Author Topic: Is This Buffett's AT&T Moment?  (Read 5709 times)

Nomad

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Is This Buffett's AT&T Moment?
« on: February 24, 2019, 04:16:10 PM »
I recall reading in one of the Buffett biographies that WEB knew Ben Graham was ready to hang it up when Graham told investors to buy AT&T, the fully-valued large cap stalwart of its day. After reading the 2019 letter, I'm left wondering: Has Buffett himself reached a similar point?

This is not intended as criticism of WEB, who I admire very much and whose public statements and writings have been invaluable to me as an investor and a human being. But recent developments do make me wonder. In the last couple of years WEB has:

- Recommended market-cap-weighted indexing for most retail investors (not a bad approach IMO, but curious given his famous "Superinvestors of Graham and Doddsville" article from the 1980s and also possibly a route to heartbreak given recent market valuations and popularity of the strategy)

- Made several purchases, including AAPL and some VC-style investments, in the very technology sector he once considered anathema (these are probably the work of Todd and Ted but nevertheless reflect a marked change in approach for Berkshire)

- Written increasingly short letters to shareholders (50th anniversary edition notwithstanding)

- Told investors that the market value of Berkshire, not the book value, is the preferred valuation metric going forward (2019 letter)

The last of these was the most shocking for me given how much emphasis Bufffett has placed on the compound growth rate of Berkshire's book value over the past decades. Granted, in the long run, the market is a weighing machine, blah blah blah, but in the long run we're also all dead, as Keynes pointed out. Buffett has spent what seems like an eternity warning us about the vagaries of Mr. Market and how he can under-price companies for years at a time, only to suddenly switch gears and rely on Mr. Market's appraisal of Berkshire as the primary indicator of its intrinsic value.

Am I reading too much into things? It's true that recent accounting changes, the rise of intangible assets, etc. make book value a less accurate indicator of value today than it once was, but to throw it out entirely in favor of the market's appraisal of Berkshire seems bizarre to me given everything I know about WEB. It's certainly possible that this shift is a function of Berkshire's massive size, increasingly efficient capital markets, the sheer number of Munger's cod fishers casting nets in depleted waters, and frustratingly high equity valuations. But could it instead be an indicator that Buffett is content to slowly transition the reins to Todd and Tedd during his later years while remaining the public face of Berkshire?

In any event, I'm curious to hear the thoughts of the smarter, wiser folks on this board because I'm legitimately baffled by the seeming shift in Buffett's approach to investing.


Gregmal

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Re: Is This Buffett's AT&T Moment?
« Reply #1 on: February 24, 2019, 04:37:05 PM »
I am hardly a BRK expert, but these where also kind of my feelings as well. IMO the Buffett we've seen the last half decade is hardly the man we all admire. We've seen a lot of high profile investors get eaten alive by what's occurred with the markets since the GFC, so maybe WEB is no different. It's just odd seeing it from him. Especially since he more or less shot the lights out and was vintage Buffett during the GFC. IDK, the dude is nearly 90, beat cancer, and probably has others areas of his life he neglected over the decades that maybe he feels deserve more of his time now. But to me, despite all of his wisdom, he is no longer a must follow investor and he is making obvious mistakes, not to mention, as you stated, doing things he never used to.

Casey

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Re: Is This Buffett's AT&T Moment?
« Reply #2 on: February 24, 2019, 06:24:06 PM »
It seems like he made clear in the annual letter that the cash levels and not buying all that much during the Q4 drop was a market call. Something about the value of high quality businesses being "sky high". Perhaps that's just saving face, though.

If the market is 20-25% lower in 2020 then, no, I don't think this was Buffett's AT&T moment. If things just go churning on upwards and Berkshire underperforms the S&P by a few points each year, then yeah.

Basically, this could be an AT&T moment, but who can tell without hindsight.

About 40 or 50% of my portfolio has been in Berkshire for a while... just for context/disclosure.

scorpioncapital

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Re: Is This Buffett's AT&T Moment?
« Reply #3 on: February 25, 2019, 12:24:13 AM »
"If things just go churning on upwards and Berkshire underperforms the S&P by a few points each year, then yeah."

If this happens, Berkshire will continue to chug along and outperform S&P upward too - and with 25% cash. From what I've seen it has kept up with SP and a little bit plus.

On the other hand if things go down, it has huge buying power.

Whatever happened to the idea of patience?

And no it won't do what a biotech stock or IT stock is doing right now. But then again it won't do what those stocks will do when things go in reverse either.

Lemsip

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Re: Is This Buffett's AT&T Moment?
« Reply #4 on: February 25, 2019, 12:37:16 AM »

If this happens, Berkshire will continue to chug along and outperform S&P upward too - and with 25% cash. From what I've seen it has kept up with SP and a little bit plus.

Spot on. Reading a lot of commentary, you'd almost miss the fact that through Jan 1 2019, BRK has outperformed the S&P by a hefty margin each of 1,2,3,4 and 5 year time frames all the time keeping solid firepower, a defensive approach and outstanding business results.

woltac

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Re: Is This Buffett's AT&T Moment?
« Reply #5 on: February 25, 2019, 04:02:44 AM »
Perhaps the change is for exactly the reasons he cites:

First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Charlie and I expect that reshaping to continue in an irregular manner. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.

Maybe the third reason should have been listed first.  Take a look at the equity of a company that buys back stock on a regular basis.  Moody’s is an extreme example, at 12/31/17 the MCO had negative equity of $114.9m.

I see this as a clear indicator that major stock buybacks are coming soon.


DooDiligence

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Re: Is This Buffett's AT&T Moment?
« Reply #6 on: February 25, 2019, 04:33:59 AM »
Perhaps the change is for exactly the reasons he cites:

First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Charlie and I expect that reshaping to continue in an irregular manner. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.

Maybe the third reason should have been listed first.  Take a look at the equity of a company that buys back stock on a regular basis.  Moody’s is an extreme example, at 12/31/17 the MCO had negative equity of $114.9m.

I see this as a clear indicator that major stock buybacks are coming soon.

Aha, AZO comes to mind too.
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Drinkers & Smokers 13.1% - ABEV MO // Auto's & Oil 14.5% - CLB GPC VDE // Tech 2.1% - AAPL

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DanielGMask

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Re: Is This Buffett's AT&T Moment?
« Reply #7 on: February 25, 2019, 05:12:34 AM »

If this happens, Berkshire will continue to chug along and outperform S&P upward too - and with 25% cash. From what I've seen it has kept up with SP and a little bit plus.

Spot on. Reading a lot of commentary, you'd almost miss the fact that through Jan 1 2019, BRK has outperformed the S&P by a hefty margin each of 1,2,3,4 and 5 year time frames all the time keeping solid firepower, a defensive approach and outstanding business results.

Berkshire's total return has underperformed the S&P for the last decade. Graphic attached.
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scorpioncapital

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Re: Is This Buffett's AT&T Moment?
« Reply #8 on: February 25, 2019, 05:24:37 AM »
The one question I have but first a compliment. An incredible dedication to circle of competence. But what happens when that circle gets old due to disruption? Shouldn't Buffett start to improve his circle of competence? Ok Apple, a little. Only he knows how much he really gets that. If more businesses are getting disrupted it would seem Berkshire needs new competence in new kinds of businesses?

stahleyp

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Re: Is This Buffett's AT&T Moment?
« Reply #9 on: February 25, 2019, 05:54:31 AM »
I think you guys are too hard on him. Have you looked at the performance of all most all "value" managers over the past 10 years? He's left most of them in the dust.

When Klarman, Watsa, Einhorn, Rominck (and several others) were bearish, he was buying - and optimistic.

1)The Superinvestors speech was from 1984. Things change over 35 years! Indexing is the best way for most people. I agree with him 100%. Are valuations high? Probably. But the index funds will still do better than most other options (before and after taxes).

2) He has the ability to adapt. If he stuck with the old ways always (even when a better way was found) he would have stayed at Graham's level. He far surpassed him.

3) I wish the letters were longer, too. But I don't think he wants to talk just to talk. Plus, he's almost 90. If anyone thinks he's the Buffett of 30 or 40 years ago...well, are you the same person you were a few (or couple) decades ago?

4) I agree here right now but need to think about it longer.
« Last Edit: February 25, 2019, 05:56:36 AM by stahleyp »
Paul