petec

The stock is at 81 now. But the new company will have different shares outstanding. So we can only say 81 is only an indication of what the new company will trade at? 1 share of Kraft will get you one share of Kraft Heinz.

The pref won't keep paying Buffett because they are paying it back as part of the refinancing. They've also considered the Mondelez international rights and have that in their plans.

Not all, but I fear a lot did, yes. I think the combination of high taxes on dividends, low taxes on cgt, stock options, and buybacks is a potent incentive to redirect quite a lot of corporate value from shareholders to senior managers. And the clear positive correlation of buybacks with stock prices tends to support the idea that capital is not being well allocated. I should be clear here: I'm sure a good proportion of capex is being well allocated. But capex is not where the dividend money has gone. It's gone to buybacks. I agree entirely and I am not arguing for high rates (although I don't think much of QE). But I would argue that deflation isn't just because of deleveraging. In fact, the world is still leveraging and added debt worth ~40% of GDP from 2007 to 2013. Deflation is at least in part because of malinvestment: too many factories making too much stuff, hence PPI deflation in China. I totally agree life is generally getting better and new products are exciting - and that some money has always been malinvested. I just think that when money creation is at record levels, and seems to be going into asset prices not real demand, it's fair to assume that a higher than normal proportion is being wasted! Absolutely. I think we're going through an amazing period of change. I'll be very interested to see how it gets reflected in earnings though. All these industries are massively disruptive. Facebook, for example, provides targeted advertising. Less targeted channels will likely lose a lot of revenue to them. Technological improvements ought to drive productivity and more rapid GDP growth, but a) that's not new and b) I'm not sure how much of that GDP growth will accrue to existing SP500 companies in earnings. Edit: speed of going global is a good point. Not sure how much of SP500 earnings it applies to though. I'm basically a big bull on general progress in the world, but I do think that graph tells of excessive bullishness amongst equity analysts. P

Wrong, if it is a) being malinvested which is sadly quite normal when money is this cheap or b) being spent on buybacks (which obviously grows per share earnings but not earnings per se). Agree re mix changes in the index, but I think (although cannot prove) that every time period has had its fast growing industries. Overall, while I agree that no chart provides a perfect prediction tool, it's not hard to say that things might be dangerous when margins are high, multiples are high, and expectations are really just extrapolations of both. That's a recipe for danger. Not that I expect a crash soon given all the free money - I just think we're asking for trouble at some point.

Behring, Buffett, Lehmann, Telles, Abel, Britt Cool...that's a serious board of directors, and that's only the BRK/3G side! And quite an achievement for a 30-year-old! http://www.bloomberg.com/bw/articles/2014-01-23/meet-warren-buffetts-top-troubleshooter-tracy-britt-cool

+1 I remember Grantham pointing out that the correlation between market multiples and margins should be -1 but it is actually slightly over +1.

Why would accounting changes make much of a difference? I realise they matter, but they would simply cause a step change in earnings. That might not be on the graph, admittedly. But accounting changes won't affect the cagr, will they? And they won't affect the fact that estimates assume earnings will continue up in a straight line. As for buybacks, nothing on the graph suggests this is per share data so would buybacks matter?

Wow. Excellent graph.

Could you expand on this? I would argue that if it were not for QE you would still get mass corporate bond defaults in overbuilt industries (like rails were in the 1850's); that keeping zombie companies alive is a big misallocation of capital; that growth will therefore be slower than it has been in the past; and that multiples if anything ought to be lower. Interested in your thinking.

Yes - apart from anything else it takes him to 10 companies that would, if they were separate, be Fortune 500 companies. 490 to go...

Does Kraft own Cadbury? Or is that under Mondelez? This is ironic given that Buffett criticized the Cadbury acquisition and the simultaneous sale of the pizza business, a few years ago, and ended up selling his shares. Now he will own probably a 50% stake lol. Yes, but in a company that is much better managed under Lehman and doesn't misallocated capital :)

Well, you surely will get the chance to buy it later closer to NAV, or even below NAV… of course, what nobody can be sure about is how much that NAV would be by then… ;) Cheers, Gio Exactly. So I just bought a starter position ;) No discipline, that's my problem!

I like it too. I am just being cheap about paying a 15% premium to cash. No doubt I will regret this.

Interesting - do you have time to open a thread on this?

I don't have good stocks ideas on these but three that strike me as unstoppable are: - Rising data usage especially over mobile - Driverless cars - 3D printing The issue with the latter two being that they are as likely to disrupt existing industries in an unpredictable way as they are to generate big returns for investors. I'd say the same of rising healthcare costs.

No, but: 1) I thought it was fairly obvious that bmichaud was joking re: Buffett taking his advice and recognising that would have helped you avoid irritating people when you (I hope) didn't intend to. 2) slagging off someone else's analysis without providing any of your own doesn't earn you a lot of respect in most places (especially here, where many of us have come to respect bmichaud's thoughts). P

I wondered who'd been pushing it up ;)

They don't want a stable source of value in the currency they consume in. They want a stable source of value in real terms. Thus, their behaviour can change very fast if the currency starts to lose value. Obviously that's a big if. Most of the time I think that's absolutely right. But when such vast amounts of new money have been created I wonder whether misallocation is confined to pockets. Most of us would probably agree that the bond markets aren't going to produce a great return, so that's a colossal chunk of capital that's currently misallocated. China has almost certainly overbuilt factories relative to demand - that's why PPI there has been falling for 3 years. Tech, property - the list of things that might well be overvalued is quite long. Japan hasn't destroyed capital in war or famine over the last 25 years. They've actually printed a lot of new money, starting in the mid 1990s. Yet they've still had deflation as their massive stock and property bubble burst. P

But both currencies were backed by gold until 1971, and since then (it seems to me) we have had a slow loosening of monetary policy. Confidence is a funny thing: it's there until it's not. I don’t know exactly why we are talking about this… but here I agree with Packer: I don’t see any plausible substitute for the USD in the foreseeable future. Gio I brought it up because of Packer's comment about huge demand for fixed interest securities, which is something that could change overnight (I am not predicting that it will). And I suspect we'd have said the same in the UK until relatively shortly before the pound ceased to be the reserve currency. Again, not a prediction, but it's always useful to think about unexpected things that could genuinely shake the world. My broader point is that QE may destroy capital and be deflationary. The demand for fixed income is driven by the amount of savings being generated versus destroyed via wars, famine, ect. I don't see this slowing down but increasing as the we are adding to a large stock with new savings flows every day from all around the world including emerging markets. Packer Agreed...so long as people trust the currency the fixed income securities are denominated in. If they do not... Example: would you invest in yen bonds? I would not because the government is clearly hell-bent on depreciating the yen. Eventually, if they are successful, that will be an issue not just for foreign buyers, but for local ones too. Then they will find something else to do with their savings. A side point is that I think misallocation of capital is a far greater destroyer of capital than wars have been.

But both currencies were backed by gold until 1971, and since then (it seems to me) we have had a slow loosening of monetary policy. Confidence is a funny thing: it's there until it's not. I don’t know exactly why we are talking about this… but here I agree with Packer: I don’t see any plausible substitute for the USD in the foreseeable future. Gio I brought it up because of Packer's comment about huge demand for fixed interest securities, which is something that could change overnight (I am not predicting that it will). And I suspect we'd have said the same in the UK until relatively shortly before the pound ceased to be the reserve currency. Again, not a prediction, but it's always useful to think about unexpected things that could genuinely shake the world. My broader point is that QE may destroy capital and be deflationary.

For this reason alone, Fairfax is no comparison to Berkshire. I don't believe Prem Watsa thinks differently either. Surely they would kill to build a fortress at FFH like Berkshire. He is doing all he can do to protect FFH the best he can, but there is none like Berkshire to withstand an epic period of insurance claims. If this does not form the central basis of comparing risk at BRK or FFH, wth is? Earning 9% versus 15% returns? I'm not sure we are disagreeing! And I think they are building a fortress like BRK, slowly. My point is simply that BRK would do better in a catastrophe because they have more operating businesses like MidAmerican; and FFH would do better coming out the other side because they have more businesses that would be exposed to higher rates.

+1. My approach to Buffet, Prem, Gaynor, et al is to figure out whether I trust them at the start and then place my capital with them permanently (so long as the companies are fairly valued). Some people find that hard. For some reason, I find it easier to do that than trust my analysis of operating businesses. That's one of the reasons I have a lot of money in (very carefully chosen) jockey stocks: I manage not to buy and sell at the wrong times (by and large) because I just go back to "I trust this guy to build value". So far that's worked out pretty well!

+1! If anything should perturb investors, and I think to certain degree this was a royal f**k up because they were so conservative, but the hedges cost us a lot. They were just way too early with them. Equity prices were cheap, the hedges had limited upside at the time, and the only reason they needed them was because any significant drop in their equity/bond portfolio would have been magnified by the amount of asset/equity leverage they use. You can't fault them for their conservatism, as the world was falling apart...but They would have been better off holding more cash and no hedges, or maintained a lower ratio of leverage. Cheers! +1 I'd add that Buffet also lost all his investment in some of the whole companies he bought...including one discussed in the last letter (shoe company, name escapes me for now). Also, accident year underwriting for the last 10y has been profitable and getting better. Abilyi's post reads like something from 5 years ago imho. All in all one of the oddest threads on the site! No offence intended to anyone - all questions are useful - but I think we are barking up the wrong tree here.

But both currencies were backed by gold until 1971, and since then (it seems to me) we have had a slow loosening of monetary policy. Confidence is a funny thing: it's there until it's not.

In a natural disaster FFH will certainly lose money - but they are built to withstand that and would benefit from hard pricing after. I regard that as antifragile (but I think they'd get hit harder than BRK because thy are more insurance-weighed). In a financial tsunami they're rock solid (unless it's a hyperinflation - I haven't figured that out yet. Probably more so than BRK given the hedges and swaps. And I agree, few investors will do better in a downturn.