Author Topic: BRK Valuation  (Read 13850 times)

Thrifty3000

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Re: BRK Valuation
« Reply #90 on: June 28, 2020, 11:20:07 AM »
I think AAPL is overvalued as well, but I still see no logic in your including the cash in the calculation.  If he sold all the Apple and retained that as cash, then your ratio would appear much worse as the look-through earnings numerator would have decreased but the cash+portfolio denominator would stay the same excluding taxes.

I agree. Lumping together cash and investments is a gummed up way of evaluating BRK. I only pointed out the high PE of those two items because another poster mentioned the Rational Walk's grouping of cash and investments when making their point that the rest of BRK is cheap.

I personally Love investments with multiple earnings streams, and I feel like I run into the argument that "you get the rest for free" All The Time. In fact, I've been plenty guilty of wanting to use that phrase when evaluating things like Altius, or FFH, or FFH Africa/India, or even something like St. Joe back in the day.

IMHO (and talking to myself too) it's probably best if that phrase is deleted from the value investor lexicon. 9 times out of 10, if I keep pushing myself to uncover what the true look through earnings potential of each earnings stream is, I come to find that if you're getting "part of an investment for free" in a highly liquid, highly informed, free market system it's because you're paying too much for the other parts.

In the case of Berkshire, we know we're paying too much for Apple, etc. In fact, another COBF thread is currently discussing the merits of shorting Apple if you hold BRK. (Maybe worth exploring if you'd normally sell an equity for a 40% premium to fair value.)

For me, the biggest curve balls in recent months are how to think about Covid and the deployment of cash. And, one of the biggest surprises of my investing life is that Buffett was fearful when all others were fearful. I'm sure for very good reason, which only time will tell, but that wasn't supposed to be in his DNA (especially with $100+ billion of cash).

I'm confident that if Berkshire deploys cash into equities - including share buybacks - it is with an expectation of high single digit or low double digit returns over time (see Buffett's recent commentary on airline investment justification - there was a double digit return expectation). For that reason I don't think you look at the value of cash as worth less than $1 for each $1 of cash held (despite any inflation-induced decline in near-term purchasing power).

Theoretically, $100 billion of cash could be deployed tomorrow at a 10% after tax return. Or, more likely, it could be deployed in chunks over several years (while more cash is piling up). So, you can do what Semper Augustus does and pick the "normalized" long term earnings power you're comfortable with for the $100 billion, and tack it on to your "normal" look through earnings estimate. It's probably not conservative enough to say the $100 billion represents $10 billion of after tax earnings potential, but it's probably perfectly safe to estimate $4 to $6 billion.

If look through earnings in 2018 and 2019 were around $31 billion, then after whatever covid impairments you choose to make, you could reasonably add $4 to $6 billion to represent the normal long-term earnings potential of the cash.

I already own plenty of BRK, so I'm not currently making an upward earnings adjustment for the cash. But, I have in the past, I probably would now if I had seen at least a few billion deployed in March, and who knows, I could change my mind tomorrow.
« Last Edit: June 28, 2020, 11:24:46 AM by Thrifty3000 »


StevieV

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Re: BRK Valuation
« Reply #91 on: June 28, 2020, 12:35:26 PM »
I also don't like - "you get the rest for free" analysis.  How big is the "Free" part?  How sure are you of the valuation of the "fairly valued" part?  If you change the multiple of the "not free" part maybe you aren't getting anything for free or the "free" part only represents a small discount.

Quote
Theoretically, $100 billion of cash could be deployed tomorrow at a 10% after tax return. Or, more likely, it could be deployed in chunks over several years (while more cash is piling up). So, you can do what Semper Augustus does and pick the "normalized" long term earnings power you're comfortable with for the $100 billion, and tack it on to your "normal" look through earnings estimate. It's probably not conservative enough to say the $100 billion represents $10 billion of after tax earnings potential, but it's probably perfectly safe to estimate $4 to $6 billion.

I'm concerned about the value of this $100 B, the ability to deploy it at high rates and the timing of doing so.


Mephistopheles

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Re: BRK Valuation
« Reply #92 on: June 28, 2020, 12:49:55 PM »
I think AAPL is overvalued as well, but I still see no logic in your including the cash in the calculation.  If he sold all the Apple and retained that as cash, then your ratio would appear much worse as the look-through earnings numerator would have decreased but the cash+portfolio denominator would stay the same excluding taxes.

The consensus seems to be that the value of the float liability is less than dollar for dollar because maybe it never needs to be paid back.

If you invert that, what's the value of a cash asset that earns ~0 and may never be put to productive use? Possibly less than dollar for dollar is appropriate there as well.

I agree with this line of thought. Maybe the best way to discount the float liability for the IV calculation is just take out the amount in cash that we are never going to see. Buffett talks about $20 billion minimum, it's probably more realistically $40 billion. 20 minimum he refuses to spend and add another 20 that will never be spent fast enough as it is made. Add another $10 billion to be safe. So that is $50 billion cash that for shareholder purposes, we will never see.

So out of $130 billion float, we can consider as free money approx (130-50) = 80 billion of it.

The stock is still insanely cheap with these numbers.

People tend to weigh recent trends too heavily. Would we be talking about discounting the cash balance if we didn't see this massive upswing in stock prices? Would people be questioning Buffett's judgment for not repurchasing in March if S&P was even lower today?

BRK sentiment is just far too negative right now, which is part of the reason I am buying LEAPS. The option prices say it all, such a low amount of volatility priced in. But we have seen BRK move huge amounts in short periods of time in the past and we will see it again. Not to mention the ridiculously low Price/Book ratio.

That cash pile will quickly look heroic if/when we have another downswing. For that reason by buying BRK you are naturally hedging against the downside.

The expectations are so low right now that any sort of good news will cause a huge jump. Imagine next Q we see $10 billion in repurchase activity?

bizaro86

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Re: BRK Valuation
« Reply #93 on: June 28, 2020, 01:40:42 PM »
I think AAPL is overvalued as well, but I still see no logic in your including the cash in the calculation.  If he sold all the Apple and retained that as cash, then your ratio would appear much worse as the look-through earnings numerator would have decreased but the cash+portfolio denominator would stay the same excluding taxes.

The consensus seems to be that the value of the float liability is less than dollar for dollar because maybe it never needs to be paid back.

If you invert that, what's the value of a cash asset that earns ~0 and may never be put to productive use? Possibly less than dollar for dollar is appropriate there as well.


BRK sentiment is just far too negative right now, which is part of the reason I am buying LEAPS. The option prices say it all, such a low amount of volatility priced in. But we have seen BRK move huge amounts in short periods of time in the past and we will see it again. Not to mention the ridiculously low Price/Book ratio.

I agree with this entire post, but especially the part about sentiment. I converted a big chunk of my BRK position from shares to LEAPs on Friday. 2:1 ratio of deep ITM calls to shares. If it continues to drop I'll do more. Biggest reasoning is I think risk of permanent impairment at the current price is very low.

Thrifty3000

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Re: BRK Valuation
« Reply #94 on: June 28, 2020, 04:57:11 PM »
I think AAPL is overvalued as well, but I still see no logic in your including the cash in the calculation.  If he sold all the Apple and retained that as cash, then your ratio would appear much worse as the look-through earnings numerator would have decreased but the cash+portfolio denominator would stay the same excluding taxes.

The consensus seems to be that the value of the float liability is less than dollar for dollar because maybe it never needs to be paid back.

If you invert that, what's the value of a cash asset that earns ~0 and may never be put to productive use? Possibly less than dollar for dollar is appropriate there as well.


BRK sentiment is just far too negative right now, which is part of the reason I am buying LEAPS. The option prices say it all, such a low amount of volatility priced in. But we have seen BRK move huge amounts in short periods of time in the past and we will see it again. Not to mention the ridiculously low Price/Book ratio.

I agree with this entire post, but especially the part about sentiment. I converted a big chunk of my BRK position from shares to LEAPs on Friday. 2:1 ratio of deep ITM calls to shares. If it continues to drop I'll do more. Biggest reasoning is I think risk of permanent impairment at the current price is very low.

Man, I hope you guys are right. I invested a small fortune in March thanks to trade triggers that were based on a pre-covid view of the world.

If you take the pre-covid look through earnings of $31 billion, and then add a $5 billion upward adjustment for the cash holdings, you get normal earnings of $36 billion, or $15 per B share (close to the Semper Augustus expectation of normal earnings). If you slap an 18 multiple on it you get a fair value of $270 per B share. If the value doubles over the next 7 to 10 years and you pay today's price of $175 then you'll earn your spot in value investor heaven. Hopefully investing turns out to be that easy.

But why did one of the greatest investment minds in history... who knows the salient financial details of thousands of businesses, the interworking of global supply chains, the price history of commodities and their impact on the raw material costs of his dozens of investments (including the price of sugar's impact on the profitability of an 8 ounce serving of coke), whose best friend Bill Gates is also a founder of one of the most valuable companies on the planet and who predicted the enormous global economic pain of a pandemic years before it happened, who together with Gates jointly funds a foundation with its finger on the pulse of the highest probability solutions to covid, who has any world leader and several of the world's greatest risk handicappers - like Ajit Jain - on speed dial... stop buying back shares in March?

It wasn't because he's ill-informed.
« Last Edit: June 28, 2020, 05:01:36 PM by Thrifty3000 »

steph

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Re: BRK Valuation
« Reply #95 on: June 29, 2020, 12:07:58 AM »
He probably was too well informed. Bill Gates scared him and he got very little time to buy at prices he really found attractive.

Never forget that in 2008 he didn't buy anything meaningful in the stockmarket.  He responded to very attractive offers made to him with preferreds,etc....


JPerez

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Re: BRK Valuation
« Reply #96 on: June 29, 2020, 05:13:33 AM »
I think the reason why he is so cautious is because, as he said, the range of outcomes in the pandemic is so wide.
He has lived through many recessions in his live and despite the differences they all have many things in common and I am sure He has developed a mental model to apply to recessions so He is comfortable buying stocks during those times.
This case is different, this situation is new for all of us, nobody has any experience living through this and nobody know what the consequences will be.
The way he has built his wealth and Berkshire is betting on companies that will do well but most importantly that have no risk, in his mind, to become worthless.
He has repeatedly said he would never invest in a share that could be a 10 bagger if there is any small chance that it could be a zero.
That is why he doesn't invest in technology, before he invests in a company he has to visualize and become comfortable with how the company would look in 5 or 10 years and that is very difficult to do with technology companies.
What is the upside of going all in in the march low? A few extra points of performance for the next few years?
What was the downside if the pandemic was worse or if the Fed wouldn't have acted the way it did?
Even now though the range of outcomes is narrowing, still there are lots of unknowns. And spend your cash doesn't seem to me like the best idea.
What if the vaccines don't work, what if the government reduce the stimulus?
Both are unlikely but there isn't a zero chance of them
On the other hand I find ridiculous all the bashing of Buffett and Berkshire over the recent months because of the underperformance.
Has Berkshire underperformed the S&P 500, not to talk about the Nasdaq over the last 5 and 10 years by a good margin? Obviously yes but consider this.
At the top of the last cycle (December of 2007) Berkshire book value was 78000 per A share at the end of December 2019 it was 262000, more than tripled over 12 years.
How is that a bad outcome?
We can also compare what their cash, securities, earnings power was then and now and in my opinion Berkshire has done an excellent job in the last decade at growing intrinsic value taking very few risks.
By the way the share price has gone from150000 at the end of 07 to 337000 at the end of 2019. So the multiple for Berkshire is lower while the multiple of the market as a whole has gone up substantially hence the underperformance.
Going forward I think they will outperform the index, not because they will have crazy returns but because I think it is hard to see the market going up 8% a year in the next decade while it is easier to see that kind of compounding from Berkshire.
The only things that bothers me a little about the way the company is managed is that I don't think they will do substantial buybacks while Buffett is managing it (I hope I am wrong). I think he is a collector of businesses and I don't think he wants to erode his capital base in any substantial manner so that he can acquire big companies when the opportunity arises. I think he would love for Berkshire to be the biggest company in the world and that could blind him and reduce the buybacks even when they would make sense

longinvestor

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Re: BRK Valuation
« Reply #97 on: June 29, 2020, 07:08:41 AM »
I think the reason why he is so cautious is because, as he said, the range of outcomes in the pandemic is so wide.
He has lived through many recessions in his live and despite the differences they all have many things in common and I am sure He has developed a mental model to apply to recessions so He is comfortable buying stocks during those times.
This case is different, this situation is new for all of us, nobody has any experience living through this and nobody know what the consequences will be.
The way he has built his wealth and Berkshire is betting on companies that will do well but most importantly that have no risk, in his mind, to become worthless.
He has repeatedly said he would never invest in a share that could be a 10 bagger if there is any small chance that it could be a zero.
That is why he doesn't invest in technology, before he invests in a company he has to visualize and become comfortable with how the company would look in 5 or 10 years and that is very difficult to do with technology companies.
What is the upside of going all in in the march low? A few extra points of performance for the next few years?
What was the downside if the pandemic was worse or if the Fed wouldn't have acted the way it did?
Even now though the range of outcomes is narrowing, still there are lots of unknowns. And spend your cash doesn't seem to me like the best idea.
What if the vaccines don't work, what if the government reduce the stimulus?
Both are unlikely but there isn't a zero chance of them
On the other hand I find ridiculous all the bashing of Buffett and Berkshire over the recent months because of the underperformance.
Has Berkshire underperformed the S&P 500, not to talk about the Nasdaq over the last 5 and 10 years by a good margin? Obviously yes but consider this.
At the top of the last cycle (December of 2007) Berkshire book value was 78000 per A share at the end of December 2019 it was 262000, more than tripled over 12 years.
How is that a bad outcome?
We can also compare what their cash, securities, earnings power was then and now and in my opinion Berkshire has done an excellent job in the last decade at growing intrinsic value taking very few risks.
By the way the share price has gone from150000 at the end of 07 to 337000 at the end of 2019. So the multiple for Berkshire is lower while the multiple of the market as a whole has gone up substantially hence the underperformance.
Going forward I think they will outperform the index, not because they will have crazy returns but because I think it is hard to see the market going up 8% a year in the next decade while it is easier to see that kind of compounding from Berkshire.
The only things that bothers me a little about the way the company is managed is that I don't think they will do substantial buybacks while Buffett is managing it (I hope I am wrong). I think he is a collector of businesses and I don't think he wants to erode his capital base in any substantial manner so that he can acquire big companies when the opportunity arises. I think he would love for Berkshire to be the biggest company in the world and that could blind him and reduce the buybacks even when they would make sense
[/b]
+1

Agree wholeheartedly that he’s not terribly excited about buying back. That said, he’s acutely aware that the next guy needs buybacks in his toolkit. Likely the main tool. The longer the  undervalued situation can continue the easier it is for the next guy. “You all have to endure us” Munger!

ValueMaven

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Re: BRK Valuation
« Reply #98 on: June 29, 2020, 10:12:49 AM »
Chris Bloomstrain from the Manual of Ideas on 3/26

'Berkshire is a big position for us, and I think they’re in pretty good shape. That’s the proper
way to think about it. When I think about Berkshire — I said it at the year end — they had
about $42 billion in economic earnings. That includes $3 billion for the optionality of the
cash, and everybody can make their own decision about that, so $40 billion. It won’t be $40
billion this year, but discounting 2021 and beyond, I think $40 billion is right. When the
stock traded at a market cap of less than $400 billion, I don’t recall a time that Berkshire
has traded at 10x what I would call normalized earnings. It’s got a fortress balance sheet,
and it’s got a lot of businesses inside it that are about as well protected against the
downturn as you can have. It made no sense to me that the stock traded at 160.'

Thrifty3000

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Re: BRK Valuation
« Reply #99 on: June 29, 2020, 11:54:14 AM »
I think the reason why he is so cautious is because, as he said, the range of outcomes in the pandemic is so wide.
He has lived through many recessions in his live and despite the differences they all have many things in common and I am sure He has developed a mental model to apply to recessions so He is comfortable buying stocks during those times.
This case is different, this situation is new for all of us, nobody has any experience living through this and nobody know what the consequences will be.
The way he has built his wealth and Berkshire is betting on companies that will do well but most importantly that have no risk, in his mind, to become worthless.
He has repeatedly said he would never invest in a share that could be a 10 bagger if there is any small chance that it could be a zero.
That is why he doesn't invest in technology, before he invests in a company he has to visualize and become comfortable with how the company would look in 5 or 10 years and that is very difficult to do with technology companies.
What is the upside of going all in in the march low? A few extra points of performance for the next few years?
What was the downside if the pandemic was worse or if the Fed wouldn't have acted the way it did?
Even now though the range of outcomes is narrowing, still there are lots of unknowns. And spend your cash doesn't seem to me like the best idea.
What if the vaccines don't work, what if the government reduce the stimulus?
Both are unlikely but there isn't a zero chance of them
On the other hand I find ridiculous all the bashing of Buffett and Berkshire over the recent months because of the underperformance.
Has Berkshire underperformed the S&P 500, not to talk about the Nasdaq over the last 5 and 10 years by a good margin? Obviously yes but consider this.
At the top of the last cycle (December of 2007) Berkshire book value was 78000 per A share at the end of December 2019 it was 262000, more than tripled over 12 years.
How is that a bad outcome?
We can also compare what their cash, securities, earnings power was then and now and in my opinion Berkshire has done an excellent job in the last decade at growing intrinsic value taking very few risks.
By the way the share price has gone from150000 at the end of 07 to 337000 at the end of 2019. So the multiple for Berkshire is lower while the multiple of the market as a whole has gone up substantially hence the underperformance.
Going forward I think they will outperform the index, not because they will have crazy returns but because I think it is hard to see the market going up 8% a year in the next decade while it is easier to see that kind of compounding from Berkshire.
The only things that bothers me a little about the way the company is managed is that I don't think they will do substantial buybacks while Buffett is managing it (I hope I am wrong). I think he is a collector of businesses and I don't think he wants to erode his capital base in any substantial manner so that he can acquire big companies when the opportunity arises. I think he would love for Berkshire to be the biggest company in the world and that could blind him and reduce the buybacks even when they would make sense

Yeah, I think you're on to something with the recession mental model point...

Imagine being Buffett in March. His operations and suppliers in China have already gone dark. The US is just starting to work through a shutdown - averting what was already happening in Italy. He already sees the cash drain on Dairy Queen China, suppliers delaying deliveries, orders being canceled, plummeting rail car loads, a massive drop in daily auto insurance claims, planes not flying, assembly lines halting, and employees being furloughed.

His buddy Billy G. advised a vaccine is 18 months away at best, and that the first iterations may not protect the at-risk population (so buckle up for prolonged behavior changes). He's surely talked to his top managers about downside risk scenarios, and about the parental support potentially needed to survive 18, 24, or even 36 months. He's likely urged them to look out for good competitors in financial trouble. In other words he's handicapped Berkshire's risk, so he can more fully focus on opportunity.

He knows there's an unprecedented amount of corporate debt sitting one notch above junk. He knows financial markets are gumming up, and companies like AIG are at the mercy of commercial paper. He knows full well the lock down can only subsist about 45 days before businesses globally start dropping like flies. There could soon be opportunities aplenty.

He has no idea how the government will respond to this crisis, or how the economy will respond to the government. (The CARES act was introduced to the Senate floor on March 19, at least 9 days after Buffett's last Q1 share repurchase - for $214 per B share.)

He does know the Warren Buffett help line is starting to ring...

My conclusion:

It makes perfect sense for those events to trigger a "recession mental model." Therefore, it makes perfect sense for Buffett to halt repurchases at that time, as the option value of cash was potentially worth FAR more than a moderately discounted share of Berkshire Hathaway. In fact, now that we've talked it out, I'd be scratching my head a bit if he HAD kept buying back shares. So, to that I say well played, Buffett.