Author Topic: "The secrets to Buffett's success" in The Economist  (Read 11396 times)

woltac

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"The secrets to Buffett's success" in The Economist
« on: September 28, 2012, 06:54:13 PM »
Pretty basic article from The Economist:

http://www.economist.com/node/21563735

Discusses Buffett's preference for "low beta" stocks and attributes 1/3 of the historic return to the insurance float.  Nothing new here. I am a little disappointed for an article in The Economist.
« Last Edit: September 28, 2012, 07:23:25 PM by woltac »


NormR

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Re: "The secrets to Buffett's success" in The Economist
« Reply #1 on: September 28, 2012, 08:11:56 PM »
Anyone else LOL at the very notion that low beta is the reason for Buffett's success?   

Green King

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Re: "The secrets to Buffett's success" in The Economist
« Reply #2 on: September 28, 2012, 08:25:57 PM »
personally it got me very mad.  >:(

But in reality i think they are wrong, its the cherry coke and no vegetable diet that he has been practicing over his life time.  ;D
GK

ExpectedValue

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Re: "The secrets to Buffett's success" in The Economist
« Reply #3 on: September 28, 2012, 09:57:53 PM »
Anyone else LOL at the very notion that low beta is the reason for Buffett's success?   


In the Economist article, they say that he bought high quality businesses that were down on their luck and amplified the returns on those investments with leverage from float -- what's incorrect about that?

If you really sit down and study Buffett, you will see that is exactly what he did for the most part. Every 10 years or so when the market goes haywire, he's able to deploy capital into situations like the preferred deals he did during the financial crisis (he did similar in the late 80s) and generate extra returns, but for the most part it's all come down to levering up high quality businesses.

Now these businesses do indeed tend to exhibit low beta traits, that's true -- but I think that's just caused by the fact that they're high quality businesses with stable cash flows (ideal for levering).



ERICOPOLY

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Re: "The secrets to Buffett's success" in The Economist
« Reply #4 on: September 28, 2012, 10:22:39 PM »
Now these businesses do indeed tend to exhibit low beta traits, that's true -- but I think that's just caused by the fact that they're high quality businesses with stable cash flows (ideal for levering).

Right.  He needs to put a value on them (prediction is necessary) so they must first be predictable.  Therefore... not very volatile as shareholders sleep well sitting on something predictable.
 

twacowfca

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Re: "The secrets to Buffett's success" in The Economist
« Reply #5 on: September 29, 2012, 03:05:50 AM »
Now these businesses do indeed tend to exhibit low beta traits, that's true -- but I think that's just caused by the fact that they're high quality businesses with stable cash flows (ideal for levering).

Right.  He needs to put a value on them (prediction is necessary) so they must first be predictable.  Therefore... not very volatile as shareholders sleep well sitting on something predictable.
 

Yeah. The simplist model for BRK would be leverage from float and DTA and a modest amount of debt used to buy high quality businesses with predictable cash flows. 

It used to puzzle me how WEB is attracted to the purchase of a great business that had been around 100 years with modest growth prospects at a not so wonderful price that might have an earnings yield of 7% or so.  However, with BRK's internal leverage, that modest earnings yield then increases to 10% or so.  Then, BRK earns a compound rate of maybe 4% per annum above what the great businesses in its stable earn.  Then, the large cash holdings and regular generation of float enable BRK to occasionally pick up unusual bargains like BAC pref + warrants.  Result: now the compounding machine's normalized earnings are perhaps compounding at 11% to 12%  per annum, much more than the earnings of the other great businesses it owns.

Think about it.  Here is this mega cap company, selling for less than 1.2 times Q3 BV that is still a machine that compounds earnings and BV at a much higher rate than some of the very best S&P 500 companies that sell at perhaps more than 4 times BV.  We're talking about a company that has compounded BV/SH at the highest rate of all for the last 47 years!

Plus, BRK does another neat thing.  A few years ago I puzzled over BRK's SEC filings that Warren himself had apparently personally signed.  These listed at the time $8B or so "best of best" holdings like AmEx, Wells Fargo, Coke etc.  I think these were the majority of BRK's pension plan holdings, things that appropriately would have a growing earnings yield of 7 % or so with enormous compounding potential by the time the pensions had to be paid out.  Contrast that to the bond heavy assets of the typical pension plan that will probably earn about half that rate.  :)
« Last Edit: September 29, 2012, 05:29:05 AM by twacowfca »

giofranchi

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Re: "The secrets to Buffett's success" in The Economist
« Reply #6 on: September 29, 2012, 05:41:36 AM »

Yeah. The simplist model for BRK would be leverage from float and DTA and a modest amount of debt used to buy high quality businesses with predictable cash flows. 

It used to puzzle me how WEB is attracted to the purchase of a great business that had been around 100 years with modest growth prospects at a not so wonderful price that might have an earnings yield of 7% or so.  However, with BRK's internal leverage, that modest earnings yield then increases to 10% or so.  Then, BRK earns a compound rate of maybe 4% per annum above what the great businesses in its stable earn.  Then, the large cash holdings and regular generation of float enable BRK to occasionally pick up unusual bargains like BAC pref + warrants.  Result: now the compounding machine's normalized earnings are perhaps compounding at 11% to 12%  per annum, much more than the earnings of the other great businesses it owns.

Think about it.  Here is this mega cap company, selling for less than 1.2 times Q3 BV that is still a machine that compounds earnings and BV at a much higher rate than some of the very best S&P 500 companies that sell at perhaps more than 4 times BV.  We're talking about a company that has compounded BV/SH at the highest rate of all for the last 47 years!

Plus, BRK does another neat thing.  A few years ago I puzzled over BRK's SEC filings that Warren himself had apparently personally signed.  These listed at the time $8B or so "best of best" holdings like AmEx, Wells Fargo, Coke etc.  I think these were the majority of BRK's pension plan holdings, things that appropriately would have a growing earnings yield of 7 % or so with enormous compounding potential by the time the pensions had to be paid out.  Contrast that to the bond heavy assets of the typical pension plan that will probably earn about half that rate.  :)

twacowfca,
great analysis of BRK! AmEx, Wells Fargo, Coke… a 7% earnings yield, add the benefit of float and you get a 10% earnings yield, pick up occasionally some unusual bargain and you compound at 11% to 12%… It looks easy!
So why isn’t it copied more often? You know that I am thinking hard about LRE: why an outstanding (unique, I daresay!) underwriter like LRE keeps the large part of its investments in short-term bonds, instead of just copying what Mr. Buffett has shown works so well? I don’t understand: Mr. Brindle could very well go on concentrating exclusively on the underwriting business - as he should do, because that is clearly what he does best -… but why don’t hire YOU??!!  ;) If only with the goal to replicate what you have written about BRK’s way of investing! It doesn’t take Mr. Buffett to do that! If the reason is: it works for BRK, because of Mr. Buffett’s skills; well, then I don’t agree. I just don’t see how Mr. Buffett’s unique investing skills should be required, to achieve good results the way you have so clearly described.

giofranchi
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biaggio

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Re: "The secrets to Buffett's success" in The Economist
« Reply #7 on: September 29, 2012, 06:11:05 AM »
sure sign of genius, taking something that is difficult and making it look so simple.

"Simple but not easy" as WEB says

giofranchi

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Re: "The secrets to Buffett's success" in The Economist
« Reply #8 on: September 29, 2012, 06:57:41 AM »
Hey! Mr. Buffett is a genius! No doubt about it! But let’s take another example: Mr. Gayner of Markel Corp.. MKL has compounded book value per share at 17% annualised for the last 20 years. They clearly are good underwriters (although not as good as LRE!) and Mr. Gayner is a good value investor. But a genius?! I have been looking at what Mr. Gayner buys and sells for years now, and it doesn’t even seems to me that he strives to “pick up occasionally” those “unusual bargains” twacowfca has written about.
I think that my question is legitimate, also because I heard Mr. Munger ask it many times before: why are so few those who try to emulate Berkshire business model?

giofranchi
« Last Edit: September 29, 2012, 07:01:27 AM by giofranchi »
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warrior

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Re: "The secrets to Buffett's success" in The Economist
« Reply #9 on: September 29, 2012, 07:01:31 AM »
Economist article tried to oversimplify, "Anyone who finds it easy is stupid." -- Charlie Munger