Corner of Berkshire & Fairfax Message Board

General Category => Berkshire Hathaway => Topic started by: shalab on July 16, 2017, 11:34:29 AM

Title: berkshire - cheap?
Post by: shalab on July 16, 2017, 11:34:29 AM
Book value at end of Q1 - $124 (including KHC stake of 10B  not counted in book value - actual value is close to 15 B, -5B for tax allowance)
Book value at end of Q2 - $129  SP500 perf + ~1.5% => 4.5% gain from Q1. If book value is $128, P/B is 1.32, if book value is 129, P/B is 1.31.

For comparison - average P/B for SP500 company is 3.1.
The famous FAAMG stocks look like this:

AMZN => 27
FB => 7.2
GOOG => 5
AAPL => 5.9
MSFT => 7.7

Title: Re: berkshire - cheap?
Post by: rb on July 16, 2017, 01:06:12 PM
I don't think it makes sense to even look at P/B of any of the techs. I mean.. what's the book value of Google's search algorithm?
Title: Re: berkshire - cheap?
Post by: crastogi on July 16, 2017, 06:14:37 PM
Book value at end of Q1 - $124 (including KHC stake of 10B  not counted in book value - actual value is close to 15 B, -5B for tax allowance)
Book value at end of Q2 - $129  SP500 perf + ~1.5% => 4.5% gain from Q1. If book value is $128, P/B is 1.32, if book value is 129, P/B is 1.31.

For comparison - average P/B for SP500 company is 3.1.
The famous FAAMG stocks look like this:

AMZN => 27
FB => 7.2
GOOG => 5
AAPL => 5.9
MSFT => 7.7

Well, Berkshire's P/B will always be lower because they are in different kind of businesses as the list above.  The returns on capital employed are much higher for companies like Google, as they have fewer hard assets. 

Buffett is looking to soak up all the capital Berkshire is creating by deploying in businesses which will provide a predictable return, even if the returns are not spectacular. 

Title: Re: berkshire - cheap?
Post by: scorpioncapital on July 17, 2017, 01:58:06 AM
cheap? verdict is out. Expensive? Doesn't seem so. You could do this - take all of their 4 major categories, financial products, insurance, manufacturing & retail, energy and calculate the sectory P/BV. Then weight it according to the size of that business to Berkshire. Then you can see if it's below that.
Title: Re: berkshire - cheap?
Post by: boilermaker75 on July 17, 2017, 06:57:05 AM
Buffett is a buyer at a P/B of 1.2. So does that mean he thinks at P/B = 1.2  buying BRK is like buying a dollar for fifty cents? That would mean at current prices you are getting a dollars worth of BRK for $0.55.
Title: Re: berkshire - cheap?
Post by: tombgrt on July 17, 2017, 07:10:29 AM
Buffett is a buyer at a P/B of 1.2. So does that mean he thinks at P/B = 1.2  buying BRK is like buying a dollar for fifty cents? That would mean at current prices you are getting a dollars worth of BRK for $0.55.

No, he doesn't think that.

What happened with this forum? Or is it mainly this thread? Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?
Title: Re: berkshire - cheap?
Post by: Jurgis on July 17, 2017, 07:25:41 AM
Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

To be fair, people may have been buying BRK at $70 whenever that was. And people are looking for investments now when BRK is at $16X and may still be relatively attractive compared to other opportunities in the market. Sure it's not gonna return 20% or probably even 15% a year. But it could return annual 10% and outperform the market (and a lot of other ideas).
Title: Re: berkshire - cheap?
Post by: tombgrt on July 17, 2017, 07:29:32 AM
Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

To be fair, people may have been buying BRK at $70 whenever that was. And people are looking for investments now when BRK is at $16X and may still be relatively attractive compared to other opportunities in the market. Sure it's not gonna return 20% or probably even 15% a year. But it could return annual 10% and outperform the market (and a lot of other ideas).

Yes, of course. I just meant that people didn't even discuss the much bigger margin of safety back then except for a few members. Now they are starting to compare it versus BV of tech companies and making silly assumptions concerning what Buffett thinks BRK is worth.
Title: Re: berkshire - cheap?
Post by: Jurgis on July 17, 2017, 07:34:09 AM
Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

To be fair, people may have been buying BRK at $70 whenever that was. And people are looking for investments now when BRK is at $16X and may still be relatively attractive compared to other opportunities in the market. Sure it's not gonna return 20% or probably even 15% a year. But it could return annual 10% and outperform the market (and a lot of other ideas).

Yes, of course. I just meant that people didn't even discuss the much bigger margin of safety back then except for a few members. Now they are starting to compare it versus BV of tech companies and making silly assumptions concerning what Buffett thinks BRK is worth.

I see. Yeah, comparing BV to tech companies is not very productive.
Title: Re: berkshire - cheap?
Post by: Liberty on July 17, 2017, 07:54:42 AM
Valuing BRK on book makes less and less sense as time goes on. It used to be mostly insurance cos with a portfolio of publicly traded stocks and a few operating businesses on top, but now it's also bunch of very large operating businesses of various kinds. The two-column valuation method makes most sense, IMO.

I certainly wouldn't compare the book value of BRK to GOOG or whatever...
Title: Re: berkshire - cheap?
Post by: cubsfan on July 17, 2017, 07:58:06 AM
Over long periods of time, it has worked extremely well.

That said - it is a "blunt tool" - and I agree the 2 column method is the best.
Title: Re: berkshire - cheap?
Post by: shalab on July 17, 2017, 08:03:57 AM
This is a good post, p/b is a metric like any other metric. If you look at the debt (debt/equity), another picture will emerge. Now, many techs have surged because of p/e expansion,  not necessarily because they increased earnings or book value etc. In some cases, the debt has also increased tremendously.

 I asked in another thread when people think the tech stocks will rise another 50% from current valuations. In Berkshires case, everything else being equal and without a major recession, it will be five years or less. It is difficult to estimate this for the techs.





Valuing BRK on book makes less and less sense as time goes on. It used to be mostly insurance cos with a portfolio of publicly traded stocks and a few operating businesses on top, but now it's also bunch of very large operating businesses of various kinds. The two-column valuation method makes most sense, IMO.

I certainly wouldn't compare the book value of BRK to GOOG or whatever...
Title: Re: berkshire - cheap?
Post by: boilermaker75 on July 17, 2017, 10:31:52 AM
Buffett is a buyer at a P/B of 1.2. So does that mean he thinks at P/B = 1.2  buying BRK is like buying a dollar for fifty cents? That would mean at current prices you are getting a dollars worth of BRK for $0.55.

No, he doesn't think that.

What happened with this forum? Or is it mainly this thread? Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?


I was buying. Actually in 2009 I got some in the $40s. From some time in 2008 to 2009 I positioned 1/3 of my portfolio in BRK.

Edit: So maybe at P/B= 1.2, you are getting $1 of BRK for $0.70, or whatever you think. My main point is that if Buffett is still buying at P/B=1.2, then BRK will probably never get there and I am buying at P/B = 1.3. Actually I am writing puts whenever BRK is at P/B =1.3, which I have been continuously doing the last 9 years, so I get a little more margin of safety if put to.
Title: Re: berkshire - cheap?
Post by: boilermaker75 on July 17, 2017, 10:45:42 AM
Valuing BRK on book makes less and less sense as time goes on. It used to be mostly insurance cos with a portfolio of publicly traded stocks and a few operating businesses on top, but now it's also bunch of very large operating businesses of various kinds. The two-column valuation method makes most sense, IMO.

I certainly wouldn't compare the book value of BRK to GOOG or whatever...

Liberty,

I agree. But if Buffett is still using P/B = 1.2 as a buyback point then it is useful to me.

Unless that has changed and I missed it?

Boiler
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 17, 2017, 11:32:37 AM
Please read the topics in this forum about the 1.2 x BV share buy back treshold for BRK, Boilermaker75,

It has been discussed in all details and depth on here. It's obvious, based on your posts here about it - stated with all due respect - that you have not done that.
Title: Re: berkshire - cheap?
Post by: boilermaker75 on July 17, 2017, 11:58:41 AM
Please read the topics in this forum about the 1.2 x BV share buy back treshold for BRK, Boilermaker75,

It has been discussed in all details and depth on here. It's obvious, based on your posts here about it - stated with all due respect - that you have not done that.

John,

Are you referring to this thread?

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/1-2x-pbv-entry-point/360/

I have read it, but it has been a while. So I am sure I am forgetting something I read. (I read most of what is posted at CoBF, but I am sure I forget a lot!)

Just glancing at the last couple of pages of posts from that thread I am not sure what I am missing?

Maybe I am just not understanding what I have read?

Boiler
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 17, 2017, 12:36:23 PM
I apologize for a non-constructive reply here, Boilermaker75.

If you read the December 12, 2012 Press Relase from Berkshire (http://berkshirehathaway.com/news/dec1212.pdf), it's all about the word "may".

"may" here is not the same as "will", it's not in any way an automatic mechanism, and Mr. Buffett stated at the last AGM, that Berkshire would not "prep" its own stock in that situation.

I think some fellow board members has called it a "soft floor" under the stock.

It all depends on the given capital allocation alternatives in that specific and particular situation.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 17, 2017, 12:58:22 PM
Valuing BRK on book makes less and less sense as time goes on. It used to be mostly insurance cos with a portfolio of publicly traded stocks and a few operating businesses on top, but now it's also bunch of very large operating businesses of various kinds. The two-column valuation method makes most sense, IMO.

I certainly wouldn't compare the book value of BRK to GOOG or whatever...

Quote
Q: Do you think the equity positions in Berkshire will do better for Berkshire going forward or the wholly-owned businesses?
 
MUNGER: Well I think that wholly owned businesses will because we won't be paying any taxes on selling and I think they’ll continue to grow and I think they'll do better. I think the wholly owned businesses of Berkshire—or the the 80% owned or what have you—are on average, better than the S&P. So I think we'll do better in that part than the S&P. And I don't think our stocks located in a corporation subject to taxation will do enough better than the S&P when paying the taxes. But if we're buying the stocks with the float in some insurance company, of course it changes.
 
But no, I would say that of course, if you buy Berkshire, you should not be buying it on the strength of its little insurance portfolio.
 
People who buy Berkshire—when you bought Berkshire back 30 or 40 years ago you were getting a bunch of marketable securities that did this, count em up and the businesses were free. Of course those people made a lot of money. We outperformed the market by miles in those days and the businesses did well. And now, we've got businesses that are averaging out doing well and our marketable securities are a small percentage of our cap.
 
There were years when we had more marketable securities per share than our book value per share. Now, it’s quite different. And of course the market at its present modal—it’s a different world. The one thing about Berkshire that's interesting is we do get some opportunities that other people don't get. If you're 3G and want a partner for your next deal, who the hell are they going to come to? They know we're a good partner, so we see stuff other people don't see. That helps.

You get $106/share in Investments/cash, and ~$9/share in earnings. So at $170/share, you're paying around 7x Op earnings per share for a very diverse group of businesses, earning stable, predictable earnings, which have been selected by the greatest capital allocator of all time. The group probably earns 15-20% on capital, and while growth may be limited, I don't expect it to lag the S&P.

So as others have said, I think ~11-12% annual return from today's price is a reasonable expectation. This is why I hold Berkshire in my 401k rather than an S&P index fund.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 17, 2017, 01:20:44 PM
Valuing BRK on book makes less and less sense as time goes on. It used to be mostly insurance cos with a portfolio of publicly traded stocks and a few operating businesses on top, but now it's also bunch of very large operating businesses of various kinds. The two-column valuation method makes most sense, IMO.

I certainly wouldn't compare the book value of BRK to GOOG or whatever...

Quote
Q: Do you think the equity positions in Berkshire will do better for Berkshire going forward or the wholly-owned businesses?
 
MUNGER: Well I think that wholly owned businesses will because we won't be paying any taxes on selling and I think they’ll continue to grow and I think they'll do better. I think the wholly owned businesses of Berkshire—or the the 80% owned or what have you—are on average, better than the S&P. So I think we'll do better in that part than the S&P. And I don't think our stocks located in a corporation subject to taxation will do enough better than the S&P when paying the taxes. But if we're buying the stocks with the float in some insurance company, of course it changes.
 
But no, I would say that of course, if you buy Berkshire, you should not be buying it on the strength of its little insurance portfolio.
 
People who buy Berkshire—when you bought Berkshire back 30 or 40 years ago you were getting a bunch of marketable securities that did this, count em up and the businesses were free. Of course those people made a lot of money. We outperformed the market by miles in those days and the businesses did well. And now, we've got businesses that are averaging out doing well and our marketable securities are a small percentage of our cap.
 
There were years when we had more marketable securities per share than our book value per share. Now, it’s quite different. And of course the market at its present modal—it’s a different world. The one thing about Berkshire that's interesting is we do get some opportunities that other people don't get. If you're 3G and want a partner for your next deal, who the hell are they going to come to? They know we're a good partner, so we see stuff other people don't see. That helps.

You get $106/share in Investments/cash, and ~$9/share in earnings. So at $170/share, you're paying around 7x Op earnings per share for a very diverse group of businesses, earning stable, predictable earnings, which have been selected by the greatest capital allocator of all time. The group probably earns 15-20% on capital, and while growth may be limited, I don't expect it to lag the S&P.

So as others have said, I think ~11-12% annual return from today's price is a reasonable expectation. This is why I hold Berkshire in my 401k rather than an S&P index fund.

This. This piece by SlowAppreciation (http://minesafetydisclosures.com/blog/2017/4/16/berkshire-hathaway-brkb), combined with the two Semper Augustus Client Letters about intrinsic value of BRK was the documents that gave me conviction to continue to add to BRK going forward.

Very much appreciated, SlowAppreciation, thank you for sharing. Damn good work. Please give your GF a gentle hug from me, it appears from your blog, that she is giving you a hand on your work.
Title: Re: berkshire - cheap?
Post by: Paarslaars on July 17, 2017, 02:18:23 PM
Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

I was taking a 35% position :)
Title: Re: berkshire - cheap?
Post by: racemize on July 17, 2017, 02:19:59 PM
Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

I was taking a 35% position :)

I sold virtually every nonfinancial stock I had and put it in Berkshire.  I wish I'd levered it.
Title: Re: berkshire - cheap?
Post by: boilermaker75 on July 17, 2017, 02:28:48 PM
I apologize for a non-constructive reply here, Boilermaker75.

If you read the December 12, 2012 Press Relase from Berkshire (http://berkshirehathaway.com/news/dec1212.pdf), it's all about the word "may".

"may" here is not the same as "will", it's not in any way an automatic mechanism, and Mr. Buffett stated at the last AGM, that Berkshire would not "prep" its own stock in that situation.

I think some fellow board members has called it a "soft floor" under the stock.

It all depends on the given capital allocation alternatives in that specific and particular situation.

John,

Thanks for the clarification. I did not catch the "may."

Thanks,

Mike
Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 03:19:19 PM
This. This piece by SlowAppreciation (http://minesafetydisclosures.com/blog/2017/4/16/berkshire-hathaway-brkb), combined with the two Semper Augustus Client Letters about intrinsic value of BRK was the documents that gave me conviction to continue to add to BRK going forward.

Very much appreciated, SlowAppreciation, thank you for sharing. Damn good work. Please give your GF a gentle hug from me, it appears from your blog, that she is giving you a hand on your work.
Just read slow appreciation's piece. It's pretty well written. One big flaw is that in the valuation it ignores the float. While the value of that liability is less then book, it is definitely far from zero.
Title: Re: berkshire - cheap?
Post by: cubsfan on July 17, 2017, 05:06:19 PM
Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

I was taking a 35% position :)

I sold virtually every nonfinancial stock I had and put it in Berkshire.  I wish I'd levered it.

I'm at 40%+ on BRK and very comfortable with it.

Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 17, 2017, 05:07:04 PM
Valuing BRK on book makes less and less sense as time goes on. It used to be mostly insurance cos with a portfolio of publicly traded stocks and a few operating businesses on top, but now it's also bunch of very large operating businesses of various kinds. The two-column valuation method makes most sense, IMO.

I certainly wouldn't compare the book value of BRK to GOOG or whatever...

Quote
Q: Do you think the equity positions in Berkshire will do better for Berkshire going forward or the wholly-owned businesses?
 
MUNGER: Well I think that wholly owned businesses will because we won't be paying any taxes on selling and I think they’ll continue to grow and I think they'll do better. I think the wholly owned businesses of Berkshire—or the the 80% owned or what have you—are on average, better than the S&P. So I think we'll do better in that part than the S&P. And I don't think our stocks located in a corporation subject to taxation will do enough better than the S&P when paying the taxes. But if we're buying the stocks with the float in some insurance company, of course it changes.
 
But no, I would say that of course, if you buy Berkshire, you should not be buying it on the strength of its little insurance portfolio.
 
People who buy Berkshire—when you bought Berkshire back 30 or 40 years ago you were getting a bunch of marketable securities that did this, count em up and the businesses were free. Of course those people made a lot of money. We outperformed the market by miles in those days and the businesses did well. And now, we've got businesses that are averaging out doing well and our marketable securities are a small percentage of our cap.
 
There were years when we had more marketable securities per share than our book value per share. Now, it’s quite different. And of course the market at its present modal—it’s a different world. The one thing about Berkshire that's interesting is we do get some opportunities that other people don't get. If you're 3G and want a partner for your next deal, who the hell are they going to come to? They know we're a good partner, so we see stuff other people don't see. That helps.

You get $106/share in Investments/cash, and ~$9/share in earnings. So at $170/share, you're paying around 7x Op earnings per share for a very diverse group of businesses, earning stable, predictable earnings, which have been selected by the greatest capital allocator of all time. The group probably earns 15-20% on capital, and while growth may be limited, I don't expect it to lag the S&P.

So as others have said, I think ~11-12% annual return from today's price is a reasonable expectation. This is why I hold Berkshire in my 401k rather than an S&P index fund.

This. This piece by SlowAppreciation (http://minesafetydisclosures.com/blog/2017/4/16/berkshire-hathaway-brkb), combined with the two Semper Augustus Client Letters about intrinsic value of BRK was the documents that gave me conviction to continue to add to BRK going forward.

Very much appreciated, SlowAppreciation, thank you for sharing. Damn good work. Please give your GF a gentle hug from me, it appears from your blog, that she is giving you a hand on your work.

Thank you, and hug given.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 17, 2017, 05:09:03 PM
This. This piece by SlowAppreciation (http://minesafetydisclosures.com/blog/2017/4/16/berkshire-hathaway-brkb), combined with the two Semper Augustus Client Letters about intrinsic value of BRK was the documents that gave me conviction to continue to add to BRK going forward.

Very much appreciated, SlowAppreciation, thank you for sharing. Damn good work. Please give your GF a gentle hug from me, it appears from your blog, that she is giving you a hand on your work.
Just read slow appreciation's piece. It's pretty well written. One big flaw is that in the valuation it ignores the float. While the value of that liability is less then book, it is definitely far from zero.

There's more than one way to skin a cat. I know one can do a float-based valuation of BRK, but felt it was the least-approachable from a casual reader perspective and also the one I'm least confident in doing accurately. So I left it out. I don't think it changes things all that much, and there's nothing wrong with baking in further conservatism to one's model.
Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 05:18:41 PM
This. This piece by SlowAppreciation (http://minesafetydisclosures.com/blog/2017/4/16/berkshire-hathaway-brkb), combined with the two Semper Augustus Client Letters about intrinsic value of BRK was the documents that gave me conviction to continue to add to BRK going forward.

Very much appreciated, SlowAppreciation, thank you for sharing. Damn good work. Please give your GF a gentle hug from me, it appears from your blog, that she is giving you a hand on your work.
Just read slow appreciation's piece. It's pretty well written. One big flaw is that in the valuation it ignores the float. While the value of that liability is less then book, it is definitely far from zero.

There's more than one way to skin a cat. I know one can do a float-based valuation of BRK, but felt it was the least-approachable from a casual reader perspective and also the one I'm least confident in doing accurately. So I left it out. I don't think it changes things all that much, and there's nothing wrong with baking in further conservatism to one's model.
Well you count the securities per share but ignore the associated liability that finances those assets. Under this method every insurance company, indeed every financial institution on the planet is grossly undervalued.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 17, 2017, 05:38:25 PM
This. This piece by SlowAppreciation (http://minesafetydisclosures.com/blog/2017/4/16/berkshire-hathaway-brkb), combined with the two Semper Augustus Client Letters about intrinsic value of BRK was the documents that gave me conviction to continue to add to BRK going forward.

Very much appreciated, SlowAppreciation, thank you for sharing. Damn good work. Please give your GF a gentle hug from me, it appears from your blog, that she is giving you a hand on your work.
Just read slow appreciation's piece. It's pretty well written. One big flaw is that in the valuation it ignores the float. While the value of that liability is less then book, it is definitely far from zero.

There's more than one way to skin a cat. I know one can do a float-based valuation of BRK, but felt it was the least-approachable from a casual reader perspective and also the one I'm least confident in doing accurately. So I left it out. I don't think it changes things all that much, and there's nothing wrong with baking in further conservatism to one's model.
Well you count the securities per share but ignore the associated liability that finances those assets. Under this method every insurance company, indeed every financial institution on the planet is grossly undervalued.

Sorry, I misunderstood your original post.

This is a fair point, though I don't recall Buffett subtracting the liabilities when using the "two-column" valuation method. Curious why that might be.
Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 05:48:50 PM
I think that maybe when Buffett does it, it's more of a rough sketch. He has no intention of spoon feeding a valuation of BRK. But I'm also pretty sure that when he looks to acquire an insurance company he doesn't count the float liability as zero.

Basically the float has to be discounted in some way. It's less then book but still a significant number.

Also in reference to your write-up. At a meeting in years past he did mention in passing that the basket of businesses BRK owns are probably worth about 14x pre tax.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 17, 2017, 06:01:26 PM
I think that maybe when Buffett does it, it's more of a rough sketch. He has no intention of spoon feeding a valuation of BRK. But I'm also pretty sure that when he looks to acquire an insurance company he doesn't count the float liability as zero.

Basically the float has to be discounted in some way. It's less then book but still a significant number.

Also in reference to your write-up. At a meeting in years past he did mention in passing that the basket of businesses BRK owns are probably worth about 14x pre tax.

Do you remember how long ago that was? Reason I ask is the basket has changed significantly since 2009. Was that statement made pre-2009?
Title: Re: berkshire - cheap?
Post by: cubsfan on July 17, 2017, 06:11:24 PM
Do you remember how long ago that was? Reason I ask is the basket has changed significantly since 2009. Was that statement made pre-2009?

I'm pretty sure it was 2012 meeting.
Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 06:17:43 PM
It would have been in the 2011-2014 period.

As with everything WB says he says keep it in perspective. 14x pre tax is a very generic multiple. If you asked me what a US based company is worth without telling me the company I'd say about 14x pre tax. Let me demonstrate:

Take a hurdle rate of 9% (4% for risk free + 5% risk premium), US GDP growth will be about 4%, assume earnings growth will match GDP, and say a tax rate of about 30%. Throw that into a DCF and TADA!: you get a valuation of about 14x pre tax.
Title: Re: berkshire - cheap?
Post by: LC on July 17, 2017, 06:57:54 PM
Well you count the securities per share but ignore the associated liability that finances those assets. Under this method every insurance company, indeed every financial institution on the planet is grossly undervalued.
Isn't Berkshire generally posting underwriting profits, though? Their float is being paid for because they are better underwriters than other institutions. To other firms the float is a liability but for Brk it is an asset, or at least that is how I understand it.
Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 07:16:48 PM
No LC. You could capitalize the underwriting profits in the valuation, which Slow Appreciation did. But that comes nowhere near to cancelling the liability.

Let me put it this way. As sure as the sun will come up tomorrow, a tiny part of that float is a payment that GEICO has to make to a body shop in the next week to pay for work that was done on John's car, because John got into an accident 2 weeks ago. Is that payment an asset or a liability to Berkshire? The float is made up of thousands examples like this spread out over time.

Let me put it another way. Let's say that you have insurance company A which has a consistent total ratio of 100.01% and insurance company B which has a consistent total ratio of 99.99%. Does A have a float liability and B have a float asset, thus making B way more valuable than A? Of course not.

Berkshire's present value of float is less then book. But it is still a huge liability and should not be ignored when valuing Berkshire.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 17, 2017, 07:44:08 PM
No LC. You could capitalize the underwriting profits in the valuation, which Slow Appreciation did. But that comes nowhere near to cancelling the liability.

Let me put it this way. As sure as the sun will come up tomorrow, a tiny part of that float is a payment that GEICO has to make to a body shop in the next week to pay for work that was done on John's car, because John got into an accident 2 weeks ago. Is that payment an asset or a liability to Berkshire? The float is made up of thousands examples like this spread out over time.

Let me put it another way. Let's say that you have insurance company A which has a consistent total ratio of 100.01% and insurance company B which has a consistent total ratio of 99.99%. Does A have a float liability and B have a float asset, thus making B way more valuable than A? Of course not.

Berkshire's present value of float is less then book. But it is still a huge liability and should not be ignored when valuing Berkshire.

From the AR,

So how does our float affect intrinsic value? When Berkshire’s book value is calculated, the full amount
of our float is deducted as a liability, just as if we had to pay it out tomorrow and could not replenish it. But to
think of float as a typical liability is a major mistake. It should instead be viewed as a revolving fund. Daily, we
pay old claims and related expenses – a huge $27 billion to more than six million claimants in 2016 – and that
reduces float. Just as surely, we each day write new business that will soon generate its own claims, adding to
float.
If our revolving float is both costless and long-enduring, which I believe it will be, the true value of this
liability is dramatically less than the accounting liability. Owing $1 that in effect will never leave the premises –
because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out
the door tomorrow and not be replaced. The two types of liabilities, however, are treated as equals under GAAP.
A partial offset to this overstated liability is a $15.5 billion “goodwill” asset that we incurred in buying
our insurance companies and that is included in our book-value figure. In very large part, this goodwill represents
the price we paid for the float-generating capabilities of our insurance operations. The cost of the goodwill,
however, has no bearing on its true value. For example, if an insurance company sustains large and prolonged
underwriting losses, any goodwill asset carried on the books should be deemed valueless, whatever its original
cost.
Fortunately, that does not describe Berkshire. Charlie and I believe the true economic value of our
insurance goodwill – what we would happily pay for float of similar quality were we to purchase an insurance
operation possessing it – to be far in excess of its historic carrying value. Indeed, almost the entire $15.5 billion
we carry for goodwill in our insurance business was already on our books in 2000 when float was $28 billion.
Yet we have subsequently increased our float by $64 billion, a gain that in no way is reflected in our book value.
This unrecorded asset is one reason – a huge reason – why we believe Berkshire’s intrinsic business value far
exceeds its book value.
Title: Re: berkshire - cheap?
Post by: LC on July 17, 2017, 08:04:01 PM
Rb: I don't understand your point (then again I am pretty dense...)

If we take your example of company A (underwriting losses) and B (underwriting gains) and simplify the problem:

Imagine they both write their first business today.
Let's remove all investments of the float, assume they only hold cash.

Let's go forward 1000 years of this behavior, and then look at the companies.

Company A will now be bankrupt due to underwriting losses. Company B will have printed money continuously.

If we go back to time zero, we see the underwriting performance of A to be a huge liability which has wiped out the company, but a huge asset to B.
Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 08:36:04 PM
Rb: I don't understand your point (then again I am pretty dense...)

If we take your example of company A (underwriting losses) and B (underwriting gains) and simplify the problem:

Imagine they both write their first business today.
Let's remove all investments of the float, assume they only hold cash.

Let's go forward 1000 years of this behavior, and then look at the companies.

Company A will now be bankrupt due to underwriting losses. Company B will have printed money continuously.

If we go back to time zero, we see the underwriting performance of A to be a huge liability which has wiped out the company, but a huge asset to B.
Yes I think you're misunderstanding what I'm trying to say. First of all no insurance company would just keep their float in cash. Secondly, I think there's some confusion around the words asset and liability where you're thinking more of a figurative sense of the words and I'm saying more of the financial sense of the words.

Let me clarify my A and B example a bit more by adding a couple more assumptions. 1: Both companies are behaving like insurance companies and the float is invested in a diversified portfolio of bonds and stocks. 2: Lets assume that both companies have floats of 100 billion.

I know my example is a bit extreme but it's so for a reason. Basically what i was trying to get with my example is that the financial performance of the two companies is essentially the same. Because one has a perpetual underwriting profit makes it a bit more valuable than the other which has a perpetual underwriting loss. But perpetual underwriting profits do not vanish a float liability which in my (updated) example would mean that one company is $100B more valuable than the other. Obviously incorrect.

Also if that were true then a hot stock tip: Progressive has had an underwriting profit for at least 10 years. Take out float liability and it's trading at 1/2 book. Happy days!

Basically, the quote from WB in the AR is spot on. All that means as I've been saying is that float is less then book but still a meaningful liability for BRK. I actually like this discussion because I've been thinking and struggling for a while to get to a good model to discount BRKs float. I hope this thread will help me get closer.

Final thought. If float was an asset rather then a liability then it means it has financial value. In turn that means the someone is willing to pay BRK to have those obligations taken off their hands. Obviously not true. There's nobody there, and WB would agree to that deal in a second. In fact large chunks of BRK float are made up of the obligations of other insurance companies that BRK took over. However those companies paid BRK (handsomely?) to do that.
Title: Re: berkshire - cheap?
Post by: Jurgis on July 17, 2017, 08:53:59 PM
Great post, rb.
Title: Re: berkshire - cheap?
Post by: LC on July 17, 2017, 09:01:26 PM
I've got a couple of thoughts but it's a bit late here so I'll put one here and mull over the rest for tomorrow. The reason I took out the investing portion when comparing 2 insurance companies is this:

Imagine an insurance company with negative underwriting profits. They are essentially a leveraged investment company. They pay X% for financial obligations, and try to invest to make X+Y%. The only value they add is via investing.

Take away their investing arm, and they will eventually drown. So their only real asset is their ability to invest profitably.

So why write insurance business? To grow AUM. So we can think of the liability associated with float as the cost for an investment manager to increase their AUM.

So if we look at it from that perspective, let's go back to underwriting profitably. Imagine investing with a fund manager. You pay him a % to invest with him. At some point you will redeem your investment, but when is that a REAL liability to his business? I can think of 3 scenarios:
-your clients will all jump ship in a crisis
-your performance is consistently just plain bad

and most importantly,
-your cannot replace any leaving AUM

Maybe I'm rambling but that's a thought I had.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 17, 2017, 09:27:14 PM
I'm no accountant.

Can someone build a simple model for what Buffett calls "dramatically lower liability to GAAP" replacing the word "dramatic" with ratios between 0.1 to 0.9 of GAAP reported liability and offset the goodwill $15.5B and the "float growth capability acquired using that goodwill resulting in $64 Billion of additional float since 2000 that in no way is reflected in the book" and what is the range of additional IV we are talking about.

I'm getting ridiculous numbers, enough to keep me awake!

Title: Re: berkshire - cheap?
Post by: rb on July 17, 2017, 09:45:08 PM
I'm no accountant.

Can someone build a simple model for what Buffett calls "dramatically lower liability to GAAP" replacing the word "dramatic" with ratios between 0.1 to 0.9 of GAAP reported liability and offset the goodwill $15.5B and the "$64 Billion of float growth capability acquired using that goodwill since 2000 which is in no way captured in the book" and what is the range of additional IV we are talking about.

I'm getting ridiculous numbers, enough to keep me awake!
Well that's the million dollar question isn't it? Btw, I don't think accounting has anything to do with it.

Let me propose another thought experiment. Because i think the underwriting profit murks the waters a lot. Let's put BRK in an underwriting loss. So I'll give BRK a 2 billion underwriting loss as opposed to 2 billion profit. Through my newfound powers I'll also increase the return of the securities portfolio by 4 billion a year. Ignore the tax effects and all other peculiarities.

In this case basically the profitability of BRK doesn't change. So it's value doesn't not change. Should make analysis easier though.
Title: Re: berkshire - cheap?
Post by: LC on July 17, 2017, 09:56:18 PM
It's value may change. All earnings are not created equal. If you think their underwriting earnings are more or less valuable than their investment portfolio earnings, then I would think their value would change.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 17, 2017, 10:05:08 PM
I'm no accountant.

Can someone build a simple model for what Buffett calls "dramatically lower liability to GAAP" replacing the word "dramatic" with ratios between 0.1 to 0.9 of GAAP reported liability and offset the goodwill $15.5B and the "$64 Billion of float growth capability acquired using that goodwill since 2000 which is in no way captured in the book" and what is the range of additional IV we are talking about.

I'm getting ridiculous numbers, enough to keep me awake!
Well that's the million dollar question isn't it? Btw, I don't think accounting has anything to do with it.

Let me propose another thought experiment. Because i think the underwriting profit murks the waters a lot. Let's put BRK in an underwriting loss. So I'll give BRK a 2 billion underwriting loss as opposed to 2 billion profit. Through my newfound powers I'll also increase the return of the securities portfolio by 4 billion a year. Ignore the tax effects and all other peculiarities.

In this case basically the profitability of BRK doesn't change. So it's value doesn't not change. Should make analysis easier though.

BTW, Buffett did not say that the float was an asset. It is just a dramatically lower liability than GAAP suggests.

Also, Goodwill of $15.5B came about in 2000 because of acquisition of GenRe (I think)? Also, my understanding is that many of Jain's policies written end up being costless and claimless!  Like the March Madness, Hole in one's etc. You collect, wait out the event, no? If there is ever a payout it gets paid over a very long time. Think Lloyds. I believe Buffett uses the term "long enduring" in this sense. 
Title: Re: berkshire - cheap?
Post by: thelads on July 18, 2017, 02:15:01 AM
Apologies in advance, as what I am about to propose may well be wrong. But I think of this simply as a choice of liability. It has debt like qualities, and is a source of financing. The point I think Buffett is making is that this is a long lived liability. Like a revolving credit facility, but one that is drawn almost all the time and whose size stays constant or grows. The alternative source of financing could be debt or equity, but both are higher cost. I have no idea what the right average life or duration of this liability should be, though if we look back to 1995, the float has only grown at GEICO, so you can say its at least 20 years. Probably a lot longer, but that depends on your view of automous driving, etc, other things affecting float. But just for arguments sake, lets say the right proxy is a 30 year bond as a replacement for float. What yield would need to be paid on that? Not just today, but in a normal environment? Even if we took a conservative price of say 2.5%, with a 30 year, zero coupon bullet bond, the fair value of such float (if labeled as a bond instead) would be ~50 cents on the dollar.

I may be wrong, but I think this is roughly the calculation he is doing, though what tenor as a proxy he uses, and what cost of debt, I don't know. But this also matches his comment that the float value is lower in a ZIRP world. All very intuitive I think also, but with this framework you can at least put a range of value on things. You can build a quick bond calculator to test this yourselves. It is obviously very sensitive to the interest rate you use. Obviously there is substantial value to growth in the float too.

The other thing that is really nice about float as a form of financing is that it is uncorrelated to other sources of financing, is non recourse, and doesn't have covenants or knock outs associated (except in a big tail event) - all of which allows WEB to operate counter cyclically even more so than he would otherwise.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 18, 2017, 02:46:12 AM
Great discussion - thank you all,

- - - o 0 o - - -

I think I read somewhere in the past, that Bershire lags analyst coverage... - not! It's actually one of the best covered companies in the world! - due to this board! That's meant as a compliment to my fellow board members!

- - - o 0 o - - -

Personally, I have a habit of thinking of the float and the deferred taxes in the Berkshire balance sheet as financial obligations basically free of interest [without discounting them], however the nature of those obligations separately are very different, and and the same time a bit similar.

I have never moved myself into the for me mentally unknown territory to try to estimate their net present value. If I should try to do it with the float, I would most likely use the provision triangles that we have access to from the 10-Ks, and try to discount the payouts using a WACC.

This approach is basically a calculation based on a liquidation perspective of the liability, based on hindsight [histocal experience] projected to the future, the provision triangles are naturally dynamic over time etc.etc.

After all, what rb is pursuing, is a method for doing a rough estimate of the overall discount to apply to the Berkshire float, so I think - with all the flaws inherent in this method - that it's better to try that than just doing nothing, if you're pursuing to do the discount.

Edit:

The percentage table on lower part of p. 91 in the 2016 10-K will be where to start, and then decompose total float on GEICO, Gen Re, BHRG & BH Primary to do the math.

Edit 2:

Total float year end 2016 is stated to USD 91.6 B, ref. the February 25 2017 Press Release. At p. 87 at the top in the 2016 10-K  there is a specification of the part of the float, totalling USD 76.918 B, ref. that separate post in the Berkshire balance sheet year end 2016.
Title: Re: berkshire - cheap?
Post by: vinod1 on July 18, 2017, 05:14:52 AM
“[If] I were offered $7 billion for [$7 billion of] float
and did not have to pay tax on the gain, but would
thereafter have to stay out of the insurance business
forever—a perpetual noncompete in any kind
of insurance—would I accept that? The answer is
no. That’s not because I’d rather have $7 billion of
float than have $7 billion of free money. It’s
because I expect the $7 billion to grow.”

—Warren Buffett, 1996 Annual Shareholders’
Meeting, as quoted in Outstanding Investor Digest.

“If you could see our float for the next 20 years and
you could make an estimate as to the amount and
the cost of it, and you took the difference between
its cost and the returns available on governments,
you could discount it back to a net present value.”

—Warren Buffett, 1992 Annual Shareholders’
Meeting, as quoted in Outstanding Investor Digest.


I wrote up BRK in 2010, here is the extract related to the float valuation:

The key question concerns the value of float. Float is money an insurance company holds but does not own. Float arises because premiums are received before losses are paid and this interval can be of several years. During this interval, the insurer can invest the money for its own gain. The premiums are often not sufficient to cover all the costs and insurance company has to part with some of the returns generated out of float to make up for the shortfall.

To get an understanding of the theoretical basis for assigning value to float, let us take an example. Assume you are offered the following proposition: You are offered $100 to be paid back after the end of 50 years. You do not have to pay any interest and also get to keep all the money earned in the interim from investing the $100. The only restriction is that you can only invest in high quality investment grade bonds and treasuries.

How much would a smart business man be willing to pay for such an offer? If you can estimate the market rates of interest for long term bonds are going to be about 4% then the business man should be willing to pay about $86. (The business man can invest $14 at 4% for the 50 year period to end up with $100.)

Of course, the business man would not go through the trouble of investing to end up with no profit so he is going to offer something a little lower to make relatively low risk profit.

Insurance float for Berkshire is a lot like this example with few additional benefits. First, the $100 amount is likely to grow around the nominal GDP growth rate of 4-5%. Second, as long as the business is not wound up there is no need to pay back the $100. The effective length of the investment is longer than 50 years. Third, there is a strong possibility of getting paid something like 1-2% for the privilege of holding the money.

So what would a business man offered this proposition pay for this? It should be obvious that it would be at least $100 without even performing any complicated math.

A conservative value of this float can be calculated mathematically with a few assumptions. Assuming no growth in float in the future; that float earns at the treasury bond rate (4%); discounted at the treasury bond rate; and that the insurance segment would not liquidated in the foreseeable future; the present value of the float is simply the amount of float i.e. $100 using the constant growth dividend model.

There are two caveats to this calculation of the value of float.

(1) Shareholder incurs an additional cost for the float through an insurer due to tax penalty. This cost has been estimated at around 1% by Buffett.

(2) There is uncertainty in the true cost of float as it a near certainty that there would be periods of underwriting losses. Both these complications however should not alter the final value in the above calculation as it would be possible to conservatively earn enough above the Treasury bond rate on the float to mitigate this additional cost.

Vinod

Title: Re: berkshire - cheap?
Post by: racemize on July 18, 2017, 05:27:15 AM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.
Title: Re: berkshire - cheap?
Post by: vinod1 on July 18, 2017, 05:33:04 AM
To put it more concisely, if you are given $100 today and every year going forward you would be given another $3 to $4 for the next 100 years with the caveat that you might also have to give back $3 to $5 once every 10 years (to simulate underwriting loss), what would you pay for that privilege?

I would pay $100 for that. Note that, you would get that $100 back immediately to be paid back in 100 years.

Vinod
Title: Re: berkshire - cheap?
Post by: vinod1 on July 18, 2017, 05:42:41 AM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple.

When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation.

Vinod
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 06:54:28 AM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple.

When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation.

Vinod

Which brings us full circle to the theme of this thread. All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value. The grossest error is the use of the near universal "let's put a 10x multiple on the Pre-tax earnings". Semperaugustus comes closer than most in properly valuing Berkshire. Being elegant in paper calculations doesn't preclude being ridiculously wrong. In a world where ridiculousness is rampant to unhinged on the other side. Think FANG.

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!
Title: Re: berkshire - cheap?
Post by: racemize on July 18, 2017, 07:27:37 AM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple.

When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation.

Vinod

Perhaps I'm being dense here, but if we take $90 billion in float liability and then call it $50 billion in asset (after your adjustments above), it would have well over $100 billion effect in value change from book value, wouldn't it?  In other words, it isn't just discounting it as a liability if you would be willing to pay someone to get it, so it seems like it would be a big swing.
Title: Re: berkshire - cheap?
Post by: racemize on July 18, 2017, 07:28:49 AM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple.

When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation.

Vinod

Which brings us full circle to the theme of this thread. All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value. The grossest error is the use of the near universal "let's put a 10x multiple on the Pre-tax earnings". Semperaugustus comes closer than most in properly valuing Berkshire. Being elegant in paper calculations doesn't preclude being ridiculously wrong. In a world where ridiculousness is rampant to unhinged on the other side. Think FANG.

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!

Buffett said in the last meeting that IV could compound at 10% if interest rates rise.  I don't think this is anything like FANG growth, but it is steady and obviously not priced like FANG is.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 07:57:21 AM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple.

When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation.

Vinod

Which brings us full circle to the theme of this thread. All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value. The grossest error is the use of the near universal "let's put a 10x multiple on the Pre-tax earnings". Semperaugustus comes closer than most in properly valuing Berkshire. Being elegant in paper calculations doesn't preclude being ridiculously wrong. In a world where ridiculousness is rampant to unhinged on the other side. Think FANG.

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!

Buffett said in the last meeting that IV could compound at 10% if interest rates rise.  I don't think this is anything like FANG growth, but it is steady and obviously not priced like FANG is.

Let's first catch up to IV. From the discussion here we're off to way off.
Title: Re: berkshire - cheap?
Post by: LC on July 18, 2017, 08:08:03 AM

The other thing that is really nice about float as a form of financing is that it is uncorrelated to other sources of financing, is non recourse, and doesn't have covenants or knock outs associated (except in a big tail event) - all of which allows WEB to operate counter cyclically even more so than he would otherwise.

I essentially agree with the rest of your post, but I am not so sure about this. I don't know the insurance business that well, but I would think that the profitability of new insurance business is somehow correlated to the current interest rate environment. When cash is cheap, lots of people can write business, which pushes down profitability (I could be wrong here). Buffett notoriously does not want to write unprofitable business.

Here is the big assumption that Buffett makes:

Owing $1 that in effect will never leave the premises –because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced.

As long as new, profitable business can be written, for Buffett (or any other consistently profitable underwriter), this business is like having the ability to draw upon a negative-interest rate revolving loan.

Title: Re: berkshire - cheap?
Post by: shalab on July 18, 2017, 08:27:54 AM
IV: if we take 50% of float as being equal to equity at 50B, the book value is equal to the current market cap!

Regarding FAMG - Microsoft's pre-tax earnings have dropped in the last five years (even adjusting for restructuring costs) from  ~27B to ~23B this year but the stock has doubled. In the same time, the long term debt has gone up from ~20B to ~76B. If we put the pre-tax multiple of 10 to the earnings as some folks are saying, this is worth only 250B give or take. However, the market cap now is 575B.

Something has to give
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 08:29:45 AM

The other thing that is really nice about float as a form of financing is that it is uncorrelated to other sources of financing, is non recourse, and doesn't have covenants or knock outs associated (except in a big tail event) - all of which allows WEB to operate counter cyclically even more so than he would otherwise.

I essentially agree with the rest of your post, but I am not so sure about this. I don't know the insurance business that well, but I would think that the profitability of new insurance business is somehow correlated to the current interest rate environment. When cash is cheap, lots of people can write business, which pushes down profitability (I could be wrong here). Buffett notoriously does not want to write unprofitable business.

Here is the big assumption that Buffett makes:

Owing $1 that in effect will never leave the premises –because new business is almost certain to deliver a substitute – is worlds different from owing $1 that will go out the door tomorrow and not be replaced.

As long as new, profitable business can be written, for Buffett (or any other consistently profitable underwriter), this business is like having the ability to draw upon a negative-interest rate revolving loan.
What's the backup that Buffett have to make that statement,
1. Profitable growth has a long history at Berkshire.
2. Profitable growth doesn't have a long history elsewhere in the insurance industry.
3. The contrast between1&2 will drive the rest to idiot behavior. Think AIG.
4. The idiots have to get it off their books.

Where else but Berkshire will that float go to?

To top it off, Jain and Buffett are sitting out and likely waiting for all of the new idiot capital coming into the next decade of poor reinsurance market to blow up. They sold every bit of their MunichRe and SwissRe positions within the last few years. They'll be back.
Title: Re: berkshire - cheap?
Post by: thelads on July 18, 2017, 08:46:40 AM
Thanks LC - I take your point. I think though that float has grown pretty much continuously since he took control of it, even during the crisis. But I may be remembering that incorrectly. The cost consistently though has been close to or better than zero. He does float into other areas of insurance and I completely agree, focuses on profitability, but even with that, en masse I think the float has grown.

The comparison I make with other investors is probably poorly articulated. What I meant to do was to compare to a hedge fund, or other entity that levers its positions. Most often, these players borrow on margin or from facilities akin to margin debt, backed by the value of the securities owned. So in a high vol environment, initial margin must climb and the availability of financing goes down (as cost climbs). Berkshire has no such problem on his financing leg as far as I can see. So while his assets may be correlated, his liabilities aren't. This is a pet peeve of mine on the HF side. So much time and effort is spent on the asset side, the liability side is often an afterthought. Even with their "equity" capital, it is often monthly, or quarterly with some delay. Hardly permanent capital, and for a given expertise area/segment, the equity and debt flows tend to be correlated. Again, just not the case with WEB and Berkshire.

I hear you on the big assumption point. How can one be accurate? And this is huge for GEICO given autonomous driving. What will they be underwriting in 10 years? How much could float contract? If the real duration on this liability is a lot shorter than I assumed (say 30 years) then the value of the float vs the balance outstanding would be much lower than the 50% I mention. That to me is the biggest uncertainty. Indeed, on that point, you can stress the value of the float. From the GAAP treatment as 0% benefit, regardless of underwriting profit, assuming it must be or can be gone tomorrow. Or, it can be 30-40 years, etc, which gets you to the 50% (Depending on interest rate used) or more. So I don't think there is a simple answer. We have some assumptions to make on the opportunity cost of finding similar financing, and then how long this can be outstanding and what affects that.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 18, 2017, 08:52:54 AM

Which brings us full circle to the theme of this thread. All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value. The grossest error is the use of the near universal "let's put a 10x multiple on the Pre-tax earnings". Semperaugustus comes closer than most in properly valuing Berkshire. Being elegant in paper calculations doesn't preclude being ridiculously wrong. In a world where ridiculousness is rampant to unhinged on the other side. Think FANG.


Would you mind clarifying this a bit point a more? If memory serves me correctly, the Semper Augustus valuation was a sum-of-the-parts one, where they applied a multiple to each line of business. So are you saying that any "let's put a multiple on earnings" valuation is wrong, or only when doing it to BRK's overall GAAP # (which includes both realized cap gains/dividends and op earnings)?
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 18, 2017, 09:06:36 AM
SlowAppreciation,

Semper Augustus February 2017 Client Letter, p. 35, top schedule. 4 methologies.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 18, 2017, 09:11:24 AM
SlowAppreciation,

Semper Augustus February 2017 Client Letter, p. 35, top schedule. 4 methologies.

Right, I remember then laying out all 4 but they say "sum of the Parts and GAAP Adjusted Financials are our most reliable methodologies". I think the basis of their sum of the parts valuation was applying a multiple to a slightly-adjusted earnings # per segment. For example, MSR gets 20x whereas insurance underwriting may get 10x. I was just hoping longinvestor could clarify his/her point re: applying multiples being incorrect.
Title: Re: berkshire - cheap?
Post by: LC on July 18, 2017, 09:46:28 AM
I think though that float has grown pretty much continuously since he took control of it, even during the crisis. But I may be remembering that incorrectly.
You think correct, here are insurance premiums received:

2005 - $21,997
2006 - $23,964
2007 - $31,783
2008 - 25,525
2009 - 27,884
2010 - 30,749
2011 - 32,075
..
2016 - 45,881

I personally think the assumption being made is a decent one to make. History certainly supports it, both from a premium growth side, and the fact that Buffett has created one of the best insurance machines out there. IMHO and as you mention, only drastic technological changes will alter this trajectory.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 10:05:00 AM
SlowAppreciation,

Semper Augustus February 2017 Client Letter, p. 35, top schedule. 4 methologies.

Right, I remember then laying out all 4 but they say "sum of the Parts and GAAP Adjusted Financials are our most reliable methodologies". I think the basis of their sum of the parts valuation was applying a multiple to a slightly-adjusted earnings # per segment. For example, MSR gets 20x whereas insurance underwriting may get 10x. I was just hoping longinvestor could clarify his/her point re: applying multiples being incorrect.

Applying a 10x multiple is what I was talking about. Why 10x? Why not 9x or 11x or 15x? What assumptions go into that? Does the S&P at 26x square with BRK's 10x?




 
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 18, 2017, 10:14:59 AM
SlowAppreciation,

Semper Augustus February 2017 Client Letter, p. 35, top schedule. 4 methologies.

Right, I remember then laying out all 4 but they say "sum of the Parts and GAAP Adjusted Financials are our most reliable methodologies". I think the basis of their sum of the parts valuation was applying a multiple to a slightly-adjusted earnings # per segment. For example, MSR gets 20x whereas insurance underwriting may get 10x. I was just hoping longinvestor could clarify his/her point re: applying multiples being incorrect.

Applying a 10x multiple is what I was talking about. Why 10x? Why not 9x or 11x or 15x? What assumptions go into that? Does the S&P at 26x square with BRK's 10x?

Ah gotcha, thanks for clarifying.
Title: Re: berkshire - cheap?
Post by: cubsfan on July 18, 2017, 10:43:39 AM
From longinvestor - you hit the nail on the head.

All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value.

This has been the case for years..

Being elegant in paper calculations doesn't preclude being ridiculously wrong.

So true in the case in the case of Berkshire!

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!


Berkshire - the gift that keeps on giving.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 11:06:21 AM
From longinvestor - you hit the nail on the head.

All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value.

This has been the case for years..

Being elegant in paper calculations doesn't preclude being ridiculously wrong.

So true in the case in the case of Berkshire!

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!


Berkshire - the gift that keeps on giving.

May the analysts keep publishing wrong reports and Mr. Market continue to remain in the wrong until the day I retire. May BRK instantly trade above IV starting that day. The 10% growth in IV thereafter will be quite satisfactory.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 18, 2017, 11:20:51 AM
From longinvestor - you hit the nail on the head.

All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value.

This has been the case for years..

Being elegant in paper calculations doesn't preclude being ridiculously wrong.

So true in the case in the case of Berkshire!

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!


Berkshire - the gift that keeps on giving.

May the analysts keep publishing wrong reports and Mr. Market continue to remain in the wrong until the day I retire. May BRK instantly trade above IV starting that day. The 10% growth in IV thereafter will be quite satisfactory.

Amen. How much of a discount to IV do you think BRK trades at currently? 15%?
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 11:38:49 AM
From longinvestor - you hit the nail on the head.

All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value.

This has been the case for years..

Being elegant in paper calculations doesn't preclude being ridiculously wrong.

So true in the case in the case of Berkshire!

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!


Berkshire - the gift that keeps on giving.

May the analysts keep publishing wrong reports and Mr. Market continue to remain in the wrong until the day I retire. May BRK instantly trade above IV starting that day. The 10% growth in IV thereafter will be quite satisfactory.

Amen. How much of a discount to IV do you think BRK trades at currently? 15%?

At least as much as the SemperAugustus report had it as the most likely scenario at the end of 2016. Some 36% headroom to IV. Likely more since more value has been added to the coffers since. I like it that they used "as if BRK was trading at IV" numbers in the table to project out to 2026. Few others do that. And yet conservative.

You did not answer the question on how you came up with 10x.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 11:49:38 AM
Berkshire's value fits Buffett's fat man joke perfectly right now.

You don't need to know if that man is 350 or 380 pounds to know that he is fat.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 18, 2017, 12:20:09 PM
From longinvestor - you hit the nail on the head.

All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value.

This has been the case for years..

Being elegant in paper calculations doesn't preclude being ridiculously wrong.

So true in the case in the case of Berkshire!

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!


Berkshire - the gift that keeps on giving.

May the analysts keep publishing wrong reports and Mr. Market continue to remain in the wrong until the day I retire. May BRK instantly trade above IV starting that day. The 10% growth in IV thereafter will be quite satisfactory.

Amen. How much of a discount to IV do you think BRK trades at currently? 15%?

At least as much as the SemperAugustus report had it as the most likely scenario at the end of 2016. Some 36% headroom to IV. Likely more since more value has been added to the coffers since. I like it that they used "as if BRK was trading at IV" numbers in the table to project out to 2026. Few others do that. And yet conservative.

You did not answer the question on how you came up with 10x.

Oh sorry, I didn't know that was addressed to me haha. Don't get too hung up on the 10x pre-tax. It's just back of the napkin stuff, and based on Buffett and Charlie saying that's what they look to pay when buying a business (10x operating earnings / 15x net income). I personally think BRK's operating businesses are worth closer to 20x post-tax all things considered, and my valuation model puts a pre-tax multiple on each segment (ranging from 8x - 16x). We can quibble over what multiple to use, but I don't think it really detracts from our shared conclusion: BRK looks undervalued.

So we have a very conservative multiple estimate for a company which is conservatively run, employs conservative accounting, and has hidden value obfuscated by GAAP accounting (e.g., LT deferred tax liabilities, KHC not being marked to market, BAC warrants, etc). Using all these extremely conservative scenarios, BRK is still undervalued by 15-20%. And best case is maybe 2x that. Either way, it doesn't really matter to me as Berkshire is a large position of mine that I'm comfortable holding for a very long time.

Said more simply, we don't need to know a man's precise weight to know he's obese.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 01:01:28 PM
From longinvestor - you hit the nail on the head.

All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value.

This has been the case for years..

Being elegant in paper calculations doesn't preclude being ridiculously wrong.

So true in the case in the case of Berkshire!

Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits.

It all adds up to the 20% earnings growth we're seeing since 1999.

Thank heavens the market is wrong!


Berkshire - the gift that keeps on giving.

May the analysts keep publishing wrong reports and Mr. Market continue to remain in the wrong until the day I retire. May BRK instantly trade above IV starting that day. The 10% growth in IV thereafter will be quite satisfactory.

Amen. How much of a discount to IV do you think BRK trades at currently? 15%?

At least as much as the SemperAugustus report had it as the most likely scenario at the end of 2016. Some 36% headroom to IV. Likely more since more value has been added to the coffers since. I like it that they used "as if BRK was trading at IV" numbers in the table to project out to 2026. Few others do that. And yet conservative.

You did not answer the question on how you came up with 10x.

Oh sorry, I didn't know that was addressed to me haha. Don't get too hung up on the 10x pre-tax. It's just back of the napkin stuff, and based on Buffett and Charlie saying that's what they look to pay when buying a business (10x operating earnings / 15x net income). I personally think BRK's operating businesses are worth closer to 20x post-tax all things considered, and my valuation model puts a pre-tax multiple on each segment (ranging from 8x - 16x). We can quibble over what multiple to use, but I don't think it really detracts from our shared conclusion: BRK looks undervalued.

So we have a very conservative multiple estimate for a company which is conservatively run, employs conservative accounting, and has hidden value obfuscated by GAAP accounting (e.g., LT deferred tax liabilities, KHC not being marked to market, BAC warrants, etc). Using all these extremely conservative scenarios, BRK is still undervalued by 15-20%. And best case is maybe 2x that. Either way, it doesn't really matter to me as Berkshire is a large position of mine that I'm comfortable holding for a very long time.

Said more simply, we don't need to know a man's precise weight to know he's obese.

Peace! We're all going to enjoy this hell of a ride up.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 18, 2017, 01:23:55 PM
I hope your are right, longinvestor.

I think within the last almost five years, there has only been one day beside this, where I have been allocating more capital than today. That day was the day after the Brexit vote, buying SAN.

Today I added to BRK.B, because of the talk and discussion in this topic. No more fooling around with buying in drips.

USD relative to EUR has been down quite some today, also [important for me as an European investor], likely because of all the talk about the political gridlock in the US with the health care reform.
Title: Re: berkshire - cheap?
Post by: cubsfan on July 18, 2017, 01:55:28 PM
I hope your are right, longinvestor.

I think within the last almost five years, there has only been one day beside this, where I have been allocating more capital than today. That day was the day after the Brexit vote, buying SAN.

Today I added to BRK.B, because of the talk and discussion in this topic. No more fooling around with buying in drips.

USD relative to EUR has been down quite some today, also [important for me as an European investor], likely because of all the talk about the political gridlock in the US with the health care reform.

IF your holding period is long enough (3-5yrs), you will do quite well. Have some capital for bad market days, where you can
add - but if you are lucky enough to get BRK in the low 150's, maybe high 140's - then you're really lucky.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 18, 2017, 02:07:04 PM
I hope your are right, longinvestor.

I think within the last almost five years, there has only been one day beside this, where I have been allocating more capital than today. That day was the day after the Brexit vote, buying SAN.

Today I added to BRK.B, because of the talk and discussion in this topic. No more fooling around with buying in drips.

USD relative to EUR has been down quite some today, also [important for me as an European investor], likely because of all the talk about the political gridlock in the US with the health care reform.

IF your holding period is long enough (3-5yrs), you will do quite well. Have some capital for bad market days, where you can
add - but if you are lucky enough to get BRK in the low 150's, maybe high 140's - then you're really lucky.
Have buy orders in for those prices.

Just for bragging, bought down to $125 in 2015, down to $47 during the GFC. Bought some in between, but not as much as during 2009 and 2015.
Title: Re: berkshire - cheap?
Post by: Jurgis on July 18, 2017, 03:51:41 PM
To be a devil's advocate in this BRK love fest, I'll just note that Buffett has been buying AAPL, BK and LUV instead of buying BRK:

http://www.dataroma.com/m/holdings.php?m=brk

Maybe he knows better?  8)




Personally for me it's very hard to do relative valuations. If I was faced with firing squad and had to choose between AAPL, JPM, BRK and GOOGL (screw LUV), I'd probably choose... no wait... don't shoot me yet... let me think... wait... ::)
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 18, 2017, 04:07:12 PM
Just hilarious, Jurgis! [ : - ) ]

- - - o 0 o - - -

On a more serious note:

I really want rb to chime in here, on:

1. His thoughts about the discounting of the float liability,
2. His further comments about the piece by SlowAppreciation.

- - - o 0 o - - -

I hope that rb is just having a good time off the board in the summer period up there in Toronto.
Title: Re: berkshire - cheap?
Post by: vinod1 on July 18, 2017, 04:51:42 PM
The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple.

When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation.

Vinod

Perhaps I'm being dense here, but if we take $90 billion in float liability and then call it $50 billion in asset (after your adjustments above), it would have well over $100 billion effect in value change from book value, wouldn't it?  In other words, it isn't just discounting it as a liability if you would be willing to pay someone to get it, so it seems like it would be a big swing.

I probably did not explain well.

Float can be considered as equivalent to debt.

Unlike debt, however, float is never really paid back unless the company liquidates or shrinks its insurance business.

So we are discounting the debt to a near zero value. Not adding another asset.

Vinod
Title: Re: berkshire - cheap?
Post by: racemize on July 18, 2017, 06:17:05 PM
I probably did not explain well.

Float can be considered as equivalent to debt.

Unlike debt, however, float is never really paid back unless the company liquidates or shrinks its insurance business.

So we are discounting the debt to a near zero value. Not adding another asset.

Vinod

I think where I'm not following is that you are willing to pay for the float.  If Berkshire has it and you would buy the float for face value, then not only is the float not a liability for Berkshire, it is an asset (since they can sell it).  Thus, the logic seems to me to tilt to more than calling the float zero liability.
Title: Re: berkshire - cheap?
Post by: rb on July 18, 2017, 06:42:12 PM
I think where I'm not following is that you are willing to pay for the float.  If Berkshire has it and you would buy the float for face value, then not only is the float not a liability for Berkshire, it is an asset (since they can sell it).  Thus, the logic seems to me to tilt to more than calling the float zero liability.
Nobody buys just float. When an insurance company buys float they also get a whole bunch of assets along with it. Think of the Lloyds deal as a good example.

Not even an insane person would pay to take over a in insurance company's liabilities.
Title: Re: berkshire - cheap?
Post by: racemize on July 18, 2017, 07:09:32 PM
I think where I'm not following is that you are willing to pay for the float.  If Berkshire has it and you would buy the float for face value, then not only is the float not a liability for Berkshire, it is an asset (since they can sell it).  Thus, the logic seems to me to tilt to more than calling the float zero liability.
Nobody buys just float. When an insurance company buys float they also get a whole bunch of assets along with it. Think of the Lloyds deal as a good example.

Not even an insane person would pay to take over a in insurance company's liabilities.

I'm not saying they do, I'm extending vinod's thought experiment where he said he would pay for the float.
Title: Re: berkshire - cheap?
Post by: LC on July 18, 2017, 07:10:45 PM
If the float is $100 but only $90 will be paid out, and you can invest it for an extra $5, why not pay $5 for it? Free ten bucks, no?
Title: Re: berkshire - cheap?
Post by: rb on July 18, 2017, 07:15:14 PM
If the float is $100 but only $90 will be paid out, and you can invest it for an extra $5, why not pay $5 for it? Free ten bucks, no?
OMG, we're only talking we're only talking only about float liability here. You can't invest any of that. That's just money going out. The thing you can invest are the securities which were only counted. What we're talking about is the fair value of the float liability, aka the NPV of money that has to be paid out.
Title: Re: berkshire - cheap?
Post by: LC on July 18, 2017, 08:24:06 PM
Yea, I thought it was obvious we were talking about the net value of the float, including the invested assets and any underwriting profits. As you say not even an insane person would pay to assume just the liability. You need to be paid for that.
Title: Re: berkshire - cheap?
Post by: rb on July 18, 2017, 08:45:49 PM
On a more serious note:

I really want rb to chime in here, on:

1. His thoughts about the discounting of the float liability,
2. His further comments about the piece by SlowAppreciation.

- - - o 0 o - - -

I hope that rb is just having a good time off the board in the summer period up there in Toronto.
Thanks for asking John. Summer here in Toronto is lovely :). It makes you feel guilty about time you spend inside. The time to read annual reports is in the winter damn it! I'm actually still adjusting back to Toronto. I recently returned from a 3 week holiday in Italy. Posting has been more limited during that time.

Now onto the more serious things. Regarding SlowAppreciation's piece. As I've said it's pretty well written. He did miss the float liability, but we've beat on that enough. The other thing i would do different is doing a much deeper dive into the subs, not just group all the op-cos together and then slap a generic multiple on them. BNSF is very different from Sees Candy, which is very different from Clayton.

This is how I would go about it. A valuation for BNSF, one for BHE, one for Manufacturing, Services, & Retailing (hey you have to use a bucket somewhere), one for financial products and one for underwriting. If you want to be really through I would also split the insurance group into Geico, reinsurance ops, and other primary. Yes that's a gigantic pain in the ass. But Geico is valuable as hell (at least 3x book) and as a shareholder you want to understand that value and the dynamics of it. 

- - - o 0 o - - - (I love your use of dividers)

Ok. Enough about the blog post. Let's talk about about float discounting.

My thoughts are along Vinod1's. Basically the moment you capitalize the underwriting profit, the float liability just becomes zero-coupon debt. Yes it's a revolving fund and all that. But so is most corporate debt - through refinancing. So now that we see it as zero-coupon debt we can go ahead and calculate the discount. The discount will be equal to the capitalized value of the coupon BRK would have to pay to borrow the equivalent of its float.

So the formula is D=F*c*(1-t)/r where

D=Discount to float face value
F=Float face value
c=coupon BRK would have to pay on debt
t=BRK tax rate
r= hurdle rate

So, let's calculate it. We know F=106B, c would probably be between 3-4%, let's go with 4 to be conservative, t is 36%, r is maybe 9%.

Then D=106*.04*(1-.36)/.09=30.15. So the discount to float is about 30 billion. From this amount you would have to subtract the goodwill carried by the insurance cos in order to get to valuation.

I know this is a bit long.... but you asked for it.

Cheers
Title: Re: berkshire - cheap?
Post by: rb on July 18, 2017, 08:58:53 PM
Yea, I thought it was obvious we were talking about the net value of the float, including the invested assets and any underwriting profits. As you say not even an insane person would pay to assume just the liability. You need to be paid for that.
No, we were talking just about the liability side of float. In the model the securities portfolio (which includes the asset side of float) was already counted. The underwriting profits were capitalized, so already added to value. What was left is the liability side of float. So the discussion is about what is the fair value of the liability side of the float.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 19, 2017, 12:27:01 AM
I really like the approach of yours to the Berkshire float in post #84, rb,

Thank you for sharing your thoughts.

I had a number inside my head in the same range while I was thinking about doing a calculation based on the information in the 10-Ks and discounting it with a WACC, just by looking on the numbers and without doing the calculations.

So in the area of USD 30B it is, give or take a bit.

- - - o 0 o - - -

Good to have you back.
Title: Re: berkshire - cheap?
Post by: vinod1 on July 19, 2017, 05:40:10 AM
I probably did not explain well.

Float can be considered as equivalent to debt.

Unlike debt, however, float is never really paid back unless the company liquidates or shrinks its insurance business.

So we are discounting the debt to a near zero value. Not adding another asset.

Vinod

I think where I'm not following is that you are willing to pay for the float.  If Berkshire has it and you would buy the float for face value, then not only is the float not a liability for Berkshire, it is an asset (since they can sell it).  Thus, the logic seems to me to tilt to more than calling the float zero liability.

My thought experiment is not very "thoughtfull" :)

I mean it more as discounting the liability that is going to be paid out over a very long time.

Vinod
Title: Re: berkshire - cheap?
Post by: racemize on July 19, 2017, 06:14:19 AM
No, that was my fault, I didn't think through the theoretical book of your thought experiment carefully enough.
Title: Re: berkshire - cheap?
Post by: rolling on July 19, 2017, 04:07:40 PM
Buffett is a buyer at a P/B of 1.2. So does that mean he thinks at P/B = 1.2  buying BRK is like buying a dollar for fifty cents? That would mean at current prices you are getting a dollars worth of BRK for $0.55.

No, he doesn't think that.

What happened with this forum? Or is it mainly this thread? Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

As has been noted, despite being more expensive it might be a much better buy today than it was back then. Unfortunately i went all in brk-b at 87 in Dec2012. It never went that low again and it was an horrible deal (i sold all my portfolio which was composed of only 3 stocks, which went on to be a 15 bagger, a 6 bagger and a small position in a double). Valuations are relative.

Today i think brk is a better deal then it was back then. It is trading at a 15-20% discount to a 10% return (190-200$). How much is this worth? Choose a discount rate and you'll have the answer. An appropriate discount rate for this risk would likely be near 6%, but i don't think anyone would pay that:
-active investors seak much more
- passive investors don't see an insurance stock as a bondlike investment

Anyway, the discount to the 10% hurdle and the likelihood of that result make it a very interesting investment relative to the few alternatives available. I keep brk in my radar in case I stop finding other options.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 19, 2017, 08:51:06 PM
Buffett is a buyer at a P/B of 1.2. So does that mean he thinks at P/B = 1.2  buying BRK is like buying a dollar for fifty cents? That would mean at current prices you are getting a dollars worth of BRK for $0.55.

No, he doesn't think that.

What happened with this forum? Or is it mainly this thread? Where we you guys when berkshire was trading at $70 and it's BV had much more margin of safety?

The closest Buffett has come to suggesting or hinting how the buyback threshold relates to IV was in the 2011 AR when it was 1.1x; See below. Berkshire is a different company six years hence. Heck, the relationship between BV and IV has gotten so meaningless that Buffett has actually changed the parameters in the IV discussion where Market Value and Earnings have taken the place of BV. How can one be so sure that he is not suggesting that the 1.2x represents a 50 cent dollar.


Share Repurchases
Last September, we announced that Berkshire would repurchase its shares at a price of up to 110% of book
value. We were in the market for only a few days – buying $67 million of stock – before the price advanced beyond
our limit. Nonetheless, the general importance of share repurchases suggests I should focus for a bit on the subject.
Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take
care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the
company’s intrinsic business value, conservatively calculated.
We have witnessed many bouts of repurchasing that failed our second test. Sometimes, of course,
infractions – even serious ones – are innocent; many CEOs never stop believing their stock is cheap. In other
instances, a less benign conclusion seems warranted. It doesn’t suffice to say that repurchases are being made to
offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders
are hurt unless shares are purchased below intrinsic value. The first law of capital allocation – whether the
money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another. (One
CEO who always stresses the price/value factor in repurchase decisions is Jamie Dimon at J.P. Morgan; I
recommend that you read his annual letter.)
Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like
making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our
own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our
directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)
Nevertheless, we don’t enjoy cashing out partners at a discount, even though our doing so may give the selling
shareholders a slightly higher price than they would receive if our bid was absent. When we are buying,
therefore, we want those exiting partners to be fully informed about the value of the assets they are selling.
At our limit price of 110% of book value, repurchases clearly increase Berkshire’s per-share intrinsic
value. And the more and the cheaper we buy, the greater the gain for continuing shareholders. Therefore, if given
the opportunity, we will likely repurchase stock aggressively at our price limit or lower. You should know,
however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets.
Nor will we buy shares if our cash-equivalent holdings are below $20 billion. At Berkshire, financial strength
that is unquestionable takes precedence over all else.

Title: Re: berkshire - cheap?
Post by: StevieV on July 20, 2017, 07:20:30 AM
How can one be sure that Mr. Buffett is not suggesting that 1.2 book is a 50 cent dollar?  Below is what he had to say in the 2014 letter (published in early 2015).


This cheery prediction comes, however, with an important caution: If an investor’s entry point into
Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares
have occasionally reached – it may well be many years before the investor can realize a profit. In other
words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire
is not exempt from this truth.


That at least certainly implies that 2.4x book value would not be fair value and, thus, that 1.2 book would not be a 50 cent dollar.  IV may have moved more away from book value in the last 2 years, but not significantly enough to change that.

Also, IMHO, all valuation methods point to 1.2 book not being a 50 cent dollar.  For example, SlowAppreciation's solid write-up does not arrive at a conclusion that BRK is worth anything near 2.4x book.

Anyway, I think that BRK is a solid company and may be a good investment here.  However, when I say a good investment, I am talking about 8-11% growth in IV/year plus, perhaps, a little multiple expansion depending upon when you sell. 
Title: Re: berkshire - cheap?
Post by: racemize on July 20, 2017, 07:26:13 AM
I came to post that as well.  No way 1.2 is 50 cents.  Probably 70.

Quote
First and definitely foremost, I believe that the chance of permanent capital loss for patient Berkshire shareholders is as low as can be found among single-company investments. That’s because our per-share intrinsic business value is almost certain to advance over time.

This cheery prediction comes, however, with an important caution: If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.

Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our view, that is an essential criterion for repurchases that is often ignored by other managements.)

For those investors who plan to sell within a year or two after their purchase, I can offer no assurances, whatever the entry price. Movements of the general stock market during such abbreviated periods will likely be far more important in determining your results than the concomitant change in the intrinsic value of your Berkshire shares. As Ben Graham said many decades ago: “In the short-term the market is a voting machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors amateurs and professionals alike – border on lunacy.

Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.

Another warning: Berkshire shares should not be purchased with borrowed money. There have been three times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a satisfactory holding for investors. But it could well be a disastrous choice for speculators employing leverage.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 20, 2017, 09:24:28 AM
How can one be sure that Mr. Buffett is not suggesting that 1.2 book is a 50 cent dollar?  Below is what he had to say in the 2014 letter (published in early 2015).


This cheery prediction comes, however, with an important caution: If an investor’s entry point into
Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares
have occasionally reached – it may well be many years before the investor can realize a profit. In other
words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire
is not exempt from this truth.


That at least certainly implies that 2.4x book value would not be fair value and, thus, that 1.2 book would not be a 50 cent dollar.  IV may have moved more away from book value in the last 2 years, but not significantly enough to change that.

Also, IMHO, all valuation methods point to 1.2 book not being a 50 cent dollar.  For example, SlowAppreciation's solid write-up does not arrive at a conclusion that BRK is worth anything near 2.4x book.

Anyway, I think that BRK is a solid company and may be a good investment here.  However, when I say a good investment, I am talking about 8-11% growth in IV/year plus, perhaps, a little multiple expansion depending upon when you sell.

I'd agree here (and thanks for the compliment). It's not going to compound at 20%/yr, but I think 8-12% is spot on. And that's nothing to sneeze at. If you have $500k today and it compounds at 10%/yr for the next 30 years you can easily retire.... 
Title: Re: berkshire - cheap?
Post by: longinvestor on July 20, 2017, 09:36:18 AM
Investing is an act of arrogance that everybody is wrong.

With BRK this won't be the first time that everybody is wrong. Funny that the world always finds that out in hindsight. This time won't be different. 

I do look forward to the day when we do buy that 50 cent dollar. Now that is a happy thought in my mind with my (very) large position.

btw: As John Hjorth has posted before, SemperAugustus has done the finest job with their in depth analysis of BRK. I re-read the section on under-reported earnings buckets at BRK that in effect add over $100 B of IV.  ;)
Title: Re: berkshire - cheap?
Post by: valueinvesting101 on July 20, 2017, 12:32:03 PM
Did Buffett mention during last AGM that he will buy stock at higher multiple of 1.25 or 1.24 if large block of share were available? I feel like I heard that but could not find it in the transcript.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 20, 2017, 12:54:42 PM
valueinvesting101,

I'm pretty sure, you can't find that in the Yahoo clip.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 20, 2017, 02:01:40 PM
Investing is an act of arrogance that everybody is wrong.

With BRK this won't be the first time that everybody is wrong. Funny that the world always finds that out in hindsight. This time won't be different. 

I do look forward to the day when we do buy that 50 cent dollar. Now that is a happy thought in my mind with my (very) large position.

btw: As John Hjorth has posted before, SemperAugustus has done the finest job with their in depth analysis of BRK. I re-read the section on under-reported earnings buckets at BRK that in effect add over $100 B of IV.  ;)

With regard to the first sentence of your post, longinvestor, I just have to steal the content of a very short post made by rb here on CoBF recently in another topic: "I'll steal that line!" [Please feel free to call it "double-stealing" - for my part! [lol]].

That first line of yours, in your last post in this topic  - is to me - just so true. It is all about being consistent to your thesis, and at the same time being factual, looking at the facts, as is.

The facts that matters to you, may be totally different between each of us. We simply can't all be right on this, nor all be wrong.

- Again, I hereby nominate you, longinvestor, as candidate to the CoBF poster of this week.

- - - o 0 o - - -

"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

Personally, I think I'm getting better at this game, - mentally -, over time.

That does not imply, that I'm good at it, yet, nor that I'll ever be.

- - - o 0 o - - -

It's just such a fascinating experience to push ones own mind absolutely to the limit, which is to me, what I'm doing here.
Title: Re: berkshire - cheap?
Post by: CassiusKing1 on July 20, 2017, 06:13:37 PM
Great conversation. Good stuff all around. Thanks for sharing.
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on July 21, 2017, 06:56:25 AM
Did Buffett mention during last AGM that he will buy stock at higher multiple of 1.25 or 1.24 if large block of share were available? I feel like I heard that but could not find it in the transcript.

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share with purchase threshold?
 
WARREN: When the time comes—and it could come reasonably soon—even while I’m around, but we really don’t think we can get the money out in a reasonable period of time into things we like. We have to re-examine, then what we do with those funds that we don’t think can be deployed well. And at that time, it would make a decision and it might include both. But it could be repurchases, it could be dividends.
 
There are different inferences that people draw from a dividend policy than from a repurchase policy in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in. But if we felt that we had cash that was unlikely to be used—excess cash—in a reasonable period of time and we thought repurchases, at a price that was still attractive to continuing shareholders was feasible in a substantial sum—that could make a lot of sense.
 
At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But, at a point the burden of proof is definitely on us. I mean, the last thing we like to do is own something that a hundred times earnings where the earnings can’t grow. As you point out, we got almost $100 billion. It’s $90 billion plus invested in a business—we’ll call it a business—where we’re paying almost a hundred times earnings and it’s kind of a lousy business.
 
CHARLIE: It’s more after every tax earnings.
 
WARREN: Yeah, so we don’t like that and we shouldn’t use your money that way for a long period of time. And then, the question is, are we going to be able to deploy it? And I would say that history is on our side, but it would be more fun if the phone would ring instead of just relying on history books. I am sure that sometime in the next 10 years—and it could be next week or it could be nine years from now—there will be markets in which we can do intelligent things on a big scale.
 
But it would be no fun if that happens to be nine years off—and I don’t think it will be—but just based on how humans behave and how governments behave and how the world behaves. But like I say at a point, the burden of proof really shifts to us big time and there’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more snd we think we’re doing something brilliant by doing it. Charlie?
 
CHARLIE: Well, I agree with you and the answer is maybe.
 
WARREN: He does have a tendency to elaborate
Title: Re: berkshire - cheap?
Post by: StevieV on July 21, 2017, 07:15:09 AM
"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 21, 2017, 08:12:13 AM
Did Buffett mention during last AGM that he will buy stock at higher multiple of 1.25 or 1.24 if large block of share were available? I feel like I heard that but could not find it in the transcript.

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share with purchase threshold?
 
WARREN: When the time comes—and it could come reasonably soon—even while I’m around, but we really don’t think we can get the money out in a reasonable period of time into things we like. We have to re-examine, then what we do with those funds that we don’t think can be deployed well. And at that time, it would make a decision and it might include both. But it could be repurchases, it could be dividends.
 
There are different inferences that people draw from a dividend policy than from a repurchase policy in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in. But if we felt that we had cash that was unlikely to be used—excess cash—in a reasonable period of time and we thought repurchases, at a price that was still attractive to continuing shareholders was feasible in a substantial sum—that could make a lot of sense.
 
At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But, at a point the burden of proof is definitely on us. I mean, the last thing we like to do is own something that a hundred times earnings where the earnings can’t grow. As you point out, we got almost $100 billion. It’s $90 billion plus invested in a business—we’ll call it a business—where we’re paying almost a hundred times earnings and it’s kind of a lousy business.
 
CHARLIE: It’s more after every tax earnings.
 
WARREN: Yeah, so we don’t like that and we shouldn’t use your money that way for a long period of time. And then, the question is, are we going to be able to deploy it? And I would say that history is on our side, but it would be more fun if the phone would ring instead of just relying on history books. I am sure that sometime in the next 10 years—and it could be next week or it could be nine years from now—there will be markets in which we can do intelligent things on a big scale.
 
But it would be no fun if that happens to be nine years off—and I don’t think it will be—but just based on how humans behave and how governments behave and how the world behaves. But like I say at a point, the burden of proof really shifts to us big time and there’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more snd we think we’re doing something brilliant by doing it. Charlie?
 
CHARLIE: Well, I agree with you and the answer is maybe.
 
WARREN: He does have a tendency to elaborate

 ;D ;D The last exchange between them.

In another exchange, they were goading each other as to the size of the next elephant deal. Buffett said "something like $150B" and Munger chimed "Now you're talking". They are surely not thinking buybacks at all. If the market does give it to them, they'll do it but but they are still-a-hunting. It would be kind of silly if they retire shares and soon after this $150-200 B deal comes up and they have to issue shares. They would be in a position of Buffett's disavowed "being under the mercy of the kindness of strangers" in a sense because the price at the time may be value destroying to shareholders.

Something tells me that the 1.2x buyback is there to make it easier for the next guy. That poor bastard will have one hell of a time stepping into the shoes; besides will have something like $400 B to allocate in his first decade. Buffett is perhaps setting up a return-of-capital-scenario to make him somewhat of a hero to the shareholder community. 



Title: Re: berkshire - cheap?
Post by: John Hjorth on July 21, 2017, 08:35:02 AM
"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.

In general I agree with your post, StevieV,

What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me.
Title: Re: berkshire - cheap?
Post by: StevieV on July 21, 2017, 10:16:40 AM
"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.

In general I agree with your post, StevieV,

What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me.

Makes sense.  I tend to think BRK shouldn't be part of a great individual investor's portfolio.  It is not the type of company Mr. Buffett himself would buy at low capital levels.  It is not something I would expect Packer to buy, or that I would probably want him to buy if I was investing with him.

Owning stocks like BRK over a longer term and without leverage is a drag on the 25%+ CAGR returns that someone like Packer is achieving (or Pabrai aspires to).

Given my current allocation and strategy, it would be very tough to have those type lalapalooza type returns.  I have not proven that I am a great investor and, for various reasons, want some more conservative companies.  I am generally fine with that.  I do however, sometimes wonder whether I should follow a strategy where sustained higher returns of the lalapalooza type are at least possible.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 21, 2017, 01:19:07 PM
"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.

In general I agree with your post, StevieV,

What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me.

Makes sense. I tend to think BRK shouldn't be part of a great individual investor's portfolio.  It is not the type of company Mr. Buffett himself would buy at low capital levels.  It is not something I would expect Packer to buy, or that I would probably want him to buy if I was investing with him.

Owning stocks like BRK over a longer term and without leverage is a drag on the 25%+ CAGR returns that someone like Packer is achieving (or Pabrai aspires to).

Given my current allocation and strategy, it would be very tough to have those type lalapalooza type returns.  I have not proven that I am a great investor and, for various reasons, want some more conservative companies.  I am generally fine with that.  I do however, sometimes wonder whether I should follow a strategy where sustained higher returns of the lalapalooza type are at least possible.

Well then, I will be like ordinary investor Joe the plumber living in Omaha who put $10,000 in Buffett's hands in 1957. Ordinariness from here on would (edit:could )be 10% CAGR( edit: or 9, 8, 7, 6 or whatever the index does) for the next 50 years. Edit: the likelihood of it becoming a zero is as low as I can fathom.

 Leave the greatness for the greats, I suppose.
Title: Re: berkshire - cheap?
Post by: Jurgis on July 21, 2017, 01:24:27 PM
Some people think they can predict BRK return in next 30 or 50 years...  :o

Good luck.
Title: Re: berkshire - cheap?
Post by: bizaro86 on July 25, 2017, 12:01:07 PM
Some people think they can predict BRK return in next 30 or 50 years...  :o

Good luck.
I think predicting BRK won't do 25% per year for the next 30 years is a pretty safe bet. At their current size, I'm quite confident that isn't possible.
Title: Re: berkshire - cheap?
Post by: AJDelphi on July 26, 2017, 12:54:45 AM
Did Buffett mention during last AGM that he will buy stock at higher multiple of 1.25 or 1.24 if large block of share were available? I feel like I heard that but could not find it in the transcript.

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share with purchase threshold?
 
WARREN: When the time comes—and it could come reasonably soon—even while I’m around, but we really don’t think we can get the money out in a reasonable period of time into things we like. We have to re-examine, then what we do with those funds that we don’t think can be deployed well. And at that time, it would make a decision and it might include both. But it could be repurchases, it could be dividends.
 
There are different inferences that people draw from a dividend policy than from a repurchase policy in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in. But if we felt that we had cash that was unlikely to be used—excess cash—in a reasonable period of time and we thought repurchases, at a price that was still attractive to continuing shareholders was feasible in a substantial sum—that could make a lot of sense.
 
At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But, at a point the burden of proof is definitely on us. I mean, the last thing we like to do is own something that a hundred times earnings where the earnings can’t grow. As you point out, we got almost $100 billion. It’s $90 billion plus invested in a business—we’ll call it a business—where we’re paying almost a hundred times earnings and it’s kind of a lousy business.
 
CHARLIE: It’s more after every tax earnings.
 
WARREN: Yeah, so we don’t like that and we shouldn’t use your money that way for a long period of time. And then, the question is, are we going to be able to deploy it? And I would say that history is on our side, but it would be more fun if the phone would ring instead of just relying on history books. I am sure that sometime in the next 10 years—and it could be next week or it could be nine years from now—there will be markets in which we can do intelligent things on a big scale.
 
But it would be no fun if that happens to be nine years off—and I don’t think it will be—but just based on how humans behave and how governments behave and how the world behaves. But like I say at a point, the burden of proof really shifts to us big time and there’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more snd we think we’re doing something brilliant by doing it. Charlie?
 
CHARLIE: Well, I agree with you and the answer is maybe.
 
WARREN: He does have a tendency to elaborate

 ;D ;D The last exchange between them.

In another exchange, they were goading each other as to the size of the next elephant deal. Buffett said "something like $150B" and Munger chimed "Now you're talking". They are surely not thinking buybacks at all. If the market does give it to them, they'll do it but but they are still-a-hunting. It would be kind of silly if they retire shares and soon after this $150-200 B deal comes up and they have to issue shares. They would be in a position of Buffett's disavowed "being under the mercy of the kindness of strangers" in a sense because the price at the time may be value destroying to shareholders.

Something tells me that the 1.2x buyback is there to make it easier for the next guy. That poor bastard will have one hell of a time stepping into the shoes; besides will have something like $400 B to allocate in his first decade. Buffett is perhaps setting up a return-of-capital-scenario to make him somewhat of a hero to the shareholder community.

I totally agree on your comment about making it easier for the next guy. Buffett has barely used repurchases with Berkshire and if the next guy does it at cheap prices you could still get good per share returns after Buffett is gone. The benchmark just makes it easier for the next person to see what cheap is.
Title: Re: berkshire - cheap?
Post by: longinvestor on June 14, 2018, 06:04:52 PM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 15, 2018, 10:02:12 AM
Thanks for the update, longinvestor.

Yes, somehow as boring as sitting at a put & take, where all the prior visitors have caught all the fish - perhaps leaving one huge potential catch to get, which species we have yet to find out!
Title: Re: berkshire - cheap?
Post by: racemize on June 15, 2018, 10:27:50 AM
So disclosure here: I own BRK and GOOG (and more of BRK), but...

The earnings/book of the 'A' (Amazon) really isn't useful and shouldn't be used for comparison against Berkshire.  Bezos is hiding billions of dollars in earnings through reinvestment, and the margins and growth of AWS is insane.  While I wouldn't say Amazon's current price is cheap, I have created models where it can still do very well, it just requires assumptions that I'm not willing to make.  (I've also made models where it drops in half, but I doubt that will happen, it just shows that I really don't know)

On the other hand, if you want to look at something like Tesla and perhaps Netflix, then by all means.
Title: Re: berkshire - cheap?
Post by: scorpioncapital on June 15, 2018, 12:49:01 PM
http://www.stern.nyu.edu/~adamodar/pdfiles/country/UserValuation2018New.pdf
Title: Re: berkshire - cheap?
Post by: Liberty on June 18, 2018, 12:26:44 PM
So disclosure here: I own BRK and GOOG (and more of BRK), but...

The earnings/book of the 'A' (Amazon) really isn't useful and shouldn't be used for comparison against Berkshire.  Bezos is hiding billions of dollars in earnings through reinvestment, and the margins and growth of AWS is insane.  While I wouldn't say Amazon's current price is cheap, I have created models where it can still do very well, it just requires assumptions that I'm not willing to make.  (I've also made models where it drops in half, but I doubt that will happen, it just shows that I really don't know)

On the other hand, if you want to look at something like Tesla and perhaps Netflix, then by all means.

That's not the only problem with this approach... Book? Who cares about the book value of these companies? It's not like they're financials (I know they have lots of cash on the balance sheet, but still)... Would you value Microsoft or Adobe on book value too? And not looking at growth and growth runway and ROIC ex-excess cash and things like that...

BRK's great, but it has a pretty different profile from, say, Facebook.

I think focusing on easily quantifiable metrics without analyzing the actual businesses is exactly the kind of myopia that Buffett warns against.
Title: Re: berkshire - cheap?
Post by: KinAlberta on June 18, 2018, 01:13:20 PM
I wonder if there shouldn’t be a cute phrase about the increasing discomfort with cash piling (up while investors increasingly view positive market returns as inevitable) to serve as s precursor to Buffett’s quip about being greedy when others are fearful.




Warren Buffett's Cash "Problem" Just Got $2.4 Billion Worse -- The Motley Fool
https://www.fool.com/investing/2018/06/08/warren-buffetts-cash-problem-just-got-24-billion-w.aspx

Title: Re: berkshire - cheap?
Post by: CorpRaider on June 18, 2018, 05:16:07 PM
Being lazy so ignoring me is probably doing me a favor, but what kind of un-levered returns has been the recent historical experience in BRK Energy?  ~5-7%? 
Title: Re: berkshire - cheap?
Post by: rolling on June 19, 2018, 03:32:41 AM
Being lazy so ignoring me is probably doing me a favor, but what kind of un-levered returns has been the recent historical experience in BRK Energy?  ~5-7%?
As you asked, I'm not answering your question  ;D

What do you mean by unlevered?
- ROA?
- after subsiary leverage (ROE)?
- after parent leverage (BRK energy leverage)?

From what I understand they are granted a defined ROE for each subsidiary. Last time I checked around 10% (someone?). In addition, at parent level (BRK energy) they usually carry some leverage over that leverage (not sure how much... that would be interesting to know... someone?). In addition, BRK itself used to carry some leverage over that (I believe it no longer does: float is on cash, brk finance leverage is mostly to cover manufactured home credits and there is minor leverage at subsidiaries).

edit:
https://www.berkshirehathawayenergyco.com/assets/pdf/2018-fiic-presentation.pdf

edit2: page 18 in the presentation. ROE by subsidiary

edit3: page 29, debt by subsidiary and parent debt (6,452M+100M). Total: 35 251M.
equity (page 14) 28.2M. 
So Parent leverages subsidiaries in 23.2%. Interest and some other costs maybe should be eliminated to adjust parent leverage over subsidiaries. Subsidiary ROE a little over 10%

Title: Re: berkshire - cheap?
Post by: CorpRaider on June 19, 2018, 04:49:58 AM
Thanks. That presentation is literally the only thing I've looked at.  Weird.  I think it says they earn 10-12% regulatory ROEs across the operating units and they are running @ like 60% leverage on a BH Energy basis.

I am mostly interested as a potential clue to how WEB views his opportunity set. 
Title: Re: berkshire - cheap?
Post by: rolling on June 19, 2018, 06:38:23 AM
Thanks. That presentation is literally the only thing I've looked at.  Weird.  I think it says they earn 10-12% regulatory ROEs across the operating units and they are running @ like 60% leverage on a BH Energy basis.

I am mostly interested as a potential clue to how WEB views his opportunity set.
How did you get at 60% leverage? My numbers got to 23%... which explains the 2017 adjusted ROE of 10.7% (parent adds leverage but for sure assumes some general costs).
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 19, 2018, 06:59:00 AM
WSJ is running a good article on NextEra Energy, in case people have missed it the last couple days -
https://www.wsj.com/articles/how-a-florida-utility-became-the-global-king-of-green-power-1529331001
Title: Re: berkshire - cheap?
Post by: CorpRaider on June 19, 2018, 07:25:42 AM
Thanks. That presentation is literally the only thing I've looked at.  Weird.  I think it says they earn 10-12% regulatory ROEs across the operating units and they are running @ like 60% leverage on a BH Energy basis.

I am mostly interested as a potential clue to how WEB views his opportunity set.
How did you get at 60% leverage? My numbers got to 23%... which explains the 2017 adjusted ROE of 10.7% (parent adds leverage but for sure assumes some general costs).

Just took it from slide 19 of the deck you linked ("Credit Ratios Support our Credit Ratings") Debt/Total Capitalization column for Berkshire Hathaway Energy for 2015 - 2017. It is right at 60% for each year.
Title: Re: berkshire - cheap?
Post by: Libs on June 19, 2018, 08:39:45 AM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?
Title: Re: berkshire - cheap?
Post by: thepupil on June 19, 2018, 10:44:00 AM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.
Title: Re: berkshire - cheap?
Post by: sleepydragon on June 19, 2018, 11:57:41 AM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?

Brk has 180b of stock portfolio, I think? Maybe the earning of these companies as % of brk ownership?
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on June 19, 2018, 04:17:30 PM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

Look through earnings are ~$12b—so plus op earnings—let's call it around ~$35b total.

Berkshire is trading around 13x earnings which seems like a fair deal to me.
Title: Re: berkshire - cheap?
Post by: sleepydragon on June 19, 2018, 04:38:11 PM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

Look through earnings are ~$12b—so plus op earnings—let's call it around ~$35b total.

Berkshire is trading around 13x earnings which seems like a fair deal to me.

If excluding the 100b cash, the pe becomes around 11ish I think
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on June 19, 2018, 07:29:09 PM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

Look through earnings are ~$12b—so plus op earnings—let's call it around ~$35b total.

Berkshire is trading around 13x earnings which seems like a fair deal to me.

If excluding the 100b cash, the pe becomes around 11ish I think

Yup, even "fairer"
Title: Re: berkshire - cheap?
Post by: Swedish_Compounder on June 19, 2018, 09:09:22 PM
I would add 8 BUSD or so for expected increase in float. Buffett has said that due to its long term nature, float increase can be seen as earnings.
Title: Re: berkshire - cheap?
Post by: karthikpm on June 26, 2018, 05:36:45 PM
https://www.marketwatch.com/story/breaking-up-berkshire-hathaway-may-be-the-best-idea-in-a-post-buffett-world-2018-06-26

Maybe this is a sign it's cheap
Title: Re: berkshire - cheap?
Post by: Dynamic on June 26, 2018, 09:53:44 PM
I think perhaps it's a sign that the general market is not cheap. These stories also tend to surface when Berkshire happens to be trading near the bottom of its range, making the unfavorable comparisons with the total return index 'work' in supporting the premise over a number of years, making it easier to mask cherry picking of data points for the comparisorn because the cherry picked end date is the obvious point of comparison - today

In the last couple of days we've seen price to intrinsic value about as low as any time in the last two years, so many n-year periods will look bad for Berkshire.

To my mind the suggestions made might please "the market" in the short term but not help Berkshire in the long term, but the refusal to act on them might sustain or even improve the shareholder constituency of Berkshire to those with a more long term value focus.

One of the nice things with Berkshire is the number of surprises that are positive. They are few and far between in such a low interest rate, high market price environment hence the build up of low yielding cash, but it's possible that the next deal that significantly moves the needle in the way Precision Castparts did will create a significant surge in intrinsic value.

For Berkshire's IV growth to pretty much match or slightly beat the pre tax market growth while building up so much cash and deducting tax deferrals from Berkshire's gains is no mean feat. When that cash is deployed in good deals at fair prices, it might start to look like it in the superficial terms the general market recognises.

So yes, I'd take that article as a decent contrarian indicator
Title: Re: berkshire - cheap?
Post by: Cigarbutt on June 27, 2018, 05:52:16 AM
For Berkshire's IV growth to pretty much match or slightly beat the pre tax market growth while building up so much cash and deducting tax deferrals from Berkshire's gains is no mean feat. When that cash is deployed in good deals at fair prices, it might start to look like it in the superficial terms the general market recognises.

1+

The more things change…

60 years ago, when reflecting on 1958 performance and previous comments, Mr. Buffett had discussed this contrarian concept:

“Our performance, relatively, is likely to be better in a bear market than in a bull market so that deductions made from the above results should be tempered by the fact that it was the type of year when we should have done relatively well. In a year when the general market had a substantial advance, I would be well satisfied to match the advance of the averages.”

He also explained how he could benefit from unexpected decreases in prices out of proportion to the decline of intrinsic value of even undervalued securities.

In 1958, the 10-year treasury yield was standing pretty much where it is today but the stock market to GDP ratio was depicted differently despite what Mr. Buffett described then as a psychology animated by mercurially-tempered people.

Some things change but some stay the same. The challenge is to differentiate between the two.

From my humble perspective, the most outstanding accomplishment in this market is not that BRK will outperform going forward, it is that BRK was able to match recent advances in price. Because of its size, BRK is unlikely to hit it out of the park but is well positioned to outperform the S&P in the event that seemingly inevitable profits don’t show up.

I guess BRK could be called a sleep well at night modified barbell strategy large market cap stock. A unique combination.

Title: Re: berkshire - cheap?
Post by: Dynamic on June 27, 2018, 07:16:18 AM
https://investorplace.com/2018/06/dont-sell-berkshire-hathaway-stock-despite-recent-underperformance/ (https://investorplace.com/2018/06/dont-sell-berkshire-hathaway-stock-despite-recent-underperformance/)

The above article, while still thinking it likely that Berkshire will get broken up in future (possibly by the government, not the management) and thinking that this will result in a shareholder windfall, is much more reasonable about why Berkshire is good value especially compared to richly priced areas of the market such as FANG stocks.
Title: Re: berkshire - cheap?
Post by: longinvestor on June 27, 2018, 07:51:10 AM
OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG
         Mkt cap: $2321   Net Earnings: $31.6   Book: $257.3   P/E 73.4   P/B 9.0
BRK           Mkt Cap $483   Net Earnings: $45   Book: $348   P/E 10.7   P/B 1.4

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

It's all over for BRK. The FANG's have won and they will take it all!


How are you coming up with $45B earnings for BRK?

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

Fwiw, all of the numbers above, BRK and FANG alike, are lazily taken from the summary financials. Non-intellectual, non-analytical,
just numbers. From those numbers, it is evident that the market has clearly picked the winners and it is not BRK. It doesn't matter a bit that the sum of FANG earnings< that of BRK. Pre- or post Tax, before the tax act or after etc. etc.  It has been so last year and the year before and. But for the market, it is all about the future. BRK is from the past!

Now here is something to chew on; if virtually all of the FANG earnings have come from advertising, specifically online advertising, one should wonder as to just how important they are to those who pay for those ads and what kind of value they get from it. Meaning additional sales from reaching individual eyeballs. Yes, your and mine. While we are searching and socializing. So I dug into this topic and ran into this,

http://www.thedrum.com/opinion/2018/03/19/marketers-who-prioritise-digital-advertising-have-delusions-effectiveness

So, I wonder why we still see ludicrous statements such as this one from Stephan Croix, Pizza Hut’s chief sales and brand office for Europe, at the Millennial 20/20 conference in London last week: "We used to invest 70% in traditional media; now we're investing 100% in digital media."

That giant sucking sound you hear is masses of people going to Domino's Pizza
.

Perhaps there is some rational thinking behind Geico's predominant use of traditional advertising as they brand their way to the #1 auto insurer in the USA. Maybe, just maybe, they figured out that paying $12 per click to Google doesn't pay off. Or even $11 or $8 or $1. Stick with real world advertising. Leave the hope-of-sales-advertising to the wannabes who are desperate for any sales.

And one more thing to chew on, the N in FANG is irony in itself. A big part of why they are so ubiquitously popular is the no-ad viewing. People hate ads, many stupid marketers pretend that this hate doesn't exist. And Mr. Market loves online ads, to the tune of 2 Trillion!





Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 09:32:33 AM
Not sure why there is so much animosity towards FANG stocks.  Generally they are companies that are growing fast and taking over from legacy business models.  Lower profits today is just tax efficient--growing is faster and more efficient if you pay less tax by recognizing less profit (see:  expansion of CapEx of Berkshire's railroads and utilities)....the runrates of those companies are wildly profitable.  Not saying they are great value stocks, but I'm shaking my head thinking about people actually thinking that software companies should ever be valued on a price to book basis....book value is meaningless when the assets are code.


Anyway, there is no need to rehash the investment thesis of BRK on this board, however currently BRK is trading at a level that makes OK sense relative to the market as a whole.  Despite investments in companies with truly egregious valuations (e.g. AXP and KO), the industrial and insurance businesses both look to be positioned well, and at least the $100 billion in cash is earning higher returns as interest rates kick up. 

I'm not really excited about the stock portfolio:  KHC, WFC, AXP, BAC and KO...yikes!  Hopefully those will provide a bond-like 3-4% return.  WFC has their issues, but with BAC hopefully they do better with higher interest rates and less regulatory burden.  Unfortunate that WFC can't grow....that's going to hurt.  Could be worse!  At least Uncle Warren sold IBM!

Title: Re: berkshire - cheap?
Post by: John Hjorth on June 27, 2018, 12:38:42 PM
alwaysdrawing,

To me, your post here is refreshing, because it's providing Berkshire pushback [, of which there isen't much in this forum here on CoBF].

Personally, I think differently about the investments in KHC, WFC, AXP & KO. I'm considering them financed by Berkshire insurance float [not to be confused with any other insurance float], making them basically nobrainers, longterm. [Berkshire has the ability to hold on to these positions.] [1]

Also, personally, I consider BAC an investment with really good potential [also financed by Berkshire float], even from recent price levels [please see the BAC topic here on CoBF in the Investment Ideas forum].

- - - o 0 o - - -

Edit - added note:

[1] You also have to take into consideration deferred taxes on unrealized gains in your investment calculations of proceeds eventually available for reinvestment anywhere else.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 01:08:28 PM
alwaysdrawing,

To me, your post here is refreshing, because it's providing Berkshire pushback [, of which there isen't much in this forum here on CoBF].

Personally, I think differently about the investments in KHC, WFC, AXP & KO. I'm considering them financed by Berkshire insurance float [not to be confused with any other insurance float], making them basically nobrainers, longterm. [Berkshire has the ability to hold on to these positions.]

Also, personally, I consider BAC an investment with really good potential [also financed by Berkshire float], even from recent price levels [please see the BAC topic here on CoBF in the Investment Ideas forum].

Thanks.  As for AXP, KO, WFC, KHC....obviously they are part of the float, however they are priced for perfection.  All are slow growth companies with earnings that are tiny relative to their share value.  It's tough to see a world where any of those companies can grow a dollar invested today at even 10%, and I would guess most will grow at half that rate, with a risk that the market value reprices the equity as interest rates rise. 

Without getting into numbers, Kraft Heinz is a dying company with products that are losing market share and even traditional marketplaces to upstart differentiated brands.  Sure, they will keep cashing ketchup checks for years to come, but not exactly a business poised to make much incremental money on invested capital.

American Express squandered their opportunity to become a truly global brand, and their model is harder to grow than Mastercard or Visa.  This isn't exactly like it was 20 years ago when the rest of the world wanted to be like America, and revered the US.  With "America" in the name, and losing their panache among younger people, and even facing competition from Chase Sapphire Reserve and other luxury cards, it's hard to see AXP growing like the old days.  The business isn't dead--they will keep cashing checks for a long time--but what young person loves their American Express card?  They may have lost an entire cohort.

Wells Fargo is a fine bank that had poor oversight and used aggressive tactics to expand their relationships with customers.  They were caught with their hand in the cookie jar, and have to pay the penalty of not growing via M&A, and reforming the tactics that made them a superior business.  That's a bad combination.

Coca Cola is a sugar business in a world that may start to face a serious sugar backlash.  They may have other products, but Coke only has room to lose market share not gain it.  I don't see them having superior power to raise prices significantly (i.e. beyond inflation), and they already sell about as much Coke as will be sold in the world.  The equity is priced extremely richly and I expect in the bull case, Coke makes a few % per year for buyers of their stock today.

BAC possibly an exception, as they are not restricted to grow like WFC and will start earning materially higher returns on their assets as interest rates rise.  Even so, they aren't exactly going to grow the way their share price has grown in the last 10 years post-2008.

For the others, the only reason I believe Buffett still owns those companies is A) there is a giant deferred tax liability that will have to be realized if they are sold, and B) there aren't a lot of attractive large cap stocks out there right now, and C) Buffett doesn't care anymore about maximizing returns as his record is basically set. 

None of those companies would be bought by Buffett today, and certainly not when Buffett actually cared about maximizing returns.
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 27, 2018, 01:51:29 PM
Does AXP have a "truly egregious valuation" ? 
Title: Re: berkshire - cheap?
Post by: SlowAppreciation on June 27, 2018, 01:55:48 PM
Quote

Perhaps there is some rational thinking behind Geico's predominant use of traditional advertising as they brand their way to the #1 auto insurer in the USA. Maybe, just maybe, they figured out that paying $12 per click to Google doesn't pay off. Or even $11 or $8 or $1. Stick with real world advertising. Leave the hope-of-sales-advertising to the wannabes who are desperate for any sales.


Actually GEICO is one of the top 5 spenders on Google's DoubleClick platform (and has been for a long time). In fact, they alluded to it a bit in the 2017 shareholder meeting:

Quote
CHARLIE: Well, we avoided the tech stocks, as we felt we had no advantage there and other people did. And I think that’s a good idea not to play where the other people are better. But you know, if you ask me in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there and we were smart enough to do it and didn’t do it. We do that all the time, too.

WARREN: We were their customer very early on with GEICO, for example, and we saw—these figures are way out of date—but as I remember, we were paying them $10 or $11 a click (or something like that). And any time you’re paying somebody $10 or $11 bucks every time somebody just punches a little thing where you got no cost at all, you know, that’s a good business unless somebody’s going to take it away from you.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 02:35:11 PM
Does AXP have a "truly egregious valuation" ? 

Not if you are happy owning a company with 0 revenue growth and a 4% return.  Not going to get rich owning stocks like AXP.  Maybe you stay rich, maybe not.  People view AXP as no risk and are valuing the equity like a bond.  Well, owning perpetual bonds in a rising interest world is a great way to destroy purchasing power. As interest rates go up, that 4% return looks worse and worse and will be re-priced.

If that's your idea of a good investment, then enjoy your returns.  I'd rather earn 2% in a savings account than own AXP.  It's the opposite of what I want in a stock:  limited upside and big downside if the price falls or earnings falter.  AXP has been complacent for years because it just kept cashing the checks each month.  Now they have a luxury product that is losing appeal and facing increasing competition, at the same time that growth has stalled out for years.

Where's the margin of safety?  Just that the checks are rolling in each month?  I seriously can't believe how many investors are happy with 4%!  4% is a horrible return!





Title: Re: berkshire - cheap?
Post by: John Hjorth on June 27, 2018, 02:36:22 PM
alwaysdrawing,

To me, your post here is refreshing, because it's providing Berkshire pushback [, of which there isen't much in this forum here on CoBF].

Personally, I think differently about the investments in KHC, WFC, AXP & KO. I'm considering them financed by Berkshire insurance float [not to be confused with any other insurance float], making them basically nobrainers, longterm. [Berkshire has the ability to hold on to these positions.]

Also, personally, I consider BAC an investment with really good potential [also financed by Berkshire float], even from recent price levels [please see the BAC topic here on CoBF in the Investment Ideas forum].

Thanks.  As for AXP, KO, WFC, KHC....obviously they are part of the float, however they are priced for perfection.  All are slow growth companies with earnings that are tiny relative to their share value.  It's tough to see a world where any of those companies can grow a dollar invested today at even 10%, and I would guess most will grow at half that rate, with a risk that the market value reprices the equity as interest rates rise. ...

The point here is, that you don't even need growth to make good money, because of the Berkshire float financing these Berkshire positions. [So far, you have got growth, on the mentioned basket, as a whole. I think it'll still grow at a decent clip going forward.]

Personally, I disposed of all WFC shares recently, held directly by family members and myself, but that was just another [more or less short term] consideration [I saw better possible outcomes elsewhere with US banks], not including leverage.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 02:48:22 PM

The point here is, that you don't even need growth to make good money, because of the Berkshire float financing these Berkshire positions. [So far, you have got growth, on the mentioned basket, as a whole. I think it'll still grow at a decent clip going forward.]

Personally, I disposed of all WFC shares recently, held directly by family members and myself, but that was just another [more or less short term] consideration [I saw better possible outcomes elsewhere with US banks], not including leverage.

Amazing that on a board that is devoted to Warren Buffett, people justify holding any random stock with a positive yield because it's bought using someone else's money.  Buffett got rich through buying large concentrated positions in undervalued securities using the float.  Nonetheless, the underlying investments should be analyzed on merit. 

I recognize that there is a large deferred tax benefit from owning hugely appreciated positions in AXP and KO, however those investments will not from today perform satisfactorily by any standard measure of investment success.  The optimistic scenario is 5% returns for those companies.  Is that OK to earn on float in a 0% interest world?  Sure, but as interest rates go up, there will be alternative investments--especially investment grade bonds--and I would guess those "blue chip" companies will be revalued to reflect that the equity in no growth companies is riskier than the cash coupons from investment grade bonds.

Title: Re: berkshire - cheap?
Post by: John Hjorth on June 27, 2018, 03:00:30 PM
alwaysdrawing,

I'll be pleased to read your suggestions to reallocations of these positions, including tax consequenses, to make things better for Berkshire. Don't you think Mr. Buffett has been through this mental excersise?
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 27, 2018, 03:09:08 PM
Have you decided there is a 4% return here?  Or is that based on some arithmetic?  I don't own American Express stock, except I suppose indirectly through my Berkshire shares.  My wife and I use a Chase Sapphire Reserve Visa as our primary card, and I am happy with them.  But with a quick look I see a stock trading a few bucks shy of an all-time high, at $96.96 per share, which will earn about $7.10 per share in net eps this year.  13.6x earnings at an all time high with a bit of a brand and market position with high spending card users, an established share repurchase program.  Doesn't seem egregious but I don't own it so what do I know?  If I had a block with a huge deferred tax liability and my percent ownership of the company kept marching upward I don't think I would be stressing about 13x earnings at an all time high market price.

Does AXP have a "truly egregious valuation" ? 

Not if you are happy owning a company with 0 revenue growth and a 4% return.  Not going to get rich owning stocks like AXP.  Maybe you stay rich, maybe not.  People view AXP as no risk and are valuing the equity like a bond.  Well, owning perpetual bonds in a rising interest world is a great way to destroy purchasing power. As interest rates go up, that 4% return looks worse and worse and will be re-priced.

If that's your idea of a good investment, then enjoy your returns.  I'd rather earn 2% in a savings account than own AXP.  It's the opposite of what I want in a stock:  limited upside and big downside if the price falls or earnings falter.  AXP has been complacent for years because it just kept cashing the checks each month.  Now they have a luxury product that is losing appeal and facing increasing competition, at the same time that growth has stalled out for years.

Where's the margin of safety?  Just that the checks are rolling in each month?  I seriously can't believe how many investors are happy with 4%!  4% is a horrible return!
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 27, 2018, 03:19:03 PM
alwaysdrawing,

Off topic here:

I have actually been looking at AXP within the last few days, and honestly, I have quite a few questions about the company, and what it's doing, from my local perspective.

I will post about it in the AXP topic in the Investment Ideas forum soon, and I hope you'll chim in. Small position for me during many years. Peace.
Title: Re: berkshire - cheap?
Post by: rb on June 27, 2018, 03:54:48 PM
Let em pick at another thread here.

Coca Cola is a sugar business in a world that may start to face a serious sugar backlash.  They may have other products, but Coke only has room to lose market share not gain it.  I don't see them having superior power to raise prices significantly (i.e. beyond inflation), and they already sell about as much Coke as will be sold in the world.  The equity is priced extremely richly and I expect in the bull case, Coke makes a few % per year for buyers of their stock today.

Coke has no pricing power beyond inflation? Coke revenue is about $0.09 per 8 oz serving. A standard 330 ml can is just shy of 1.5 servings. Are you seriously telling me that Coke's maximum pricing power is $0.0018 per serving or $0.0027 per can? If coke raises prices by $0.01 per serving or $0.015 per can, it's earnings go up by 25%. That's serious pricing power.

C) Buffett doesn't care anymore about maximizing returns as his record is basically set.

Anyone who think that Buffett doesn't care about making money and only cares about his record clearly doesn't know much about the man.

None of those companies would be bought by Buffett today, and certainly not when Buffett actually cared about maximizing returns.

BAC, KHC are fairly recent acquisitions. Not that long ago BRK was adding to its WFC stake. It's application to the FED to waive the 10% threshold on WFC is also quite recent.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 04:18:39 PM
alwaysdrawing,

I'll be pleased to read your suggestions to reallocations of these positions, including tax consequenses, to make things better for Berkshire. Don't you think Mr. Buffett has been through this mental excersise?

On a high level, taxes will have to be paid eventually, and if you have the opportunity to compound at higher rates it's worthwhile to do so. 

Whether AXP earns $5 or $7 a share, at the end of the day, the company is not growing revenues and haven't for years.  The increase in earnings will be due to changes in the tax code, not improvements in the business.  In fact, the business is deteriorating, as the company is run by people who think millennials want a partnership with Uber as a feature of their credit card (maybe they do--however I don't see many young people using AmEx or many who perceive it as a status symbol that they want). 

Look at the returns of AXP stock vs. the S&P 500 or Visa or Mastercard or Paypal.  Which would you rather have owned?  Simply cashing the same checks every year, without the ability to grow the business is not a recipe for success.  Even with all that EPS, the true return to shareholders isn't that high because it's been (mostly) wasted trying and failing to grow, or buying back stock.  Even with the buybacks, you would still have rather owned S&P, V, MA, PYPL or others.

My contention is that Buffett doesn't care about maximizing returns to shareholders anymore.  He cares about preserving his legacy, and because of that he will not take any chances like selling stocks like AXP for something better, because there is an immediate tax consequence, he's a high % owner so it may hurt the value of the stock, and it should hopefully still earn some positive return.  Is that the excellence you expect from Buffett?

In the large cap space, it becomes tougher to invest in companies, however there are still companies that are growing that will have reasonable returns on dollars invested today.  I don't want to muddy the waters too much with specific companies I like, however I will say that there are better options out there.

Buffett should consider alternatives particularly in the regulated utility and industrial space where he can earn solid returns on incremental capital.  The best opportunities would be utilities where there has been a lack of investment, and he can deploy cash into tax advantaged CapEx, and earn a return on investment, like his investment in Burlington Northern Santa Fe Railroad.

One other alternative is to buy back Berkshire stock at a higher threshold than in the past, but where his return on invested capital would be higher than in stocks like AXP or KO.  That is a tax efficient way to return capital to shareholders, and is likely better than the returns on the pile of cash and stalled out businesses he currently has.






Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 04:23:31 PM
BAC, KHC are fairly recent acquisitions. Not that long ago BRK was adding to its WFC stake. It's application to the FED to waive the 10% threshold on WFC is also quite recent.

Unless I'm mistaken, BAC was due to the preferred shared converting upon the common dividend yielding a higher return than the prefs, and although I don't especially like BoA, it's not as bad as the others.

I wouldn't particularly call KHC a successful investment, would you?

Wells Fargo is only gaining as a percentage of ownership because of buybacks by WFC, not because Buffett has been buying in the open market.
Title: Re: berkshire - cheap?
Post by: sleepydragon on June 27, 2018, 04:28:34 PM
Why does people think AXP and KO and WFC are currently bad investments? It’s laughable. I think they are great investments at current price. Are you sure that you know these companies well enough, better than Buffett? How long have you been following these companies ? Have you even read the 10K?
Title: Re: berkshire - cheap?
Post by: rb on June 27, 2018, 04:59:12 PM
BAC, KHC are fairly recent acquisitions. Not that long ago BRK was adding to its WFC stake. It's application to the FED to waive the 10% threshold on WFC is also quite recent.

Unless I'm mistaken, BAC was due to the preferred shared converting upon the common dividend yielding a higher return than the prefs, and although I don't especially like BoA, it's not as bad as the others.

I wouldn't particularly call KHC a successful investment, would you?

Wells Fargo is only gaining as a percentage of ownership because of buybacks by WFC, not because Buffett has been buying in the open market.

As far as I recall BRK paid about 12 billion for KHC back in 2013. That investment is now worth about 20 billion at market cap plus a whole slew of massive dividends because I think about 8 of the 12 billion was the 9% preferred. So without crunching the numbers I think it washes out at around a double over the 5 years. That's after the stock took it in the shorts this year.

Since you've asked: Yes I would consider that a successful investment. I have no problem with just doubling my money every 5 years.

In the case of WFC Buffett was making open market purchases as recently as Q4 2015.

Based on what you write here tells me that you don't actually know much of what you're talking about.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 05:36:42 PM


As far as I recall BRK paid about 12 billion for KHC back in 2013. That investment is now worth about 20 billion at market cap plus a whole slew of massive dividends because I think about 8 of the 12 billion was the 9% preferred. So without crunching the numbers I think it washes out at around a double over the 5 years. That's after the stock took it in the shorts this year.

Since you've asked: Yes I would consider that a successful investment. I have no problem with just doubling my money every 5 years.

In the case of WFC Buffett was making open market purchases as recently as Q4 2015.

Based on what you write here tells me that you don't actually know much of what you're talking about.

I believe Buffett bought an addition $5 billion in Kraft as the merger completed in 2015, raising his basis to $17 billion, although I could be wrong there.  If that's the case it's not exactly the best return during the 2013-2018 period.  Correct me if I'm wrong on his basis, but I believe the prefs were the only part of that deal that did OK.

Q4 2015 isn't all that recent, and how well have those purchases done?

None of this affects what my overarching point is:  much of the current common stock portfolio will not outperform over the next 10 years.  I think the S&P 500 is probably in a better position than BRK [edit: BRK's common portfolio.  I think the controlled businesses will do fine and better than the S&P], with the exception that in a downturn Buffett's pile of cash is likely to get some deals similar to previous sweetheart deals like the Goldman and BAC prefs in 2008.  That optionality does not make those common shares any better investments.
Title: Re: berkshire - cheap?
Post by: Cigarbutt on June 27, 2018, 05:41:34 PM
alwaysdrawing,

The answers you’re getting are mostly deserved but I think you raise an interesting point which is related to another question: once you made a stock a core holding, should one refrain from selling whatever the market is offering for it?

For example the goal may not be to determine if KO is an “inevitable” or “bad” investment. It’s a price value assessment. Can’t comment in details about all the investments you mentioned but KO still has an amazingly strong franchise (brand and distribution) and will still be around in 20 years earning more than it is now. However, IMO, the moat has been decreasing (retail environment is changing, evolving tastes, private labels, health issues and retailer pricing power against KO) and the price now, IMO, implies relatively low returns going forward. 

If you look back at what happened to KO and compare your assessment of intrinsic value versus price over time, I conclude, like you, that KO is not undervalued.

I suspect Mr. Buffett looks at capital allocation decisions in order to maximize returns but he has, in the past, discussed regrets about not selling Coke in the late 90’s.

https://www.barrons.com/articles/SB10670404744196300

“Berkshire has done very well with its Coca-Cola and Gillette stakes, accumulated in the late 1980s. But Buffett says he erred by not selling them at their late 1990s peaks. Coke, at 45, and Gillette, at 30, are about 50% below their highs. "Coke and Gillette weren't the focal point of the bubble, but they achieved bubble prices," the Berkshire chief observes. At their highs, Coke and Gillette traded for about 50 times earnings.”

But others are right to point the tax reasons and the opportunity costs as Mr. Buffett, these days, does not seem to be able to compete on price for both stocks and whole businesses but I think that the major reason for Mr. Buffett not selling the “inevitable” stock holdings that you mention is because he considers them to be permanent, pretty much like Geico or BNSF. Do you think that he would sell Geico even if offered an insane price?

KO closed at 43.07 today.

In the past, I have held Fairfax as a “core holding” but the % exposure varied a lot over the years (giving rise to improved results over time, even with tax accounted for) and I considered doing the same for BRK. I continue to wonder if that’s the “right” thing to do for core holdings.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 05:49:57 PM
I believe Buffett also believes that some of the long held common stock holdings are overvalued and that is why he added this note in the 2016 letter:

Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 06:06:22 PM
alwaysdrawing,

The answers you’re getting are mostly deserved but I think you raise an interesting point which is related to another question: once you made a stock a core holding, should one refrain from selling whatever the market is offering for it?

For example the goal may not be to determine if KO is an “inevitable” or “bad” investment. It’s a price value assessment. Can’t comment in details about all the investments you mentioned but KO still has an amazingly strong franchise (brand and distribution) and will still be around in 20 years earning more than it is now. However, IMO, the moat has been decreasing (retail environment is changing, evolving tastes, private labels, health issues and retailer pricing power against KO) and the price now, IMO, implies relatively low returns going forward. 

If you look back at what happened to KO and compare your assessment of intrinsic value versus price over time, I conclude, like you, that KO is not undervalued.

I suspect Mr. Buffett looks at capital allocation decisions in order to maximize returns but he has, in the past, discussed regrets about not selling Coke in the late 90’s.

https://www.barrons.com/articles/SB10670404744196300

“Berkshire has done very well with its Coca-Cola and Gillette stakes, accumulated in the late 1980s. But Buffett says he erred by not selling them at their late 1990s peaks. Coke, at 45, and Gillette, at 30, are about 50% below their highs. "Coke and Gillette weren't the focal point of the bubble, but they achieved bubble prices," the Berkshire chief observes. At their highs, Coke and Gillette traded for about 50 times earnings.”

But others are right to point the tax reasons and the opportunity costs as Mr. Buffett, these days, does not seem to be able to compete on price for both stocks and whole businesses but I think that the major reason for Mr. Buffett not selling the “inevitable” stock holdings that you mention is because he considers them to be permanent, pretty much like Geico or BNSF. Do you think that he would sell Geico even if offered an insane price?


To answer the above, no I don't think he'd sell Geico because of his aversion to selling controlled businesses, but I think he would have sold if he was back in the profit maximization days.

As far as core holdings--I find the whole concept laughable.  Buffett himself regularly says that at one price a security makes sense and at another price it's silly.  I believe Buffett should sell some of the stocks at silly prices, and I believe that some of his "core" holdings are at silly prices relative to their future prospects.  In fact, if he does view them as core holdings that he would never sell, he is tying his hands behind his back and billions of dollars of shareholder capital for a silly reason.

At today's prices, these companies will not make Buffett or his investors materially richer over the next 10 years.  There are huge opportunity costs.  I believe Buffett himself would not buy these stocks if he had $10 million, and I also think he wouldn't buy them if he only had $10 billion.  In fact, if his ownership stake wasn't so huge, and selling wouldn't itself possibly cause disruptions in the stock price, I believe he already would have sold.  I have not heard a cogent argument that any of those stocks are poised to earn superior returns over the next 1, 5 or 10 years.

Buffett earned his reputation, deservedly, on concentrated positions in undervalued securities.  Anyone who thinks the stocks in Buffett's portfolio resemble the stocks of 40, 30 or 20 years ago is crazy.  Even 10 or 5 years ago the portfolio looked better than now.  Part of the difference is because stocks have done better than their underlying performance.  The prices today are silly, and neither offer a margin of safety, or the prospect of superior future returns.

I'll take my own portfolio against Buffett's common stock holdings.

That is not to say that Buffett isn't an incredible analyst or that Berkshire's operating companies aren't going to do fine.  It's merely a comment on the construction of the current common stock portfolio.
Title: Re: berkshire - cheap?
Post by: sleepydragon on June 27, 2018, 08:34:57 PM
 alwaysdrawing, can you share your portfolio so we can see how much better it is?
Title: Re: berkshire - cheap?
Post by: Spekulatius on June 27, 2018, 08:36:07 PM
 Don’t think that KO and KFC are great investment at current prices, and if I owned them, I would sell them and pay my taxes. Coporate taxes are lower now, which should reduce the hurdle. I think he can find investment which will compound much better.

AXP for me is a questionmark. I personally like the profit, but I agree that it lost is cache with the younger generation. They need to overhaul their marketing.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 08:44:52 PM
alwaysdrawing, can you share your portfolio so we can see how much better it is?

I'd consider that off topic.  <10% of my personal portfolio contains securities with a large enough market cap to be relevant for consideration for Berkshire.

I'm pleased but not satisfied with my returns, and they have outperformed the S&P 500 and Berkshire by a comfortable margin.
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 27, 2018, 08:47:37 PM
alwaysdrawing, can you share your portfolio so we can see how much better it is?

I'd consider that off topic.  <10% of my personal portfolio contains securities with a large enough market cap to be relevant for consideration for Berkshire.

I'm pleased but not satisfied with my returns, and they have outperformed the S&P 500 and Berkshire by a comfortable margin.

Could you be a bit more evasive?
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 08:56:48 PM
Could you be a bit more evasive?

How is what I own in my portfolio related to whether or not Berkshire Hathaway stock is cheap or fairly valued?  Especially if those securities could not reasonably be purchased by Berkshire in volumes enough to move the needle on their portfolio?

If I want to share random tickers I hold or investment ideas, I will share them in their own threads....this thread isn't really designed to get feedback or criticism about investments unrelated to BRK.

Title: Re: berkshire - cheap?
Post by: rb on June 27, 2018, 08:58:57 PM
Alwaysdrawing, please point out which one of your posts talks about whether Berkshire Hathaway is cheap or not right now.
Title: Re: berkshire - cheap?
Post by: Lakesider on June 27, 2018, 08:59:13 PM
Could you be a bit more evasive?

How is what I own in my portfolio related to whether or not Berkshire Hathaway stock is cheap or fairly valued?  Especially if those securities could not reasonably be purchased by Berkshire in volumes enough to move the needle on their portfolio?

If I want to share random tickers I hold or investment ideas, I will share them in their own threads....this thread isn't really designed to get feedback or criticism about investments unrelated to BRK.

Oh please share. Is that not why we are all here?
Title: Re: berkshire - cheap?
Post by: rb on June 27, 2018, 09:10:03 PM
Give him a minute. He needs to google some outperforming small caps.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 27, 2018, 09:21:07 PM
Give him a minute. He needs to google some outperforming small caps.

I feel like I've steered this discussion off the rails here, although I'm surprised the discussion became so toxic.   That was not my intention when I posted in this thread. 

I did want to point out that I like Berkshire's wholly owned insurance and utility companies, however I did not like the makeup of the common stock portfolio, and tried to give a surface level criticism of the positions and my thoughts on their prospects.  I didn't want to set off a firestorm--it doesn't seem unusual or out there to think stocks like KO and AXP are not exciting or value picks today.  If you disagree, that's fine....eventually we will find out.
Title: Re: berkshire - cheap?
Post by: Lakesider on June 27, 2018, 09:41:15 PM
Well just to contribute something, I think Berkshires future out performance will come from its liquidity, buying things when at the right valuation.

Wasn't trying to be toxic. I was just curious to what mega caps you think brk could buy to replace holdings in KO, KFC, WFC ect in this market that would bring better returns for the next 10 years.

Cheers

Title: Re: berkshire - cheap?
Post by: scorpioncapital on June 27, 2018, 11:28:07 PM
What about growth? I mean, many companies like IBM, ORCL are being penalized with a flat share price for years for having growth either approaching zero, microscopically above zero or contracting slightly. Is Berkshire experiencing organic growth? Growth from acquisitions is a more lumpy process.
Title: Re: berkshire - cheap?
Post by: ScottHall on June 28, 2018, 02:57:29 AM
I don't get the bad reaction to alwaysdrawing. I agree with a lot of the points brought up, and think people are being too harsh. I don't see anything offensive about that contra view of Berkshire, part of which is similar to what I've expressed in the past. Berkshire is a great company but I'm not sure it's a great investment anymore, either, and sold my shares after the tax reform run-up.

I might buy them back at some point because a lot of its businesses are "old reliable" and there is a place for that in a portfolio, but for me, doubtful to be a "core holding" on account of I like stuff that's a bit higher octane than Berkshire but with much better growth profiles. I see Berkshire as an occasional "role player" for my "team" of stocks, but not something I would build my franchise around. I could see it playing a bigger role for others, though, depending on their risk tolerance and what they're trying to do.

One thing that I don't think a lot of investors appreciate is what sort of role a stock will play in their portfolios. Are its traits complementary to the stocks you already have or does adding it weaken the portfolio even if the stock itself is seemingly underpriced. It's something I have been thinking about more lately. I own Markel for similar reasons, it adds value for me because it's not another Google or Amazon or Facebook.
Title: Re: berkshire - cheap?
Post by: clutch on June 28, 2018, 04:26:31 AM

Especially if those securities could not reasonably be purchased by Berkshire in volumes enough to move the needle on their portfolio?


Part of the reason why Buffett is holding onto these stocks is precisely this. He probably cannot find alternative mega cap stocks that fit his investing framework other than, e.g., Apple.
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 28, 2018, 04:55:28 AM
Just to address the question of BRK’s Kraft Heinz cost basis, it is $9.8 Billion. Not 17. See annual report

$4.25 Billion for original Heinz equity, $5.26 Billion for Kraft deal [this is $9.51 but has been reduced by cash dividends I assume]

$8 Billion Heinz pref, paying $720 million per year for 3 years, $300 million redemption premium in 2016.
Title: Re: berkshire - cheap?
Post by: Cigarbutt on June 28, 2018, 05:32:17 AM
I don't get the bad reaction to alwaysdrawing. I agree with a lot of the points brought up, and think people are being too harsh.

-----

I agree partly. Perhaps in addition to throwing tomatoes on stage, alwaysdrawing could give an example of a specific stock sold in exchange for another large cap bought and justify the move with some numbers. I have a feeling this is done regularly at the head office and may have something to do with recent modifications in terms of the notion of permanence of marketable securities.

-----

One thing that I don't think a lot of investors appreciate is what sort of role a stock will play in their portfolios. Are its traits complementary to the stocks you already have or does adding it weaken the portfolio even if the stock itself is seemingly underpriced. It's something I have been thinking about more lately. I own Markel for similar reasons, it adds value for me because it's not another Google or Amazon or Facebook.

-----

Constructive criticism.
I think I see what you may mean (I guess it depends how you define risk) but I submit that it may be getting dangerously close to the modern portfolio diversification definition: give up return in order to feel better.

-----
Title: Re: berkshire - cheap?
Post by: rolling on June 28, 2018, 05:54:49 AM

The point here is, that you don't even need growth to make good money, because of the Berkshire float financing these Berkshire positions. [So far, you have got growth, on the mentioned basket, as a whole. I think it'll still grow at a decent clip going forward.]

Personally, I disposed of all WFC shares recently, held directly by family members and myself, but that was just another [more or less short term] consideration [I saw better possible outcomes elsewhere with US banks], not including leverage.



Amazing that on a board that is devoted to Warren Buffett, people justify holding any random stock with a positive yield because it's bought using someone else's money.  Buffett got rich through buying large concentrated positions in undervalued securities using the float.  Nonetheless, the underlying investments should be analyzed on merit. 

I recognize that there is a large deferred tax benefit from owning hugely appreciated positions in AXP and KO, however those investments will not from today perform satisfactorily by any standard measure of investment success.  The optimistic scenario is 5% returns for those companies.  Is that OK to earn on float in a 0% interest world?  Sure, but as interest rates go up, there will be alternative investments--especially investment grade bonds--and I would guess those "blue chip" companies will be revalued to reflect that the equity in no growth companies is riskier than the cash coupons from investment grade bonds.
Disclaimer: I have no opinion on KO or AXP stocks

That being said:
1) tax leverage is for free, if the expected return were a safe 5% BRK would likely earn near 6% with current taxes and over 6,5% with previous taxes. So Buffett would need to find a group of investments that would give him a safe and higher return (while keeping adequate diversification in his portfolio)

2) not growing is not necessarily a bad thing: it means all dollars earned are available for imediate distribution. A P/E of 14 would grant him a 7.1% return before tax leverage. A P/E of 20 would grant 5%. Tax leverage adds 20%. How much do you expect from the S&P500?

3) brk is a big company that made shareholders rich. If you are already rich, your main objective should be to stay rich. So safety in equity investments is a must for BRK, even if at the cost of a lower return. If you are looking for the stars, you shouldn't buy. That was a mistake I made a few years back that cost me a ton of money (sold 5x and 20x baggers to buy a little more than a double). Fortunately i realized on time and had some excellent years that helped a lot). However, after a few years looking for the stars, as you get nearer them, you start changing your mind and now you just don't want to get poor again: now is finally the time to start buying BRK, at least with a decent chunk of your portfolio



Title: Re: berkshire - cheap?
Post by: Cardboard on June 28, 2018, 06:03:50 AM
"Part of the reason why Buffett is holding onto these stocks is precisely this. He probably cannot find alternative mega cap stocks that fit his investing framework other than, e.g., Apple."

And it is not like he is out of cash to buy the FANG stocks or something else. So he is making a conscious decision that he does not want to own that stuff. At least at this price.

If you think that Buffett is purely passive then you should note that Washington Post became Graham Holdings and it is now gone, effectively sold his P&G stake which had bought Gillette, recently forced the hand of executives at USG to sell out.

Therefore I would think that you are quite mistaken to believe that he is not having a very critical look of the portfolio at all times and looking at potential alternatives.

Finally, when things go on for a long time, some assume that it will continue forever. Now we have some millenials who have started to invest in the last 5 or 6 years, never experienced a bear market, never experienced a recession, never seen a true panic and are now smarter than the greatest investor of all times... They probably should read the Intelligent Investors and get a feel for history.

Cardboard
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 28, 2018, 06:27:22 AM
Give him a minute. He needs to google some outperforming small caps.

I feel like I've steered this discussion off the rails here, although I'm surprised the discussion became so toxic.   That was not my intention when I posted in this thread. 

I did want to point out that I like Berkshire's wholly owned insurance and utility companies, however I did not like the makeup of the common stock portfolio, and tried to give a surface level criticism of the positions and my thoughts on their prospects.  I didn't want to set off a firestorm--it doesn't seem unusual or out there to think stocks like KO and AXP are not exciting or value picks today.  If you disagree, that's fine....eventually we will find out.

TBF, I'm not particularly thrilled with the management of KO (IMHO they seem to be going off the rails with brand line extensions & executive pay.)
Can't really comment intelligently re: AXP except to say that I think Chenault was a douche.

https://www.bloomberg.com/features/2015-how-amex-lost-costco/

---

The point is that you boasted returns & provided nothing solid to back it up.

Nearly everyone on COBF will demonstrate their gains & mistakes with unflinching honesty.
(That's why I respect this place so much.)

If you make a claim regarding your returns (especially when you've been dogging WEB & Chuck) then put up some evidence.
Title: Re: berkshire - cheap?
Post by: longinvestor on June 28, 2018, 06:32:58 AM
We’re discussing so much about the stock portfolio which has been expressly stated to become the declining value @ Berkshire. The conversion to illiquid holdings is going on unabated. Let’s keep making noise. Cheapness comes from the businesses, the float and the tax benefit there.
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 28, 2018, 08:17:50 AM
"Part of the reason why Buffett is holding onto these stocks is precisely this. He probably cannot find alternative mega cap stocks that fit his investing framework other than, e.g., Apple."

And it is not like he is out of cash to buy the FANG stocks or something else. So he is making a conscious decision that he does not want to own that stuff. At least at this price.

If you think that Buffett is purely passive then you should note that Washington Post became Graham Holdings and it is now gone, effectively sold his P&G stake which had bought Gillette, recently forced the hand of executives at USG to sell out.

Therefore I would think that you are quite mistaken to believe that he is not having a very critical look of the portfolio at all times and looking at potential alternatives.

Finally, when things go on for a long time, some assume that it will continue forever. Now we have some millenials who have started to invest in the last 5 or 6 years, never experienced a bear market, never experienced a recession, never seen a true panic and are now smarter than the greatest investor of all times... They probably should read the Intelligent Investors and get a feel for history.

Cardboard

Those are good points, backed by historical Berkshire facts, Cardboard,

I would add Munich Re to your list.
Title: Re: berkshire - cheap?
Post by: Jurgis on June 28, 2018, 08:26:56 AM
I expected better from longtime CoBF participants. Although I don't completely agree with alwaysdrawing's opinion, I am surprised about toxic and dismissive comments. You guys can be better... I hope.

Peace
Title: Re: berkshire - cheap?
Post by: Liberty on June 28, 2018, 08:31:53 AM
I don't get the bad reaction to alwaysdrawing. I agree with a lot of the points brought up, and think people are being too harsh. I don't see anything offensive about that contra view of Berkshire

Quote
I expected better from longtime CoBF participants. Although I don't completely agree with alwaysdrawing's opinion, I am surprised about toxic and dismissive comments. You guys can be better... I hope.

Agreed.
Title: Re: berkshire - cheap?
Post by: Jurgis on June 28, 2018, 08:34:10 AM
Nearly everyone on COBF will demonstrate their gains & mistakes with unflinching honesty.
(That's why I respect this place so much.)

Actually zero people on CoBF have posted their portfolios and (audited) returns. The annual return threads do not include portfolios and are mostly anonymous polls with very few people posting their returns explicitly connected to the poster. Even the ones who post their returns, don't post their portfolios.

So your request is IMO out of line.
Title: Re: berkshire - cheap?
Post by: rb on June 28, 2018, 08:37:42 AM
"Part of the reason why Buffett is holding onto these stocks is precisely this. He probably cannot find alternative mega cap stocks that fit his investing framework other than, e.g., Apple."

And it is not like he is out of cash to buy the FANG stocks or something else. So he is making a conscious decision that he does not want to own that stuff. At least at this price.

If you think that Buffett is purely passive then you should note that Washington Post became Graham Holdings and it is now gone, effectively sold his P&G stake which had bought Gillette, recently forced the hand of executives at USG to sell out.

Therefore I would think that you are quite mistaken to believe that he is not having a very critical look of the portfolio at all times and looking at potential alternatives.

Finally, when things go on for a long time, some assume that it will continue forever. Now we have some millenials who have started to invest in the last 5 or 6 years, never experienced a bear market, never experienced a recession, never seen a true panic and are now smarter than the greatest investor of all times... They probably should read the Intelligent Investors and get a feel for history.

Cardboard

Those are good points, backed by historical Berkshire facts, Cardboard,

I would add Munich Re to your list.
And Tesco, Kraft, Johnson & Johnson, Wal-Mart's gone, back in the day Freddie Mac was a huge position that got the boot, IBM was in and out, Exxon was a real quick in and out. There is a list.
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 28, 2018, 09:21:55 AM
I'm sure Warren would love to have places to put money that would soak up the excess capital and force some long-held stock position sale decisions, but most of the time the question is - if I sell AXP or KO, then what?  Sell them to do what with the capital? 

AXP and KO might sound like pieces of shit to some folks, but last time I checked they both consistently earned 20-30% return on equity, and the longer you are in a business the more that basic figure matters to your outcome.  How much does this company earn on the actual capital tied up in running the thing, and how sustainable is that.
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 28, 2018, 09:29:37 AM
AXP and KO might sound like pieces of shit to some folks, but last time I checked they both consistently earned 20-30% return on equity, and the longer you are in a business the more that basic figure matters to your outcome.  How much does this company earn on the actual capital tied up in running the thing, and how sustainable is that.

I totally agree with the above.  Except the stock price is almost 10x book....remind me what that means for investors today?  Will they be earning 20-30% on their investment? or 10% of that since they paid 10x the price of the book value equity?

At least they have great revenue growth:

2015 44,294,000
2016 41,863,000   
2017 35,410,000
2018 Estimate 31,800,000

Great company. 

Sure it was a 10 bagger for Buffett....but does anyone think that it's the best place for his money?  I would take any random other S&P 100 company over KO...the price is silly.   


Title: Re: berkshire - cheap?
Post by: Viking on June 28, 2018, 10:05:02 AM
Over the years I have held BRK as a bond substitute. I have held it for short periods of time (sold it after it has run up 6 or 8%). Rinse and repeat.

We will learn over the next couple of years if the bond bull market is officially dead. If we are indeed in a rising interest rate environment (i.e. if Gundlach is correct with his prediction that the 10 years US treasury could rise to 6% in the next 3 or 4 years) then at its current price BRK looks like a solid buy for portfolios as a substitute for part of their bond holdings.

Peter Lynch, in his book One Up On Wall Street, when analyzing stocks he suggests dropping them in one of 6 buckets; BRK to me would be classified as a stalwart. Solid company, well managed, slow grower. With a lower expected return. He would have some stalwarts in his portfolio to provide protection as they typically sold off less than other holdings. After purchase, if the stock ran up in price (and hit his sell price target) he would sell and buy another stalwart that was out of favour with Mr Market and on sale. Pretty simple but very effective over time.
Title: Re: berkshire - cheap?
Post by: rolling on June 28, 2018, 12:46:59 PM
Over the years I have held BRK as a bond substitute. I have held it for short periods of time (sold it after it has run up 6 or 8%). Rinse and repeat.

We will learn over the next couple of years if the bond bull market is officially dead. If we are indeed in a rising interest rate environment (i.e. if Gundlach is correct with his prediction that the 10 years US treasury could rise to 6% in the next 3 or 4 years) then at its current price BRK looks like a solid buy for portfolios as a substitute for part of their bond holdings.

Peter Lynch, in his book One Up On Wall Street, when analyzing stocks he suggests dropping them in one of 6 buckets; BRK to me would be classified as a stalwart. Solid company, well managed, slow grower. With a lower expected return. He would have some stalwarts in his portfolio to provide protection as they typically sold off less than other holdings. After purchase, if the stock ran up in price (and hit his sell price target) he would sell and buy another stalwart that was out of favour with Mr Market and on sale. Pretty simple but very effective over time.
If It's not asking too much, what other stalwarts do you have? Throughout this year I've intermitently been on brk, google and davita, accordingly to the price fluctuations, but I don't see them the same way I see brk... Thank you.

Ps: added brk today. 18% of the portfolio now.
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 28, 2018, 02:31:08 PM
Nearly everyone on COBF will demonstrate their gains & mistakes with unflinching honesty.
(That's why I respect this place so much.)

Actually zero people on CoBF have posted their portfolios and (audited) returns. The annual return threads do not include portfolios and are mostly anonymous polls with very few people posting their returns explicitly connected to the poster. Even the ones who post their returns, don't post their portfolios.

So your request is IMO out of line.

The OP clearly stated,


I'll take my own portfolio against Buffett's common stock holdings.


Which begs the question, "so what are you holding?"

I'm not the only one here who raised the question but you apparently have some kind of axe to grind with me so grind away.
Title: Re: berkshire - cheap?
Post by: Jurgis on June 28, 2018, 02:44:13 PM
you apparently have some kind of axe to grind with me so grind away.

 ::)
Title: Re: berkshire - cheap?
Post by: Viking on June 28, 2018, 03:24:38 PM
Over the years I have held BRK as a bond substitute. I have held it for short periods of time (sold it after it has run up 6 or 8%). Rinse and repeat.

We will learn over the next couple of years if the bond bull market is officially dead. If we are indeed in a rising interest rate environment (i.e. if Gundlach is correct with his prediction that the 10 years US treasury could rise to 6% in the next 3 or 4 years) then at its current price BRK looks like a solid buy for portfolios as a substitute for part of their bond holdings.

Peter Lynch, in his book One Up On Wall Street, when analyzing stocks he suggests dropping them in one of 6 buckets; BRK to me would be classified as a stalwart. Solid company, well managed, slow grower. With a lower expected return. He would have some stalwarts in his portfolio to provide protection as they typically sold off less than other holdings. After purchase, if the stock ran up in price (and hit his sell price target) he would sell and buy another stalwart that was out of favour with Mr Market and on sale. Pretty simple but very effective over time.
If It's not asking too much, what other stalwarts do you have? Throughout this year I've intermitently been on brk, google and davita, accordingly to the price fluctuations, but I don't see them the same way I see brk... Thank you.

Ps: added brk today. 18% of the portfolio now.

Rolling, my favourite group right now are the large US banks (surprise, surprise). For the past couple of years I have viewed them as turnaround plays. However, I now view the big US banks as more like stalwarts. As an example, you can buy BAC today at $29. It will earn about $2.55 in 2018 and close to $2.90 in 2019. 100% of earnings will be returned to investors for the next few years (2% dividend and 8% stock buybacks). It will grow top line by about 4% and bottom line by about 15% for the next few years. Under Trump US GDP growth may actually accelerate. The Fed will continue hiking rates. Mobile banking is dramatically lowering costs. Operating leverage continues quarter after quarter.  Deregulation has legs.

Do I expect 30% per year from my big US bank stocks? No. I will be very happy with 15-20% returns. Like shooting fish in a barrel. :-)

PS: I do think at some point in the next couple of years investors are going to fall back in love with bank stocks where they will bid up the PE multiple. When I see This happen I will be happy to sell and wait in the weeds for the next fat pitch.
Title: Re: berkshire - cheap?
Post by: CorpRaider on June 28, 2018, 03:39:59 PM
Is USB the best big(ish) bank?
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on June 28, 2018, 04:05:40 PM
Berkshire itself is down 5-6% in Q2, and the public securities are up around 7 billion this quarter (4 billion of which is due to AAPL, a very fine investment), so depending how the closely held part of the company does, the relative value of BRK is improving.  Price to book will possibly be below 1.3, which puts it in buyback territory (stated as 1.2x book)

Here's hoping Uncle Warren sells KO for a giant taxable gain, and buys back BRK.B or almost any other company.
Title: Re: berkshire - cheap?
Post by: rb on June 28, 2018, 04:09:36 PM
Is USB the best big(ish) bank?
USB is a really, really well run bank. For that reason they always seem to have a premium-ish valuation. I also think that their growth prospects are inferior to the majours. Those two factors combined have always conspired against me building a position in USB.
Title: Re: berkshire - cheap?
Post by: sleepydragon on June 28, 2018, 05:48:09 PM
Over the years I have held BRK as a bond substitute. I have held it for short periods of time (sold it after it has run up 6 or 8%). Rinse and repeat.

We will learn over the next couple of years if the bond bull market is officially dead. If we are indeed in a rising interest rate environment (i.e. if Gundlach is correct with his prediction that the 10 years US treasury could rise to 6% in the next 3 or 4 years) then at its current price BRK looks like a solid buy for portfolios as a substitute for part of their bond holdings.

Peter Lynch, in his book One Up On Wall Street, when analyzing stocks he suggests dropping them in one of 6 buckets; BRK to me would be classified as a stalwart. Solid company, well managed, slow grower. With a lower expected return. He would have some stalwarts in his portfolio to provide protection as they typically sold off less than other holdings. After purchase, if the stock ran up in price (and hit his sell price target) he would sell and buy another stalwart that was out of favour with Mr Market and on sale. Pretty simple but very effective over time.
If It's not asking too much, what other stalwarts do you have? Throughout this year I've intermitently been on brk, google and davita, accordingly to the price fluctuations, but I don't see them the same way I see brk... Thank you.

Ps: added brk today. 18% of the portfolio now.

Rolling, my favourite group right now are the large US banks (surprise, surprise). For the past couple of years I have viewed them as turnaround plays. However, I now view the big US banks as more like stalwarts. As an example, you can buy BAC today at $29. It will earn about $2.55 in 2018 and close to $2.90 in 2019. 100% of earnings will be returned to investors for the next few years (2% dividend and 8% stock buybacks). It will grow top line by about 4% and bottom line by about 15% for the next few years. Under Trump US GDP growth may actually accelerate. The Fed will continue hiking rates. Mobile banking is dramatically lowering costs. Operating leverage continues quarter after quarter.  Deregulation has legs.

Do I expect 30% per year from my big US bank stocks? No. I will be very happy with 15-20% returns. Like shooting fish in a barrel. :-)

PS: I do think at some point in the next couple of years investors are going to fall back in love with bank stocks where they will bid up the PE multiple. When I see This happen I will be happy to sell and wait in the weeds for the next fat pitch.

15% means doubling every five years. I am ok with that :)
The banks are going to earn 15% roe in a few years, certainly this case for WFC.
Title: Re: berkshire - cheap?
Post by: rb on June 28, 2018, 06:05:07 PM
15% means doubling every five years. I am ok with that :)
The banks are going to earn 15% roe in a few years, certainly this case for WFC.

Such an underachiever :P
Title: Re: berkshire - cheap?
Post by: Valuehalla on June 29, 2018, 02:51:46 PM
The quarter in done

BRK is extremly cheap, just trading at 1,28 x BV

BRK.B price                  $186.65                         -6.4% since end Q1
BV per B                   app  $145.20           1.29              app 3 % up since end Q1
KHC adj BVPS           app  $146.10           1.28        app 3 % up since end Q1

BRK a big big buy !
Title: Re: berkshire - cheap?
Post by: longinvestor on June 29, 2018, 04:56:26 PM
The quarter in done

BRK is extremly cheap, just trading at 1,28 x BV

BRK.B price                  $186.65                         -6.4% since end Q1
BV per B                   app  $145.20           1.29              app 3 % up since end Q1
KHC adj BVPS           app  $146.10           1.28        app 3 % up since end Q1

BRK a big big buy !

1.2x is the price Buffett is wanting to buy. So @ 1.28x it is overvalued by about 9%😏
Title: Re: berkshire - cheap?
Post by: rb on June 29, 2018, 04:59:38 PM
I wonder if the price gets close whether the buyback threshold will get altered due to the tax law.
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 29, 2018, 05:23:44 PM
I wonder if the price gets close whether the buyback threshold will get altered due to the tax law.

Would you please explain the implications of the new tax law in regards to buybacks?

This is an honest question & not an attempt to be inflammatory.
I really want to understand, as I am slowly building BRK into my largest position.
Title: Re: berkshire - cheap?
Post by: Dynamic on June 30, 2018, 01:05:06 AM
I'm not answering for rb, but I recall an off the cuff example in an interview, possibly CNBC after the annual report in February, where Buffett said that if a large block of stock became available, for example from a family or foundation that couldn't easily sell in the open market and they felt it made sense the board might increase the buyback authorisation slightly to maybe 128% or something. A large enough block would be meaningful enough to move the needle in increasing intrinsic value per share.

I believe the question was asked in relation to the tax cut. Every dollar of book value, except those where the after tax return is regulated (Energy) or competed away (McLane or auto insurance maybe over time), should now be more productive. Equally the economic goodwill of companies like GEICO gets ever greater as they grow without a mark up in their book value.
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 30, 2018, 02:38:13 AM
I recall that interview with Mr. Buffett that Dynamic in referring to, too. To my best recollection without trying to look up the video I consider Dynamic's description here accurate.

- - - o 0 o - - -

In Jeff's book [book by fellow board member rainforesthiker] (http://www.cornerofberkshireandfairfax.ca/forum/books/inefficient-market-theory-jeff-hood/) there is a chapter 8 called "Investment Case studies - The Variant perception and the Inefficient Rationale". Investment case #6 is Berkshire Hathaway, and is called "Mispriced due to Indexation". [start p. 149.]

In short, it's about when the US financials go out of favour from time to time in the market, Berkshire does too, because of indexing and because Berkshire is a material component of S&P Financial Select Sector, while the properties of Berkshire as an investment are materially different than the properties of the other financials in that category/index.

Personally, I feel and think, that this is exactly where we are now.
Title: Re: berkshire - cheap?
Post by: racemize on June 30, 2018, 02:49:29 AM
I recall that interview with Mr. Buffett that Dynamic in referring to, too. To my best recollection without trying to look up the video I consider Dynamic's description here accurate.

- - - o 0 o - - -

In Jeff's book [book by fellow board member rainforesthiker] (http://www.cornerofberkshireandfairfax.ca/forum/books/inefficient-market-theory-jeff-hood/) there is a chapter 8 called "Investment Case studies - The Variant perception and the Inefficient Rationale". Investment case #6 is Berkshire Hathaway, and is called "Mispriced due to Indexation". [start p. 149.]

In short, it's about when the US financials go out of favour from time to time in the market, Berkshire does too, because of indexing and because Berkshire is a material component of S&P Financial Select Sector, while the properties of Berkshire as an investment are materially different than the properties of the other financials in that category/index.

Personally, I feel and think, that this is exactly where we are now.

It is the largest weighted company in XLF:
http://etfdb.com/etf/XLF/
Title: Re: berkshire - cheap?
Post by: Valuehalla on June 30, 2018, 04:30:40 AM

Every dollar of book value, except those where the after tax return is regulated (Energy) or competed away (McLane or auto insurance maybe over time), should now be more productive. Equally the economic goodwill of companies like GEICO gets ever greater as they grow without a mark up in their book value.

I agree totally with Dynamic

The buyback shall be increased. Its to long already on a level of 1.2

1) cause of tax reform
2) cause time passed by (goodwill effect fe geico)

Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 04:36:58 AM
A big block of stock for sale is Buffett’s own annual charitable giving. Wondering if that block could be bought back in a private transaction versus in the general market? As a one timer versus the remaining annual buybacks? That would move the needle, anyone know how many shares that is? My guess is he has another 12 years to give away?
Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 04:47:06 AM
A big block of stock for sale is Buffett’s own annual charitable giving. Wondering if that block could be bought back in a private transaction versus in the general market? As a one timer versus the remaining annual buybacks? That would move the needle, anyone know how many shares that is? My guess is he has another 12 years to give away?

Of course that would make shareholders wealthier at the expense of the Gates foundation and the beneficiaries thereof. Unless there are clauses!
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 30, 2018, 04:53:32 AM
longinvestor,

The donation to the Gates Foundation July last year was 14,220,001 B shares (https://www.sec.gov/Archives/edgar/data/315090/000119312517225931/d405498dsc13da.htm), equivalent to 9,480 A shares.

I don't think Mr. Gates would engage in such a transaction though.

Edit:

So, for this year, it would be about ~ [14,220,001 * 0,95 * ~USD190] ~ USD 2.6 billion. [It doesen't really move the needle! [ : - D] - Absolutely crazy to think about ...]
Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 04:59:15 AM
longinvestor,

The donation to the Gates Foundation July last year was 14,220,001 B shares (https://www.sec.gov/Archives/edgar/data/315090/000119312517225931/d405498dsc13da.htm), equivalent to 9,480 A shares.

I don't think Mr. Gates would engage in such a transaction though.
So $34 billion worth is left to be given away?
Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 05:02:02 AM
longinvestor,

The donation to the Gates Foundation July last year was 14,220,001 B shares (https://www.sec.gov/Archives/edgar/data/315090/000119312517225931/d405498dsc13da.htm), equivalent to 9,480 A shares.

I don't think Mr. Gates would engage in such a transaction though.

Edit:

So, for this year, it would be about ~ [14,220,001 * 0,95 * ~USD190] ~ USD 2.6 billion. [It doesen't really move the needle! [ : - D] - Absolutely crazy to think about ...]

The clause I had in mind is that Gates foundation “holds “ this block and sells it over time?
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 30, 2018, 05:26:31 AM
longinvestor,

So you mean rinse and repeat yearly for all those A-shares earmarked for the Gates Foundation to be converted to B, donated to Gates Foundation and then sold back to Berkshire for Berkshire cash?
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 30, 2018, 05:37:46 AM
Quote
longinvestor,

So you mean rinse and repeat yearly for all those A-shares earmarked for the Gates Foundation to be converted to B, donated to Gates Foundation and then sold back to Berkshire for Berkshire cash?

So the Gates Foundation owns about 58 million B shares today.  Warren converts his A-shares to B-shares before he gives them away.  Over time there will be fewer and fewer A shares, as designed.

The Gates Foundation will continue to receive a shrinking number of shares, but very possibly not a shrinking dollar amount, annually, continuing a decade or so after Warren's death and they will at some point after his death receive the balance of his public bequest to them.

I don't think Berkshire and the Gates foundation will do a block transaction even though I can't personally find an ethical problem with it.  It is very possibly not what is best for the foundation, which has special permission to dispose of BRK.B shares much more slowly than they are technically required to by law.  So their special dispensation allows them to hold $11 Billion and growing of BRK.B shares, which is probably a pretty great asset for a foundation like theirs.

But never say never.  Anyone with a material sized block of stock should phone Omaha if they want to sell to the mothership on the cheap
Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 05:46:28 AM
longinvestor,

So you mean rinse and repeat yearly for all those A-shares earmarked for the Gates Foundation to be converted to B, donated to Gates Foundation and then sold back to Berkshire for Berkshire cash?
Opposite: one time private transaction now whereby shares are retired and public sales down the road. Berkshire cash would come into play now but not later. I don’t know if such a thing is even possible/feasible. I can think of three stakeholders here.

1. Buffett foundation- do more good despite market prices
2. Gates foundation- do more good while not pressured to find worthy causes all at once.
3. Remaining shareholders- instantly and meaningfully benefit.

The board will have to decide and approve the transaction. Key question is how other possible investment opportunities right now compare with retiring shares.
Title: Re: berkshire - cheap?
Post by: Cigarbutt on June 30, 2018, 06:24:22 AM
I wonder if the price gets close whether the buyback threshold will get altered due to the tax law.

Would you please explain the implications of the new tax law in regards to buybacks?

This is an honest question & not an attempt to be inflammatory.
I really want to understand, as I am slowly building BRK into my largest position.

Wanting to learn is a sign of relative strength.
Will risk becoming a strawman and submit that your question is more subtle than it appears.

Mr. Buffett has explained that stock should be bought back 1- with excess funds and 2- when the stock is available at a discount to intrinsic value. The 1,2 rule is simply a tool to try to estimate the mismatch between book value and the discounted value that can trigger the buy back. Over time, for a firm, the ratio between intrinsic value and book value may increase.

Mr. Buffett has mentioned the emphasis on entire businesses recognized at book value as a potential reason for the growing mismatch.

For the tax part (the 2017 Augustus letter is helpful if you want to play with numbers, see below), when enacted, first, book value increases (which should not change the 1,2 multiplier if the market adjusts...) but, also, the future earning power is increased, under some assumptions (see below), so return on capital is increased and therefore the multiplier should increase.
https://seekingalpha.com/article/4151002-semper-augustus-investments-group-2017-letter-clients

Assumptions:
-corporate tax decrease is a good thing, OK
-corporate tax decrease will result in higher productivity, probably OK at Berkshire Hathaway
-a debt-financed corporate tax decrease is a good thing (don't want to get into politics but that leads to the next big assumption)
-the corporate tax decrease will be permanent, IMO uncertain

There have been reports circulating on the internet suggesting that the threshold for buy back should be mathematically adjusted to reflect the tax rate going from 35 to 21%, suggesting that the threshold should go to 1,4-1,5, but things are more complicated. First, the effective tax rate adjustment may not reflect the headline numbers. Second, and more importantly IMO, just like with the unrecognized book value aspect of consolidated subsidiary, the new tax rates will result in higher retained earnings (higher book value) going forward so, even if positive, the benefits of lower tax rates will be eventually be recognized in book value, with a lag, so one cannot simply use a rule of three.

Reasonable to expect the 1,2 number to go to 1,25 or 1,3.

Even if the excess fund argument should be independent from the discount to intrinsic value argument, at some point, the cash "cushion" may start to burn a hole in the pocket and the multiplier adjustment may be used to calm the crowd who keeps yelling: Swing, you bum!
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 30, 2018, 07:37:10 AM
Thanks to all for the thoughtful responses.

It took me quite a few years of reading before I finally started buying BRK (began watching it around $80. & 1st purchase was around $190.)

I'm a full time student with no active income other than a Pell Grant & a tiny scholarship (hopefully, scholarship awards will grow.)

I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

I can't see BRK's businesses being reproduced for 1.3 +/- book, and in the event of a large downturn, the strong shareholder base plus buybacks seem like good backstops for the equity. I understand that the non-wholly owned investments can fluctuate, and I may be wrong, but I look at these as lagniappe.

If the tax cut isn't permanent, the increase in economic goodwill should give this juggernaut a bit more momentum to sustain a possible future reversion to higher tax rates?

---

On another note, will the decrease in corporate tax rate increase competition by spurring a lot of new business start-ups?
Seems to me like it would, since the hurdle is so much lower.
Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 09:37:11 AM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Title: Re: berkshire - cheap?
Post by: valueinvesting101 on June 30, 2018, 09:48:51 AM
Buffett talks about buying even at 1.25 or 1.27 of the book value.

https://buffett.cnbc.com/video/2018/02/26/buffetts-health-care-partnership-is-determined-to-contain-costs-full-interview.html?&start=1115

Original rational for buying above book value was that there are two liabilities viz. float and deferred tax liability were completely deducted as they were debt or accounts payable but economic nature of these liabilities are vastly different. With tax reforms deferred tax liability has actually gone down but multiple for buying at 1.2 times book remains. Assets are definitely more valuable with tax reforms as their after tax earning power goes up but part of misrepresentation of deferred tax liability is fixed so in a 1.2 times multiple has been extended.

Another argument made was with passage of time, underperforming assets are mark down but outperforming ones are never marked up. This causes difference between carrying value of the asset and their economic worth. Initial buyback was announced at 1.1 time in 2011 and increased to 1.2 in 2012. It has been almost 6 year since 2012 so just divergence between carrying value or economic value will justify buyback at 1.27-1.3 times book which is current price.
Title: Re: berkshire - cheap?
Post by: globalfinancepartners on June 30, 2018, 09:50:17 AM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Students come in all ages.  DooDiligence is in his mid 50's or something like that
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 30, 2018, 10:22:10 AM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Students come in all ages.  DooDiligence is in his mid 50's or something like that

Yes, that was actually funny!

The difference between young and more mature students:

Young students: Strugling very hard, and result-oriented to get IN to the hamster wheel chosen as preference.
More mature students: Working more balanced, but still result-oriented [still hell bent] to get OUT of the hamster wheel chosen ealier in life. If such a student has some guts, that person is actually designing and building the future job for him/her self!

-Right, Jeff?
Title: Re: berkshire - cheap?
Post by: longinvestor on June 30, 2018, 11:37:39 AM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Students come in all ages.  DooDiligence is in his mid 50's or something like that

hmmm.. goes to show assumptions don't work! More respect for the a-typical student ;)

Talking about assumptions, I can't let go of the chance to point out the topic of FANG versus BRK that consumed so many pages on this thread. Everyone here know to how to zero in on the exact BV and the multiple thereof for BRK literally to two or more decimal places; There are look thru earnings and cost of float and DTL projections and and.....in other words, few assumptions need to be made to value BRK.

How about the FANGs; any assumptions being made?  Naah, don't think so! Growth baby, growth. Just sit back and watch them win it all!
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 30, 2018, 12:20:15 PM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Students come in all ages.  DooDiligence is in his mid 50's or something like that

Yes, that was actually funny!

The difference between young and more mature students:

Young students: Strugling very hard, and result-oriented to get IN to the hamster wheel chosen as preference.
More mature students: Working more balanced, but still result-oriented [still hell bent] to get OUT of the hamster wheel chosen ealier in life. If such a student has some guts, that person is actually designing and building the future job for him/her self!

-Right, Jeff?

Absolutely!

I’m majoring in classical guitar & minoring in piano but plan on reversing that after the Fall semester.

The guitar has to be forced to play this stuff, whereas it simply flows from the keyboard.

As to employment prospects, I’m doing live & studio sound reinforcement for other students / performers & am slowly investing in equipment (picks & shovels instead of joining the gold rush.)

The puzzles presented by music theory instructors are just icing on the cake & every day in class is an absolute joy.

I try to help struggling / working students where I can, with the hope that a few of them will remember me after I’m gone (in another 25 or 30 years?!?)

Sorry for the thread derailment.
Thanks to all for helping me hang on to my grub stake!

——

Forgot to add, I’m 56.
Title: Re: berkshire - cheap?
Post by: racemize on June 30, 2018, 12:37:27 PM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Students come in all ages.  DooDiligence is in his mid 50's or something like that

hmmm.. goes to show assumptions don't work! More respect for the a-typical student ;)

Talking about assumptions, I can't let go of the chance to point out the topic of FANG versus BRK that consumed so many pages on this thread. Everyone here know to how to zero in on the exact BV and the multiple thereof for BRK literally to two or more decimal places; There are look thru earnings and cost of float and DTL projections and and.....in other words, few assumptions need to be made to value BRK.

How about the FANGs; any assumptions being made?  Naah, don't think so! Growth baby, growth. Just sit back and watch them win it all!

I think you are underestimating the work going into most of FANG by value investors.  I’m assuming Munger is a hero of yours?  If so, you might consider trying to articulate the position of your opponents better than they can, and I don’t think “growth baby growth” counts.

Disclosure: I own Berkshire. Among FANG, I own one (less than Berkshire), think another is worth buying, and will likely be wrong to dismiss the value of a third. And I still might be wrong about the N.
Title: Re: berkshire - cheap?
Post by: DooDiligence on June 30, 2018, 01:13:05 PM
Maybe one day, it’ll be changed to BANG?

Disclaimer: Not to be taken seriously (or is it?)
Title: Re: berkshire - cheap?
Post by: John Hjorth on June 30, 2018, 05:03:10 PM
I think you are underestimating the work going into most of FANG by value investors. ...

... Disclosure: I own Berkshire. Among FANG, I own one (less than Berkshire), think another is worth buying, and will likely be wrong to dismiss the value of a third. And I still might be wrong about the N.

Here, I've edited the post by Joel quite heavily, not to mention all Joel's quotes, them all basically gone here [naturally they are all above]. Here, I'm doing it with sincere intentions, to focus on what's on my mind here.

- - - o 0 o - - -

Where are we headed? - And don't even think to ask me that question! [<- And it is totally neutral meant!] - Naturally, I don't know the answer.

It's about some pretty hard core [please don't confuse "hard core" here with "deep"] value investors catching interest in the FANGs and doing work on them, and at the same time growth investors showing interest in value cases here on CoBF.

I started noticing it in the beginning of this year, I think.

- - - o 0 o - - -

I think I'll try to branch it out in a separate topic here on CoBF later this Sunday. I think it could become an awesome discussion topic.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 01, 2018, 08:18:15 AM


It took me quite a few years of reading before I finally started buying BRK (began watching i
I've shifted my philosophy from trying to find upside (a dubious endeavor for me), to Howard Marks "downside protection", and in this respect, Berkshire is the only company I understand well enough to feel comfortable with.

+1
I came to that conclusion as well between 2009 and 11. After messing around with lesser names and ideas. Downside protection for the really long term is rare. My conclusion is that they simply don’t exist elsewhere. Not just that I cannot find them. The secret is to have lower expectations while taking the downside protection.

You have a huge leg up on me in that you’re doing this as a student. Mine happened in my middle years and the messing around cost me. No big regrets, pleased that I learned that then, not now or later.

Good luck to us.

Students come in all ages.  DooDiligence is in his mid 50's or something like that

hmmm.. goes to show assumptions don't work! More respect for the a-typical student ;)

Talking about assumptions, I can't let go of the chance to point out the topic of FANG versus BRK that consumed so many pages on this thread. Everyone here know to how to zero in on the exact BV and the multiple thereof for BRK literally to two or more decimal places; There are look thru earnings and cost of float and DTL projections and and.....in other words, few assumptions need to be made to value BRK.

How about the FANGs; any assumptions being made?  Naah, don't think so! Growth baby, growth. Just sit back and watch them win it all!

I think you are underestimating the work going into most of FANG by value investors.  I’m assuming Munger is a hero of yours?  If so, you might consider trying to articulate the position of your opponents better than they can, and I don’t think “growth baby growth” counts.

Disclosure: I own Berkshire. Among FANG, I own one (less than Berkshire), think another is worth buying, and will likely be wrong to dismiss the value of a third. And I still might be wrong about the N.

Okay, I did, to the best of my ability in post #126 in this thread. Here is the link that post was centered around,

http://www.thedrum.com/opinion/2018/03/19/marketers-who-prioritise-digital-advertising-have-delusions-effectiveness

http://galbithink.org/ad-spending.htm is another link showing total advertising spend in the US 1919 until 2007.

Here's my Mungerism (trying to state the other side better), which I know to be better

Ad spending appears to have an upper bound at about 2% of GDP (See link#2)
Digital ads will not replace traditional ads completely. (see link #1)
Digital ads are not as effective as real world ads in building brands. (see link #1)
Consumers would prefer not to be advertised to; Think NFLX (free lunch thing practiced by FG allows them to abuse consumers)
Regulation is somewhat late to deal with surreptitious use of personal data by FG. It just got started with GDPR.

As stated in my prior post, for the purpose of this discussion, I am equating FG to FANG.

There it is. Make it better.


Title: Re: berkshire - cheap?
Post by: racemize on July 01, 2018, 01:51:33 PM
Just to be clear - stating the other side better than they can is stating the argument for their side not yours.  Your summary of the opposite side is "growth baby growth"--that is not a well articulated version of your opponent's stance.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 01, 2018, 05:58:00 PM
Just to be clear - stating the other side better than they can is stating the argument for their side not yours.  Your summary of the opposite side is "growth baby growth"--that is not a well articulated version of your opponent's stance.

I am leaving it at that.
Title: Re: berkshire - cheap?
Post by: Spekulatius on July 07, 2018, 06:37:57 AM
"Part of the reason why Buffett is holding onto these stocks is precisely this. He probably cannot find alternative mega cap stocks that fit his investing framework other than, e.g., Apple."

And it is not like he is out of cash to buy the FANG stocks or something else. So he is making a conscious decision that he does not want to own that stuff. At least at this price.

If you think that Buffett is purely passive then you should note that Washington Post became Graham Holdings and it is now gone, effectively sold his P&G stake which had bought Gillette, recently forced the hand of executives at USG to sell out.

Therefore I would think that you are quite mistaken to believe that he is not having a very critical look of the portfolio at all times and looking at potential alternatives.

Finally, when things go on for a long time, some assume that it will continue forever. Now we have some millenials who have started to invest in the last 5 or 6 years, never experienced a bear market, never experienced a recession, never seen a true panic and are now smarter than the greatest investor of all times... They probably should read the Intelligent Investors and get a feel for history.

Cardboard


Those are good points, backed by historical Berkshire facts, Cardboard,

I would add Munich Re to your list.

Very few people learn from their own mistakes. Even fewer people learn from the mistakes of others.

Going back to the thread, WEB tends to convert public holdings into fully owned ones, if he gets the chance. He uses tax free exchanges. He may be a sloth in terms of value realization, but he is not entirely inactive..
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 09, 2018, 09:52:43 AM
Has anybody here on CoBF tried to estimate the BV/share for Berkshire end of period 2018H1?

[I have read the posts by Valuehalla in this topic, but I respectfully towards Valuehallas post of June 29th 2018 submit, that the calculations - at least to me - are too cursory. [I hope you don't get me wrong here, Valuehalla ... - I have always enjoyed reading your posts here on CoBF about Berkshire in your capacity as long term Berkshire shareholder.]]

For my part, it's the tax expense in the 10-Q for 2018Q1 that is really teasing me.

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?
Title: Re: berkshire - cheap?
Post by: alwaysdrawing on July 09, 2018, 03:08:36 PM
Inexact numbers, but these are the share price differences in the big positions (total of 80% of the portfolio)

Ticker   Weight   Change
AAPL   23.1%   10.16%
WFC   12.7%   2.98%
KHC   10.6%   4.00%
BAC   10.1%   -3.11%
KO   9.0%   0.21%
AXP   7.6%   4.56%
PSX   2.7%   16.18%
USB   2.3%   -1.29%
MCO   2.2%   6.04%

Overall that 80% of the portfolio was up $7 billion in value (about 4.6%), share price was down 5.8%.

The remainder of the portfolio you can calculate, but shouldn't be a huge impact.  We obviously also do not know what buys/sells happened in Q2
Title: Re: berkshire - cheap?
Post by: Valuehalla on July 09, 2018, 03:56:54 PM
The quarter in done

BRK is extremly cheap, just trading at 1,28 x BV

BRK.B price                  $186.65                         -6.4% since end Q1
BV per B                   app  $145.20           1.29              app 3 % up since end Q1
KHC adj BVPS           app  $146.10           1.28        app 3 % up since end Q1

BRK a big big buy !

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
Title: Re: berkshire - cheap?
Post by: Dynamic 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
Title: Re: berkshire - cheap?
Post by: John Hjorth 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.
Title: Re: berkshire - cheap?
Post by: Dynamic 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.
Title: Re: berkshire - cheap?
Post by: nickenumbers 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.
Title: Re: berkshire - cheap?
Post by: DooDiligence 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.

Make Berkshire Great Again!
Title: Re: berkshire - cheap?
Post by: Dynamic 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).
Title: Re: berkshire - cheap?
Post by: Valuehalla 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/
Title: Re: berkshire - cheap?
Post by: Dynamic 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
Title: Re: berkshire - cheap?
Post by: longinvestor 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
Title: Re: berkshire - cheap?
Post by: Dynamic 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.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 11, 2018, 04:21:40 PM
Semper Augustus does a much better job than this CNBC article in laying bare how incredulous the status quo really is. No, it is not a one quarter headline grabbing event.
Title: Re: berkshire - cheap?
Post by: Cigarbutt on July 11, 2018, 06:37:35 PM
Interesting exchange between longinvestor and Dynamic.

A way to resolve the issue may simply be to apply what Spekulatius said today when commenting on "The Margin of Safety" by Seth Klarman:
"I found Howard Marks book unremarkable too. I know he is revered here, but I really didn‘t get much from his book, other than the idea to think about where we are in a cycle. Even with respect to the latter, it might just be better not to think about cycles at all and look at all Investments case by case and forget about the large picture."  (my bold)

Some suggest (like Mr. Klarman) that there may be value in trying to understand the general context. If found to be valuable, one can decide for himself how to integrate this concept into investment decisions (stay fully invested, delegate the responsibility to a third party (like you eloquently explain in reply #225 of this thread (see quote below) or hold the responsibility yourself).

"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." (my bold)

Dynamic, I agree that there may be an element of statistical distribution but your fluid dynamics explanation does not take into account human nature.

To complement what longinvestor has provided, here's a link:
http://integratinginvestor.com/value-investing-is-life-imitating-art/

Value investing means different things to different people but I would not include momentum. I think this aspect is one of the fundamental reasons that Mr. Buffett tends to underperform a little in bull markets but overperforms in bear markets.

I really like it when momentum is on my side but try to dissect it out of my investment decisions.

To paraphrase Oscar Wilde: what is found in life and nature {and markets} is not what is really there but is that which has been taught to people to find there.

Crowds are not always right.
Title: Re: berkshire - cheap?
Post by: Dynamic on July 11, 2018, 11:03:29 PM
Semper Augustus does a much better job than this CNBC article in laying bare how incredulous the status quo really is. No, it is not a one quarter headline grabbing event.

I think maybe i went a little too far the other way actually on reflection, but I did have some difficulty accepting Semper Augustus's view that index investing was exacerbating the thinning out of the distribution of returns so that tech names contributed almost all the gains. Their Berkshire analysis later in their letter was the best I've read.

Anyhow, while I like to remember how probability distribution trails work and avoid cherry picking, I was too strong implying that cherry picking accounted for all of it. There is some real skewing going on and the returns so seem unusually concentrated even if we should always expect concentration in gains.
Title: Re: berkshire - cheap?
Post by: rolling on July 12, 2018, 12:52:55 AM
Semper Augustus does a much better job than this CNBC article in laying bare how incredulous the status quo really is. No, it is not a one quarter headline grabbing event.

I think maybe i went a little too far the other way actually on reflection, but I did have some difficulty accepting Semper Augustus's view that index investing was exacerbating the thinning out of the distribution of returns so that tech names contributed almost all the gains. Their Berkshire analysis later in their letter was the best I've read.

Anyhow, while I like to remember how probability distribution trails work and avoid cherry picking, I was too strong implying that cherry picking accounted for all of it. There is some real skewing going on and the returns so seem unusually concentrated even if we should always expect concentration in gains.

indexing effects (in my thinely informed opinion) can be best understood if you imagine only two active investors exist and all others just index: every time those two agree in an above market purchase, all others will follow and bid the stock up  while dumping all other stocks to normalize the weighting. This two pronged move will feed on itself until the two investors act again.

Applied to the real market: companies in favour to active investors (be it because of momentum or real increase in value) will be bid up by indexing and the remaining will be sold down. Only active investors can stop this trends and will do so only after the first have risen further and the second have fallen further down.
Title: Re: berkshire - cheap?
Post by: Dynamic on July 12, 2018, 01:47:12 AM
Cigarbutt, I'd agree that momentum is a very real effect. Unlike momentum or intertia in physics however, it can reverse very quickly, so don't assume that a stock with high momentum will continue moving upwards albeit more slowly and then gradually reverse direction in the event of bad news or results. It might be better to call it speed or velocity than momentum, as momentum is velocity x mass. Stocks don't tend to have much mass or inertia, but some of them maintain a pretty steady speed of price movement for quite a long time unless a force acts upon them, but a fairly moderate force can overcome their most mass (inertia) to make them take on substantial velocity in the other direction.

Certain people in market will look at what has 'performed' well recently and jump aboard, either directly or by looking for smart managers who were on board that train where they want part of that action. That is certainly what happened with the huge interest in tech or TMT funds in the late 1990's and into 2000-2001. Now a lot of this focuses on FAANG and friends.

If applying this to value, some value investors may delay their buying decision until not only is a stock sufficiently undervalued but perhaps they'll wait until it shows some signs of beginning to be revalued upwards by the broader market, so they avoid tying up their capital in 'value traps' or having to wait a long to for the unrecognised value from being priced into the stock and for it to rise. They might even use some chartist approaches to time their entry, foregoing some of the gains, but potential reducing the time waiting in an undervalued stock.

I could see this is a particularly valid concern in the cigar-butt type positions where the stock is not expected to experience compound growth in the business fundamentals, so all the time waiting for the price to rise, you're not benefiting from the business gaining fundamental intrinsic value over time (unless they pay out a substantial dividend of course).

Conversely, if you buy a fundamentally good or great business that is able to compound over time with a good ROE and ROIC and no concern over heavy debt loads, you can be very happy watching it slowly compound for the long term even if your stock price remains resolutely stuck at a 30-50% discount to IV, especially if you are considering adding to your position. If you already have the full exposure you desire, you may prefer the kicker of seeing not only compounding IV but an upward re-rating of the stock, then you can get maybe 30-40% cagr and be able to sell later to take advantage of the next great undervalued idea you have in a year or two (or if not simply hold and enjoy the decent compounding in the fundamental IV.

Likewise, if you have a good to great business that compounds or distributes most of its free cash flow, selling at a substantial discount to IV, you should probably buy regardless of the danger signals visible in the broader market and its thinning number of outperformers or fears of trade wars or recessions. Very often such danger signs are around for many years before the actual top of the market (I think I remember some quite convincing danger signs being persuasively express by value legends in 2015-2018 at least, if not longer), and if you aren't fully invested in good compounders, you could well have a lot of your capital on the sidelines missing out on 3-6 years of good to great compounding (10%+ and possibly a lot more like 20% in a bull market) that would still see you well ahead of cash even after a 30-50% market crash eventually arrives. When that crash arrives, you may have to be willing to sell some moderately undervalued positions in good to great companies to raise the funds to buy some deeply undervalued huge bargains in previously overvalued great companies, rather than just using cash you had waiting on the sidelines, but it really doesn't take many years of good compounding while you are a little concerned about frothy markets to compensate for the eventual and inevitable downswing and leave you well ahead of cash earning next to nothing. If you accept that smart people will be calling the bear market for year before it arrives, and you have no ability to accurately estimate its time of arrival, you may be able to ignore it, so long as you can stomach severe 'losses' in market value.

Then again, if you're deep value and insist on a particularly high margin of safety, you might get better returns when you do invest but actually make investments far less often. Then, you should expect to have a lot of money on the sidelines while you patiently await the next big opportunity and should compensate by the outsized gains when you finally put it to work and your outperformance of folks like me in crashes when you're holding a lot of cash.

Inside Berkshire it's a little different. It seems to be mostly the float that's sitting in cash, waiting for a good buy with strong downside protection and reasonable to great upside. The shareholders' equity portion of investable funds is pretty much all being put to work already while the float portion of non-callable funding using other people's money is pretty much all in cash and short term T-bills/deposits. In the event of a downturn, the downside protection and the range of opportunities is likely to produce a sensible situation to invest much of the float portion into undervalued equities or whole company acquisitions, then over a few years, the operating profits of Berkshire's subsidiaries will gradually refill the pot and again float will be represented by mainly cash and equivalents as the next cycle matures.

Returning to momentum not being part of value.
Chartists tend to try to imagine psychological factor like 'resistance' and 'support' levels or slopes or perhaps statistical lines at 1 or 2 standard deviations, such as Bollinger bands or moving averages and to some extent some of these methods try to capture momentum effects too. In their pure form they ignore the fundamentals, but their are many flavours of chart-reading too and they can pick and choose.

In looking at Berkshire I have an element of appreciating some of these factors actually. There is a fundamental providing a moving support level or soft floor, and that's the stated buyback threshold of 120% of Book Value per share, which gets updated every quarter. Perhaps the upper part of Berkshire's trading range is in the 160% to 170% of BV area nowadays, rather than maybe 200% as it was maybe 20 years ago.
I imagine that soft floor support level will be breached in the event of a serious market crash because there will be great value opportunities in many places that will look more attractive than Berkshire to a lot of smart value investors, at least for a few months, but in normal market conditions, ever since Berkshire introduced first the 110% of BV threshold then the 120% of BV threshold for their buyback authorisation, I cannot recall either level being breached (if BV is defined as the last published BV), or being only slightly breach on rare occasions (if BV is defined as the live Book Value or the yet-to-be-published book value of a quarter just ended).

To me that gives enough downside protection and long-term compounding that I can meet my goals yet still take advantage of great opportunities that might come up once every few years by selling some BRK.B. If the market really crashes, I'm sure my Berkshire will be well down from its peak and quite undervalued in the market, but I may still preserve enough market value to find worthwhile trades among stocks that are more deeply beaten down that it would be beneficial for me to sell BRK.B at the bottom of the market.

But there are many ways to adapt value investing to your style and your goals, opportunity set and circle of competence, so your mileage may vary, and I certainly don't profess to be anything like a great investor.
Title: Re: berkshire - cheap?
Post by: CorpRaider on July 12, 2018, 05:06:41 AM
"indexing effects (in my thinely informed opinion) can be best understood if you imagine only two active investors exist and all others just index: every time those two agree in an above market purchase, all others will follow and bid the stock up  while dumping all other stocks to normalize the weighting. This two pronged move will feed on itself until the two investors act again.

Applied to the real market: companies in favour to active investors (be it because of momentum or real increase in value) will be bid up by indexing and the remaining will be sold down. Only active investors can stop this trends and will do so only after the first have risen further and the second have fallen further down." 


I may be misunderstanding you, but I think the index investors in your example would do nothing and the stock that was increased in price/market cap by the transaction between the active investors would have a higher relative weight simply because of the price as established by the active participants.
Title: Re: berkshire - cheap?
Post by: longinvestor on July 12, 2018, 05:07:16 AM
Here’s a summary of recent posts;
1. Cheery consensus in full force. Around 6 or so now famous names.
2. No, value has not died permanently. Whew, my waiting induced boredom is not coma! Thank goodness for message boards where comatose hang together in the afterlife 😉

In the excellent link in Cigarbutt’s post above to the Integrating Investor, the Li Lu quote provided “You either get value investing at the outset or you never will”. Hmmm...whither me?
Title: Re: berkshire - cheap?
Post by: Dynamic on July 12, 2018, 05:08:28 AM
indexing effects (in my thinely informed opinion) can be best understood if you imagine only two active investors exist and all others just index: every time those two agree in an above market purchase, all others will follow and bid the stock up  while dumping all other stocks to normalize the weighting. This two pronged move will feed on itself until the two investors act again.

Applied to the real market: companies in favour to active investors (be it because of momentum or real increase in value) will be bid up by indexing and the remaining will be sold down. Only active investors can stop this trends and will do so only after the first have risen further and the second have fallen further down.

I know where you're coming from and there's certainly some merit in this model.

A lot of this was discussed in the thread about the Semper Augustus Letter (http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/semper-augustus-letter/msg327704/#msg327704), so you might find that interesting, even if I'm not sure we agreed or came up with a convincing conclusion.

There the point was made that the proportion of declared index funds is about 13% of all activity or maybe 25% of all funds in the market (from a skim read - perhaps need to check the sources). So even if many managed funds are closet-indexing a substantial part of their money, it still represents probably no more than 50% of the market cap, and if indexers trade much less frequently, it also represents much less than 50% of the traded volume in a given period.

If there are no deposits or withdrawals from index funds, they do not impact the market for the buying and selling of underlying stocks at all, except on the re-weighting of the index or at any other times when the algorithms start to adjust the weightings of their stock holdings (e.g. they may choose to select only a sample of the smaller-weighted index components to reduce costs while maintaining reasonably small tracking error, or to allow larger deviations between the index fund's weighting and the official index weighting among those smaller positions where it matters less overall).

If there are net withdrawals from index funds (and others too) for a certain period, that will produce selling pressure on all the stocks they contain over that period on average proportional to the rate of withdrawal and how that compares to traded market volumes.

Conversely, if there are net deposits, which is probably more normal, especially with reinvesting dividends, that will produce buying pressure on all the stocks contained.

Nonetheless, for market-cap weighted indexes, as far as I can see, essentially, 1 million units of the index, say, represents x% of each company's outstanding share count, regardless of their weighting in the index. As long as they remain in the index and the index has the same number of constituent companies, their weighting is adjusted according a fixed percentage of the number of shares outstanding (except for rare occasions when it's adjusted for free float, which would include Berkshire Hathaway and a few other stocks where insiders are not expected to buy or sell stock and contribute to the trading market or where there are substantial numbers of restricted shares and so on).

So if Apple buys back and retires 2% of its outstanding stock, its weighting will decrease to (0.98 x its previous weighting) so that 1 million units of the index still represents x% of the stock outstanding. The buyback program actually eventually causes the index funds to sell stock (or to buy less stock than the inflow would otherwise make them buy) once the index weighting is readjusted.

If there is net inflow into index funds it certainly does provide some buying volume to all component stocks regardless of the underlying price whether the stock is ludicrously expensive or ludicrously cheap or somewhere in the middle. So it may cause a net upward push to the market prices of all index components over time until everyone decides to head for the exits in a panic! But it seems logical that it's a small proportion of traded volume that doesn't care about the price at all. It seems the stock turnover and thus trading volume generated by managed funds and institutions and for many individual investors is far, far higher than for index funds, so they should still have an outsized influence on price-setting.

Nonetheless many fund managers do experience pressure to include the popular names to attract assets under management, so may be pressured to buy even when they're already rather fully priced, possibly at the expense of fund performance, even if their past performance came about by buying those names only when they were much more undervalued. And many individual investors of a similar mind but who don't choose to invest in funds are attracted to the familiar names they read about a lot too and want a piece of that action (especially if it has risen recently - 'momentum' again), without necessarily having any grounding in the difference between price and value.

But the passivity and moderate market volume caused by indexing and the static weighting (in terms of proportion of market cap and thus proportion of shares) - unless I'm entirely wrong here - should be relatively minor impacts, shouldn't they?

Perhaps the counter-argument is that indexing is a more insidious and powerful form of volume, because it is all in one direction (net inflow-and-reinvestment or net outflow of funds causing only either continual buying pressure or continual selling pressure respectively on all stocks in the index) while other market participants who are actively trading are acting on opinions about the correct current and future pricing of the securities under various strategies, and largely offset each other's bullish or bearish opinions, but nonetheless the balance is skewed by the one-directional pressure from indexers.
Title: Re: berkshire - cheap?
Post by: rolling on July 12, 2018, 05:24:55 AM
"indexing effects (in my thinely informed opinion) can be best understood if you imagine only two active investors exist and all others just index: every time those two agree in an above market purchase, all others will follow and bid the stock up  while dumping all other stocks to normalize the weighting. This two pronged move will feed on itself until the two investors act again.

Applied to the real market: companies in favour to active investors (be it because of momentum or real increase in value) will be bid up by indexing and the remaining will be sold down. Only active investors can stop this trends and will do so only after the first have risen further and the second have fallen further down." 


I may be misunderstanding you, but I think the index investors in your example would do nothing and the stock that was increased in price/market cap by the transaction between the active investors would have a higher relative weight simply because of the price as established by the active participants.
Let us do the math:
Stock 1 equals 50% of the 100 point index. Stock 1 doubles and is now 66,6% of the 150 point index. Index funds get the same boost in price.

It seems to me you are right    :o sorry to all
Title: Re: berkshire - cheap?
Post by: Dynamic on July 12, 2018, 06:41:52 AM
Don't worry, @rolling, I think it's been a good discussion to have and I value your contribution, and how indexing may or may not affect market prices is an important question to consider if people are pontificating about calling the top of the market based on such effects or thinning of gains to just a few popular names.
Title: Re: berkshire - cheap?
Post by: aws on July 12, 2018, 09:43:04 AM
I'm not sure if it's been mentioned before in this thread or others, but I would think you need to be careful with the 1.2x book calculations when there is so much cash laying around.  Cash is clearly not worth more than 1x book, and with around $42/B share in cash that's not insignificant.  If they were to buyback any material number of shares starting at 1.2 book, they would soon be buying above that level.
Imagine for a simplified example that there are exactly 2.5 billion B share equivalents, that the market value is $200/sh, the book value is 166.67/sh (so trading at 1.2/book, which is 416.67 billion total), and they have well over $100B in starting cash.  If they did a $100B tender at the $200/sh and it was fully subscribed then 500 million shares would be retired all at 200/sh, leaving 2 billion shares and a new market cap 400B, and a new book value of 316.67B.  Assuming the market value is still $200/sh at that point they would now be trading at 1.26 times book.

With that said, I've been a buyer lately in the high 180s and am glad to see it.
Title: Re: berkshire - cheap?
Post by: Dynamic on July 12, 2018, 10:18:55 AM
Interesting. You could argue that most of that cash is not included in book value anyway as it's roughly equal to the insurance float which is a balancing liability.

You could also argue that it is worth more than carrying value if you believe it will be wisely invested soon.
Title: Re: berkshire - cheap?
Post by: nickenumbers on July 12, 2018, 10:28:07 AM
BRK price over the last couple of weeks and perhaps the last month or so has not rallied like the Dow or the S&P.


Does anyone know an event or a narrative that might explain why it has not tracked the S&P with the rally?

I am buying because I think banks are going to have a great day tomorrow, and BRK is going to have a great quarter when it releases on 8/2/18 for various reasons.


Related question- Do you think with all the robo-trading/advising BRK is adversely affected by the volatility of its Net Income due to the inclusion of all investments now running thru the P&L?  I wonder if computer algos have been adjusted to include this muddling up of the Net Income.
Title: Re: berkshire - cheap?
Post by: John Hjorth on July 12, 2018, 10:49:28 AM
I recall that interview with Mr. Buffett that Dynamic in referring to, too. To my best recollection without trying to look up the video I consider Dynamic's description here accurate.

- - - o 0 o - - -

In Jeff's book [book by fellow board member rainforesthiker] (http://www.cornerofberkshireandfairfax.ca/forum/books/inefficient-market-theory-jeff-hood/) there is a chapter 8 called "Investment Case studies - The Variant perception and the Inefficient Rationale". Investment case #6 is Berkshire Hathaway, and is called "Mispriced due to Indexation". [start p. 149.]

In short, it's about when the US financials go out of favour from time to time in the market, Berkshire does too, because of indexing and because Berkshire is a material component of S&P Financial Select Sector, while the properties of Berkshire as an investment are materially different than the properties of the other financials in that category/index.

Personally, I feel and think, that this is exactly where we are now.

It is the largest weighted company in XLF:
http://etfdb.com/etf/XLF/ (http://etfdb.com/etf/XLF/)

Nickenumbers,

Above is my offer what's going on with Berkshire in the market at end of June 2018, with comment from Joel [racemize]. Also ref. the latest discussion in this topic between rolling and Dynamic. I still think today this thesis has merit.