Corner of Berkshire & Fairfax Message Board

General Category => Berkshire Hathaway => Topic started by: Zorrofan on December 11, 2017, 10:46:08 AM

Title: What would you do.....
Post by: Zorrofan on December 11, 2017, 10:46:08 AM
fareastwarriors posted this on the general news thread but it made me wonder how many will stay "loyal" to BRK after WEB & CM are no longer in charge?  I will vote against any breakup, forgoing short-term gain for the long-term profit I believe BRK will continue to generate. What are your thoughts?

"After Decades of Hints, Buffett’s Heir May Now Be More Apparent

 The pressure to dismantle Berkshire will mount. The bulwark against that impulse is his successor, whose identity is one of the business world’s best-kept secrets.


https://www.bloomberg.com/news/articles/2017-12-07/after-decades-of-hints-buffett-s-heir-may-now-be-more-apparent"


cheers
Zorro
Title: Re: What would you do.....
Post by: StubbleJumper on December 11, 2017, 11:33:00 AM
I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes.

As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc).  With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his.  To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually.  So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders.

What about the next guy?  Or more likely the second or third guy after WEB?  Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO.  With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves.  It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company.  Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. 

When the CEOs and management teams of the subsidiaries sees this, how will they react?  WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs.  But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. 

To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie.  Larger because of the ridiculous annual cashflows and the stupendous market cap.  Incorrigible because there's no legitimate threat of a takeover.  The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up.  But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder.

Nope, my sense is that we will probably get lucky with the next guy and we'll get good management.  But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management.  Enjoy current management while it lasts -- it's too good to be true!



SJ
Title: Re: What would you do.....
Post by: Jurgis on December 11, 2017, 11:59:40 AM
Can I get an option "I don't care"?

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.
Title: Re: What would you do.....
Post by: Zorrofan on December 11, 2017, 01:48:59 PM
I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes.

As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc).  With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his.  To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually.  So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders.

What about the next guy?  Or more likely the second or third guy after WEB?  Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO.  With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves.  It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company.  Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. 

When the CEOs and management teams of the subsidiaries sees this, how will they react?  WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs.  But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. 

To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie.  Larger because of the ridiculous annual cashflows and the stupendous market cap.  Incorrigible because there's no legitimate threat of a takeover.  The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up.  But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder.

Nope, my sense is that we will probably get lucky with the next guy and we'll get good management.  But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management.  Enjoy current management while it lasts -- it's too good to be true!



SJ

Sadly, you raise some good points. My original hope had been that the Gates Foundation would hold on to the shares WEB donated and through their own self-interest replace WEB as our guard against all the potential issues you raised.  I thought that a small dividend paid out after WEB & CM are gone would generate enough cash to meet the charity's IRS requirements. However it appears they are just going to sell the shares.
Title: Re: What would you do.....
Post by: Jurgis on December 11, 2017, 02:09:13 PM
My original hope had been that the Gates Foundation would hold on to the shares WEB donated and through their own self-interest replace WEB as our guard against all the potential issues you raised... However it appears they are just going to sell the shares.

I'm pretty sure Gates foundation is not set up as perpetual foundation and/or Buffett's donation is not intended as perpetual contribution. Pretty sure there are conditions that the money to be used within certain timeframe, so yes, they have to sell the shares.

I don't remember the source, so you might have to hunt for it if you want confirmation. (Or maybe someone on CoBF will confirm or contradict the above).
Title: Re: What would you do.....
Post by: gfp on December 11, 2017, 02:18:08 PM
The gates foundation is required to sell shares. They have been selling them much slower than would be required, as they have received some accommodation - but they are still required to sell and Warren was aware of the rules governing “excess business holdings” or whatever it’s called. Basically you can’t concentrate a foundation in a single stock so that foundations aren’t used to control companies (obviously abroad the rules are different, ikea etc..)
Title: Re: What would you do.....
Post by: John Hjorth on December 11, 2017, 02:31:52 PM
The source is the original donation letter from Mr. Buffett to the Gates Foundation, where the condition is mentioned as increased spending [charity activity ramp up] in the foundation. I suppose otherwise there would be tax consequenses for Mr. Buffett personally.
Quote
There are three conditions to this lifetime pledge. First, at least one of you must remain alive and active in the policy-setting and administration of BMG. Second, BMG (or any intermediary) must continue to satisfy legal requirements qualifying my gifts as charitable and not subject to gift or other taxes. And, finally, the value of my annual gift must be fully additive to the spending of at least 5% of the Foundation’s net assets. I expect there to be a ramp-up period of two years during which this condition will not apply. But beginning in calendar 2009, BMG’s annual giving must be at least equal to the value of my previous year’s gift plus 5% of BMG’s net assets. If this amount is exceeded in any year, however, the excess can be carried forward and be offset against a shortfall in subsequent years. Similarly a shortfall in a given year can be made up in the following year.
Title: Re: What would you do.....
Post by: DooDiligence on December 11, 2017, 03:06:46 PM
I wouldn't want to see a breakup / spinco event until after I fill up.

How about this though?

Are we agreed that Berkshire is not being valued today as a sum of the parts entity? (if not, then my premise breaks the rest of this post.)

What if everything except Geico & reinsurance was spun out in the most tax efficient manner possible and you have the option of rolling into the new entity like 1969? (prob have to keep See's too out of honor.)

I'd elect to own the new entity over MOST of the spinco's without hesitation!

You get the float.

Able, Jain, T & T get the privilege of starting the whole thing over again for another 2 or more generations!

---

A "Maybe" option should be added.
Title: Re: What would you do.....
Post by: cubsfan on December 11, 2017, 03:15:06 PM
I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners
who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going
to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns
new investors coming in - that that is the case.

Am I missing something here??
Title: Re: What would you do.....
Post by: John Hjorth on December 11, 2017, 03:30:02 PM
It's actually in the bull's eye!, cubsfan.

Earlier today, I was actually thinking about the hypothetical situation of new Berkshire CEO introducing a new version of the owners manual. How would that be received, if it contained material changes touched earlier in this topic by StubbleJumper?

Personally, I'm surprised by interim poll outcome so far. [Yes 9 - No 18 right now].

The breakup scenario actually playing out is a nightmare for me. I do not vote at the AGMs. The breakup scenario would make me go through that hassle.
Title: Re: What would you do.....
Post by: cubsfan on December 11, 2017, 03:38:39 PM
Direct from the Owner's Manual:

11. You should be fully aware of one attitude Charlie and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns.........
Nevertheless, gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.

IF you are going to pontificate on a breakup of Berkshire - I think it's very unlikely to happen. Warren keeps his promises, and
Howard Buffett, as the keeper of the culture is going to enforce this promise long after Warren has left the scene.


Title: Re: What would you do.....
Post by: DooDiligence on December 11, 2017, 03:49:10 PM
I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners
who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going
to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns
new investors coming in - that that is the case.

Am I missing something here??

I'm embarrassed to say that I forgot this commitment.

Also forgot the benefits of being owned by BRK:

1. No more SEC filings
2. No more dog & pony shows
3. Former divs getting reinvested in the biz for more advantageous returns
4. ???

OK, I had abstained but now cast my no vote.
Title: Re: What would you do.....
Post by: StubbleJumper on December 11, 2017, 04:47:31 PM
I can't see how a breakup of Berkshire is even possible. Correct me if I am wrong, but Buffett made a promise to those owners
who sold their business to him - that those businesses would not be sold, that Berkshire would be a permanent home for thier life's work. Isn't that the case?  So unless labor relationships change or the businesses look like unending losses, Berkshire is not going
to sell wholly owned business to make a few extra dollars. I think, even the Owner's Manual published by Buffett, even warns
new investors coming in - that that is the case.

Am I missing something here??


Sure, that might be true for something like Nebraska Furniture or Borsheims.  But there's nothing that I know of that would prevent a spin of Mid American, BNSF, Dairy Queen, Sees, or many of the other subs.  And, the original owners of the businesses that WEB bought are not spring chickens either, so they'll be croaking too in the not too distant future.  At a certain point, the original family won't have much involvement in the management of their former company.


SJ
Title: Re: What would you do.....
Post by: cubsfan on December 11, 2017, 05:08:27 PM
Stubble - fair point:

Those distinctions would make an excellent question for the annual meeting. I certainly don't understand it that way, and
it would be good for Buffett to clarify - because he makes no such distinction/exception in the Owner's Manual.
Title: Re: What would you do.....
Post by: StubbleJumper on December 11, 2017, 05:22:02 PM
Stubble - fair point:

Those distinctions would make an excellent question for the annual meeting. I certainly don't understand it that way, and
it would be good for Buffett to clarify - because he makes no such distinction/exception in the Owner's Manual.


Well, not to put too fine a point on it, but what WEB says is pretty irrelevant.  The next CEO (or two or three CEOs in the future) can simply change the Owners Manual.  AFAIK, there's nothing legally binding about it.  Similarly, I'd be surprised if any of the assurances that Warren extended to previous owners was ever written in a purchase contract -- it was likely a gentlemen's agreement.  He'd be bonkers to make a legally binding promise to never sell an asset.

If a future CEO is somebody of dubious personal integrity, then all bets are off.


SJ
Title: Re: What would you do.....
Post by: rb on December 11, 2017, 06:48:12 PM
IF you are going to pontificate on a breakup of Berkshire - I think it's very unlikely to happen. Warren keeps his promises, and
Howard Buffett, as the keeper of the culture is going to enforce this promise long after Warren has left the scene.
Cubsfan, I think you're pretty spot on with your posts. Not only will Howard be left behind as the enforcer but a lot of shares will be in the hands of various foundations. Yes, they have to sell shares and spend the money. But that will take a long time. So they'll be significant shareholders for the foreseeable future. How much do you want to bet that they've received specific instructions on how to vote in the case of a breakup?

On top of all that Berkshire will be a horrible mess to untangle (by design?) with the insurance cos owning operating subs, etc, etc.

Furthermore trying to break up Berkshire can be a career ending event. Berkshire has shitloads of shareholders that don't sell their shares and are patient in collecting their returns/value. These types don't jump up cause the stock might get a pop from a corporate event and may very well be angered by the thought. They may very well lash out at who gets the brilliant idea. Being CEO of Berkshire will be a pretty sweet gig for anyone. Why would one risk that just to try a breakup? I'm pretty sure the CEO's contract will not have a clause where he gets to walk away with $100 million in the event of a breakup as is the case with other companies.

Finally, a breakup would be a value destructive event and thus pretty stupid. Berkshire benefits a lot from the fact that subs can cross-pollinate each other with capital which results in efficient allocation of capital. A lot of capital deployment actually happens at the sub level. Let's take MidAmerican for example. It never paid a dividend to HQ. Is that because Berkshire doesn't like divvies (other subs have strict dividend requirements)? Or is it because MidAmerican had and attractive set of investment opportunities that HQ didn't and thus that money was more valuable in their hands than HQ? Do you then think that MidAmerican would be more valuable as a stand alone entity where it would pay out 60-80% of its earnings or in its current form inside of Berkshire?
Title: Re: What would you do.....
Post by: John Hjorth on December 11, 2017, 07:14:40 PM
...  Let's take MidAmerican for example. It never paid a dividend to HQ. Is that because Berkshire doesn't like divvies (other subs have strict dividend requirements)? Or is it because MidAmerican had and attractive set of investment opportunities that HQ didn't and thus that money was more valuable in their hands than HQ? Do you then think that MidAmerican would be more valuable as a stand alone entity where it would pay out 60-80% of its earnings or in its current form inside of Berkshire?

No, rb, There are minority shareholders that Berkshire is loyal to, and then there are minority shareholders down in the whole system, that are in the doghouse. Mr. Sokol is one of these.
Title: Re: What would you do.....
Post by: longinvestor on December 11, 2017, 08:59:49 PM
Terrific thread. Here's my two cents, probably less.

Buffett owned some 33% of the company before the giving started. As many have pointed out, that ownership lis largely going to the foundations. Buffett made the statement that he used to worry about the breakup some time back but doesn't any more. There's likely covenants etc. In place in the trustees hands. There's another 12 years of his giving away, I think. Imo, the key piece of the puzzle is the stock buyback. They are likely to keep the threshold close to 1.2x and, let's say 15 years from now, the BV is so far off from IV that they raise the threshold to close to 2. Should Berkshire be selling for over2x, well, the breakup artistes disappear, anyway. Buy enough to offset Buffett 's 33%. In the meantime, insiders buy up from the current 10% ownership(read Cunningham).

They'll make it impossible to break Berkshire up. That 'll be one hell of a proxy fight, should someone want to try. I don't think I live to see that day. Too bad.
Title: Re: What would you do.....
Post by: DooDiligence on December 12, 2017, 12:06:46 AM
Stubble - fair point:

Those distinctions would make an excellent question for the annual meeting. I certainly don't understand it that way, and
it would be good for Buffett to clarify - because he makes no such distinction/exception in the Owner's Manual.

Awesome Q to ask & very pertinent in light of succession speculation.

Who's gonna nut up & get in line to ask?

I'd be tempted to show up this year just to watch that (especially if it was someone from COBF!)

And to watch Munger try to beat the crap out of the guy with a gigantic Porterhouse in the parking lot of Gorat's!!!
(this would only happen if the question blindsided him, which I doubt it would...)
Title: Re: What would you do.....
Post by: DooDiligence on December 12, 2017, 12:15:05 AM
Terrific thread. Here's my two cents, probably less.

Buffett owned some 33% of the company before the giving started. As many have pointed out, that ownership lis largely going to the foundations. Buffett made the statement that he used to worry about the breakup some time back but doesn't any more. There's likely covenants etc. In place in the trustees hands. There's another 12 years of his giving away, I think. Imo, the key piece of the puzzle is the stock buyback. They are likely to keep the threshold close to 1.2x and, let's say 15 years from now, the BV is so far off from IV that they raise the threshold to close to 2. Should Berkshire be selling for over2x, well, the breakup artistes disappear, anyway. Buy enough to offset Buffett 's 33%. In the meantime, insiders buy up from the current 10% ownership(read Cunningham).

They'll make it impossible to break Berkshire up. That 'll be one hell of a proxy fight, should someone want to try. I don't think I live to see that day. Too bad.

Here's to there being no skeletons for a douche like Singer to get ahold of.
Title: Re: What would you do.....
Post by: cubsfan on December 12, 2017, 09:42:24 AM

Awesome Q to ask & very pertinent in light of succession speculation.

Who's gonna nut up & get in line to ask?

I'd be tempted to show up this year just to watch that (especially if it was someone from COBF!)


DD - we're voting you in on that one. Get up at 2:00am, get in line, and you'll be first guy at the mike
        I'm sleeping in!

Title: Re: What would you do.....
Post by: DooDiligence on December 12, 2017, 10:23:29 AM

Awesome Q to ask & very pertinent in light of succession speculation.

Who's gonna nut up & get in line to ask?

I'd be tempted to show up this year just to watch that (especially if it was someone from COBF!)


DD - we're voting you in on that one. Get up at 2:00am, get in line, and you'll be first guy at the mike
        I'm sleeping in!

Can't, Munger scares me & I love a good Porterhouse but not in that way.



Still might go though since I'm an owner now!
Title: Re: What would you do.....
Post by: rkbabang on December 12, 2017, 10:44:10 AM
Can I get an option "I don't care"?

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.


I don't think you are the only one.  I expect the stock to tank on that day and I expect to back up the truck if it does.
Title: Re: What would you do.....
Post by: rb on December 12, 2017, 11:38:57 AM
My truck stands ready as well.
Title: Re: What would you do.....
Post by: Gregmal on December 12, 2017, 11:51:05 AM
Can I get an option "I don't care"?

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.


I don't think you are the only one.  I expect the stock to tank on that day and I expect to back up the truck if it does.

Warren is irreplaceable. Maybe the effects won't be immediate. Maybe they take a decade or two, but many great and valuable businesses often gradually turn into country clubs once their founding members turn over. It's one of the reasons many rollups do not work.
Title: Re: What would you do.....
Post by: DooDiligence on December 12, 2017, 11:59:00 AM
Vroom, vroom...
Title: Re: What would you do.....
Post by: thowed on December 12, 2017, 12:44:17 PM
I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

I wonder if Howard etc. have any instructions on doing a split at any point?

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.
Title: Re: What would you do.....
Post by: Jurgis on December 12, 2017, 01:07:43 PM
I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

I wonder if Howard etc. have any instructions on doing a split at any point?

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.

You can always convert A to B. And without taxable event I think, but I am not an accountant/etc.
Title: Re: What would you do.....
Post by: StubbleJumper on December 12, 2017, 02:09:01 PM
I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

I wonder if Howard etc. have any instructions on doing a split at any point?

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.

You can always convert A to B. And without taxable event I think, but I am not an accountant/etc.


Yes, the A shares can definitely be converted to B shares, which would enable holders to more easily sell a portion of their holdings rather than being obligated to sell in tranches of $300k.

But, the bigger issue in my mind is that the ownership becomes less concentrated when the original geezers finally take that long dirt nap.  An owner with $100m in shares splits it amongst his four kids at $25m each.  Then, what often happens is that the first generation that actually works to accumulate a fortune tends to be quite thrifty and rarely sells, but the second generation that inherits a fortune has a tendency to fritter away the money.  Those major owners (some of whom are on the board of directors) may not be a source of stability if the second generation partially fritters away their inheritance.

At this stage, Warren's life has gone into extra innings, and good for him.  But, I'd love to see a $20B annual dividend initiated in an effort to limit the annual cashflow that the next management teams can mismanage.


SJ
Title: Re: What would you do.....
Post by: rb on December 12, 2017, 02:17:22 PM
I hope this relates enough to the OP, but this got me thinking about the future of the A shares i.e. the current holders will have had them for quite a long time, and won't be spring chickens themselves.

What happens when they die?  How will their heirs be disposed towards a US$300,000+ share that doesn't produce any income, especially when WEB is gone?

I wonder if Howard etc. have any instructions on doing a split at any point?

p.s. Apologies if this has been discussed previously - I don't read every BRK thread.
Yes they can convert A to B, effectively engineering their split.

Also if the tax bill passes the estate tax will be repealed. This will eliminate a large pressure to sell shares.

In regards to income it's likely that BRK will introduce a dividend when the cash flows grow large enough. But even without a dividend the holders of shares can borrow against the shares. As long as the margin rates are below BRK returns that would be a smart play.
Title: Re: What would you do.....
Post by: DooDiligence on December 13, 2017, 08:42:27 AM
I think WEB & Chuck have planned for the evolution of Berkshire & a dividend would be super smart (not now please, but eventually.)

Also, what about the possibility of upping the buyback threshold & a highly publicized (AGM) repurchase/conversion event.

"Scuse me but is this the line for those who want to tender/convert?"

"No sir, this is where you make reservations for Gorats."
Title: Re: What would you do.....
Post by: John Hjorth on December 13, 2017, 11:10:13 AM
Can I get an option "I don't care"?

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

I have been thinking a bit about your stance on this, Jurgis.

I have seen on your blog that you have a large chunk of your capital allocated to Berkshire, Fairfax & Markel. Do you mind sharing the approximate weightings for you within those three?

PS: I read your blog monthly. Always interesting to read what you have been up to last month, and your short comments about your thinking related to that.
Title: Re: What would you do.....
Post by: Jurgis on December 13, 2017, 12:13:01 PM
Can I get an option "I don't care"?

As I have said before, I am selling my BRK position the moment Warren is out (assuming stock does not crater to unreasonable discount). He is not replaceable. Splitting or not splitting won't make much difference likely. Although it's possible that holders after Warren's exit will still get OKish return.

I have been thinking a bit about your stance on this, Jurgis.

I have seen on your blog that you have a large chunk of your capital allocated to Berkshire, Fairfax & Markel. Do you mind sharing the approximate weightings for you within those three?

PS: I read your blog monthly. Always interesting to read what you have been up to last month, and your short comments about your thinking related to that.

I don't mind to disclose, but I have to admit that my percentage allocations are really not indicative of anything. I don't sell on overvaluation or to switch to better investment; I also sometimes buy too slowly or not at all or not the best pick.
Allocations are BRK ~= Fairfax. MKL ~= 1/4 of that. Considering that I bought MKL during their Alterra purchase slump, I would have done much better by allocating more to MKL.

But then we also had a topic on CoBF whether FFH or MKL will get to $1K price first. We know the outcome now.  ;)

BTW, you're the only person reading my blog. Thanks for being valued member of the audience.
Title: Re: What would you do.....
Post by: John Hjorth on December 13, 2017, 12:22:35 PM
Thanks, Jurgis.

- - - o 0 o - - -
[ : - ) ]
Title: Re: What would you do.....
Post by: StubbleJumper on December 13, 2017, 12:50:23 PM
I think WEB & Chuck have planned for the evolution of Berkshire & a dividend would be super smart (not now please, but eventually.)



Warren is 87 years old.  How much longer do you want to wait?  At this stage, his chances of still being around in 5 years are 50:50.  Berkie has what, $100+ billion of cash sitting around and not being deployed?  That strikes me as plenty for an elephant hunt, if that's what Warren and Charlie want.  At this point, institute a healthy dividend (perhaps $20B per year) and stop accumulating cash.  It's virtually certain that the next management team will be far worse capital allocators than the current team, so institute that healthy dividend now so they'll have less cash available to waste.  As we know, once a divvy is in place, they can be pretty tough to roll back....


SJ
Title: Re: What would you do.....
Post by: rb on December 13, 2017, 12:54:09 PM
So pay out a $20 billion dividend (virtually all free cash) -- no more tuck ins at subs. Yea, that sounds like a brilliant idea.
Title: Re: What would you do.....
Post by: StubbleJumper on December 13, 2017, 01:09:18 PM
So pay out a $20 billion dividend (virtually all free cash) -- no more tuck ins at subs. Yea, that sounds like a brilliant idea.

First off, I do not at all appreciate the tone of that comment.

Turning to the actual issue, is it your sense that there is currently a lack of liquidity?  Clearly an insurance company needs plenty of liquidity to manage tail risks in their operations.  So, currently consolidated cash and t-bills are what, $109B?  That strikes me as more than healthy, unless there is a legitimate expecation of making like a $40B acquisition in the near future.

With respect to free cashflow, do you doubt that cash from operations will exceed $40 billion by 2022?  Seriously, it has never really crossed my mind that cash from operations wouldn't continue to grow.  So, yep, you do need something for maintenance capex...  But, with $40B of cash from operations, there's plenty of room for a healthy dividend.  And, with current cash balances being what they are, I can't imagine any problem starting with a divvy of ~$20b and growing into it.  Remember, my motivation is to keep the next management teams from having the current ridiculous cash inflows and desperately looking for a way to deploy it.

Finally, what is your view of Berkie's current capital structure? Are you of the view that the more capital intensive business are not in a position to float debt for major capital projects?

Respectfully yours,

SJ
Title: Re: What would you do.....
Post by: Cigarbutt on December 13, 2017, 01:30:59 PM
I seem to remember that Mr. Buffett said (or is reported to have said) that it would eventually be hard to justify to shareholders having something like 150 billion at the holding company. So, it is reasonable to expect a dividend if current circumstances are maintained.

Also, I would say that, subjective elements aside, over time, the return of what BRK has become (huge) will have to eventually gravitate to the level of the overall market. Long term, one would expect also that the "culture" and the "system" will eventually wear off. So a dividend is likely to make more sense going forward.

Of course, given the values built over decades, the reversion to the mean is not for tomorrow.
Title: Re: What would you do.....
Post by: DooDiligence on December 13, 2017, 01:37:28 PM
I think WEB & Chuck have planned for the evolution of Berkshire & a dividend would be super smart (not now please, but eventually.)



Warren is 87 years old.  How much longer do you want to wait?  At this stage, his chances of still being around in 5 years are 50:50.  Berkie has what, $100+ billion of cash sitting around and not being deployed?  That strikes me as plenty for an elephant hunt, if that's what Warren and Charlie want.  At this point, institute a healthy dividend (perhaps $20B per year) and stop accumulating cash.  It's virtually certain that the next management team will be far worse capital allocators than the current team, so institute that healthy dividend now so they'll have less cash available to waste.  As we know, once a divvy is in place, they can be pretty tough to roll back....


SJ

I don't want it to happen until I get my fill of shares.

I know, I know, quit thumb sucking & just go all in.
Title: Re: What would you do.....
Post by: LC on December 13, 2017, 01:59:49 PM
A
Good
Question for a Berkshire annual meeting would be: IF they were to institute a dividend, what amount would they choose? It would give us insight into what warren thinks is excess capital and what amount of cash is necessary.
Title: Re: What would you do.....
Post by: LongTermView on December 14, 2017, 02:58:10 PM
As cubsfan said, selling subsidiaries goes against what is in the owner's manual.

Buffett's 50 year letter talks about it as well:
Quote
Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.

Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most public-utility companies in developing wind and solar projects.

...

It’s possible, of course, that someday a spin-off or sale at Berkshire would be required by regulators. Berkshire carried out such a spin-off in 1979, when new regulations for bank holding companies forced us to divest a bank we owned in Rockford, Illinois.

Voluntary spin-offs, though, make no sense for us: We would lose control value, capital-allocation flexibility and, in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would have difficulty in being as effective if running a spun-off operation, given the operating and financial advantages derived from Berkshire’s ownership. Moreover, the parent and the spun-off operations, once separated, would likely incur moderately greater costs than existed when they were combined.
Title: Re: What would you do.....
Post by: longinvestor on December 14, 2017, 09:16:02 PM
As cubsfan said, selling subsidiaries goes against what is in the owner's manual.

Buffett's 50 year letter talks about it as well:
Quote
Sometimes pundits propose that Berkshire spin-off certain of its businesses. These suggestions make no sense. Our companies are worth more as part of Berkshire than as separate entities. One reason is our ability to move funds between businesses or into new ventures instantly and without tax. In addition, certain costs duplicate themselves, in full or part, if operations are separated. Here’s the most obvious example: Berkshire incurs nominal costs for its single board of directors; were our dozens of subsidiaries to be split off, the overall cost for directors would soar. So, too, would regulatory and administration expenditures.

Finally, there are sometimes important tax efficiencies for Subsidiary A because we own Subsidiary B. For example, certain tax credits that are available to our utilities are currently realizable only because we generate huge amounts of taxable income at other Berkshire operations. That gives Berkshire Hathaway Energy a major advantage over most public-utility companies in developing wind and solar projects.

...

It’s possible, of course, that someday a spin-off or sale at Berkshire would be required by regulators. Berkshire carried out such a spin-off in 1979, when new regulations for bank holding companies forced us to divest a bank we owned in Rockford, Illinois.

Voluntary spin-offs, though, make no sense for us: We would lose control value, capital-allocation flexibility and, in some cases, important tax advantages. The CEOs who brilliantly run our subsidiaries now would have difficulty in being as effective if running a spun-off operation, given the operating and financial advantages derived from Berkshire’s ownership. Moreover, the parent and the spun-off operations, once separated, would likely incur moderately greater costs than existed when they were combined.
Obstructionist.