thepupil

Spekulatius covered it. MBS are negatively convex. Their duration increases when you don’t want more duration and vice versa. They’re effective “short rate volatility”.

deleted because used wrong data

*rite - coastal elitist

for example, you can buy a 21 year Berkshire Energy bond for 4.2% today, right now. BRKHEC 5.15% of 2043 for $112. This has duration of 13~14 or so, so mark to market will be bad if rates go up a lot, but it's still a quite safe bond and we haven't seen 4 handles on very safe bonds in 3-4 years. I have a 1.8% position in this. If/when rates go up, I'll add another issuer at a 5 handle yield..and another and another (in tax advantaged). with i-bonds in taxable at 7% and longer duration high quality borrower yields starting to pick up, over time would hope to "defease" mortgage with high quality fixed income. for now though, it's just a start and you want to do this over time, not all at once IMO. i think most will vomit at the idea of making 4% for 21 years though. I get it.

actually think this offering is illustrative of a material increase in spreads in very high quality borrowers. For example, the 2.5% of 2051 issued last January priced at an 85 spread. this offering's 2052's are priced at 165 spread to 30 yr. at a point, I might consider going long IG credit spreads. not there yet though. mechanically this would be you go long high quality corporate bonds in IRA, short TLT in taxable. another way to look at is Berkshire's 2051 note issued last year is at $79 / $100. A successful bond short on the part of Berkshire! if rates go up and spreads stay same, I think very long duration high quality paper will be an interesting asset class. it won't be impossible to see a 2051 bond issued by berkshire at $60 / $100 and yielding 5% (it's at $80 / 3.6% now). That would be an attractive bond to buy to offset my 2051 mortgage at 2.875%.

amen

S&P 500's earnings per share are up about 40% over that time frame. We can try to figure out whether those earnings are sustainable, but it's not completely unwarranted.

i mean it's all one account, but Berkshire is the anchor tenant in my taxable account w/ IBKR. IT's about 30% of that account, which currently has no margin outstanding because i'm getting ready to send a boat load of money to uncle sam in april. if i choose to sell nothing and pay that with margin, I'd be about 20% levered in that account and <10% overall (including IRA's and stuff). I think margin usage is a very individual choice and one should potentially include the cost of "disaster puts" (way OTM) in order to prevent forced sales. In the past, I've used a general guideline of Buy $100 of Berkshire, Buy 30% OTM long term puts for 1-2%/yr, borrow $40 against the berkshire for general pupil purposes. that way i could always sell for a 30% loss and still be in line with general margin guidelines. IBKR would let me go nucking futs with margin. i could be 300% long if i wanted to.

I would argue ownership of Berkshire is very tax efficient. I pay a 4 handle marginal tax rate on any income that touches me. Berkshire pays 21% on an accrual basis and far lower on a cash basis (because of the DTL). Even if Berkshire paid cash for all its expense, keeping my money in Berkshire would be more tax efficient than pass through vehicle to me. In the past 3 years, Berkshire has booked $268 billion of pretax income, accrued $52 billion of income tax expense (19%), and paid $16 billion of cash taxes (6%). The power of tax deferral should not be underestimated. paying cash taxes equivalent to 6% of pretax income is not that bad. The cash taxes amount to 18% of the last 3 years operating earnings from non insurance subs. Of course, there's the fact that Berkshire needs to return its earnings via divvy to me or i need to sell (both of which trigger tax at my level) in order to monetize Berkshire. I solve that through borrowing against it rather than selling and do not foresee having any reason to sell, particularly given the diversification and business quality (unless it became egregiously overvalued) I understand what you are saying regarding holding stocks in a C Corp is presumably tax inefficient because there are two layers of tax. But this isn't a high turnover mutual fund of stocks w/ C corp tax treatment. Very large portions of the portfolio of businesses are permanent or quasi permanent holdings. If one has a long term time horizon and doesn't intend to sell, holding Berkshire is very tax efficient at both the berkshire and investor level. Just look at the gross sales over the last 3 or so years. Buffett is selling $15-$16B / year on a $350B stock portfolio and $600-$800B portfolio of businesses; my own personal turnover is far higher. There iwll be some turnover, but Berkshire is not forced to sell anything because of $140B of cash and $30B of operating earnings. in theory, I think your idea of tax inefficiency has merit. in practice, i don't think it does.

Also, I know you want to put BHE aside, but 2009 - 2011: $1.1B --> $1.3B NI, investing about $2.5B / year. $14B equity in 2011 2019- 2021: ~$4B NI, investing about $6.5- $7B / year. $47B equity in 2021 there's some inorganic in there (bought NV IIRC) but it's not really about huge ROE's so much as it as about deploying massive amounts of capital with safety/durability at decent regulated (low risk) returns.

Yes I’m not a rails expert. I don’t think we should accepts the market’s appraisal of UNP as absolutely the right multiple for BNSF. But generally it’s an irreplaceable duopoly that can earn reasonable returns on large amounts of capital while also distributing a fair bit to its owner per year. It’s deserving of a low cap rate/ high multiple IMO. Whether that’s 15x 20x or 25x (1.5-2.5x book) or whether the company is “underearning” by not choosing to adopt PSR, we can have reasonable debate about those but big picture, but I think we can agree that it’s worth much more than book.

please see BNSF's 10K. $6 billion of net income after tax. average FCF for last 3 years is ~$5 billion. BNSF has had higher capex than depreciation. how one views that is dependent on how one views the attractiveness of the overall returns. this is critical infrastructure of the US of A. at what multiple do you think BNSF should trade?

yes, that very well may be true. Just trying to demonstrate that book or 1.4x book is way off.

what do you think BNSF and BHE are worth? https://www.berkshirehathaway.com/BHE2021InvestPresent.pdf This is a nice presentation on BHE. BHE is generating about $4 billion of utility earnings (not inclusive of BYD gains, includes tax benefits). I'd say this is worth about $100 billion. 25x earnings. The utility index average is 24x. I think BHE is far above average utility. BHE is an advantaged, ESG friendly growth utility. there are few like it. It's correct that its nominal ROE is unimpressive (also BYD is $7B / $50B of the equity so growth in that is obscuring the ROE a bit). But there's massive investment going on at high single digit/maybe even double digit ROE's. The ability to invest massive amounts of capital at HSD ROE's and create a very durable income stream (vs say a portfolio of bonds) is a an advantage for Berkshire and adds ballast to the ship that is Berkshire. If you think I'm too aggressive, 1.4x book which would be $70 billion or 17.5x earnings which I think would be fairly reasonable as well. Arguing for book value is tough not right IMO. BNSF is a bit simpler than BHE which is a complex utility holding company undergoing truly massive investment. BNSF is bigger but less profitable than UNP. BNSF made about $6 billion last year. UNP made about $6.5 billion. My extremely shorthand lazy man's way of getting a starting point for BNSF is 0.9x UNP. UNP is $156B. 0.9x = $140 billion; this would be 23x GAAP. Book value is $46 billion. Collectively these two have $90 billion of equity (take Rails and energy assets of $215B, subtract $97 billion of liabilitis in that section of the 10K and $30B of the DTL). I think they're worth about $240 billion or 2.6x book. Those aren't conservative, but I'm happy to own them at the prices implied by Berkshire. Then there's Manufacturing, Mclane, and Service/Retailing Manufacturing made $10 billion pretax, Mclane made $230mm, S&R made $4.4Billion. So in total about $14.5 billion of pretax profit. I know these less well than the rest. Allocate your corporate interest, goodwill, etc, apply taxes, do whatever. Morningstar in August 2021 came to a valuaiton of 144K / share regarding this which is just north of $200 billion, which would seem reasonable to me given the quality/growth/ etc. I haven't mapped out precisely how much equity is attributable to this segment but in total it has $140 billion of identifiable assets, so the implied P/B s likely quite high. I think your pushback will be that these are lazy comps based or secondary valuation or that they're too rich or not what you would pay. That's fine. My point is that there's lots of Berkshire that a market based or NAV based approach just won't be relevant. this has been the thesis for 10 years and has played out well in absolute terms (and more recently in relative terms as well)

Apple = $160 billion MV as of 12/31, $35 billion of cost. $125 billion unrealized gain. DTL = $125 B * 20% = $25 billion. Book Value = $135 billion ($160B - $25B). $135 Billion / $160 billion = 84%. The book value of Berkshire's stake in AAPL is equal to 84% of the market value gross of the deferred tax liability. I think total addback of the DTL is too aggressive, but also would not deduct the entire deduction. Berkshire has a $90 billion DTL. $15B is related to BNSF. As long as Capex > Depr, this "never" comes due. You can see increase in the DTL as a consistent addback on BNSF's cash flow statement. For valuing Berkshire, this should be disregarded because it will be included in the valuation of BNSF. $13B is related to BE. Likewise, if you're valuing Berkshire Energy seperately, then you should not adjust for this at the Berkshire level. That leaves about $60 billion of DTL, most of which is related to unrealized appreciation like that of AAPL above. The most aggressive choice would be to ignore it entirely. The most conservative would be to pretend that Berkshire will sell all stocks immediately and realize that liability (ie it's worth full book). For me the truth lies in between, but I think that full deduction of the securities related DTL is overly conservative.

think you should take a closer look at Berkshire. only about $500-$600B / $960B of assets are financial (cash/t-bills/stocks/etc). There's also significant value in borrowing $90 billion for 0% with unknown but long duration (deferred tax liability). There's value in borrowing $75 billion of BNSF / BE bonds at very low rates for very long term, likewise with Berkshire corporate debt. Then there's the $150 billion of float, which is more complicated but likely not worth par as a liability (I'm not in the camp of adding it back). So if you have assets on the balance sheet that aren't marked to market and have liabilities that aren't worth their full accounting value, might Berkshire be worth a significant premium to book? Yes. YEs it might. I've seen you respond "well then where's the super high ROIC". Because book value is going up through stock appreciation, this clouds earnings power relative to book of the operations. Also, Berkshire Energy is not a super high ROE business, but it's a very stable / safe business with ltos of reinvestment opportunities. What would you pay for a sovereign perpetual with a coupon of 8%-10%? (I'm not saying it's risk free but the utility index does not trade at book in this rate environment). You can't cherry pick Apple (which is carried at about 84% of 12/31 market value by the way because of the DTL). You gotta look at the whole thing.

BAM bid for Befimmo at 47/share today, 50% premium. had no position in it or PGRE which also got bids

yea...i mean the clear answer is more houses should be built, but that takes time...NIMBY-ism, construction costs, etc.

to follow up on this, the most recent "market update" from the realtor that's sent out notes that there is 1 home listed in our neighborhood of 800. she was lamenting that fact because she needs volume and her advertisement read like "please increase inventory for everyone's sake, sell your home now!". she did note that homes aren't quite getting the peak premiums to ask because of rates. when i texted this to my parents in sough florida, they said "our neighborhood has 250 and none are for sale". the house 2 doors down from us tenants just turned over. Asking rent went from $4K to $5K between the leases (in less than 12M's); i thought the landlord was crazy for buying this house for 15% more than what i paid in 2019 despite the home being in worse condition and havign 1 less bedroom (same-ish "model" but from the 1940's so 80 years of differences). the landlord seems less crazy now that his rents grew 25% (or whatever was negotiated). I spoke to the tenant yesterday and asked where he was moving from. Local family been here a while. He said "it's frustrating, we were going to buy our house from our landlord, then he got an all cash offer that he couldn't refuse and needed us to counter within 1-2 weeks". He said they couldn't find anywhere similar to live and signed an 18 month lease with this landlord as soon as they could Good times.

love the $200K cash/year spend flex lol.

there's a very unpleasant tipping point where this is not the case (regarding general societal order, rule of law, property rights etc) I don't think we're anywhere near that, but there are limits to how much my rent and royalty receipts can go up without getting a little scared!

I think this is relevant…roughly even split between 240 votes “the more wealthy I get the (more/less)risk I take” based on my very comprehensive and authoritative survey Baupost’s TAM is 1/2 of wealthy people/institutions. No wonder they manage so much

the first bolded par is my point. people invest in stuff for reasons other than beating the S&P500. Outperformance is not the be-all end all (and there are certainlty periods in their history where they outperformed) for the record, i don't really like Baupost. regarding the 2nd point, that's a very long and complex discussion. But to simplify it, the greater your withdrawal rate and the greater % of budget or whatever is dependent on investments, the more volatility sensitive. jus think of a 25 year old's 401k as the ultimate volatility loving "institition"....it has huge percentage inflows and an almost infinite time horizon...the 25 year olds budget/revenue is 0% from investments the most volatility hating "institution" has net outflows and is solely dependent on investments to pay the bills. (excess) volatility destroys the long term purchasing power of that type of institution

It's almost as if...the organization has always been about preserving capital...while taking different risks than a 100% stock portfolio or 60/40 https://twitter.com/NeckarValue/status/1489380335817314308/photo/1

I'm torn on this...for a decade, I haven't owned enough tech. I've underestimated the growth runway of these truly amazing businesses and my risk asset purchasing power declined accordingly (because I didn't own enough of them). I got the poor relative performance i deserved. Since October 2020, that has reversed markedly. I've destroyed the market and made up years of lost ground. That's continued in 2022. But that doesn't necessarily feel sustainable and ultimately i want to "cover my short" in these businesses. Is FB at 15x a better 10 year proposition than FRPH at 0.7x NAV? I would say "probably yes". Now FRPH is much lower risk and has lower variance of outcomes in my opinion, but it's probably a mistake to own 10x as much FRPH as FB which is the case with me...and yes i'll still call it FB... on the other hand...the moves of the past week have also illustrated how much more comfortable i am with my NAV plays...if my NAV plays fell 25% in a day, they'd be just plain bonkers cheap...whereas most of the tech stuff is merely "flirting" with cheap or "is cheap if this good stuff continues to happen. I've thought about converting 10-20-30% of the PA to index and just staying in my lane with the rest. I buy a good bit of index each month in my 401k, but the portfolio is such that it will take a while to get to a reasonable %.... i don't know...i haven't really done much.