Author Topic: berkshire - cheap?  (Read 51563 times)

Dynamic

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Re: berkshire - cheap?
« Reply #220 on: July 09, 2018, 05:03:54 PM »
Edit:

Dynamic,

Do you have an estimate for what will hit Berskshire P/L with regard to the listed investments for 2018Q2, based on your tool, & based on i.e. unchanged Berkshire portfolio composition, compared to end period 2018Q1?

Yes, it looks like about $5.9bn gain in market value for the quarter to 30 June 2018 aside from KHC which is treated more like a subsidiary. I estimated the tax on the realized gain on the Monsanto merger arbitrage already, but crudely assume 21% deferred tax liability increase is a little over  $1.2bn and net gain in portfolio is about $4.6bn-$4.7bn for the quarter. This does include the effect of known disposals but the economic effect will be the same.

Pretty sure the Apple position cannot have grown or they'd have filed a Form 4 on reaching 5% as @globalfinancepartners said on the Look Through thread. It's possible that other positions have been added to or initiated and likely that there is some small trimming required to keep banks like Wells Fargo below 10%, but I'd imagine they won't make a dramatic difference.

Running some rough numbers for fun on 29th June, just before the quarter closed I was within the ballpark of Valuehalla's estimated Book Value - perhaps 10-20 cents below a few hours before the portfolio market value got a late boost- I don't remember exactly - but I haven't tried to account for seasonality of each earnings line and I'm not sure of the tax effect accounting and have no particular insight into the insurance environment. I would personally ignore KHC's price action given how it's accounted for and aiming for a conservative number.

In the past, I've done pretty well estimating about 2-2.5% quarterly increase in BV from 2015Q3 to Q4 and even picking up some BRK.B at 1.234* Q3BV in Feb 2016 $~124.56, which turned out to be 1.19* Q4BV when it was announced later that month with the 10-K.

We're not so very cheaply priced now, the holiday season boost won't help Q2 gain so much as Q4, and the tax cut mixes things up, but I estimated BV just over $145 per B share and buyback threshold will provide a soft floor of a little over $174, much in line with Valuehalla. I don't have the figures to show my working except for the portfolio gain, I just recall the resulting figure for 2018Q2 BV and the estimated buyback threshold, which I've used recently to estimate my downside in BRK.B. I may have the sheet of paper somewhere but probably won't dig it out.

When the tax cut first came through I slightly overestimated BV at year end by a dollar or so, so take my estimate with a pinch of salt.

I'm certainly bullish on Berkshire Hathaway in the mid to high 180s and I expect the buyback threshold to catch up to my buy prices since Dec2017 by about this time next year. I'm in an odd position that my home currency GBP has weakened so although BRK.B is down from the mid 190s, it's more expensive in GBP than when I bought in December. I'd love the price to hit the mid 170s for a while, but I'd be surprised
« Last Edit: July 09, 2018, 05:14:11 PM by Dynamic »


John Hjorth

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Re: berkshire - cheap?
« Reply #221 on: July 10, 2018, 01:49:20 AM »
Hi John, my figures are not cursory. They are deeply calculated. I am just to laszy to publish the details. Soon we will see, how precise these figures were. Even today we are trading just app 1.28 x BV

Oh, I apologize for my comment then, Valuehalla. And I see that Dynamic comes up with the same numbers within a narrow margin, like yours, in his very elaborate post after yours.

Thank you gents.
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Dynamic

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Re: berkshire - cheap?
« Reply #222 on: July 10, 2018, 02:03:15 AM »
Elaborate post maybe - probably not very elaborate figures (except for the Look-Through part, which is elaborate!).

It was a few rough numbers for after tax segment earnings or losses based around the 10-K and 10-Q on a sheet of paper plus the reasonably accurate Look-Through portfolio change (excluding KHC).

But the good thing is we're estimating the difference from Q1 BV to Q2 BV - about $4.00 added to BV per BRK.B share for the quarter so roughly right give or take $0.20 to $0.30 either way may be a +/- 5-8% window around the real increase, but is still pretty good for estimating the buyback threshold we'll have from early August within a dollar or so, and I'm happy enough with that.

It's a lot easier to be roughly right than it was when we were estimating the unknown impacts of the new Tax Cuts back in December. I was a bit over-optimistic at that time. For Q1 I was a lot closer but still a little optimistic.

nickenumbers

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Re: berkshire - cheap?
« Reply #223 on: July 10, 2018, 05:00:46 AM »
Valuehalla and Dynamic,

I appreciate the effort and the courage to put your numbers out there.  That is part of the reason why I joined this group was to see what a group of SMART, Value Focused, investors have to say.  We don't have to agree, but we should endeavor to be respectful.  We can all Monday morning quarterback the numbers, but I think you guys are on track AND...  I was too lazy to perform the arithmetic that you offered. I love LOVE the fact that you have taken a stab at the math for me.  Thank you for the contribution and the opinion.

I understand Charlie and Warren saying that they can not continue to grow the company at rates that they have in the past.  I get that and I get the upper limit on the economy growing.  But when you listen to them in the 1990s, and the 2000 they were saying the same thing.  Don't you think they are tamping down expectations so that they have an opportunity to exceed the expectations.  They have never been happy to grow their wealth at 4%, why would they accept that now?  I also get the fact that the cash and size of their company is a drag on their performance, but don't buy the opossum routine that Warren puts out there on slower growth.  Slow growth might happen here and there, but that is not what they are aiming for.  Finally when you have collected a menagerie of superior companies with high rates of returns as BRK has, why do we think that the S&P can outperform it? 

PS- I am long Brk.b and I have Brk.B LEAPs going out over the next 6-18 months.

DooDiligence

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Re: berkshire - cheap?
« Reply #224 on: July 10, 2018, 05:19:38 AM »
Valuehalla and Dynamic,

I appreciate the effort and the courage to put your numbers out there.  That is part of the reason why I joined this group was to see what a group of SMART, Value Focused, investors have to say.  We don't have to agree, but we should endeavor to be respectful.  We can all Monday morning quarterback the numbers, but I think you guys are on track AND...  I was too lazy to perform the arithmetic that you offered. I love LOVE the fact that you have taken a stab at the math for me.  Thank you for the contribution and the opinion.

I understand Charlie and Warren saying that they can not continue to grow the company at rates that they have in the past.  I get that and I get the upper limit on the economy growing.  But when you listen to them in the 1990s, and the 2000 they were saying the same thing.  Don't you think they are tamping down expectations so that they have an opportunity to exceed the expectations.  They have never been happy to grow their wealth at 4%, why would they accept that now?  I also get the fact that the cash and size of their company is a drag on their performance, but don't buy the opossum routine that Warren puts out there on slower growth.  Slow growth might happen here and there, but that is not what they are aiming for.  Finally when you have collected a menagerie of superior companies with high rates of returns as BRK has, why do we think that the S&P can outperform it? 

PS- I am long Brk.b and I have Brk.B LEAPs going out over the next 6-18 months.

WEB's says in nearly every letter to shareholders that we can expect combined ratios to deteriorate, and yet, insurance operations continue to perform.

He's one of my favorite pessimistic optimists.

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Dynamic

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Re: berkshire - cheap?
« Reply #225 on: July 10, 2018, 06:30:26 AM »
I have found value in having an estimate of the quarterly numbers in the past. Frequently there is a 5 week window or even 7-8 weeks in February from the quarter end date until the results are published. Having an idea of the likely soft price floor that will arrive in a few weeks can really help if you want to take a high conviction bet and get a feel for the likely downside once the numbers are released, within the normal range of market price fluctuations (which could all go out of the window in the event of a crisis, of course, but is a useful gauge of short-term risk at other times).

It really came good in Jan-Feb 2016 in particular but I also find it useful today in gauging when the asymmetry is strongly in my favour. Buying Berkshire at reasonably cheap prices can both improve the preservation of your capital so that it is ready to be deployed elsewhere if you find high conviction value, and help your IRR exceed the growth in Intrinsic/Book Value by a small but worthwhile amount over time.



Buffett is right to point out that the days of 19-20% annualized returns are gone. We don't want shareholders to expect those sort of numbers and be disappointed. Likewise, with low interest rates and low inflation, fairly certain 9-11% annualized returns for a decade or so are still attractive.

I think that from now on (and perhaps in the last 10-15 years too) there's a lot less opportunity for Berkshire (after tax) to greatly outperform the markets (before tax) with its stock picks in normal markets, and just keeping pace in normal times is still good.

Nonetheless occasional bargains will come along. Apple was a good one, and the initial investment in the $90-$100 range in 2016 was a case of a very large company with hugely loyal customers, deeply undervalued, presumably on fear of a continual decline, offering an earnings yield of 9-11% (depending whether you back out the cash or not) and with a strong buyback program picking up and retiring cheap shares and paying a decent dividend too.

However, even now Berkshire holds 5% of Apple and it's double the price, those shares only represent about 10% of BRK.B's value, so the ~40% IRR on the revaluation of that stock in 2 years provides a much smaller look-through increase in BRK.B's value, of course, though still very worthwhile and with a decent runway of per-share compounding likely to lie ahead. Even the poorer picks like IBM have not been money-losing disasters, just trailing the S&P500 a bit with mundane price action.

In these relatively fully valued markets we see at the moment, the amount of cash awaiting investment in securities or acquisitions tends to reasonably well track the insurance float most of the time, so the cash isn't a huge drag as it's other people's money we're holding onto for now and the insurance combined ratio usually averages out in our favour.

In a bear market, I imagine the opportunities and the aversion to risking the float in chasing modest returns will allow outperformance and investment of much of the float (keeping at least $20-30bn in cash on hand to cover the largest correlated insurance losses) to really take advantage of the float's long-term low-risk non-callable leverage when the downside is most limited and the upside is most lucrative. I think that's where BRK.B will lay the foundations for another moderate surge ahead of the S&P500 Total Return Index (perhaps a 20-40% relative gain, which might annualize to around 1-3% advantage over the index in 10-15 years).

I also see Berkshire's discipline to only increase premiums written and thus float when pricing is right, but forego premium volume when pricing is soft, as a huge advantage. With so much liquidity seeking returns, we haven't had a hard market for a long time. Insurance isn't as important to Berkshire now, either, but it's still a very valuable business and the float is useful too.

All in all, I think Berkshire should be very likely to perform at least as well as the index in the long run and likely to outperform it by a percent or two per annum in the long run, partly thanks to the float leverage and partly thanks to rational opportunism.

At the right sort of price it seems to me to be a great stock to compound your money slowly over time and achieve long-term accumulation goals without incurring taxes (and I willingly hold Berkshire at near 100% portfolio weighting at times) and it's a good place to park your money while awaiting truly great high conviction opportunities to enhance your returns (such as a 25% weighting in Apple at $95 in May 2016, which I funded by selling some of my BRK.B at $142, which I had taken to over 90% weighting three months before at around $125).

Valuehalla

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Re: berkshire - cheap?
« Reply #226 on: July 10, 2018, 09:30:04 AM »
Nickenumbers, you can easily find the suctrure of the math in older posts, for example for end of 2017, here:

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/2017-ye-intrinsic-value-versus-market-value/30/
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Dynamic

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Re: berkshire - cheap?
« Reply #227 on: July 10, 2018, 09:43:59 AM »
I'm guessing that's why we came up with similar numbers, Valuehalla, as I used the same sort of method albeit with the portfolio adjustment before the markets closed on the 29th June.

It seems to be a pretty sound approach to estimate one quarter ahead.t

longinvestor

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Re: berkshire - cheap?
« Reply #228 on: July 10, 2018, 10:24:08 AM »
https://www.cnbc.com/2018/07/10/amazon-netflix-and-microsoft-hold-most-of-the-markets-gain-in-2018.html?__source=yahoo%7Cfinance%7Cheadline%7Cstory%7C&par=yahoo&yptr=yahoo

Virtually all of the gains of the S&P and NASDAQ this year come from a few familiar names.

Another way of saying that the rest are going through a correction? some 494 names? The winners have taken it all
« Last Edit: July 10, 2018, 11:16:38 AM by longinvestor »

Dynamic

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Re: berkshire - cheap?
« Reply #229 on: July 10, 2018, 11:22:01 AM »
Quite possibly but it's cherry picking. You can always find companies with large weightings and strong performance but perhaps it shows how difficult it can be to match the index in short periods when extreme price changes are so concentrated and contribute a lot to index performance.

edit: What I'm trying to say is that it's a distribution with long tails of both positive and negative price moves, some of which are may times the average move of the index as a whole.

If you weight each stock according to their index weighting you can plot each stock's contribution to the index move.

Even when the index goes up 3% in a quarter, there will be a few stocks that have risen 15% to 50%, and there will be a few stocks that have fallen 15% to 50% plus many more in the middle. Of those outliers, any with a reasonably large weighting that rose will contribute most of the index's 3% move up, possibly more than 3%. This gain will be offset by the larger weighted stocks in the big fallers group to a large extent, pushing the index performance back down, and the group in the middle might contribute to either a few percent rise or fall. It's just how distributions and weighted averages work.

It's a lot like molecules in a fluid such as a gas or liquid, perhaps moving along a pipe. Most molecules move relatively slowly, and perhaps flow slightly in one direction or another, and a small proportion move relatively quickly in one direction or another. You could say the high energy molecules moving in the direction of bulk flow provide an outsized contribution to the bulk flow of the fluid, but the distribution of energies is a natural consequence of temperature and how the statistics work.

Returning to stock index effects, often certain industries gain favour based on the latest trends or legislative changes, so it's not surprising that many of the major contributor's to one quarter's change in the index are linked in some way, giving grist to the mill for such stories to be produced (humans love spotting patterns). Now and again, such a group of linked in-favour stocks, will contribute over 100% of the index's gain (perhaps as much as 4%-5% of the index's market cap), offset by a group of out-of-favour stocks that have declined in price and moderated by a whole bunch of stocks that barely moved to bring the average to maybe a 3% rise in the index.
« Last Edit: July 11, 2018, 01:09:20 AM by Dynamic »