Author Topic: berkshire - cheap?  (Read 77820 times)

rb

  • Hero Member
  • *****
  • Posts: 2922
Re: berkshire - cheap?
« Reply #80 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.


LC

  • Hero Member
  • *****
  • Posts: 3257
Re: berkshire - cheap?
« Reply #81 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.
"Lethargy bordering on sloth remains the cornerstone of our investment style."
----------------------------------------------------------------------------------------
brk.b | irm | mo | nlsn | pm | tap | v | vz | wm

rb

  • Hero Member
  • *****
  • Posts: 2922
Re: berkshire - cheap?
« Reply #82 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

rb

  • Hero Member
  • *****
  • Posts: 2922
Re: berkshire - cheap?
« Reply #83 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.

John Hjorth

  • Hero Member
  • *****
  • Posts: 2523
Re: berkshire - cheap?
« Reply #84 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.
« Last Edit: July 19, 2017, 01:15:58 AM by John Hjorth »
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

vinod1

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1294
    • My Blog
Re: berkshire - cheap?
« Reply #85 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
« Last Edit: July 19, 2017, 05:46:10 AM by vinod1 »
The fundamental algorithm of life: repeat what works. –Charlie Munger

racemize

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 2718
Re: berkshire - cheap?
« Reply #86 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.

rolling

  • Full Member
  • ***
  • Posts: 122
Re: berkshire - cheap?
« Reply #87 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.
« Last Edit: July 19, 2017, 04:13:36 PM by rolling »
My usual portfolio: Highly concentrated (up to 3 or 4 positions) in smallcaps and microcaps.

longinvestor

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1728
  • Never interrupt compounding unnecessarily -Munger
Re: berkshire - cheap?
« Reply #88 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.


StevieV

  • Full Member
  • ***
  • Posts: 177
Re: berkshire - cheap?
« Reply #89 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.