Author Topic: Wedgewood Partners on selling their BRK stake  (Read 10858 times)

longinvestor

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Re: Wedgewood Partners on selling their BRK stake
« Reply #40 on: October 15, 2019, 07:46:18 AM »
Jim “Mungofitch” over at TMF has a great way to describe where Berkshire is. Soon, (very soon hopefully), Intrinsic Value Growth should reach $100 per day per A share. And grow from there. That says a lot.
« Last Edit: October 15, 2019, 09:46:40 AM by longinvestor »


Dynamic

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Re: Wedgewood Partners on selling their BRK stake
« Reply #41 on: October 15, 2019, 09:11:08 AM »
Nice update on your line of thinking, which has been consistent.
Accepting the possibility that you may be right to "outsource", to some degree, the timing of investments (which really is not timing but sticking to internal yardsticks by Mr. Buffett {and IMO not thumb-sucking as implied by the Wedgewood move}), a potential weakness of the model may be that the IV floor that you describe may move down, as perceived by the markets, when fat pitches come along, given how progressively correlated BRK has become in downturns (typical time to use the elephant gun) and given BRK's relatively high exposure to financials.
As John Hjorth alludes to above, BRK is built to last but a question remains: is the relative advantage for BRK in downturns and the ensuing recoveries sufficient, on a relative basis?

If the buybacks become truly significant, the IV/BV ratio would narrow somewhat, but otherwise (as is likely to persist for some years) I'd imagine that there are still quite a lot of people willing to pay 120% of BV, and probably also 125% of BV in normal circumstances, which acts as something of a backstop.

They might adjust last-reported BV down a little in the event of a market crash.

Certainly, if markets plummet, Berkshire is likely to fall too, by a somewhat similar amount, such that the perceived risk-adjusted returns are commensurate for all stocks.
However, 'somewhat similar' may still be less than the general market, which could be pegged to a few reasons:
1. If it was trading at the bottom of its range before the crash (e.g. P/BV < 1.30) as it is now, it likely to fall a little less .
2. It is seen as more defensive (i.e. lower risk, meaning lower business risk as well as lower 'beta' for those who subscribe to EMH or CAPM), hence on a risk-adjusted basis it ought to fall a little less. Some of the optionality of Berkshire's assumed ability to invest its excess cash profitably when markets are down is then priced in when markets fall markedly, reducing how much it falls compared to the wider market.
3. The stock portfolio of Berkshire might well fall less than the market because it's also relatively defensive. And even if the Berkshire portfolio experiences a 20% pre-tax decline, this $42 billion reduction in market value is only about 10.6% of Berkshire's Book Value, and after applying 21% deferred tax reduction to the unrealized capital loss, BV would only reduce by 8.4%. This would be partially offset by operating earnings too.

I would expect most things to decline in market panics, Berkshire included, and for Berkshire to gain IV and increase leverage by spending that float-funded cash hoard at such times if it can deploy capital, even if it that value might be hidden for a few years. I would not expect Berkshire to fall more than the general market, but not an awful lot less than it either (unless it was highly priced going prior to the crash, of course)

I don't try to side-step market crashes, aiming to remain fully invested as I would expect the compounding I'd miss out on by predicting the crash too often and too early to exceed the losses I'd avoid by going to cash.


Munger_Disciple

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Re: Wedgewood Partners on selling their BRK stake
« Reply #43 on: October 15, 2019, 01:54:11 PM »
He's been sandbagging expectations since like 1957; maybe this time he means it.  I'm not betting that way and neither is WEB.  People wax philosophical about the portfolio being too large, but then there's Munger running a ~$150MM portfolio at DJCO and he's basically 100% in banks.

We can only go by what Buffett says. It is clear he changed his tune recently. A few years back he used to say that Berkshire will beat the index by a tiny amount (by which I took it to mean by 1% or so per annum). So he may very well mean it this time as he is kind of proving it based on the last 15 years. We have two other data points which point towards convergence with S&P 500 performance:

1. There is a perception among investors that Berkshire beats the index during bear markets and lags during bull markets. So the theory says that Berkshire will outperform massively in the future if there is a bear market. History does not support this argument. Berkshire beat the pants off the index during the great 1982-1998 bull market. Similarly Berkshire suffered the same fate as the index during the 2008-2009 bear market. But unlike the past, it didn't beat the index during the 2009-2019 bull market. Without a doubt, size has become an anchor during the last 15 years and this very much had a negative effect on Berkshire's relative performance vs the index. In addition Berkshire has become more correlated to the overall US economy and hence the index (as other have pointed out). It is hard to make a logical argument as to why Berkshire will outperform the index very long term going forward. It doesn't mean it cannot outperform over the next five years, but if you look ahead to the next 10-15 years, I cannot see how it can beat the index. But investors should be happy to own it as opposed to the index due to tax advantages as long as it doesn't meaningfully lag the index over a long time.

2. If the low interest rate environment persists, float loses at least some of its advantage. Plus public and private asset prices are likely to remain high which will make acquisitions very difficult for Berkshire. Buffett pointed out IIRC at the 2019 AM that 10% growth in IV is basically off the table unless rates increase from the current level.
« Last Edit: October 15, 2019, 01:57:50 PM by Munger_Disciple »

stahleyp

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Re: Wedgewood Partners on selling their BRK stake
« Reply #44 on: October 15, 2019, 02:54:38 PM »
From 10/11/07-3/9/09, S&P 500 was down about 50% vs about 39% for Berkshire.

IYF (financial etf) was down 74% and KIE (insurance) was down 70% so Berkshire held up very, very well.
Paul

CorpRaider

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Re: Wedgewood Partners on selling their BRK stake
« Reply #45 on: October 15, 2019, 03:27:28 PM »
Thanks for sharing your opinions, but I went through and looked at the quotes over time a few months back and my judgment was that he was maybe more conservative/pessimistic back then (in the 50's).  The beta and drawdowns of BRK are definitely lower than SPX or total market over history. 

I agree that if rates stay low and valuations stay high then expected future returns for all assets including those levered with float will be lower than history.  There are pretty much no tax advantages for holding the public securities in the c corp as Buffett just stated in the last AM, but I suppose there are tax advantages to investing in private businesses/PE generally. 

There are also probably bigger advantages to investing in a fee free private equity fund with proper incentives and the greatest investor who ever lived calling the shots.  U.S. P.E. AUM hit 5.8 trillion in 2018 (before raising probably another half a trillion+ this year)...
« Last Edit: October 15, 2019, 03:29:04 PM by CorpRaider »

Munger_Disciple

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Re: Wedgewood Partners on selling their BRK stake
« Reply #46 on: October 15, 2019, 04:35:38 PM »
From 10/11/07-3/9/09, S&P 500 was down about 50% vs about 39% for Berkshire.

If you look at peak to trough Berkshire was down more than 50% during this period.

Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)
Trough: 3/5/09 closing price 72,400 (intra-day low was lower)

Drawdown: -51.3%

Source: Yahoo Finance
https://finance.yahoo.com/quote/BRK-A/history?period1=1193900400&period2=1238569200&interval=1d&filter=history&frequency=1d

Munger_Disciple

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Re: Wedgewood Partners on selling their BRK stake
« Reply #47 on: October 15, 2019, 05:00:24 PM »
First let me preface my response by saying that I am a huge Buffett+Munger+Berkshire fanboy (obvious from my username) and have owned Berkshire for > 17 years. And I would be delighted to be proven wrong if Berkshire crushes the index by a huge amount in the future.

I went through and looked at the quotes over time a few months back and my judgment was that he was maybe more conservative/pessimistic back then (in the 50's).  The beta and drawdowns of BRK are definitely lower than SPX or total market over history.

I think the last 25 years are more relevant to the future as Berkshire has naturally evolved into a very different company now than in the distant past.   

I agree that if rates stay low and valuations stay high then expected future returns for all assets including those levered with float will be lower than history.  There are pretty much no tax advantages for holding the public securities in the c corp as Buffett just stated in the last AM, but I suppose there are tax advantages to investing in private businesses/PE generally.

I am not referring to a C-corp structure being a tax advantage. It is obviously a disadvantage. Buffett minimizes this disadvantage by investing in public security holdings in a concentrated manner and holding these almost forever. The tax efficiency instead comes from (1) being able to allocate earnings from businesses with few reinvestment opportunities to the most promising parts in terms of ROIC w/o any frictional costs, (2) no dividend policy means no dividend taxes to be paid by shareholders, (3) buybacks are naturally tax efficient and (4) some businesses within Berkshire have PE characteristics w/o any fees paid to GP as you pointed out.


wabuffo

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Re: Wedgewood Partners on selling their BRK stake
« Reply #48 on: October 15, 2019, 05:26:29 PM »
If you look at peak to trough Berkshire was down more than 50% during this period.

Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)
Trough: 3/5/09 closing price 72,400 (intra-day low was lower)

Drawdown: -51.3%


Munger_Disciple - this is an interesting example.  Before Buffett came out with his 1.1x and 1.2x book value buyback "floor" prices,  I liked to use price-to-book value as a short-hand way to buy and sell BRK.    Basically if the price approached 2x book value - you sold (or didn't buy) and if you got anywhere near book value - you bought. 

The drawdown you note neatly encapsulates this "rule".  The peak in Q4 2007 represented a price-to-book value of 1.96x book value.  The trough in Q1, 2009 represented a price-to-book of 0.95x book value.   Many people were buying BRK hand-over-fist in late 2008 and early 2009.  Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time.  He was actually selling his shares to his heirs near their lows on margin (95% margin IIRC).  It was actually a ringing of the bell to buy BRK because Munger was executing a deft tax-planning move.

There was another 50% draw-down with BRK that happened early in my investing career.  During Q4 1998 and Q1, 1999 (in the middle of the Gen Re acquisition), BRK sold briefly at 2.1x book value.  Then in March 2000, it sold as low as 1.06x book value.  I believe the fall in price from peak to trough was 49.8%.

My larger point is that 50% drawdowns do happen to BRK.  But they start from a point of very high valuation and the trough (when it happens) often represents an outstanding bargain investment. BRK's valuation today makes it unlikely you would see a 50% drawdown from today's prices.  And if you did, then you might want to buy it in size.

wabuffo
« Last Edit: October 15, 2019, 05:29:08 PM by wabuffo »

wabuffo

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Re: Wedgewood Partners on selling their BRK stake
« Reply #49 on: October 15, 2019, 05:39:51 PM »
Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. 

https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml

Who says they don't ring a bell at the bottom.  Sometimes they do!

wabuffo