racemize

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple. When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation. Vinod Which brings us full circle to the theme of this thread. All of the methods used to value BRK , as elegant and/or conservative have resulted in Mr. Market being wrong to grossly wrong about BRK's value. The grossest error is the use of the near universal "let's put a 10x multiple on the Pre-tax earnings". Semperaugustus comes closer than most in properly valuing Berkshire. Being elegant in paper calculations doesn't preclude being ridiculously wrong. In a world where ridiculousness is rampant to unhinged on the other side. Think FANG. Berkshire's float is invested neither in bonds nor securties but increasingly in long lived assets, whose earnings in turn are invested in other businesses (the real estate within BHE as an example), plus arguably their own kind of deferred tax float. Buffett calls this rabbits making more rabbits. It all adds up to the 20% earnings growth we're seeing since 1999. Thank heavens the market is wrong! Buffett said in the last meeting that IV could compound at 10% if interest rates rise. I don't think this is anything like FANG growth, but it is steady and obviously not priced like FANG is.

This would only add about $90 billion in float value which the float amount at end of 2016. Part of this float value shows up in the goodwill so you have to account for that. Part is always held in cash equivalents always. This part would not have full face value. If you make these adjustments, I think the market is valuing BRK in this manner, at least implicitly from the P/BV multiple. When you estimate value of BRK from various methods they tend to cluster together closely. So float based valuation does not radically increase BRK valuation. Vinod Perhaps I'm being dense here, but if we take $90 billion in float liability and then call it $50 billion in asset (after your adjustments above), it would have well over $100 billion effect in value change from book value, wouldn't it? In other words, it isn't just discounting it as a liability if you would be willing to pay someone to get it, so it seems like it would be a big swing.

The issue here is that this would add one or two hundred billion to berkshire IV, but the market simply doesn't value Berkshire or any insurance this way. Or saying it another way, this boost in value now would likely come at an extreme cost in value growth in the future.

I was taking a 35% position :) I sold virtually every nonfinancial stock I had and put it in Berkshire. I wish I'd levered it.

His funds are all closed to new investors.

Ok, so let's look at those. Companies that actually went bust while he held it: 1) Delta financial - yes went bust 2) Pinnacle airlines - yes went bust 3) Horsehead (zinc) - yes went bust Companies that had big drops while he held it: 4) Compucredit - 70% loss during GFC 5) Sears holdings - 60% loss during GFC 6) bioscript (chronimed) - 50% loss 7) CRYP - it appears that he exited this at $20 after buying at $30, and it got bought out later Companies that he actually made money on: 8) HNR - he exited with a gain 9) Universal alloy - he had a 132% gain on this stock 10) Lear - described as a "home run" in his letters 11) International coal - 138% gain 12) Cresud - made 118% over 3 years So, is your criteria any stock he's ever owned that ever had a big drop? In that case, you've missed a ton, which isn't that surprising since he has a predilection for leveraged cyclical companies.

This is actually not a nice summary. I'd like to see the dozen stocks. I think you missed Budget bonds, which he didn't invest in, but got most of the ones and then claimed it was just the beginning. Also, he's never closed a fund, so it is rather disingenuous to solely describe him and then mentioning closed funds. I also refer to my previous post on this topic, which does not seem to be recognized: As I mentioned earlier, all the big value guys are sucking right now. Why single him out so hard? Also, he's not the same as the "helpers" Buffett is talking about--Buffett singles out 2/20 and fund of funds. Pabrai is 25% over 6%, just like Buffett was, and has not paid himself for years at a time. I sincerely hope you guys never screw up and have someone judge you as harshly as you are doing Pabrai right now...

I think it is a lot of things. What I personally find confusing is how much everyone likes to bash performance--almost every famous value investor's (and a ton of non-famous one's too) record sucks right now. If everyone were doing hunky dory and Pabrai was lagging, ok, but they are all in the tank.

I am reading Benjamin Graham: The Father of Financial... while flying home today. In it, the authors describe a fee structure where he gets a small salary and then 20% of profits over 6% hurdle. So, at least for me, this solves the question of why Buffett used 6%. As to why Graham did, maybe it was the prevailing high grade bond rate at the time? i will need to look it up when I get home.

The board turned on him three years ago. For the most part, only one view is being presented, but there's not much point in arguing about it as we will know the answer in time.

Do you have electronic copies of those articles? I don't think I have those in my graham compilation.

My numbers came in low, the same way Gary's did. I believe the reason is because neither of us included any goodwill for the acquisition on the books. Anyway, the FFH presentation is the one with the higher common equity and projected book value per share, so I don't think there's any preferred equity in there. I believe my updated value just adjusts their calculation slightly, so it should treat it the way FFH did in the first place. Edit: Oh, I see, I used the word "total" in my post--the presentation says "common equity" and then also says BVPS is ~$385. Sorry my language wasn't too clear there.

I'm obviously still sick--all these calculations are tangible ones that exclude goodwill that will be added to FFH asset side. Still not sure how to go through all the calculations to figure this out by hand, if that is possible from the information we have.

So I just did the math and got a similar number to what Gary did, but I think it is missing some accounting minutia (if anyone can jump in on that, I would appreciate the explanation), so I don't think the new book value will be $338. If you apply the same math to the presentation Goku just posted, you would have gotten $342; instead, presentation lists total equity value of $10,855 rather than $9,587. I imagine this has to do with some combination of 1) issuing shares above book value as FFH is doing should increase book value per share; 2) there are a lot of minority shareholders that will own a portion of Allied, and they are pitching in money that isn't coming out of FFH balance sheet; and 3) other accounting rules. Anyway, if you use their reported total equity value from the presentation (and I think it should be close, given the small changes from end to Q1 of the two companies) and the new number of shares (which is higher than when the presentation was provided), you get pro forma book value of $385. Would really appreciate any people with know-how on this to help correct the math/process for getting the value. TIA.

Are you sure on that BVPS? The previous value was $361 and they are issuing shares above book value, so I would not expect it to go down.

Thanks gents.

Right, I remember the watering the weeds one--I just didn't remember one about waiting until the story changed. Is that your paraphrasing? It seems like a decent thought.

You have the actual quote from Lynch around? I like the idea of it.

I just finished reading FIASCO, and this reads like a continuation of that one, almost. What are your general impressions of that book and Liars Poker, e.g. in terms of accuracy, representativeness, etc?

Looks like the BAC position will be converted very soon.

Below may sound like nitpicking, so please skip if you're not interested. Right. Although even for "gross" or "approximate" one, it's probably harder than you said. I thought about BRK and likely the curve is much flatter - less certain - than I suggested. I.e. we don't know more than we think we don't know. Also with CBI or Fannie or SHLD, you think that there's binomial distribution, but likely the curve is quite flat too. I.e. everyone who argued that SHLD is zero or huge gainer in the last ?8? years have been wrong. Same mostly with Fannie. So maybe there was a hump towards zero, but likely much flatter than people expected. It's likely SHLD hit a probability spot that people thought was something like <1% chance (sorry this is a bit inaccurate given continuous prob distribution, but you know what I mean). Sure there are steep fall-offs at certain points, e.g. there's probably almost no scenario for BRK to return 20%+ for 5 years annualized, but overall being certain of the humps is hard. I think this relates to the behavioral economics question/test where people are asked to estimate weight of the 747 or distance to the moon with 99% confidence interval and they choose way too narrow range. The illusion of certainty. I find this topic interesting, since I wonder if it's worthwhile for me as investor to try to come up with an approximately-right curve. And how much approximately-right. Anyway, thanks for article and thanks for comments. Well, I'm not going to argue with the illusion of certainty, as that was a lot of what I was trying to point out in the essay. I guess what I'm trying to say is that I also can't use the illusion of certainty as an excuse for not at least attempting to understand what is going on and trying to improve. Anyway a few thoughts in with no particular coherence in structure: Regarding approximate graphs: I do think those two have binomial properties, but there is the possibility of it being quite flat also. FNMA though, I do think we can argue for spike at 0 and a spike at par, with potentially a large, very flat distribution around par, probably skewed in the towards $0 direction. CBI certainly has a lot more uncertainty around it, so it is almost all speculation. I think perhaps we are just talking past each other on how approximate "approximate" is. I think I'm probably arguing for something slightly more than a bucket approach that gets more refined the more certain it is. For Berkshire, I think a lot of people would have some kind of normal distribution around 8% for IV and then you can slap on whatever market filter you want for what can happen macro wise. If we are at a 5 year horizon, that latter filter is more important than the IV, but the longer we stretch out the horizon, the more the IV part matters. For something like CBI, it's just very very hard because it is a high uncertainty stock at the present moment. FNMAS should be easier than that because we know it could be worth nothing and it is easy to argue that par should have a decent high chance of happening too. Certainly there are other outcomes that are not easy to know. Mostly, I'm just saying that it isn't too hard to put investments in one of a set of buckets (e.g., higher certainty, low return; high uncertainty, larger dispersion of returns; or the ever-elusive high uncertainty, high but uncertain returns that we all believe we can find), then do some refinements, and then understand that even that isn't all that accurate. But the buckets can do a lot of work for you, I hope anyway. Regarding usefulness of graphs: I think mostly I'm taking the stance that the more I think about how uncertain things are and try to create graphs, the better, in both idea evaluation and actual investment. E.g., it is another mechanism to cause me to analyze downside scenarios. Also, to the extent that I think a graph looks one way at investment and then the outcome wasn't even in the graph, the more I can pound into my head how uncertain things are and hopefully get better at initial analysis. The possibility of measuring graphs: Personally, I'm intrigued with the idea of looking at outcomes of investments as data points to generate an investment graph for me. For example, I currently track every investment's individual IRR/performance. I currently have something like 40 data points. I can create a distribution from those data points and/or run statistics on them. Obviously, this has some issues as the individual outcomes aren't representative of the risks being taken, but if I'm using a consistent judgement pattern, it can tell me something about my graph. So far, I have something like 80% of investments being positive, but there's also a few blow-ups that I'm not too happy about (ZINC/Intralot/CBI (we'll see how the last two actually end up)). Anyway, these are random ideas that have not been fully thought out. I think this is a hard topic, but one that is important to think about. Really the essay was my first attempt to get some thoughts down and an attempt to make it useful/actionable.

Do you have any concerns regarding the size of the derivatives market in general or for any of the banks?

The essay was really only directed to the portion of your portfolio you want invested long-term in stocks. Asset allocation based on life situation is just an entirely different question than I was after. Really, this all boils down to, it's really hard to time the market. In retrospect, not a surprising outcome, just one that I wanted to verify.

Re: Why Hold Cash? The context for this essay, and I tried to make it clear in both the introduction and the conclusion, is whether cash should be held based on macro concerns/overall stock market valuation concerns/etc. and ignoring the micro. Since the GFC, this forum has been populated with people who would go into cash and talk about market overvaluation in spurts in fits from time to time. These same people would also be invested in what they considered good ideas, but would hold cash because of these concerns instead of increasing their holdings of their own good ideas. So, boiling it down to something extremely simple, I tried to answer: If I have investment(s) I like, but I think the market is overvalued, should I hold some amount of cash? If so, what is the ideal amount? What I was not trying to answer, and hence my comments on "compelling investments" (perhaps compelling wasn't the best word choice, but I'm not sure what would have been better--maybe investments meeting minimum hurdle requirements, but that's wordy as hell), was: Should I be fully invested even if I run out of ideas? I think the answer to that is a firm no as a value investor, which I believe most everyone agrees with. Many people seem to be reading this essay to mean you should be fully invested at all times, which is not what I'm saying. Anyway, the question of holding cash is mostly a function of volatility, so I wanted to find out what the answer was. E.g., if you are hugely volatile in results, then holding cash just makes sense, as you get huge savings on the way down and huge gains on the way up with cash. On the other hand, holding cash just sucks if you progress linearly or anything close to it.

Re: Know Your Graph I don't think it is terribly hard to create the general shape of the graph or figure out where the modes are for individual investments. Your BRK example is one that a lot would generally agree with, I think, but obviously the details would vary from person to person (e.g., Buffett did say he thought intrinsic value could compound at 10% going forward, with some help from interest rates). Let's take another example like CBI/FNMA or the like. Clearly, way different outcomes, and possibly bimodal ones away from each other (e.g., strong peaks at par and $0 value with wide dispersions in between). So maybe saying this another way, I think it isn't terribly hard to make a "gross" curve, but an actually accurate one is of course impossible. From a manager's point of view, the question is the kinds of bets you are making/curves of the investments, and how they would combine statistically. If one has good sizing and small positions, then lots of binary events with positive spread should give you a decent curve around your expected value. On the other hand, erratic sizing or large sizing will create bimodal curves. Holding a lot of BRK/MKL/BAM/FFH would presumably give you a pretty steady graph around 8-10%. The main issue with all of this is: 1) you have to be incredibly self-aware to describe your own graph and look at your outcomes; and 2) if you are looking for a manager, they need to be telling you 1), which is nearly impossible, as it is hard enough on its own and probably not in their best interest if it isn't good.