Berkshire Annual Letter 1995 (Part 8)
Apr 12th, 2007 by Martin Lee
Convertible Stocks
Berkshire made five private purchases of convertible preferred stocks from 1987-1991.
Dividend Year of Market Company Rate Purchase Cost Value ------- -------- -------- ------ --------
(dollars in millions) Champion International Corp 9 1/4% 1989 $300 $388(1) First Empire State Corp 9% 1991 40 110 The Gillette Company 8 3/4% 1989 600 2,502(2) Salomon Inc 9% 1987 700 728(3) USAir Group, Inc. 9 1/4% 1989 358 215
When the purchases were made, Warren expected
(a) the returns from them to moderately exceed those from medium term fixed income securities.
(b) they would not beat the returns from a business with wonderful economic prospects.
(c) they would give back at least their capital plus dividends under almost any circumstances.
As it turned out, (a) was met (but only because of the performance of Gillette), (b) was correct and (c) could be wrong (because of USAir Group).
Leaving aside Gillette, the returns of the convertibles would be no more than equal to those earned from medium term fixed income issues.
Furthermore, the returns for Gillette would have been even greater had Warren purchased the shares directly at that time instead of the convertible.
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