Corner of Berkshire & Fairfax Message Board

General Category => Berkshire Hathaway => Topic started by: crocodon on April 07, 2016, 08:23:38 AM

Title: Semper Augustus letter
Post by: crocodon on April 07, 2016, 08:23:38 AM
Interesting and extensive discussion on valuing BRK: http://www.semperaugustus.com/2016BRK.aspx
Title: Re: Semper Augustus letter
Post by: Libs on April 07, 2016, 09:32:42 AM
Thanks for posting - I thoroughly enjoyed it, especially the 1999 reprise.
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 08, 2016, 10:05:07 AM
crocodon,

Thank you very much for sharing this piece on BRK valuation. It is - by far - and so far - the best piece I have ever read about BRK valuation. H/T for this work of Christopher P. Bloomstran.

I started reading it yesterday at about 10:00 PM, and got "sucked into it" - like was it a black hole - and stopped reading at about 5:00 AM [this morning], without finishing it in full.

To me especially the sections in the piece about:
are worth the read.

Again, thank you for sharing.
Title: Re: Semper Augustus letter
Post by: longinvestor on April 08, 2016, 11:51:49 AM
Awesome. Thanks for posting.

FANG & LEMMINGS commentary captures very well where BRK was in 1999 and is right now. Perhaps will be in 2030...it's deja vu all over again!
Title: Re: Semper Augustus letter
Post by: longinvestor on April 09, 2016, 08:02:33 AM
crocodon,

Thank you very much for sharing this piece on BRK valuation. It is - by far - and so far - the best piece I have ever read about BRK valuation. H/T for this work of Christopher P. Bloomstran.

I started reading it yesterday at about 10:00 PM, and got "sucked into it" - like was it a black hole - and stopped reading at about 5:00 AM [this morning], without finishing it in full.

To me especially the sections in the piece about:
  • The BRK/General Re merger
  • Deferred taxes related to the regulated & capital intensive businesses
  • Risk
are worth the read.

Again, thank you for sharing.

Yes, this piece has been "sucking me in" to read again and again. It's a keeper!

The section on risks is very good. If I worry about anything relating to my large holding of BRK, the "kill me slowly" scenario captures it. Specifically, increasing mediocrity at the subs as leadership transitions happen in the future. Will try to understand as time goes on. Hope this is 30-50 years out. Will be quite old to dead and would be time to go all-in to index funds then, ha!

In the mean time, the "kill me fast" scenario playing out really soon will separate BRK away from the crowd once and for all; the perfect storm mega cat insurance event year, another big one like 2008 etc. happens soon at a time when BRK is sitting on $100B of liquidity. While the world fixates on Buffett's age or the next CEO or BRK's size, the prospects for the BRK shareholder is going to be all about what happens to the other guy, whether in reinsurance or the other utility or railroad etc. in either the "kill me fast or slow" scenarios. Not so much @ BRK. We will take the 1% return on equity over what happens to the other guy, won't we?
Title: Re: Semper Augustus letter
Post by: LongTermView on April 09, 2016, 03:57:29 PM
I like the BNSF and BHE discussions from pages 34 to 39.

The BNSF cash flow statement shows cash distributions of $4 billion, $3.5 billion, and $4 billion for 2015, 2014, and 2013 respectively.  BNSF is generating a lot of cash for Berkshire to spend in other areas.  BHE is different in that they're using its cash for more energy acquisitions as opposed to areas outside of energy, right?
Title: Re: Semper Augustus letter
Post by: Charlie on April 10, 2016, 02:00:50 AM
Very good analysis of Berkshire. Thanks for posting.  :)
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 12, 2016, 09:19:03 AM
I like the BNSF and BHE discussions from pages 34 to 39.

The BNSF cash flow statement shows cash distributions of $4 billion, $3.5 billion, and $4 billion for 2015, 2014, and 2013 respectively.  BNSF is generating a lot of cash for Berkshire to spend in other areas.  BHE is different in that they're using its cash for more energy acquisitions as opposed to areas outside of energy, right?
LongTermView,

Yes, I understand it the same way as you do.
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 24, 2016, 11:29:42 AM
Today I got confirmation from Chad Christensen for inclusion in the Semper Augustus client letter maling list [without being a client], and I replied with a "thanks a lot" and positive words about the BRK analysis also.

Chad replied:

Quote
Thanks for the feedback. We will have a follow-up on the BRK this week coming out.

Chad

So I'm eager to read whatever more to come, and will share it here.
Title: Re: Semper Augustus letter
Post by: Nicholas on April 26, 2016, 03:39:06 AM
Today I got confirmation from Chad Christensen for inclusion in the Semper Augustus client letter maling list [without being a client], and I replied with a "thanks a lot" and positive words about the BRK analysis also.

Chad replied:

Quote
Thanks for the feedback. We will have a follow-up on the BRK this week coming out.

Chad

So I'm eager to read whatever more to come, and will share it here.

Nice one john. It'd be much appreciated if you could share it.

Thanks
Title: Re: Semper Augustus letter
Post by: longinvestor on April 26, 2016, 05:40:08 AM
http://www.loschmanagement.com/content/operating-earnings


Here's another nice one on BRK. While not as deep an analysis, it is the first one (what I've seen) that breaks out how capital is being allocated into the 5 buckets (priorities mentioned in the chairman's letter). Roughly $200 B into wholly owned businesses/PPE versus $22 B into equities from 2006-16.
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 26, 2016, 08:19:36 AM
http://www.loschmanagement.com/content/operating-earnings


Here's another nice one on BRK. While not as deep an analysis, it is the first one (what I've seen) that breaks out how capital is being allocated into the 5 buckets (priorities mentioned in the chairman's letter). Roughly $200 B into wholly owned businesses/PPE versus $22 B into equities from 2006-16.
longinvestor,

Also a very good read - this with a new angle on things [straight cash flow vs. allocation of capital]. Thanks for sharing.
Title: Re: Semper Augustus letter
Post by: jberkshire01 on April 26, 2016, 10:23:58 AM
Chris Bloomstran's follow-up interview with Kate Welling: http://www.valueinvestingworld.com/2016/04/kate-welling-talks-with-chris-bloomstran.html
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 27, 2016, 07:59:23 AM
Today I received an email from Chad, containing the SA client letter. Basicly, the client letter was contained as two attachments to the email, consisting of a cover letter [in pdf] and the document [in pdf] linked to by jberkshire01 above.


Attached is the cover letter, as promised [nothing material news in that].
Title: Re: Semper Augustus letter
Post by: stahleyp on April 27, 2016, 09:05:19 AM
Did you guys see his returns?

Since inception net of fees is 5.4% vs 5.1% with the S&P 500. take taxes into consideration and I bet the index wins by a decent margin.
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 27, 2016, 10:00:34 AM
Did you guys see his returns?

Since inception net of fees is 5.4% vs 5.1% with the S&P 500. take taxes into consideration and I bet the index wins by a decent margin.

Paul,

Yes, I [for one] noticed that. [However I'm not sure I understand your comments about the S&P 500 - as I understand things, S&P 500 is measured before tax].

Earlier [after my first post in this topic] I looked up the quaterly holdings for SA on Edgar, and what stoke my mind [from a quick view on it] was that XOM was the second biggest position, next to BRK, in the fund. I would really like to read more about that SA thesis [based on value investing [pricing power etc.], but I'm not entitled to, as a non client.

However, that does not change my mind on or my perception of the SA BRK analysis.
Title: Re: Semper Augustus letter
Post by: ZenaidaMacroura on April 27, 2016, 10:44:31 AM
Did you guys see his returns?

Since inception net of fees is 5.4% vs 5.1% with the S&P 500. take taxes into consideration and I bet the index wins by a decent margin.

Paul,

Yes, I [for one] noticed that. [However I'm not sure I understand your comments about the S&P 500 - as I understand things, S&P 500 is measured before tax].

Earlier [after my first post in this topic] I looked up the quaterly holdings for SA on Edgar, and what stoke my mind [from a quick view on it] was that XOM was the second biggest position, next to BRK, in the fund. I would really like to read more about that SA thesis [based on value investing [pricing power etc.], but I'm not entitled to, as a non client.

However, that does not change my mind on or my perception of the SA BRK analysis.
Is XOM a relatively recent pickup?
Title: Re: Semper Augustus letter
Post by: John Hjorth on April 27, 2016, 11:40:03 AM
Did you guys see his returns?

Since inception net of fees is 5.4% vs 5.1% with the S&P 500. take taxes into consideration and I bet the index wins by a decent margin.

Paul,

Yes, I [for one] noticed that. [However I'm not sure I understand your comments about the S&P 500 - as I understand things, S&P 500 is measured before tax].

Earlier [after my first post in this topic] I looked up the quaterly holdings for SA on Edgar, and what stoke my mind [from a quick view on it] was that XOM was the second biggest position, next to BRK, in the fund. I would really like to read more about that SA thesis [based on value investing [pricing power etc.], but I'm not entitled to, as a non client.

However, that does not change my mind on or my perception of the SA BRK analysis.
Is XOM a relatively recent pickup?

ZenaidaMacroura,

I haven't checked it out, so I don't know.

Disclosure : I have a small position myself in XOM [less than 2% for myself, less than 0,5% on overall level], and I'm [personally] up about 9% [ex. dividends, in my own obscure functional currency [DKK], related closely to EUR] since I bought it, about the same time that BRK invested in XOM.
Title: Re: Semper Augustus letter
Post by: doughishere on April 27, 2016, 01:40:42 PM
http://www.loschmanagement.com/content/operating-earnings


Here's another nice one on BRK. While not as deep an analysis, it is the first one (what I've seen) that breaks out how capital is being allocated into the 5 buckets (priorities mentioned in the chairman's letter). Roughly $200 B into wholly owned businesses/PPE versus $22 B into equities from 2006-16.

That was really good.
Title: Re: Semper Augustus letter
Post by: stahleyp on April 28, 2016, 07:04:12 AM
Did you guys see his returns?

Since inception net of fees is 5.4% vs 5.1% with the S&P 500. take taxes into consideration and I bet the index wins by a decent margin.

Paul,

Yes, I [for one] noticed that. [However I'm not sure I understand your comments about the S&P 500 - as I understand things, S&P 500 is measured before tax].



Hey John,

The S&P 500 is super tax efficient so the returns are very close to what you'd have since turnover is so low. Granted, once you eventually sell it you'll owe taxes but on year to year basis, not much is going on besides dividends.
Title: Re: Semper Augustus letter
Post by: karthikpm on July 28, 2016, 03:58:49 PM
FANG's and Lemmings ;)

http://www.marketwatch.com/story/facebook-races-past-berkshire-hathaways-market-cap-2016-07-28
Title: Re: Semper Augustus letter
Post by: John Hjorth on March 06, 2017, 05:59:11 AM
Christopher P. Bloomstran, Semper Augustus Investments Group LLC, released a new  Client Letter (http://www.semperaugustus.com/2016-sai-letter--sympathy-for-the-dog-old-challenging-dogma-death-of-the-profit-margin-and-a-brief-berkshire-reduxpdf/) on 12th February 2017 with the title: "Symphaty for the Dog - 2016 Letter to Clients: Challenging Dogma, Death of the Profit Margin, and a (Brief) Berkshire Redux".

[longinvestor linked to it in the recent BRK IV topic on this board - thanks!].

It is - like the 2015 Client Letter discussed earlier in this topic - at least to me, a very good read for BRK investors, and also very entertaining!:

Just an example here as an appetizer: p. 5:

Quote
... While we sincerely doubt any preternatural correlation with our writing about Prince and his untimely demise last year, we played it safe regardless by awarding this year’s theme to the Stones, because everyone knows they’re going to live forever, especially Keith Richards, the co-author of Sympathy, the epic lead guitar and occasional lead vocalist. With a dedicated effort, I finally finished Keith’s memoir, Life, last year. It was written with James Fox in 2010, and occupied a place among the stack on the nightstand for four years. It’s an incredibly incoherent but interesting history, especially for a lifelong Stones fan. Keith’s remaining brain cells allow him to recount wandering stories while Fox interprets. I found you could only read a few pages and then had to decompress and set it aside for a few days, or weeks, but couldn’t help but come back at times ...

To me, that actually gave me association as being the best description I have seen for how I have felt while reading the last two books from Mr. Taleb! - Without implying other similarities to any extent! And from what I have read so far of Mr. Talebs next book "Skin in the Game", that does not appear to be much different.

- - - o 0 o - - -

There are a lot of interesting topics covered in the Semper Augustus 2016 Client Letter - BRK-related and general. Perhaps we could continue discussing the Letter in this topic.

- - - o 0 o - - -

My take on this, based on these two Semper Augustus Letters: I will start buying BRK again, after a break of about a half year, based on the prevailing market conditions, and the recent relationship between market price and intrinsic value of BRK.
Title: Re: Semper Augustus letter
Post by: Valuehalla on March 06, 2017, 08:39:43 AM
According to Semperaugustus valuation and the BRK letter, the situation is like this:

On 31.12.2016, per B share:
BV (not KHC adjusted)     114,74 $
IV  app                           209,00 $
Marketprice                     162,98 $
GAP app 28 % upside potential to reach IV

1.3.2017, my estimation, per B share:
BV (not KHC adjusted)      118,80 $ (incl. est. InVestGains, BAC, APPL accumulation, minus defferred tax, plus operative
IV app                             216,00 $
Marketrpice                      177,28 $
GAP app 22 % upside potential to reach IV
Title: Re: Semper Augustus letter
Post by: longinvestor on March 06, 2017, 12:07:26 PM
The Semper augustus letter is good! Here are my endorsements of their insights,
1. They've held BRK continuously since 1999. Surely, besides improving the depth of their understanding of their anchor holding, they increasingly see just how much better BRK is versus their other holdings! This is my single biggest lifetime lesson. The contrast is so stark but you have to experience this over a long period of time. Clearly they've. Going down the rabbit hole of BRK's numbers is their way of not suffering from anchoring in past convictions. You have to do that with all investments. Even with gravity defying BRK.

2.  I really applaud them for sharing this insight with their clients. In Poor Charlie's Almanac, Munger talks about how this could be conflicting for a money manager. If you hold, say 50% in a single position, what's to keep your client from doing the same without having to pay you for it? If Semper Augustus manages to do this for such a long period, more power to them. What do you say about their long term clients? You get what you truly deserve. More power to them for that!

3. The contrast they draw between the S&P index companies' terrible track record with retained earnings versus BRK's is the elephant in the room. At the end of the day the BRK that is unfolding today is all about this. Why they will continue to leave others in the dust. To hell with size or other urban myths. We'll see in due course.


Title: Re: Semper Augustus letter
Post by: CorpRaider on March 06, 2017, 12:21:59 PM
Yeah, good read.  Checked it out this weekend.  Koster's blog/links is amongst my very favorites.  Interesting thoughts about ROICs and profit margins and the impacts of QE.
Title: Re: Semper Augustus letter
Post by: longinvestor on March 07, 2017, 10:04:17 PM
Did you guys see his returns?

Since inception net of fees is 5.4% vs 5.1% with the S&P 500. take taxes into consideration and I bet the index wins by a decent margin.

I looked (again) at their returns; They bested the index by a small margin. Notable is that most of that slight out performance was carried by a few years (2001-02) and 2008-09 (they did not lose as much as the index); The index has left them in the dust over the past 7 years. Just like about anyone else!

But I bet they handsomely benefit over the next five years by their big position in BRK!
Title: Re: Semper Augustus letter
Post by: longinvestor on March 07, 2017, 10:13:06 PM
FANG's and Lemmings ;)

http://www.marketwatch.com/story/facebook-races-past-berkshire-hathaways-market-cap-2016-07-28

Market cap (update)

FANG: $1.44 Trillion
BRK: $431 Billion

Rationality be damned! Oh wait, we haven't been here before, have we? ;)


Title: Re: Semper Augustus letter
Post by: StubbleJumper on March 09, 2017, 05:40:15 AM
FANG's and Lemmings ;)

http://www.marketwatch.com/story/facebook-races-past-berkshire-hathaways-market-cap-2016-07-28

Market cap (update)

FANG: $1.44 Trillion
BRK: $431 Billion

Rationality be damned! Oh wait, we haven't been here before, have we? ;)



Yes, nearly 17 years ago, a full year before the epic tech-wreck, Sanjeev posted the following about Canada's tech-darling, Northern Telecom:

"Icemann, what do all these companies have in common?  Last QuarterTicker Revenues Earnings Market Cap.BBD 3.3B 147M 15.7BBNS 4.6B 465M 17.6BBM 4.8B 497M 17.0BCM 5.9B 676M 15.7BL 4.3B 77M 11.9BPOW 4.0B 132M 6.4BTD 5.4B 41M 21.7BRY 5.6B 578M 23.0B  If you combine all those numbers you get total quarterly revenues of 37.9B, total quarterly earnings of 2.613B, and a total market capitalization of 129B. Nortels numbers ending the same quarter look like this: revenues of 6.8B, earnings of -128M, and market capitalization of 167B. For almost one quarter less you could buy all big five banks, the largest grocery chain in Canada, the largest investment firm in Canada, and the bluest of the blue industrial companies. In the short-term the market is all about style, in the long-term it is about substance. As amazing as NT's growth has been, and it's emergence coincided with an information revolution, it is extremely overvalued. When this humpty dumpty has its fall, all the kings horses, and all the kings men, will not be able to put it back together again! So don't feel so bad that you missed the boat on NT. There are many good companies out there, that are trading at undervalued levels. Some of the ones from above are worth looking at! Many investors, including indexers will suffer the consequences, when NT has an earnings shortfall in the future, and the market rapidly removes the enormous premium applied to its market price. Cheers!"


It was obvious then, and it's obvious now.  Thanks again, Sanj.


SJ
Title: Re: Semper Augustus letter
Post by: ValueMaven on March 12, 2017, 07:50:16 AM
Brilliant analysis...the best I've seen on Berkshire hands-down.  Thank you for posting. 

Sincerely,
ValueMaven
Title: Re: Semper Augustus letter
Post by: John Hjorth on March 12, 2017, 10:46:55 AM
Brilliant analysis...the best I've seen on Berkshire hands-down.  Thank you for posting. 

Sincerely,
ValueMaven

It's actually a very good read on BRK.
Title: Re: Semper Augustus letter
Post by: ValueMaven on December 24, 2017, 05:48:32 AM
I wonder if Chris will be updating his analysis for 2017 shortly, particularly in-light of all that has occurred at Berkshire.  It still remains one of the best piece of analysis that I have read...way more detailed then JPM's coverage piece on the company.

Sincerely,
ValueMaven
Title: Re: Semper Augustus letter
Post by: longinvestor on December 24, 2017, 07:14:37 AM
FANG's and Lemmings ;)

http://www.marketwatch.com/story/facebook-races-past-berkshire-hathaways-market-cap-2016-07-28

Market cap (update)

FANG: $1.44 Trillion
BRK: $431 Billion

Rationality be damned! Oh wait, we haven't been here before, have we? ;)



Yes, nearly 17 years ago, a full year before the epic tech-wreck, Sanjeev posted the following about Canada's tech-darling, Northern Telecom:

"Icemann, what do all these companies have in common?  Last QuarterTicker Revenues Earnings Market Cap.BBD 3.3B 147M 15.7BBNS 4.6B 465M 17.6BBM 4.8B 497M 17.0BCM 5.9B 676M 15.7BL 4.3B 77M 11.9BPOW 4.0B 132M 6.4BTD 5.4B 41M 21.7BRY 5.6B 578M 23.0B  If you combine all those numbers you get total quarterly revenues of 37.9B, total quarterly earnings of 2.613B, and a total market capitalization of 129B. Nortels numbers ending the same quarter look like this: revenues of 6.8B, earnings of -128M, and market capitalization of 167B. For almost one quarter less you could buy all big five banks, the largest grocery chain in Canada, the largest investment firm in Canada, and the bluest of the blue industrial companies. In the short-term the market is all about style, in the long-term it is about substance. As amazing as NT's growth has been, and it's emergence coincided with an information revolution, it is extremely overvalued. When this humpty dumpty has its fall, all the kings horses, and all the kings men, will not be able to put it back together again! So don't feel so bad that you missed the boat on NT. There are many good companies out there, that are trading at undervalued levels. Some of the ones from above are worth looking at! Many investors, including indexers will suffer the consequences, when NT has an earnings shortfall in the future, and the market rapidly removes the enormous premium applied to its market price. Cheers!"


It was obvious then, and it's obvious now.  Thanks again, Sanj.


SJ

Fred Schwed in Where are the customers' yachts? says something like this was the rage in the period 1925-1929 (Sept, that is).

Company XYZ is going up....what do they make and what are their prospects, asks an inquiring mind.....who cares...XYZ is going up. ....All one needs to know is the ticker symbol......
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 07, 2018, 02:17:38 PM
I wonder if Chris will be updating his analysis for 2017 shortly, particularly in-light of all that has occurred at Berkshire.  It still remains one of the best piece of analysis that I have read...way more detailed then JPM's coverage piece on the company.

Sincerely,
ValueMaven

I have now started looking daily on the Semper Augustus website for new interesting stuff from Mr. Bloomstran to read. It seems to be about this time of the year new letters are posted.

I'll post here if I see something new comes up.
Title: Re: Semper Augustus letter
Post by: DooDiligence on February 08, 2018, 03:12:46 AM
I wonder if Chris will be updating his analysis for 2017 shortly, particularly in-light of all that has occurred at Berkshire.  It still remains one of the best piece of analysis that I have read...way more detailed then JPM's coverage piece on the company.

Sincerely,
ValueMaven

I have now started looking daily on the Semper Augustus website for new interesting stuff from Mr. Bloomstran to read. It seems to be about this time of the year new letters are posted.

I'll post here if I see something new comes up.

I like their creative writing style.
Title: Re: Semper Augustus letter
Post by: longinvestor on February 08, 2018, 05:51:11 AM
I wonder if Chris will be updating his analysis for 2017 shortly, particularly in-light of all that has occurred at Berkshire.  It still remains one of the best piece of analysis that I have read...way more detailed then JPM's coverage piece on the company.

Sincerely,
ValueMaven

I have now started looking daily on the Semper Augustus website for new interesting stuff from Mr. Bloomstran to read. It seems to be about this time of the year new letters are posted.

I'll post here if I see something new comes up.
Thanks for doing this. I've looked for it also.

I like them because they value Berkshire higher than everyone else. And in this matter, everyone else is wrong. Spoken like the true groupie, ha.
Title: Re: Semper Augustus letter
Post by: ValueMaven on February 08, 2018, 07:24:45 AM
It's the single best analysis of Berkshire I've seen...

Title: Re: Semper Augustus letter
Post by: SlowAppreciation on February 23, 2018, 04:21:28 PM
It's here: https://d2zm3gcvr8kng7.cloudfront.net/media/documents/351455b6-d20f-4af6-8239-2ddd0fa213cf.pdf
Title: Re: Semper Augustus letter
Post by: ValueMaven on February 23, 2018, 04:46:24 PM
Yea...WOW...Some of the best analysis I've ever read...

IV targets ranging from $240 - $250...  :)

Sincerely,
ValueMaven
Title: Re: Semper Augustus letter
Post by: Cevian on February 23, 2018, 04:48:29 PM
This is a book! :)
Title: Re: Semper Augustus letter
Post by: longinvestor on February 23, 2018, 07:23:34 PM
My favorite part of their analysis is the extent of the under-reported economic earning power, pages 67-69. Something in the order of $6000 per A share. That makes for a happy thought at bedtime for a concentrated BRK investor!
Title: Re: Semper Augustus letter
Post by: Lupo Lupus on February 24, 2018, 02:05:05 AM
Its a great letter but they keep on making the same mistake: they argue that passive investing into ETFs makes the companies with the larger weights get even larger weights => No,  ETFs flows means stocks are being bought in proportion to their current weights, so they rather cement existing weights instead of pushing the larger ones even higher .... otherwise great letter with a good overview of many problems facing markets today!
Title: Re: Semper Augustus letter
Post by: Swedish_Compounder on February 24, 2018, 04:50:59 AM
I found their analysis of Berkshire Hathaway adjusted look through earnings very interesting and rather complete, but do they not forget the value of future annual float increase? Since BRK consider their float to be basically perpetual, it is 100% free cash flow (with some restrictions) and they usually make an underwriting profit I think the increase in float is to be seen as even more valuable than earnings from the earnings statement. Thus, as a minimum the average annual float increase is to be added to the look-through earnings.

What do you guys think?
Title: Re: Semper Augustus letter
Post by: StubbleJumper on February 24, 2018, 06:23:06 AM
Its a great letter but they keep on making the same mistake: they argue that passive investing into ETFs makes the companies with the larger weights get even larger weights => No,  ETFs flows means stocks are being bought in proportion to their current weights, so they rather cement existing weights instead of pushing the larger ones even higher .... otherwise great letter with a good overview of many problems facing markets today!



Yes, that would be true if the only ETFs were broad-market ETFs like S&P500 tracking funds.  But, how much capital also flows into boutique ETFs that specialize in tech?

My take from that part of the letter is that eventually there will be a shit-load of money to be made from companies #501 through #1000+ when the ETF craze hits the ground with a thud (as it eventually must).


SJ
Title: Re: Semper Augustus letter
Post by: Lupo Lupus on February 24, 2018, 06:31:49 AM
Its a great letter but they keep on making the same mistake: they argue that passive investing into ETFs makes the companies with the larger weights get even larger weights => No,  ETFs flows means stocks are being bought in proportion to their current weights, so they rather cement existing weights instead of pushing the larger ones even higher .... otherwise great letter with a good overview of many problems facing markets today!



Yes, that would be true if the only ETFs were broad-market ETFs like S&P500 tracking funds.  But, how much capital also flows into boutique ETFs that specialize in tech?

SJ

But if this is the argument, then its not about passive investing. If people invest in tech ETF instead of the broad market, its an active decision.
Title: Re: Semper Augustus letter
Post by: StubbleJumper on February 24, 2018, 06:50:14 AM
Its a great letter but they keep on making the same mistake: they argue that passive investing into ETFs makes the companies with the larger weights get even larger weights => No,  ETFs flows means stocks are being bought in proportion to their current weights, so they rather cement existing weights instead of pushing the larger ones even higher .... otherwise great letter with a good overview of many problems facing markets today!



Yes, that would be true if the only ETFs were broad-market ETFs like S&P500 tracking funds.  But, how much capital also flows into boutique ETFs that specialize in tech?

SJ

But if this is the argument, then its not about passive investing. If people invest in tech ETF instead of the broad market, its an active decision.


Sure, but the same argument can be made about buying an S&P500 fund.  The difference is that somebody passively invests in a fund composed of the tech sub-sector rather than the "big" sub-sector (you passively throw your money into 25 tech stocks selected by somebody else rather than 500 "big" stocks selected by somebody else).  The flow of money into those ETFs arguably drives up the price of their component stocks.  The more different ETFs a stock appears in, the more likely that the capital flows will disproportionately push up its price, relative to the shares of companies that appear in fewer (or no) ETFs.

But, I'd say the point was interesting and possibly something that will be valuable for the future.  Companies that do not appear in many (any?) ETFs might offer superior returns when the whole ETF thing lands with a thud.  It's a bit of insight.  So, when snooping for value, maybe in the next couple of years the best place to look will be #501+.  That's a fairly big difference from the environment of the past 5 or 6 years where you could make scads of money finding large-cap value in plain sight (eg, US banks, automakers,etc).

I really like his letter and I suspect that I'll read it two or three more times over the year!


SJ
Title: Re: Semper Augustus letter
Post by: thepupil on February 24, 2018, 08:12:19 AM
Was Semper Scribere taken?
Title: Re: Semper Augustus letter
Post by: SlowAppreciation on February 25, 2018, 10:22:49 AM
I was able to find their 13F forms, and just posted them if anyone is interested: About 50% of their portfolio is BRK

http://minesafetydisclosures.com/individual-investor-portfolio
Title: Re: Semper Augustus letter
Post by: Dynamic on February 27, 2018, 08:26:03 AM
I was able to find their 13F forms, and just posted them if anyone is interested: About 50% of their portfolio is BRK

http://minesafetydisclosures.com/individual-investor-portfolio

And in case anyone needs a reminder, click on that link, pull down the Investor selection and under C you'll find Christopher Bloomstram. BRK.A = 19.1%, BRK.B = 26.4%. Combined BRK = 45.5% of their reportable holdings under 13-F. Everything other position is 6.0% or lower.
Title: Re: Semper Augustus letter
Post by: SlowAppreciation on February 27, 2018, 09:57:17 AM
I was able to find their 13F forms, and just posted them if anyone is interested: About 50% of their portfolio is BRK

http://minesafetydisclosures.com/individual-investor-portfolio

And in case anyone needs a reminder, click on that link, pull down the Investor selection and under C you'll find Christopher Bloomstram. BRK.A = 19.1%, BRK.B = 26.4%. Combined BRK = 45.5% of their reportable holdings under 13-F. Everything other position is 6.0% or lower.

Haha thanks for clarifying, and sorry to all that it's a little clunky
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 27, 2018, 11:29:33 AM
I just want to post here my appreciation and gratitude for what you two gents are maintaining and sharing here on CoBF, SlowAppreciation & Dynamic.

Thank you very much.
Title: Re: Semper Augustus letter
Post by: Cigarbutt on February 27, 2018, 01:27:14 PM
The letter contains a lot of useful data and analysis. I second John's appreciation and gratitude to SlowAppreciation and Dynamic.

So, many interesting topics covered in the letter.
A word here about passive investing. The growth in ETFs has so far continued unabated.

Some suggest that this is not a problem as long as some residual investors continue to do the "active" work. Too easy?
Here's a link that covers an asset class that has been influenced by this relatively new trend, the high yield debt market.
https://www.bloomberg.com/view/articles/2018-02-26/passive-investing-has-brought-marxism-to-the-junk-bond-market

The title is sensational and the conclusion contains a forecast type ending which is not necessary but the graphs and data are interesting. Passive investing is now a large part of the high yield debt market and I agree that this likely explains the increasing correlation between the different components of the asset class. Obviously, there are cyclical forces that will tend to drive spreads up and down from time to time but this increasing correlation in a very benign environment is quite unusual. (see page 17 of the letter for the two graphs showing the historical evolution of yield and spread).

I submit that going in the high yield debt market requires an eyes wide open approach. I think that the rise of passive investing is contributing to the synchronized dampening of yield and spread. It is not a problem in itself. It just means that (here assuming that the credit market is cyclical) the price action and momentum in the other direction may be magnified and that may give rise to contrarian opportunities.
Title: Re: Semper Augustus letter
Post by: Dynamic on February 27, 2018, 02:20:53 PM
Haha thanks for clarifying, and sorry to all that it's a little clunky

It's not at all clunky. I think it's great and is really useful for tracking great Value Investors and the stocks they own, but it had slipped my mind which stock picker was behind Semper Augustus, so I thought I'd be explicit for the benefit of anyone else who's similarly slow-on-the-uptake, or is new to Semper Augustus letters and their great analysis!

Your tracker is superb for tracking all these investors and brilliantly fit for purpose for idea generation.

My BRK Look-Through is focused elsewhere, so it's great to have yours too
Title: Re: Semper Augustus letter
Post by: John Hjorth on March 05, 2018, 10:04:10 AM
I got mailinglisted at Semper August about two years ago, after our "discovery" of the "first" Berkshire related Letter from there. Today, I've received the last letter by e-mail, attached to this e-mail from Chad Christensen :

Quote
Attached is a PDF copy of the year-end client letter. The theme switches to literature from rock and roll but don’t take that to mean we’re growing up...

The letter examines market valuations at extremes; bubbles in passive investing and monetary policy, with both likely to unwind unpleasantly. We update our intrinsic value summary for the portfolio and compare our holdings fundamentally with the market.

We think Berkshire Hathaway is the largest beneficiary of the 2017 Tax reform just passed. We look at the impact of the tax changes and update our intrinsic valuation analysis. Despite the shares up 21.9% last year (and 23.4% the year before), considerable upside remains.

Throughout the letter we contrast our investment approach and discipline with passive investing. We include a chart that shows the degree to which money is unnaturally distorting the big stock market indexes and how risk is building.  It’s eye opening.

Berkshire released their annual report and Warren Buffett’s Chairman's letter at BerkshireHathaway.com.

Chris was inspired by the Winter Olympics and broke the Semper world record for long letters.

We welcome your comments and feedback.

[  : - )  ]
Title: Re: Semper Augustus letter
Post by: chrispy on March 08, 2018, 03:01:08 PM
I have enjoyed the first half of the letter and now need to find time to read their BRK analysis. 

Their commentary on holding cash through various cycles and how they never plan to again once they deploy their current cash holding was very interesting.  I believe it was Racemize who posted research that concluded being 100% invested almost always works out better (when emotion is removed as a variable).

With regards to indexing, they continue to make one point that I dont agree with, nor does my math.  If folks only invest into an index fund, then every stock in that fund goes up by the same amount.  They disagree though and state that the top holdings go up the most and subsequently smaller holdings go up less and less.  My math cannot recreate their finding...  Anything that I am missing?
Title: Re: Semper Augustus letter
Post by: racemize on March 08, 2018, 03:15:16 PM
I have enjoyed the first half of the letter and now need to find time to read their BRK analysis. 

Their commentary on holding cash through various cycles and how they never plan to again once they deploy their current cash holding was very interesting.  I believe it was Racemize who posted research that concluded being 100% invested almost always works out better (when emotion is removed as a variable).

With regards to indexing, they continue to make one point that I dont agree with, nor does my math.  If folks only invest into an index fund, then every stock in that fund goes up by the same amount.  They disagree though and state that the top holdings go up the most and subsequently smaller holdings go up less and less.  My math cannot recreate their finding...  Anything that I am missing?

I think it makes sense if you continually add money and that prices are fluctuating.  It effectively makes it a momentum strategy.

Let's assume two companies in an index fund, each at $50. 

so Day 0: 50/50

When money is added in that day, then the index is equal weighted, so the extra demand from purchases would also be equally distributed, which I think is what you are saying.  However, let's say earnings for company A are amazing and earnings for company B are really poor, so the prices of the two companies change in response (which admittedly requires some activists setting the price here) to $75 and $25.

So Day 1: 75 / 25
Now, when new money flows in, it flows in 75% towards A and 25% towards B, resulting in higher demand for A than B, so the relative price change would not be the same for the two companies.  So the demand for A has increased dramatically than B over the first day.  If it increases price more, then it would get worse with each new dollar.

I guess you don't even need the first day if you just started with the second day.  But you could imagine a scenario that a small perturbation would cause an imbalance of demand for a company due to weight in the index.

That's how I've thought about it, but perhaps I'm missing something.
Title: Re: Semper Augustus letter
Post by: vinod1 on March 08, 2018, 05:13:27 PM
Race - I could not wrap my head around your example.

I cannot see any rationale when investing in say the total stock market index or the S&&P 500 index would cause some stocks to get overvalued. Passive investors are buying market weights of the stocks.

Stock A might have 10% weight, Stock B might have 5% weight and Stock Z might have 0.1% weight based on their market cap. Every additional dollar value of passive investors is invested in the same exact proportion. So I cannot see any reason for why this would benefit some stocks but not others.

One way some stocks could get overvalued is if a sector or a narrow index fund like say Social Media Index Fund (just making it up) attract a large investor base which would increase demand for all the stocks in such indexes to increase which would drive up their prices.

Regarding the letter. Blaming indexing and central bankers seem to be the common theme of all the value fund managers who are under-performing the index funds. If you read about either of these in their letter it is pretty good bet they are underperforming the index.

Vinod
Title: Re: Semper Augustus letter
Post by: Jurgis on March 08, 2018, 05:56:33 PM
vinod1 and chrispy are correct.  8)

When incremental money comes in, it will buy the percentages based on weight. But who does the selling?

racemize argues that it is easier to encourage small percentage (25%) stock sellers to sell without price going up while the big percentage (75%) stock sellers will be less willing to sell, so price for that stock would have to go up more compared to the small stock. Which would result to big stock becoming 76% and small one becoming 24%. But this means that sellers are active investors choosing what to sell. If the sellers are index investors, then this does not happen.

And even if sellers are active investors, racemize's argument is not very grounded. Why would the active seller choose to sell smaller company rather than bigger? Yeah, you can think of some anecdote like racemize did (smaller company had worse results...), but I can think of anecdote in the opposite direction (smaller company is cheaper based on some metric).  8)

Title: Re: Semper Augustus letter
Post by: racemize on March 09, 2018, 06:35:43 AM
Well, so first off, I'm not confident on this, and I've been trying to wrap my ahead around various passive indexing thought-experiments for a while now.  But for clarification on what I was saying:

My Day 0 vs Day 1 example was to show that companies that had the same initial weight (and therefore the same initial allocation of dollars) will end up having different dollar demand based on price perturbations.  Thus, I wasn't saying larger vs smaller, I was saying same IV, but price disparity ends up causing a change in the dollar amount of incremental demand by passive investors.  Or saying this another way, if there are $75 going at the company that was $50 and $25 going to the other company that was $50, then the passive index is reinforcing the price change, not dampening it. 

However, I think vinod is pointing out that for every $100 it is just 1 share of demand, so in a "share demand" framework, there isn't any difference (rather than the dollar amount above). 

Perhaps though, the indices to exacerbate momentum, they just stabilize it.  Or saying it another way, these momentum artifacts are just what happens normally in late stages of bull markets and don't have much to do with indices.
Title: Re: Semper Augustus letter
Post by: racemize on March 09, 2018, 07:04:06 AM
Here's Einhorn talking about it, which is a reflection of how I've thought about it.  Perhaps this just isn't true though:

Quote
But it seems to me that passive money management strategies are fundamentally momentum strategies. In other words, the more the stock goes up, the more it becomes weighted in the index. The more it becomes weighted in the index, the more important it becomes. It continues going up. It doesn’t ever revert. You get a bigger and bigger weighting into the stocks that are already rising. And the stocks that aren’t doing well, which tend to make them smaller parts of the index or sometimes they get replaced out of the index or replaced by something else that’s going up. So I think when you have a momentum-oriented market you wind up with better performance for passive strategies. When you have something other than that you probably have a better performance for active strategies.

I think we’re clearly in a momentum market. I think here in this market there’s clearly two groups of stocks. There are stocks that are very, very expensive and almost indifferent to valuation. You see people talk about them and they just don’t tend to put a lot of numbers next to the themes that justify these stocks.
Title: Re: Semper Augustus letter
Post by: Jurgis on March 09, 2018, 07:26:46 AM
Well, so first off, I'm not confident on this, and I've been trying to wrap my ahead around various passive indexing thought-experiments for a while now.  But for clarification on what I was saying:

My Day 0 vs Day 1 example was to show that companies that had the same initial weight (and therefore the same initial allocation of dollars) will end up having different dollar demand based on price perturbations.  Thus, I wasn't saying larger vs smaller, I was saying same IV, but price disparity ends up causing a change in the dollar amount of incremental demand by passive investors.  Or saying this another way, if there are $75 going at the company that was $50 and $25 going to the other company that was $50, then the passive index is reinforcing the price change, not dampening it. 

However, I think vinod is pointing out that for every $100 it is just 1 share of demand, so in a "share demand" framework, there isn't any difference (rather than the dollar amount above). 

Perhaps though, the indices to exacerbate momentum, they just stabilize it.  Or saying it another way, these momentum artifacts are just what happens normally in late stages of bull markets and don't have much to do with indices.

I got what you said. Perhaps I was not clear in my post. But overall the answer is that purely passive (market cap index) investing cannot cause prices to go from 50/50 to 75/25. They cannot cause relative market cap change.

In market with active investors, the active investors cause the price changes. It depends on what you mean with "reinforce" and "stabilize momentum", but you may be right that indexing supports or enlarges the influence of active investors. In a sense that $1 actively invested in a company with $99 index investment could drive up the price disproportionately, because indexers are not selling at any price and if they sell, they sell proportionately all stocks in index.

Edit: Also active investor selling active positions and buying index causes the index skew towards the stocks they did not own. But it's their selling that's causing the skew. If they sold and went to cash they would still cause the same skew.
Title: Re: Semper Augustus letter
Post by: racemize on March 09, 2018, 08:00:51 AM
I got what you said. Perhaps I was not clear in my post. But overall the answer is that purely passive (market cap index) investing cannot cause prices to go from 50/50 to 75/25. They cannot cause relative market cap change.

Right, I was saying the active investors cause it in that case (or just random perturbation in a smaller case).

Quote
In market with active investors, the active investors cause the price changes. It depends on what you mean with "reinforce" and "stabilize momentum", but you may be right that indexing supports or enlarges the influence of active investors. In a sense that $1 actively invested in a company with $99 index investment could drive up the price disproportionately, because indexers are not selling at any price and if they sell, they sell proportionately all stocks in index.

Edit: Also active investor selling active positions and buying index causes the index skew towards the stocks they did not own. But it's their selling that's causing the skew. If they sold and went to cash they would still cause the same skew.

Perhaps this is the effect I mean--momentum clearly already happens, but if the passive indices reinforce or amplify that momentum, then it could potentially cause issues both during the bull market and the reversal after, since I'm assuming it would work similarly in reverse.
Title: Re: Semper Augustus letter
Post by: chrispy on March 11, 2018, 05:53:20 AM
Good points.

That is the big question, how does this work in reverse? My understanding: Companies with the largest proportion of shares held by active owners, where the active owners are willing to sell shares in a downturn, will have an outsized decrease in share price?
Title: Re: Semper Augustus letter
Post by: Dynamic on March 13, 2018, 05:43:35 AM
I've finally got round to reading the indexing section in detail.

I think I'll need to re-read it, having thought about it, to see what is and is not being suggested in it.

It reads like a good narrative, with good reasoning and feels like it has a lot of either validity or truthiness. I certainly don't feel I'm as equipped as the author to know from the top of my head or from long experience and study how all these things work.

I can certainly envisage the instinctive actions of a large number of retail investors acting on instinct. The group I'm thinking of would be the type to start investing in equities only after a sustained period of 'consistent good performance' has been demonstrated, such as the last 2-5 years (i.e. certainly not buying low, more likely to buy near the top) and who tend to panic and sell if the market seems to be going down (i.e. a tendency to sell low). They have no concept of value being different from price, only a number that mysteriously moves up and down and shows 20% gains in each of the last couple of years.

What I am still puzzled about is whether index rebalancing has any multiplicative or reinforcing effect on 'price momentum' or even a countervailing effect on it at time when there is no net inflow or outflow as various indexing investors add funds and withdraw funds over a period.

After that, sure if there are net inflows it will tend to boost each company in proportion to their weighting.

I believe that the S&P500 index figure represents a fixed fraction of the market cap (or free-float adjusted market cap) of the companies involved.
The S&P500's total market cap at 31st Dec 2017 was $23,938,148.8 mn, float-adjusted: $22,900,164.8 mn, Index value = 2673.61

On that date, for example, AAPL was priced at $169.23 and had Mkt Cap of $858,675.6 mn (approx - I've assumed no change in share count in the last couple of months, but that doesn't change the gist of what I'm working out).

AAPL should make up 858675.6/23938148.8 of the index = 3.587% by Market Cap on 31st Dec 2017 and would still represent 3.587% of the S&P500 index value of 2673.61, meaning 95.90 index points. I we assume 1 'point' is worth $1, than means for every purchase of 1 unit of S&P500 at $2,673.61, $95.90 of that was APPL, so the number of shares of Apple purchased was $95.90/$169.23 = 0.5667 shares of AAPL.

With 5,074 mn shares in issue, that's 1/8,563,000,000 ths of the shares outstanding in AAPL represented in the index.

It should be that every other firm in the index also has 1/8,563,000,000 ths of its market cap (or perhaps that fraction of its free float market cap) represented at present. So a firm XYZ Corp valued at exactly 1/100th of AAPL's market cap on 31st December would represent 0.03587% of the S&P on that date or $0.9590.

If AAPL happened to do a 2-for-1 stock split on 1st Jan 2018, it would represent 1.1334 shares, still worth $95.90 (as the AAPL price would be $84.615) - no change in index weighting.

If it didn't split, and rose to $181.72 (close on 12th March 2018) while the index rose to 2783.02, that 0.5667 shares would be worth $102.98 out of every $2,783.02 unit of index fund (at 12th March). This is now 3.700% of the index, but didn't involve index funds buying more shares in AAPL, it just reflects its rise in stock price having increased faster than the rest of the index increased.

If rebalancing were carried out today, it would only be a reflection of changes in the number of shares in issue.

For example if AAPL were to buy back and retire 10% of its stock this quarter, effectively the index funds would have to sell 10% of their AAPL holdings to rebalance exactly. This is extreme, and no company is likely to buy back that much - maybe 2-4% in a quarter on rare occasions, and index funds could take their time rebalancing and accept some tracking error.

So having got that straight, what happens when net inflows into index funds are occurring?

Today, for every net $2,783.02 coming in, the fund will be buying typically 0.5667 shares of AAPL give or take some tracking error. This is 1/8,563,000,000 ths of its market cap.

Likewise, XYZ Corp shares would be bought at 1/8,563,000,000 ths of its market cap (i.e. they'd buy 1/8,563,000,000 ths of the shares outstanding).

Relatively, the amount of buying demand on both index constituents is the same proportion of its shares outstanding. If APPL happened to fall 10% relative to the S&P500 (still at 2783.02), and the cash inflows for the index funds were the same, they'd still buy typically 0.5667 shares of AAPL for every net $2,783.02 coming in. If nobody repurchased their own shares, it would still be 0.5667 shares.

Likewise is XYZ Corp fell 50% the S&P500 would barely budge, yet it would still have index funds buying the same 1/8,563,000,000 ths of the shares outstanding for every net inflow of $2,783.02 into these funds.

If the S&P500 fell consistently or very sharply for a few months, especially with a serious geopolitical or economic event as a 'reason', what I would imagine is that most index funds would see net outflows of capital and would then switch to being on the selling side. For every $2,783.02 of net outflow today, they'd have to sell 1/8,563,000,000 ths of the shares outstanding (or free float) in every stock in the index, give or take tracking error, meaning 0.5667 shares of AAPL worth $102.98 and almost a dollar's worth of XYZ Corp etc.

Now, I imagine the know-nothing retail investors herding into and out of index funds based on emotions will also be accompanied by retail investors herding into and out of active managed funds too (with the exception of those few Value Funds that successfully manage to discourage this adverse behaviour among their partners, either by persuasion or by penalties for withdrawals without sufficient notice).

It's likely that the active funds will also have to sell many of their positions regardless in order to fund the net redemptions, though they might be selective and strategic about which positions they sell in ways that index funds will not.

I can certainly see how the net flows of capital will shift the balance of supply and demand and the herding behaviour would, for a time, reinforce the price action that caused the herding - a positive feedback loop (positive feedback loops in 'control theory' being unstable, causing overshoots and wild swings, whereas negative feedback loops tend to cause stable more gradual response to a sudden stimulus). Negative feedback loops are more 'positive' emotionally, while positive feedback loops can often produce emotionally 'negative' outcomes.

I think it has always been this way.

It seems you need to force out most of the emotional actors from the market before only the more rational actors are left and the self-reinforcement over downward 'momentum' can correct. The longer the boom, the more irrational actors are drawn in and the higher the market will peak before it busts, and the deeper the bust will go before they are driven out.

Buffett's words may encourage many more people to buy index funds when the 'going is good' than the number that will be persuaded by his words to have the emotional detachment to stick to investing regularly even when the market has been in decline and looked scary. Only the latter group will reap the full rewards of investing in the wide range of businesses represented by the index. Those who bail out when fear abounds will tend to capture most of the falls and miss most of the rises.

What I'm not seeing is how a rise in indexing is really any different to any rise in retail fund investing (e.g. mostly actively managed in the past booms). In the past, the range of active funds was wide, and although there was herding, there were many popular approaches including momentum-based and sector-focused that paid relatively scant attention to intrinsic value, especially as retail investors piled in towards the peak of a boom. In aggregate, I think the net inflow of funds still caused increased demand in almost all stocks causing prices to tend to rise, and when there was a net outflow of funds, that caused increased supply of almost all stocks, causing prices to fall.

I'm thinking that it could be the active funds where they wish to advertise that you're taking part in the 'performance' of sexy well-known stocks like Apple, Facebook, Amazon, Google and the likes (and even Berkshire!) that may be over-weighting these  stocks to increase their appeal to market their funds to bright-eyed retail investors who want a piece of that recent 'performance' as "it's sure to continue in future" in their minds. It can be subtle things like that which will sway them into picking specific funds (and the fund's market departments know it), and perhaps its that which would drive the relatively higher demand for these market darlings who have recently 'performed' so 'well' (or as we'd put it, whose price has become less attractive in relation to their intrinsic value).

Equally, if you're trying to manage large funds actively, if a lot of additional money is flowing into your fund, it really forces you to look at investing in those stocks with the biggest market caps so you don't drastically distort the supply and demand of the smaller names by making up a great proportion of their daily volume.

I admit I'm struggling to see how it's indexing rather than just the general flow of capital into funds of all kinds, that is driving the concentration of gains into a narrow range of large-caps.

{edit}
Assuming most stocks of all sizes have similar percentage turnover of their shares in issue during a year (notable exceptions like Berkshire being the rare counter-example), and ignoring companies newly entering or leaving the index (especially large-cap entrances like BRK.B a few years ago), I cannot see index funds being responsible for the momentum multiplying effect causing the largest caps to experience the largest gains. To my mind, it seems more plausible that our culprit is the majority of non-value active managers possibly aiming to attract the most Assets Under Management as higher priority than long-term performance, that are most likely to focus on the 'big names' and large caps as all this new money comes in as we near the peak of the boom. To me it seems like that's the more likely mechanism for this concentration that precedes so many of these crashes.
{/edit}

But I'm willing to be persuaded, and would be glad to be shown if I'm wrong in any of my assumptions. I try to remain a true skeptic - willing to change my beliefs on the basis of good evidence.
Title: Re: Semper Augustus letter
Post by: Cigarbutt on March 19, 2018, 06:40:57 AM
"I admit I'm struggling to see how it's indexing rather than just the general flow of capital into funds of all kinds, that is driving the concentration of gains into a narrow range of large-caps."
I actually agree with that statement.
My assessment is that mostly the shift to index funds can be explained by the move away from mutual funds and even if index funds are passively managed, the underlying investor population, in essence, has a passive mindset.
I submit though that there may be pockets of ETFs where this does not apply: specialized, leveraged and synthetic ETFs. These funds may attract a momentum crowd and liquidity issues with precipitated attempts at price discovery have not been tested (remember how that worked out with packaged real estate subprimes securities).
IMO the infatuation with indexing is simply part of the larger picture and is based on momentum (may work in both directions as markets don't usually follow a straight line).
Isaac Newton would have said: "what goes up must come down" but markets tend to go up and his investment record is not impeccable.

I thought you would be the type to be interested in the following:
www.goldmansachs.com/our-thinking/public-policy/directors-dilemma-f/report.pdf
http://mathinvestor.org/does-indexing-threaten-the-market

If pressed for time,
-the first link shows a nice graph (exhibit 4, page 6).
-the second link refers to well done specific studies evaluating the relevant underlying questions.

Apparently, according to Mr. Bogle, the father of indexing, as long as 25% of funds are actively managed, we're probably OK.
I wonder if that number has a margin of safety.
Title: Re: Semper Augustus letter
Post by: Dynamic on March 20, 2018, 02:21:08 AM
From the first article, it seems that about 13% of the US market cap was in index funds, but that represented about 25% of all funds, since they make up about half of the market cap. This has certainly risen substantially in the last few years and accounts for most of the outflows from managed mutual funds, it would seem from their graphs.

The second article seems to provide a sampling of evidence (I've heard of a couple of the studies like Malkiel's before) that indexes don't cause significant market distortion at current levels. I found it more interesting that some new indexes are created based on backtesting, and that while over 70% outperform in the backtest, only 51% outperform after the creation of the index. Nonetheless, the backtest result seems to draw in AUM, hence the creation of the new index and tracking funds aiming to attract AUM.

It seems Wall Street marketing departments are motivated to create new index products to attract AUM, especially if backtesting provides a favorable 'story' to sell the product.

Nonetheless, a broad market index (rather than sector index etc) seems to be a sensible thing to track.

I dare say there must come a point where excessive indexing as a proportion of all trading volume would remove most of the 'price-setting function' of markets. This could provide opportunities for intrinsic value investors and arbitrageurs to profit from long and short-term discrepancies between price and value, hence providing a degree of limitation to the distortions that it might create. But we're probably still a long way from that point.
Title: Re: Semper Augustus letter
Post by: Jurgis on March 20, 2018, 07:27:25 AM
Non-market-cap weighted indexes are active strategies by definition since they do not track the market. There is no point to include them into passive-index total or consider them as passive for any other discussions.
Title: Re: Semper Augustus letter
Post by: StubbleJumper on March 20, 2018, 09:45:05 AM
Non-market-cap weighted indexes are active strategies by definition since they do not track the market. There is no point to include them into passive-index total or consider them as passive for any other discussions.


Why?  Both are just an arbitrary list of relatively static securities.  The s&p is a list of 500 companies chosen with an arbitrary set of rules, including the cap weight rule.

I could create SJ's Scrabble 500, which would be the 500 listed companies whose names form the highest Scrabble score.  In fact, I think I would have it Scrabble score weighted instead of market cap weighted.  If people recognized the genius of my passive investment find, and piled scads of capital into it, why would it be any different than the observation that semper Augustus has raised about the s&p funds?


Sj
Title: Re: Semper Augustus letter
Post by: Jurgis on March 20, 2018, 10:47:20 AM
Because the market cap based index matches the market and does not influence relative security prices when people buy/hold or sell it. That's the definition of it. And that's the reason it's truly passive.

Everything non-market-cap based does influence relative security prices when people buy or sell it. And by that fact it's an active fund. Active means that you are trying to get a different result than the market - and you get that with non-market-cap based weights. It does not matter whether your weights are fundamental (P/E, P/B whatever), technical, arbitrary (Scrabble), based on some manager's picks or whatever. In all these cases, you are taking an active position that your weights are different from the market's.

Edit: to rephrase the above: if you buy/hold/sell anything that is not market cap based index, you are engaging in price discovery. Even if it's a Scrabble index. If you buy/hold/sell market cap based index, you are not engaging in price discovery. That's IMO very significant difference.

I'm kind of surprised that some people do not realize that there is this difference between market cap based fund vs anything non-market-cap-based. And conversely that there is pretty much no difference between mechanical weight determination based on some factors and what people call "real active" (TM) stock picking. This is rather basic definitions + math...  ::)

Title: Re: Semper Augustus letter
Post by: Cigarbutt on March 20, 2018, 12:00:11 PM
Interesting.

Sticking to the strict mathematical definition, for a fund, the difference between passive and active investing is crystal clear.

When you put the underlying investor into the equation, the concept becomes qualitatively blurred.

Then, you may want to consider passive and active, not as two extremes, but as part of a spectrum.

Say you have an investor who changes his/her asset allocation from the classic definition and decides to invest 100% of funds into plain vanilla index funds. Passive?

Or if an uninformed investor actively decides to suspend the dollar cost averaging schedule in a standard index ETF and invest once per year on his/her birthday. Passive?

What about the so called actively managed mutual funds that very closely mimic indices and that rarely outperform?

My point is that the generic notion of passive investing may simply mean that the underlying process is not concerned with the use of price discovery and fundamental analysis of individual issues in order to significantly outperform the stock markets.

Some say that the rise of passive investment is relatively new and extraordinary. I submit that, in a lot of ways, many ETFs are simply a new name for many of the so called actively managed mutual funds. And I say that the typical retail investor will continue to buy high and sell low. At least, that’s what the record shows.

Perhaps I agree that passive investing mitigates the key man risk (fund manager). But it does not mitigate against those who want to have a quick and easy way to gain access to the market.

This post initially came as a rant but was modified as I reached conclusion.

Purely from the opportunistic point of view, the more the better.
Title: Re: Semper Augustus letter
Post by: Jurgis on March 20, 2018, 01:11:28 PM
Cigarbutt, you raise some reasonable questions. Some of them are due to extreme overloading of the terms "passive"/"active": they are just used too much and for different things. E.g. does a person means passive == "market cap based", passive == "no human active manager", passive == "buy and hold and not sell"? And so on... There are yet other questions similar to yours that I am aware of, but I won't mention since they would muddy the water further.  8)

I just think that people should be careful with their definitions and the products they discuss when they talk about passive/indexing and price discovery/price influence. Otherwise we get quite a few misleading and unsubstantiated claims.  8)

Peace.
Title: Re: Semper Augustus letter
Post by: Cigarbutt on March 20, 2018, 01:40:31 PM
You are correct.
The strength of a conclusion is based on solid reasoning based, as a foundation, upon the quality of clearly defined assumptions.

I got carried away with empathy after reviewing the indexing topic and after reading this article.
https://www.bloomberg.com/view/articles/2018-01-30/the-dumb-money-is-about-to-become-very-influential
Riding the wave is so much fun.

I'll try no to let it happen again (on this Board). ;)
Title: Re: Semper Augustus letter
Post by: Jurgis on March 20, 2018, 01:48:50 PM
Nah, I think your post had good and valid observations. Carry on.  8)
Title: Re: Semper Augustus letter
Post by: Dynamic on March 21, 2018, 07:43:11 AM
I agree that these are valuable observations and discussions.

We sometimes need to be precise about in what way a person, group of people or a fund is acting passively or actively.

For example, assume there exists a substantial portion of retail investors as a collective, the presumably large group who tend to put money into funds at the end of the boom cycle and withdraw it upon signs of trouble, not returning until the market has again showed multi-year gains in the recent past.

That group is making an active decision about the timing and amount of their added or withdrawn funds, regardless of whether the underlying funds make active or passive decisions about buying and selling stocks on their behalf in accord with the net inflow and outflow of investor funds.

On the subset of that group of investors that invest in broad-market index funds (market cap weighted), each fund unit represents the same fractional ownership of each company (or of each company's free float) aside from tracking error and tracker decisions to omit smaller caps or to rebalance them less often to save costs.
At the whole-market level the net inflows and outflows can be considered a contribution to price-setting (based on some kind of active momentum-like behaviour). It does not differentiate between one stock and another within the same index, however, as allocation is passive. Only flow is active and flow (assuming it is momentum-based) tends to accentuate general market rises and declines, but it shouldn't (for this subset) change the relative price-pressures on specific stocks within the index except by how it adds to or subtracts from buying or selling trends created by other market participants, unless it just so happens that, relatively to market-cap, those specific stocks happen to be among the most thinly-traded in general (daily volume as a proportion of their free float), in which case their buying pressure is outsized compared to more typically traded stocks.
Title: Re: Semper Augustus letter
Post by: Dynamic on September 05, 2018, 03:59:27 AM
Although I'm wary of resurrecting dead threads, I came across Howard Marks' Oakmark letter - Investing without people (https://www.oaktreecapital.com/docs/default-source/memos/investing-without-people.pdf?referrer=email) containing some interesting points while catching up on the Motley Fool's Berkshire Hathaway board in a post on June 19th (http://boards.fool.com/Message.aspx?mid=33099683).

It really got to the heart of another distinction I probably hadn't made in disagreeing with Semper Augustus about some aspects of passive funds and ETFs causing a thinning market.

Although index funds were the first passive funds and then ETFs were introduced to allow intra-day trading, not just "at close", there are now over 3,000 ETFs and they now include all manner of variations which might be considered passive or rules based investing. And of course, bonds as well as stocks can be traded via ETFs.

Many of these are not broad-market index based, some are based on a sector, region or some other category determined either by a human categorising them or by a set of algorithmic rules (e.g. value or growth or importantly momentum). Some are highly leveraged, some are reverse-weighted to an index and so on. There's a lot of potential for investors to actively choose to select and ETF that matches certain characteristics or strategies then passively invest according to those rules, as long as they hold the ETF, but then to actively time their ETF buys and sells, causing inflows and outflows of money, which may seriously affect the market in the event of a market shock or panic.

Oakmark's letter includes some interesting points.

One of them refers to ETFs being market-traded rather than settled at the closing price for the day, so there's no guarantee that in a big shock, the buyer will be willing to pay the current net asset value, so the seller may end up with less than the index would suggest they'd get. They say there are mechanisms built in that 'should' prevent serious discrepancies, but these haven't yet been tested in extremis.

Another is that deliberately selective ETFs, while being passive or mechanical in investment choice, may cause distortions and thinning of the market toward particular stocks if they should become particularly popular for inflows and outflows of funds. If there are particularly popular ETFs that hold high concentrations in FAANG stocks, for example. Thus it's important to distinguish between broad-market passive investing and narrow themed or categorised passive investing.

Also the author accords with some of our opinions in this thread that in a market cap weighted passive index fund, large inflows should not disproportionately favour the firms with the higher market cap. The important distinction they make is that some ETFs are not as passive in selection as others, so inflows into those ETFs could enhance distortions.

Reading Semper's letter with a distinction in mind between different kinds of passive, may change the validity of the passive versus active investing part.
Title: Re: Semper Augustus letter
Post by: Cigarbutt on September 05, 2018, 06:07:27 AM
Although I'm wary of resurrecting dead threads…

Reading Semper's letter with a distinction in mind between different kinds of passive, may change the validity of the passive versus active investing part.

There is a file which contains a few items, which is labeled "look again in 5 to 10 years", which lists potential missed specific investment opportunities. But, there is a also a section on passive investment risk. When looking back, often the conclusions is that you were wrong to be right or right to be wrong. Sometimes, to be approximately right can be extremely rewarding. To modify conclusions along with evolving evidence/anaysis and to "publicly" do so is one of the things I value most in people.

You may be interested in the following:
https://www.bostonfed.org/publications/risk-and-policy-analysis/2018/the-shift-from-active-to-passive-investing.aspx

Their institutional conclusion basically translates into adjustments and soft landings.
I would say that the major (and difficult to envisage) difficulty is not the math, it's the behavioral side.
Mr. Marks's conclusion:
"What, then, will be the route to superior performance? Humans with superior insight. At least that's my hope."
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 02, 2019, 05:22:47 AM
Welling on Wall St. - Volume 5, Issue 6 [April 1st 2016] : Listeningin [<- [ : - ) ]] Berkshire Believer - Stock's slide, Change in Buffett Valuation Guide Don't Temper Ardor [<- [ : - ) ]] (https://static.fmgsuite.com/media/documents/072450ce-9b32-48ff-bdf8-235669e8d7c5.pdf). Interview with Chris Bloomstran, Semper Augustus Investments Group LLC.

[H/T @Vexboy_Value on Twitter.]

Much water has run through the river since then, but to me still worth your time, if you are a Berkshire investor.

- - - o 0 o - - -

Still no 2018 Client Letter as of yet! - 2017 Client Letter (https://d2zm3gcvr8kng7.cloudfront.net/media/documents/351455b6-d20f-4af6-8239-2ddd0fa213cf.pdf) - also about Berkshire - was released on February 11th 2018.
Title: Re: Semper Augustus letter
Post by: gfp on February 02, 2019, 06:34:05 AM
Thanks for the post John.  Always interesting to read Mr. Bloomstran's thoughts, even if dated.

Takes me back to the beginning of 2016!  A lovely time to be a buyer indeed.  I think quite a few of us BRK-nerds were happily buying low-premium in-the-money LEAPs at the time.  I guess some of you wild folks were even more aggressive..

It is odd that, even back in 2016, Bloomstran through the railroad wasn't paying out dividends to BRK, and relied on STB filings when BNSF has always filed individually with the SEC. 
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 02, 2019, 09:48:39 AM
Thank you for the kind words, gfp,

Yes, the piece is actually a fascinating story about how client pressure on a money manager without permanent capital created a wonderful, high quality client letter. -Twitter is Twitter ... - there are gems on there from time to time though!

- - - o 0 o - - -

With regard to the situation back then in early 2016, for my part : Triggered by your post, gfp, I think what I did not do back then is now - and as of now -  my biggest error of omission [thumbsucking], based on partially ignorance, not doing my homework correctly & sufficiently, and in general not being in total control of my own sh*te - sh*te I've setup & created myself ... *SIGH* [ : - / ]. I'll elaborate on that in the "SIL/MIL investing" topic tomorrow. [Now I wrote it here, so I WILL do it morrow ...] later. [<- [ ; - ) ]]



Title: Re: Semper Augustus letter
Post by: John Hjorth on February 03, 2019, 12:56:29 PM
At least partly related to this topic: Semper Augustus Investments Group LLC portfolio composition according to 2018Q3 13-F filing, processed and sorted in Excel, attached.

Berkshire position at 38.6 percent.

I see other "good stuff" there, too, -several of the names covered actively here on CoBF by fellow board members. Mr. Bloomstran & Mr. Christensen appear to me to have a sweet tooth for O&G and materials also.

Please note the usual qualification: We don't know about positions and capital allocated to companies not listed in the US. There are three European headquartered companies in the portfolio via sponsored ADRs.
Title: Re: Semper Augustus letter
Post by: Gamecock-YT on February 22, 2019, 06:19:43 PM
2018 letter is out:

https://static.fmgsuite.com/media/documents/a7b56d26-b22e-4d16-8b65-7fe23f0ea19d.pdf
Title: Re: Semper Augustus letter
Post by: longinvestor on February 22, 2019, 07:25:45 PM
2018 letter is out:

https://static.fmgsuite.com/media/documents/a7b56d26-b22e-4d16-8b65-7fe23f0ea19d.pdf

Thanks for posting!
Title: Re: Semper Augustus letter
Post by: Charlie on February 23, 2019, 04:56:45 AM
Good warm-up read for the annual letter and great Berkshire analysis.  :)

Title: Re: Semper Augustus letter
Post by: DooDiligence on February 23, 2019, 08:17:57 AM
Outstanding analysis (the parts I'm able to comprehend) & the writing style is off the charts.

I think we may also be in tune with regards to musical tastes.

Here's to hoping Berkshires equity price falls off a cliff on Monday!
Title: Re: Semper Augustus letter
Post by: longinvestor on August 06, 2019, 07:44:31 AM
http://investorfieldguide.com/bloomstran/

Podcast not the written report. 37 minute marker if you want to cut to the chase.
Title: Re: Semper Augustus letter
Post by: cubsfan on August 06, 2019, 12:43:17 PM
http://investorfieldguide.com/bloomstran/

Podcast not the written report. 37 minute marker if you want to cut to the chase.

thanks for posting - really enjoyed this
Title: Re: Semper Augustus letter
Post by: longinvestor on August 07, 2019, 04:40:24 AM
Interesting commentary on earnings accounting inflation @ most S&P companies. He assigns a negative 15% impact to reported earnings by “don’t count that “ accounting. It’ll show up eventually. Usually does as big bath accounting. Take GE as an example! Berkshire’s propensity to keep accounting clean is by itself worth some delta over the S&P. It’ll show up over time.
Title: Re: Semper Augustus letter
Post by: CorpRaider on August 07, 2019, 05:46:24 AM
I feel like CAPE without all these Seigel adjustments picks a lot of that up too (for macro purposes).  Like, Jeremy...they don't need any help inflating earnings bro...incentives matter.  "Yeah everyone dumped in huge losses in 2008, so let's exclude that...no, let's not do that mmmmkay?"

Going to look at the longer stuff to see what he says/thinks about float.  i.e. if the longer-term recent run rate BRK ROE is 10% what about the float/holdco leverage (that's kind of what I've been thinking).
Title: Re: Semper Augustus letter
Post by: CorpRaider on August 07, 2019, 06:02:51 AM
Also, fascinating discussion of the GIS proxy/perverse incentives.  I've avoided that one just because I thought management seemed too slick/smarmy via conference calls (even before the acquisition of blue buffalo...I actually kind of liked the Annie's acquisition but some of the decisions make more sense now with his discussion of the incentives); nice to have something more concrete to look at...will be helpful to me in the future.  I also don't invest in any company where they use the term "learnings."
Title: Re: Semper Augustus letter
Post by: StevieV on August 07, 2019, 07:20:45 AM
Also, fascinating discussion of the GIS proxy/perverse incentives.  I've avoided that one just because I thought management seemed too slick/smarmy via conference calls (even before the acquisition of blue buffalo...I actually kind of liked the Annie's acquisition but some of the decisions make more sense now with his discussion of the incentives); nice to have something more concrete to look at...will be helpful to me in the future.  I also don't invest in any company where they use the term "learnings."

I also thought that was interesting.  As Charlie Munger preaches, always look at the incentives.  Per the podcast, organic growth is incentivized and cost of acquisitions isn't counted.  So, what do you get, an acquisition that costs a lot but can contribute to organic growth going forward.  Only the good (organic growth) is counted.  The bad (high acquisition cost) isn't.
Title: Re: Semper Augustus letter
Post by: Viking on August 18, 2019, 11:56:34 AM
I am re-reading prior letters... BRK has grown nicely in value during 2019. Shares under $200 look cheap :-)
Title: Re: Semper Augustus letter
Post by: gfp on December 10, 2019, 05:01:12 PM
Looks like Bloomstran / Semper Augustus has made it on to the dataroma 13f site, for those that are interested -
https://dataroma.com/m/holdings.php?m=SA
Title: Re: Semper Augustus letter
Post by: Dynamic on December 10, 2019, 05:27:54 PM
Interesting that 37% of the portfolio was in Berkshire (Class A plus Class B) and the rest has considerably smaller position sizes. Nice quality of names in there, and good for further research.
Having said that, Berkshire itself is internally diverse and Bloomstran understands it extremely well. It might have hurt Semper's market value gain on a Year-to-Date price performance basis as BRK.A/B finished 2018 strongly and has been flattish while the market has risen strongly, but it may well be that the coming year will be a great time to have an excess of Berkshire Hathaway if the intrinsic value and book value growth force the market price to break free of its previous highs eventually. I expect his 2020 letter will again have a lot of Berkshire content because again it's looking seriously mispriced despite greatly increasing its value in ways and extent that don't seem to be widely appreciated yet, and somehow I don't see that being likely to change by January or February when he writes his letter. His investors deserve to feel very positive about the future prospects, downside protection and buying opportunities afforded by the discount to IV and the growth in IV even if their portfolio may have lagged the price performance of the soaring index in 2019.
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 21, 2020, 12:22:32 PM
I wonder if we will get a Semper Augustus Letter (https://www.semperaugustus.com/clientletter) this year?
Title: Re: Semper Augustus letter
Post by: OracleofCarolina on February 21, 2020, 12:25:15 PM
Yes, look at valueinvestingworld.com
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 21, 2020, 12:32:39 PM
Yes, look at valueinvestingworld.com

Thank you so much OracleofCarolina,

Is it possible for you to be a bit more specific with regards to link? -Thank you in advance.
Title: Re: Semper Augustus letter
Post by: OracleofCarolina on February 21, 2020, 12:35:48 PM
the letter will be posted there later today, if you look at that site, there is a note that it will be there.

Cheers!
Title: Re: Semper Augustus letter
Post by: longinvestor on February 21, 2020, 08:40:26 PM
Its up there now. Thanks for the link!
Title: Re: Semper Augustus letter
Post by: ValueMaven on February 22, 2020, 05:38:53 AM
It posted .... alll 128 pages - of which Berk is about HALF the letter.  Best analysis out there on Berkshire ... his valuation targets are extremely interesting
Title: Re: Semper Augustus letter
Post by: Swedish_Compounder on February 22, 2020, 06:09:58 AM
There are lots of valuation and details indeed, but does he anywhere evaluate the company the way Buffett stresses more than once in this years letter that he evaluates companies attractiveness - by analyzing the returns on the net tangible assets required for its operations?

Buffett writes that it is over 20% for the stock holdings, on a weighted basis. So one simplification could be to assign 20% to the stock holdings and also analyze the operating entities and in the process not forget to deduct excess cash not required to run the operations.

Title: Re: Semper Augustus letter
Post by: Cigarbutt on February 22, 2020, 11:47:14 AM
To add insult to the injury related to the Don’t Fear the Repo section on share repurchases.

The author does a good job at showing how the massive amount of cash allocated to buy back activity has not materially reduced the share count over time overall and in many cases.
An interesting but mostly undiscussed topic is the ultimate value transferred through compensation packages that contain options, RSUs etc. One can infer the “true” value better when looking into the GAAP accounting and the tax accounting basis, something possible when comparing reported earnings and NIPA profits. When the stock award is issued, the value of the grant is estimated using models and expensed during the vesting period. When times are good, the ‘value’ realized from the stock compensation ends up being larger (often substantially larger). One could argue that interests are aligned and people should get what they deserve but often the incentives are short-term in nature and there are problems. Problem#1: The idea of stock-based compensation is for management to accept lower current-period wages and salaries with the expectation that the growth in the market value of the company stock will offset the reduction to their wages. With defining factors often largely more significant than specific company performance (where the wind is blowing), in good times, the value of the stock-based compensation may end up much higher that initially thought or anticipated through GAAP accounting. NIPA reports company profits using a different methodology, using tax accounting reflecting the value of the option or grant upon exercise, which reflects more directly the eventual value of the allocated stock-based compensation. There are periods (leading to the early 2000s and now) when a significant part of the divergence between the reported operating earnings and the NIPA profits diverge significantly, indicating that compensation expense ends up much higher than initially recognized and never shows up in reported company numbers. If compensation expense is not an expense, then what is it? Problem #2: When things go downhill, options, performance RSUs and others get cancelled and a batch of new ones are issued which is effectively a way to legally reprice the instruments and which is a way to make sure that higher than planned expenses in the previous period are not matched by an opposite scenario in the following.

If interested in the technicality:
https://apps.bea.gov/scb/pdf/2008/02%20February/0208_stockoption.pdf

Disclosure: I often discard companies that manifest poor capital allocation decisions (such as share repurchases) even if underlying operations are fine and have recently come to the conclusion that the parent of a relatively illiquid security has a compensation policy that is becoming excessive, in part given the above value consideration.
Title: Re: Semper Augustus letter
Post by: Spekulatius on February 22, 2020, 01:19:35 PM
I am just glad these guys weren’t put in charge of writing the Bible. An investors letter with 128 pages! Gheez.
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 23, 2020, 07:22:44 AM
I am just glad these guys weren’t put in charge of writing the Bible. An investors letter with 128 pages! Gheez.

lol. -It's great to have a Berkaholic around with a seasonal writing itch/OCD - willing to share his stuff. [ ; - ) ]
Title: Re: Semper Augustus letter
Post by: John Hjorth on February 23, 2020, 08:46:44 AM
There are lots of valuation and details indeed, but does he anywhere evaluate the company the way Buffett stresses more than once in this years letter that he evaluates companies attractiveness - by analyzing the returns on the net tangible assets required for its operations?

Buffett writes that it is over 20% for the stock holdings, on a weighted basis. So one simplification could be to assign 20% to the stock holdings and also analyze the operating entities and in the process not forget to deduct excess cash not required to run the operations.

Swedish_Compounder,

The point of the SAI 2019 Client Letter in that regard is, that Mr. Bloomstran can't - because of Berkshire's reporting in 10-Ks & 10-Qs. You have to read the "If a Tree Falls in the Forest" section starting on p. 80 & ending on p. 84.

It's pretty vocal and direct, peaking on p. 81 82 with :

Quote from: Christopher Bloomstran
... B.S. (and not balance sheet). ...

Furthermore :

Quote from: Christopher Bloomstran
... We discussed last year the quaint notion of whether reporting on what’s now a more than $800 billion in assets conglomerate should be geared to a pair of financially unsophisticated sisters of the Chairman or to professional investors with substantial amounts of their capital and their client’s capital invested in the business and the fiduciary duty that goes with it.

- I don't think it is forthcoming for a constructive discussion with the company about its reporting to involve the sisters of the controlling shareholder, Chairman & CEO - but Christ! - it's just entertainment value for free! [ : - ) ]

- - - o 0 o - - -

Mr. Bloomstran is a Berkshire reporting activist. - And I certainly think he has a point.

- - - o 0 o - - -

The methodical valuation framework is in the SAI 2015 Client Letter, which one always need for reference, while studying what is now gradually evolving to the Sagas of Icelanders (https://en.wikipedia.org/wiki/Sagas_of_Icelanders).
Title: Re: Semper Augustus letter
Post by: longinvestor on February 23, 2020, 08:47:54 AM
I am just glad these guys weren’t put in charge of writing the Bible. An investors letter with 128 pages! Gheez.

lol. -It's great to have a Berkaholic around with a seasonal writing itch/OCD - willing to share his stuff. [ ; - ) ]

I absolutely welcome this letter. For one thing, Omaha doesn’t put out future projections. We’re left reading the tea leaves of Buffett’s spoken words, lukewarm buybacks etc. What Semper clearly doesn’t do is “conservatively calculated”. I get that. He’s also talking his book. To their credit, they let you pick the multiple you are comfortable with, when it comes to the 10 year projections. But Semper has us guessing as to just how “conservatively calculated” Buffett is.

The single best line in that 112 page report is that the media is postured as if we’re talking about a company on the throes of bankruptcy 😉 Enjoy that highest ever $85 billion of reported earnings, whatever it means!
Title: Re: Semper Augustus letter
Post by: longterminvestor on February 23, 2020, 05:32:43 PM
Page 123:

"Berkshire saw its share price grow in line with intrinsic value in 2019. Given the 47% (or 40% with Kraft Heinz) gain in the stock portfolio and 24% advance in book value per share, you’d think based on the media’s take that the sky finally fell. Chicken Little will miss out on the shares being nearly as undervalued as at any time, not only during our 20-year tenure as shareholders but over the entire 55-year history with current management behind the wheel."

Shares most undervalued in history under Buffet? Being undervalued at $5Bil market cap and growing 100X to $500Bil is WAY DIFFERENT than being undervalued at $500Bil. 100X from here would be $50Trillion.

This is where size really does hinder return. We may have to get used to Brk being undervalued. Might be par for course at size. Unless it Re-Rates on something other than BV.
Title: Re: Semper Augustus letter
Post by: StevieV on February 23, 2020, 07:06:52 PM
Page 123:

"Berkshire saw its share price grow in line with intrinsic value in 2019. Given the 47% (or 40% with Kraft Heinz) gain in the stock portfolio and 24% advance in book value per share, you’d think based on the media’s take that the sky finally fell. Chicken Little will miss out on the shares being nearly as undervalued as at any time, not only during our 20-year tenure as shareholders but over the entire 55-year history with current management behind the wheel."

Shares most undervalued in history under Buffet? Being undervalued at $5Bil market cap and growing 100X to $500Bil is WAY DIFFERENT than being undervalued at $500Bil. 100X from here would be $50Trillion.

This is where size really does hinder return. We may have to get used to Brk being undervalued. Might be par for course at size. Unless it Re-Rates on something other than BV.


I enjoy the letter, but Semper's statement that the share are nearly as undervalued as at anytime in history is stupid.  2x BV growing at 20%+ can be much, much cheaper than 1x BV growing at 10% or 0.5 BV growing at 0%.

I don't get caught up a lot in what BRK should trade at.  I tend to think that BRK should return 8-12% CAGR over the next 10 years or so (picking a reasonable exit).  If that is attractive to you, then it is a buy.  If not, it is not a buy.  I'm not sure there is much more to it than that.

I'd be mildly surprised if BRK trades much above 1.5BV.  I'm not sure who'd be excited about it at 1.7 or 1.8.
Title: Re: Semper Augustus letter
Post by: scorpioncapital on February 24, 2020, 12:32:06 AM
When you say Berkshire should return 8 to 12 percent a year , from what starting price are talking about ? 230 a share? I guess you can buy on corrections and if you do it well can boost this return perhaps as high as 12 to 15. But we would need a big one.
Title: Re: Semper Augustus letter
Post by: Lemsip on February 24, 2020, 12:46:07 AM
Berkshire is down more than 7% in Frankfurt right now so a big one might be on its way.
Title: Re: Semper Augustus letter
Post by: rb on February 24, 2020, 04:01:13 AM
Lock and load!
Title: Re: Semper Augustus letter
Post by: StevieV on February 24, 2020, 07:52:21 AM
When you say Berkshire should return 8 to 12 percent a year , from what starting price are talking about ? 230 a share? I guess you can buy on corrections and if you do it well can boost this return perhaps as high as 12 to 15. But we would need a big one.

I meant from the weekend pricing of about $230 over moderate to longer timeframes.  Of course, just an estimate and endpoints certainly matter.

From today's pricing, I am not counting on a big multiple expansion.  I do think that I should be able to exit at least at about the same multiple as today and that multiple expansion may provide a bit of a tailwind.  The multiple may certainly be lower at various times, but my guess is that they'll be relatively brief periods.
Title: Re: Semper Augustus letter
Post by: brk64311 on February 24, 2020, 08:13:33 AM
The letter contains many helpful insights and very thorough analysis of BRK. But anyone else has issue with the way he proves that high growth of Fab 5 is "mathematically impossible" as shown by the tables on P63 and P64? We can discuss/debate all day about many fundamental reasons why Fab 5 will or will not grow at high rates for the next decade or two, but high growth of any company will not mathematically impossible. I believe the set up of the tables were mathematically wrong, as you need to account for the growth of Fab 5 in the first grow of the table, i.e. you can not assume S&P as a whole will only grow 4% when Fab 5 (part of S&P) grow, say 20%, for two decades. The right way is to calculate the first row in the table by assuming all companies other than Fab 5 grow 4% and Fab 5 grow at whatever rates you assume.
Title: Re: Semper Augustus letter
Post by: mjs111 on April 30, 2020, 08:33:48 AM
Chris Bloomstran has a good one hour interview on the April 30th "Invest Like The Best" podcast.

https://podcasts.apple.com/us/podcast/invest-like-the-best/id1154105909

Mike

Title: Re: Semper Augustus letter
Post by: zarley on April 30, 2020, 10:51:36 AM
Chris Bloomstran has a good one hour interview on the April 30th "Invest Like The Best" podcast.

https://podcasts.apple.com/us/podcast/invest-like-the-best/id1154105909

Mike

Awesome.  Thanks for the heads-up.
Title: Re: Semper Augustus letter
Post by: longterminvestor on May 19, 2020, 07:27:56 AM
Tobias Carlisle interview (good podcast on its own).  He just interviewed Mr. Bloomstran.  Good insight. 

Listen to Tulip Mania: Chris Bloomstran on Warren Buffett and Berkshire Hathaway with Tobias Carlisle on The Acquirers Podcast from The Acquirers Podcast on Apple Podcasts.

https://podcasts.apple.com/us/podcast/the-acquirers-podcast/id1454112457?i=1000474944217 (https://podcasts.apple.com/us/podcast/the-acquirers-podcast/id1454112457?i=1000474944217)