in a Bloomberg Television interview in Hong Kong. “While you’ve got stellar German growth, the rest of Europe is looking pretty sick.”

While withdrawals from funds investing in U.S. stocks were the most in dollar terms, redemptions from Japanese stock funds were the highest in terms of percentage of assets under management, according to EPFR. European equity funds also posted net outflows, taking year-to-date losses to $15.7 billion, the research firm said.

EPFR Global tracks funds with some $13 trillion in assets worldwide.

Emerging Markets

Global emerging-market funds took in $333 million for the week, while those investing in Latin America and emerging Europe, Middle East and Africa attracted less than $40 million each, according to the statement. Asia excluding Japan funds posted outflows of $289 million, EPFR also said.

“The biggest headwind for Asian markets was the weaker data emerging from key export markets, with the U.S., China and Japan all posting numbers that suggest their economies are slowing,” EPFR said.

Data released in the week ended Aug. 25 showed U.S. existing home sales slumped, orders for durable goods rose less than forecast and jobless claims jumped. Earlier this month, Japan reported that its gross domestic product grew an annualized 0.4 percent in the three months ended June 30. While that allowed China to overtake Japan as the world’s second- largest economy, Chinese growth is also cooling, with July industrial output rising the least in 11 months, retail sales growth easing and new loans increasing less than estimated.

Treasuries, Bonds

The U.S. economy grew at an annual rate of 1.4 percent in the second quarter, versus the 2.4 percent pace the government estimated last month, according to a Bloomberg survey before the release of Commerce Department figures today.

Inflows into emerging-market bond funds continued for a 13th consecutive week, taking this year’s total beyond 300 percent of the annual record set in 2005, EPFR said in today’s statement. The firm had previously said the 2005 high was $9.7 billion.

Dollar bonds in developing nations have returned 13 percent this year through yesterday, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index that tracks debt of 40 nations. The market has rallied every quarter since 2008, the longest winning streak since March 2004. An index tracking local- currency debt gained 18 percent this year.

Global bond funds were also poised to surpass last year’s record inflow of $47 billion, while inflows into U.S. bond funds stood at 70 percent of the total received last year, also a record high, according to EPFR.

SEC Makes Ousting of Directors Easier

By Jessica Holz and Dennis Berman (WSJ)

Shareholders won greater clout to place directors on corporate boards Wednesday, marking the latest victory for the “shareholder rights” movement that has gradually chipped away power from top executives running U.S. corporations.

But a party-line split vote at the Securities and Exchange Commission, and a denunciation of the new rule by a Republican commissioner who suggested it is illegal, points to new skirmishes ahead. Public companies, including some of the country’s largest, also hope to strike down the rule, which they say will be used to distract management and advance special-interest agendas.

For now, shareholders will have greater sway over who is eligible for election to a corporate board. Those powers mean that investors, including hedge funds, pension funds and unions, could eventually have greater influence over the strategic and financial choices of U.S. companies.

In a decision years in the making, the SEC voted 3-2 in favor of the “proxy access” rule, which requires companies to include the names of all board nominees, even those not backed by the company, directly on the standard corporate ballots distributed before shareholder annual meetings. To win the right to nominate, an investor or group of investors must own at least 3% of a company’s stock and have held the shares for a minimum of three years.

Currently, shareholders who want to oust board members must foot the bill for mailing separate ballots, as well as wage a separate campaign to woo shareholder support. Both are too costly and time-consuming for most.

Now, the targeted companies will essentially be footing the bill for the dissidents, including them in the official proxy materials. The new rule will be in place in time for the 2011 annual meeting season next spring.

SEC Chairman Mary Schapiro, who won on an issue that had dogged two of her predecessors, said the rule is a victory for shareholders seeking more control over how their companies are run. It will “enhance investor confidence in the integrity of our system of corporate governance,” she said.

Hedge funds, pension funds and labor unions have pushed for the rule for years, contending that corporate boards have little incentive to be responsive to shareholder concerns because they rarely face contested elections. After all, they argue, shareholders own the company, and should have sway over its direction. Management—even the chief executive—are hired help.

For the SEC’s two Republican commissioners, the rule violates what they view as a delicate, but effective, understanding between shareholders and company management. For critics of Ms. Schapiro, the rule will create an unruly clash of competing interests that could bog down corporate decision making.

The two SEC opponents were Republican commissioners Kathleen Casey and Troy Paredes. Ms. Casey, a lawyer and former Capitol Hill staffer who has served at the SEC since 2006, sought to lay the groundwork for a legal challenge, calling the rule “fundamentally and fatally flawed.”

Ms. Casey argued the SEC fell short in its due diligence to show the benefits of proxy access outweigh the costs. “The policy objectives underlying the rule are unsupported by serious analytical rigor,” she said, warning of “significant harm to our economy.”

Ms. Schapiro rejected the notion that the SEC acted hastily without making the case that the public needs the new rule. She cited the hundreds of comments reviewed by the SEC—among the most it has received for a proposed rule—and the “long and careful consideration” by the agency.

Alaska’s Ben Creasy, who works at the state’s insurance department, wrote a letter in support of proxy access to the SEC. “Who watches the watchman,” Mr. Creasy wrote July 1. “[I]n a society like ours, the watcher of the watchers is the people at large, and if the people are crippled in their power, the management will take advantage of the freedom.”

The new rules are part of a broader, years-long reconsideration of who holds power in a public company. Prior to the corporate raiders of the 1980s, chief executives largely ruled without fear of rebuke. More recently, hedge funds, calling themselves “shareholder activists,” have upped the ante, repeatedly attacking management pay, perks and strategic direction.

Slowly, both custom and law have moved in the activists’ favor. Worried about shareholder dissent, boards have gotten more aggressive about the performance of top executives. And they have been less willing to overlook indiscretions, as recently happened when Hewlett-Packard Co. ousted CEO Mark Hurd. Both executives and boards have also relented more easily to takeover offers, at the urging of shareholders.

Congress’s financial-regulation law, passed in July, gives the SEC clear authority to make rules on proxy access, likely blocking one line of attack. But opponents could argue that the SEC didn’t follow the right procedure in making its rules.

Ms. Casey’s comments “will certainly energize the business community to take a look at mounting a legal challenge,” said John Olson, a lawyer at Gibson, Dunn & Crutcher LLP, who advises several corporate boards.

The final rule addressed some business concerns. Smaller companies will be exempt from complying with it for three years. Investors won’t be able to borrow stock to meet the 3% threshold, and they won’t be able to use the new power to seek a change of control at a company. And they can nominate directors for no more than a quarter of a company’s board.

The rule nonetheless sets up a divide between large and small companies, with the smaller ones more vulnerable to proxy-access attacks, given the economics at play. It would take an investment of $2.4 billion to pass the 3% threshold for a company the size of Verizon Communications Inc., a sum few hedge funds can produce. But for a smaller company, say the size of Leap Wireless International Inc., the sum required would be only around $28 million.

Some veteran corporate leaders think boards with poor governance practices will be the initial targets of proxy-access contests next year. The new rule “provides a bigger club for activists to deal with those companies,” said James M. Kilts, former CEO of Gillette Inc. and a founding partner of Centerview Partners, a private equity firm. “The only thing you can do is try to resolve the issues so disgruntled shareholders are happy,” he said.

Robert S. “Steve” Miller, chairman of American International Group Inc., fears “people with narrow-interest agendas will seek board seats” despite the laudable objectives of proxy access. As a result, public-company boards may become more cautious and bureaucratic, he said, “eroding their competitiveness with privately held companies and with foreign-domiciled companies.”

Berkshire’s Lou Simpson, Stock Picker for Geico, is Retiring

Lou Simpson, who oversees investments at Geico Corp and was long considered a possible successor to Warren Buffett at Berkshire Hathaway Inc, is retiring at the end of the year, Berkshire said on Monday.

Simpson, 73, has worked for about 31 years at Geico, where he is president and chief executive of capital operations. He has worked under Buffett since Berkshire in 1996 bought what is now the third-largest U.S. auto insurer.

Buffett plans to take over Geico’s $4 billion investment portfolio when Simpson retires. Berkshire ended June with $52.5 billion of equity investments, including at Geico.

“Lou Simpson is unique within Berkshire because he has been the only one other than Buffett with complete autonomy to make investment decisions,” said Andy Kern, managing member of asset management firm Empirical Finance LLC in Dallas and author of the Buffett Ruminations blog.

The low-profile Simpson is “probably the most underappreciated member of the team among the general public because Buffett gets all the credit, and the blame, for Berkshire’s stock holdings,” Kern added.

The planned retirement of Simpson was reported earlier by the Chicago Tribune. Simpson works in that city.

In his February 2007 letter to shareholders, Buffett said Simpson had been his potential replacement to oversee Berkshire investments and would “fill in magnificently for a short period.” But he said Simpson was just six years younger than he, so “a different answer” was needed for the long-term.

Two years earlier, Buffett called Simpson “a cinch to be inducted into the investment Hall of Fame,” with average annual returns of 20.3 percent a year from 1980 to 2004, topping the Standard & Poor’s 500′s .SPX average 13.5 percent.

Buffett, Simpson and Geico Chief Executive Tony Nicely were not immediately available for comment.

Berkshire reports its equity investments and Geico’s together, so it is not always possible to tell which investments are Buffett’s and which are Simpson’s.

Generally, Buffett makes larger investments, such as Coca-Cola Co. and Wells Fargo & Co, although he told the Chicago newspaper that both men began investing in British food retailer Tesco Plc at the same time.

Buffett turns 80 next Monday. He has said that when he steps down from Berkshire, one person will succeed him as chief executive and one or more people will oversee its investments.

Vice Chairman Charlie Munger said last month that “it’s a foregone conclusion” that Chinese investor Li Lu is likely to take over some investments, The Wall Street Journal said, Buffett has transformed Berkshire since 1965 from a failing textile company into a $192 billion conglomerate with some 80 businesses and tens of billions of dollars of stocks. In afternoon trading, Berkshire Class A shares were up $30 at $116,730, and Class B shares were up 10 cents at $77.83.

Buffett has transformed Berkshire since 1965 from a failing textile company into a $192 billion conglomerate with some 80 businesses and tens of billions of dollars of stocks. In afternoon trading, Berkshire Class A shares were up $30 at $116,730, and Class B shares were up 10 cents at $77.83

Value Investing Congress 40% Discount: Last Chance

This is the last opportunity for our readers to take advantage of an exclusive $1,700 discount for the 6th Annual Value Investing Congress, taking place October 12 & 13, 2010 in New York City. This offer expires in 7 days, so get your ticket now using dicount code: N10VH6. After August 30th, the price of VIC tickets will increase by $400. 


The Value Investing Congress is the place for value investors from around the world to network with other serious, sophisticated value investors and benefit from the sharing of investment wisdom. The world-renowned presenters of successful investors present timely investment ideas, examine key concepts of value investing, and reflect on past misjudgments to help you become a more successful investor.

This year’s presenters include:

  • Bill Ackman, Pershing Square Capital Management
  • David Einhorn, Greenlight Capital Management
  • Lee Ainslie, Maverick Capital
  • John Burbank, Passport Capital
  • J Kyle Bass, Hayman Capital
  • Mohnish Pabrai, Pabrai Investment Funds
  • Amitabh Singhi, Surefin Investments
  • J. Carlo Cannell, Cannell Capital
  • Zeke Ashton, Centaur Capital Partners
  • Whitney Tilson & Glenn Tongue, T2 Partners

…with many more to come!