charlieruane

There are no bonus points in investing for difficulty. If I could hire a money manager who could meaningfully outperform in risk-adjusted terms with just megacaps, beyond what I think I can do, I'd pay him 1% per year. No need for him to dip into small caps for style points. Do you give Buffett less credit for the Apple investment because Apple was a big business? Most folks stand to nuke their nest eggs if they attempt to trade. It is not irrational to hire a money manager—even a megacap-only manager—if this fate is the alternative, assuming the manager is at least a plausible practitioner of fundamentals-based investing. And as another member mentioned, many of these high-touch managers provide additional services for the fees they charge.

To play devil's advocate for a second: is investing in any given company not merely outsourcing one's capital allocation to someone else (i.e. the CEO of that company)?

Agreed—I lump Spier and Bloomstram (and, especially, Pabrai) in the same camp overall. I just wanted to at least give Spier credit for sitting tight.

The guy just never sits still - look at the "Activity" tab on his Dataroma profile. Admittedly not *massive* turnover in terms of % of assets per quarter, but so many tiny, meaningless trims and adds that suggest a lack of discipline. Compare Bloomstran's activity with Guy Spier's—love him or hate him, Spier at least knows the value of sitting still.

You're not wrong. I'm reminded of this exchange from the 2017 annual meeting (although to be fair, the firm has grown a lot since then, and cash is now wildly more attractive, so there are good reasons to believe the $150B figure Buffett cited is outdated for good reason): JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share with purchase threshold? WARREN: ... At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But, at a point the burden of proof is definitely on us. I mean, the last thing we like to do is own something that a hundred times earnings where the earnings can’t grow. As you point out, we got almost $100 billion. It’s $90 billion plus invested in a business—we’ll call it a business—where we’re paying almost a hundred times earnings and it’s kind of a lousy business. CHARLIE: It’s more after every tax earnings. WARREN: Yeah, so we don’t like that and we shouldn’t use your money that way for a long period of time. And then, the question is, are we going to be able to deploy it? And I would say that history is on our side, but it would be more fun if the phone would ring instead of just relying on history books. I am sure that sometime in the next 10 years—and it could be next week or it could be nine years from now— there will be markets in which we can do intelligent things on a big scale. But it would be no fun if that happens to be nine years off—and I don’t think it will be—but just based on how humans behave and how governments behave and how the world behaves. But like I say at a point, the burden of proof really shifts to us big time and there’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more snd we think we’re doing something brilliant by doing it. Charlie? CHARLIE: Well, I agree with you and the answer is maybe.

Fun stuff!

Buffett has never cared about Berkshire's stock performance/volatility, absolutely or relative to the rest of the market, in the short run, whether up or down. And "as for cash being better than Apple," keep in mind that cash isn't just the going yield on short-term Treasurys. It's also pure optionality, which is incredibly valuable.

He has already explained it. It seems like the "something better" is simply the optionality and decent real returns of short-term Treasurys, especially considering AAPL's rich valuation (KO in 1998 being the model) and the USA's all-time low cap gains taxes: So, we will end up, if something dramatically happens that really changes our capital allocation strategy, we will have Apple as our largest investment, but I don’t mind at all, under current conditions, building the cash position. I think when I look at the alternative of what’s available, the equity markets, and I look at the composition of what’s going on in the world, we find it quite attractive. We don’t mind paying taxes at Berkshire, and we are paying a 21% federal rate on the gains we’re taking in Apple. And that rate was 35% not that long ago, and it’s been 52% in the past when I’ve been operating. And the government owns… The federal government owns a part of the earnings of the business we make. They don’t own the assets, but they own a percentage of the earnings, and they can change that percentage any year. (2024 Berkshire Annual Meeting)

I have never heard Buffett speak in terms of "rebalancing," in fact I've heard him espouse the opposite: concentrating on and in one's best ideas. Munger said owning 3 high-quality businesses provides enough diversification.

@gfp Great thoughts, as always! Where'd you find the Wells Fargo fun fact? Ha.

Greg is definitely running the show operationally—Buffett has even said that when CEOs need input from HQ these days, they typically call Greg. I expect buybacks to become even more systematic in the 20 years following Buffett's departure. When the stock is too expensive for buybacks to make sense, and once the cash pile grows beyond, say, ~20% of intrinsic value, Berkshire will probably issue special dividends (per recent comments from board member Sue Decker). Whale-sized acquisitions will probably become very scarce, if they continue at all (per comments from board member Chris Davis)—and if they do continue, they'll happen primarily during recessions/panics. Bolt-ons, internal reinvestment, buybacks, and special dividends are what we should expect in the post-Buffett decades. Berkshire will further cement itself as a low-risk, decentralized, still-relatively-tax-efficient capital-returning machine. Adequate returns with minute risk of permanent impairment of capital. This Berkshire will make for a great "hurdle rate" investment, i.e. its risk-adjusted returns are likely to be fairly attractive most of the time, so one can by default allocate capital there when lacking other ideas. That's a useful security in my book!

Were the ~$50B of buybacks across 2020 and 2021 not dipping a toe?

I hear you, but I want to push back a bit on these comments. It's wrong to reduce buy-and-hold to a marketing tactic. It has a few massive benefits that go beyond marketing. For public equities, buying and holding allows Berkshire to defer capital gains taxes on the portion of earnings its holdings retain and reinvest. For wholly owned subsidiaries, selling only when businesses deteriorate beyond repair makes Berkshire a uniquely attractive buyer to closely/family-held firms that don't want to see their babies (businesses) tossed around by private equity firms. As for buybacks, yes, Buffett probably should've started buying back stock way earlier. But clearly he's changed his tune—Berkshire has bought back many tens of billions of dollars of stock in the past few years, at attractive prices and with attention to valuation. So, this anti-buyback "marketing" stance you mention just doesn't exist. Your point about underinvestment in technology at e.g. Geico, though, is well taken. Insiders say Greg shines at improving Berkshire's long-held assets, and Ajit+Todd seem to be giving Geico their all, but we'll just have to see how it shakes out. All that to say: yeah, Berkshire's not as great as it once was, but it's still an incredible investment in risk-adjusted terms. You used to get ludicrous absolute returns with very low risk. Now, you get adequate absolute returns with very low risk. It would be a mistake for future managers to try to jack up absolute returns by taking on more risk; the next generation should not seek to attract new, growth-hungry shareholders. To do so without risking the company is basically impossible. Think about what Munger would say if he saw Berkshire reach to become something it couldn't be.

I'll chime in with the old refrain that Berkshire's returns should be judged in risk-adjusted terms. To be sure, PCP and the like were simply flawed investments that lost shareholders money. But BNSF's adequate absolute returns have been excellent in risk-adjusted terms. There was almost zero risk of the capital invested in BNSF becoming permanently impaired at the prices BRK paid. Attaining adequate returns with low risk is what Berkshire should strive to do going forward. In the past, we were treated to exquisite returns with low risk, but size has rendered that unlikely going forward.

Wowee! Any thoughts on the sale, @gfp?