Author Topic: Wedgewood Partners on selling their BRK stake  (Read 9581 times)

scorpioncapital

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Re: Wedgewood Partners on selling their BRK stake
« Reply #70 on: October 17, 2019, 01:30:04 AM »
He's not a market timer. He's a value timer. He's not waiting for a crash. But he is waiting for the right prices, this can occur in a crash or outside of one (eg enough time passing and apathy toward a company's valuation). A crash is just icing on the cake.


redskin

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Re: Wedgewood Partners on selling their BRK stake
« Reply #71 on: October 17, 2019, 05:07:11 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.

If purchases are made above book value and below intrinsic value, the gap between book and intrinsic value will actually widen.

wabuffo

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Re: Wedgewood Partners on selling their BRK stake
« Reply #72 on: October 17, 2019, 07:18:51 AM »
Quote
We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year

BTW - back to the original post for a quick sec.   Anyone else noticed that this bolded statement is plainly untrue. 

Here is Wedgewood's holdings of BRK.B shares over the last few years according to the 13Fs.  He actually started selling in late 2015 (when BRK got cheap and very near Buffett's 1.2x book value buyback level).  There was more selling there than this year.  How does one reconcile his statement and his many media appearances as a BRK bull with his actual record?  Perhaps I'm missing something.

wabuffo

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Re: Wedgewood Partners on selling their BRK stake
« Reply #73 on: October 17, 2019, 07:58:33 AM »
Quote
We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year

BTW - back to the original post for a quick sec.   Anyone else noticed that this bolded statement is plainly untrue. 

Here is Wedgewood's holdings of BRK.B shares over the last few years according to the 13Fs.  He actually started selling in late 2015 (when BRK got cheap and very near Buffett's 1.2x book value buyback level).  There was more selling there than this year.  How does one reconcile his statement and his many media appearances as a BRK bull with his actual record?  Perhaps I'm missing something.
wabuffo
Nice find. That seems to be further indication of my point, which is that they sound more like a contrary indicator than anything else.

https://www.morganstanley.com/wealth-investmentsolutions/pdfs/uma/wwp-1.pdf

If you check out the Morgan Stanley doc linked above, you will see net returns have substantially underperformed their index in every time period presented. Also, they actually describe themselves as large cap growth, but from the Morgan Stanley doc, you can see the portfolio is primarily mega-cap, not large cap. I won't argue with their assertion that they are growth investors, although I suspect there is a good bit of momentum there, too. Growth and momentum are a bit hard to separate though, so I can accept just calling them growth investors.

The most impressive part of their portfolio is that fact that they managed to achieve an R^2 of 0.96 over the past 3-year period. It requires effort if not skill to attain such a high R^2 with only 18-22 positions. I have noticed that closet indexers are getting better at their craft, and this might be yet another example. What is interesting is that the R^2 was so high and yet 10-yr net returns trailed their index by roughly 4.25% per year.

Is it possible that they actually sold Berkshire because it was introducing too much of an active management risk component to the portfolio, and therefore created career risk for management if the portfolio started to drift from the index?
« Last Edit: October 17, 2019, 08:04:31 AM by Read the Footnotes »

John Hjorth

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Re: Wedgewood Partners on selling their BRK stake
« Reply #74 on: October 17, 2019, 09:22:59 AM »
wabuffo,

I think this should be measured on a relative [position size in percentage] basis. The Wedgewood LPs have withdrawn substantial capital over a period, ref. what longinvestor and I have posted earlier in this topic. I have made no calculations on it though, and I don't intend to.
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LC

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Re: Wedgewood Partners on selling their BRK stake
« Reply #75 on: October 17, 2019, 01:07:29 PM »
Thats why I used Costco.

But its not about a specific name. It s about the oddity of, his macro outlook has actually been pretty spot on, but his investing style has been flaccid and completely contradicts what's he is saying. If he thinks what he thinks(ie at worst fairly valued and at best wildly undervalued...) he really can't find ANYTHING! to invest in? Especially companies he's pointed out as having missed but admires, like GOOG which was at $1000 not to long ago or Costco? Let alone myriad others? Theres something off. IMO its because he's selfishly invested in the idea of one last giant elephant hunt. But thats just my opinion and it could be any number of other things, which as a shareholder I dont like.

The criticism of Buffett has always been: ignore what he says and pay attention to what he does.

Assuming he is still mentally sharp and interested in allocating capital @ Berkshire, his lack of purchasing signals that he we are in a high tide.
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cherzeca

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Re: Wedgewood Partners on selling their BRK stake
« Reply #76 on: October 17, 2019, 01:22:43 PM »
Thats why I used Costco.

But its not about a specific name. It s about the oddity of, his macro outlook has actually been pretty spot on, but his investing style has been flaccid and completely contradicts what's he is saying. If he thinks what he thinks(ie at worst fairly valued and at best wildly undervalued...) he really can't find ANYTHING! to invest in? Especially companies he's pointed out as having missed but admires, like GOOG which was at $1000 not to long ago or Costco? Let alone myriad others? Theres something off. IMO its because he's selfishly invested in the idea of one last giant elephant hunt. But thats just my opinion and it could be any number of other things, which as a shareholder I dont like.

The criticism of Buffett has always been: ignore what he says and pay attention to what he does.

Assuming he is still mentally sharp and interested in allocating capital @ Berkshire, his lack of purchasing signals that he we are in a high tide.

...or signals that he is enjoying his afternoon naps.  by which I mean, both Buffett and munger have nothing left to prove.  so people who have nothing left to prove dont continue to do things that they used to do when they had something to prove.   

meiroy

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Re: Wedgewood Partners on selling their BRK stake
« Reply #77 on: October 20, 2019, 06:26:46 PM »

With its size and structure, the only way BRK is going to be priced to outperform is with dividends.