thepupil

well i'd obviously rather the DTL not exist ($100 KO w/ no liability is better than $100 KO w/ the DTL), so, as you point out, that is an inconsistency. But I don't think it really matters in the grand scheme of the $30B of cash being deployed / year and the value creation occurring. The DTL does not prevent the constant refreshing of the business mix, the excellent growth in operating earnings, etc. My argument has more to do with the fact that the DTL does not inhibit the cash generation and earnings growth, which is what will drive the stock. When Berkshire was more of an insurance co / investment operation, I would care more about the frictions created by the DTL in terms of constantly allocating capital to the best risk / reward. Clearly, as Buffett himself has admitted, mistakes were made and the tax tail may have wagged the investment dog. But Berkshire looks a lot different now. I think you are saying the full discount is not correct and to ignore it is not correct. While I agree with you, I think the "correct" approach is MUCH closer to ignoring it than counting it in full. Also, it's obviously an important component of valuation, but at today's market cap of $325B, the $30 odd billion DTL related to appreciated stock will result in a valuation difference that is, at maximum, 9% of the current stock price. So if you think 50% of the DTL is the "correct" accounting of it and I think 0%, then we'll come up with a 4.5% difference in current valuation and it won't really affect either of our growth/earnings expectations so looking out several years it really becomes not material. Not trying to be dismissive of the discussion, just putting it in context.

it's clear to me you understand the rationale behind "investments / share", the power of tax deferral, etc. I disagree with you in that I don't think it is "rational to discount that figure by the DTL". because the DTL is so concentrated in a few investments that are not going to be touched and because the cash to be reinvested elsewhere keeps pouring into Berkshire. In your hypothetical, where a holdco only owns 1 stock, then I agree with discounting by a DTL, because in order to invest elsewhere, the tax must be realized. I think this dynamic is seen in the real world with closed end funds that have existed for a while or conglomerates concentrated in a highly appreciated stock (like Yahoo!). T The deferred tax liability in Yahoo's case creates a friction in terms of capital allocation and the market slaps a big discount on it (I personally think in that particular instance the discount is too high and they'll find some way to work around it but some discount is warranted. In Berkshire's case, the embedded gains don't prevent optimal capital allocation and the investments w/ a big DTL are able to be monetized through divvy's. Going back to YHOO/BABA, the embedded gains arguably do prevent optimal capital allocation, distract management from the core business, and cause all kinds of problems that prevent the market from giving full credit to YHOO for its BABA shares. Because Berkshire has many other ways of raising cash (either by sitting on its ass and watching the ~$4B of investment income come in or by owning a bunch of operating businesses or by raising debt on very favorable terms or by writing insurance), there aren't any real issues or suboptimal decision making being caused by the DTL. I mean taxes may have prevented Buffett from selling KO when it traded at 50X or whatever, but that's water under the bridge and happened like 15 years ago. So I don't see the "rational" reason for applying a discount. But that's what makes a market. From your memos, you clearly understand all the mechanics at play and are free to discount what you wish to and not discount what you don't wish to. I personally still have a hard time adding back the float or capitalizing underwriting income. That to me is more aggressive than DTL. But that's been debated without end for a while other threads. People will have different valuation techniques and come up with different prices that they are willing to own/buy at.

Per share investments exists in order to add back deferred taxes and float (and account for debt by deducting interest); it's a quickhand way to try to account for Berkshire's liabilities and get rid of the ones that historically have 0 or negative cost. I personally think that adding back deferred taxes is more conservative than adding back float. the DTL really is a quasi permanent 0% interest loan, and when it comes due is completely under Berkshire's control. Berkshire has no problem monetizing investments through dividends and increased equity base over time (which allows them to underwrite more risk) without having to sell stocks. Also the DTL is pretty concentrated in a few stocks and every purchase of a new stock increases the aggregate cost basis of the equity portfolio (so for example if Berkshire wanted to raise cash they could sell a loser like IBM and generate an offsetting loss to harvest gains in KO or WFC or AXP without paying a giant tax bill)* The float on the other hand is of shorter duration and acts more like a "revolver" to use the word used in the letter today, with inflows (premiums) and outflows (claims) being a large % of the float in any given year. It can also yield negative surprises outside of control or prediction. The DTL is a simpler, lower risk loan that is much cleaner to add back. Even the CFA folks argue for adding back a perpetual DTL to equity, so it's not like Buffett pulled that out of his ass; it's standard industry practice. Not that that makes it right, just saying that it isn't exclusive to Buffett devotees, whereas adding back float is pretty Berkshire specific and more aggressive. *I think, though I'm not an expert if that's how corporate taxation of equity investments held at an insurance company works, so don't quote me.

Book Value Gain > MV Gain, therefore it was superior Simple Definition of superior : of high quality : high or higher in quality : great or greater in amount, number, or degree : better than other people

while this is true, it is not 1 for 1. because of the counter-cyclical deferred tax liability and because Berkshire holds a lot more other assets than stocks, the sensitivity of the book value relative to the change in equity portfolio is about 0.3

never received a refund before (realized investment gains), and am full on these anyways... the cost of my strategy (which was to replicate long equity exposure with LEAP's and use the cash saved to max out i-bonds so that i can build a nice i-bond position) is increasing with higher implied vol in options. for example let's say i wanted to buy me some of that berkaberk, I could buy $10K i-bonds and a $100 Jan 18 call for $36. paying about $9 of premium over 2 years (that's like borrowing at 4% a year). When I did this a few times before it was closer to 1.5-2%, so I could buy the i-bond and the berkshire LEAP and my expected 2% inflation yield would pay for my premium so i'd get a free put and free inflation optionality and start to build a material portfolio of i-bonds. this is not as attractive today (one could still use margin though). probably more than you wanted to know. most people would just fully fund the purchase of 100 shares of berkshire with cash and be done with it.

a pair that i'm considering is long the long duration low coupon bonds of the big independent acquisition targets (Apache, Anadarko, etc. and short XOM, CVX, etc.). For example, if XOM took out APC, APC's 4 1/2% of 2044 would trade from $66 to $100 on the credit spread tightening. and I think shorting the big integrated protects you a little bit from the sustained lower for longer even the big IG issuers like anadarko default scenario.

is anyone else considering shorting XOM? I don't really have a thesis yet, but it just appears to be negatively convex at this price. It seems to have almost always traded 9-13X and in order to get back there, they really need oil to go up dramatically, or to issue shares in an accretive transaction (a very strong possibility in my view), but seems tough to argue that isn't already priced int.

Thanks the pupil. It's a small liquidity sacrifice though, no? yes, it is a small liquidity sacrifice for the first year and like i said, it's not really to be used for cash that you'll move around a lot so it may not suit your purpose Year 0-1: not liquid Year 1-5: liquid, forfeit 3 months' interest (the amount shown in your account and above is net of this penalty) Year 5-30: liquid with no penalty Year 30: you must redeem federally taxable at ordinary rates upon redemption unless used to make qualifying educational expenses if bondholder falls under a a certain income limit; not subject to state tax.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm The composite rate for I bonds issued November 1, 2015 April 30, 2016, is 1.64% the yield depends on inflation. the interest rate is a composite of a fixed coupon and inflation, but the fixed coupon is basically zero. this cool cat says you should buy your i-bonds later because the fixed coup may go up. http://seekingalpha.com/article/3799726-buying-bonds-2016-one-word-advice-wait they can't go down in value but they can go to 0% coupon if inflation is negative. here's what an i-bonds position built over time looks like in real life. i envy those who were buying with fixed coupons of like 3% back in the day. hope that helps, i'm off to play some bingo and get a colonoscopy Issue Date Interest Rate Status Amount Current Value 01-01-2016 1.64% $5,000.00 $5,000.00 01-01-2016 1.64% $5,000.00 $5,000.00 03-01-2015 0.00% $5,000.00 $5,038.00 01-01-2015 1.54% $5,000.00 $5,038.00 01-01-2014 1.74% $10,000.00 $10,256.00 05-01-2013 1.54% $10,000.00 $10,288.00 05-01-2012 1.54% $5,000.00 $5,246.00 05-01-2012 1.54% $5,000.00 $5,246.00 Totals: $50,000.00 $51,112.00

i-bonds (liquid after 1 year). they are more for "long term" cash though in that you can't easily reduce/add to the position. i use it as my no risk fixed income allocation, my emergency fund, my "maybe one day I'll want to own a house and need a downpayment fund", my "oh shit interactive brokers just went under and that's where all my assets are" fund, etc. probably not what you were looking for but whenever these threads come up, I pimp the i-bonds because a 0% real return tax deferred with no credit risk, market risk, or duration risk is sexy as hell. they are also great for enlivening cocktail party conversation.

they are not legally obliged to do anything.

I like the HRG 7 3/4% of 22 @ $96, 8.6% YTM w/ duration of about 4. That being said, I keep my eyes on a very small subset of HY bonds and don't believe I have identified anything inefficient or some amazing relative value opportunity. This is probably the tightest CCC bond out there so it's not like the market doesn't realize it is safer than your typical low rated bond. Harbinger Capital is a holding company with 2 main assets: 57% stake in Spectrum Brands as well as an 80%+ stake in Fidelity & Guaranty Life It is chaired by Joe Steinberg (of Leucadia fame) and LUK is the largest shareholder. The stock has been a pretty popular value name as it trades at a discount to NAV, primarily because it used to be owned and controlled by Phil Falcone (who was barred from running a hedge fund for borrowing from his hedge fund to pay his personal tax bill and not diclosing it <---something like that, don't know the details). They've also made some poor investments in energy and credit (lost a lot of money lending to Radioshack). Assets are about $5B or so, $3.4B of that is in SPB and $1.2B is in Fidelity and Guaranty which is set to be acquired by Anbang (Chinese insurer that is often used by China bears as an example of why China is blow up prone). They have $1.8B of debt. Assuming Anbang honors its commit to buy FG&L in 2Q 2016, HRG will have virtually no net debt. I like the 7 3/4% of 2022 @ $96.0 and 8.6% YTM. These are CCC rated, holdco debt and the subordinated to subsidiary debt and HRG's senior debt , so they aren't "safe" in that regard, but I think you will agree these are nicely covered; the spectrum stake alone is worth about 2X their debt. When the FG&L buyout was announced these bonds rallied to $103, but they've since drifted down to $96. I think that once the FG&L buyout closes, the bonds will tighten, but I'm fine holding to maturity and clipping coupon if that doesn't happen. EDIT: these are like 94.5 / 96, be mindful of the bid/ask

between credit cards and venmo, I'm nearly completely cashless. My total ATM withdrawals were $200 for the year 2015.

http://lt.morningstar.com/util/GetDocument.ashx?FileId=9388 http://www.arisaig-partners.com Also check out funds managed by Arisaig.

I'd look at the holdings of the Wasatch Frontier Emerging Markets Fund to start. This is not an endorsement of that fund (it has high expenses and a terrible liquidity mismatch), but it is 48% consumer staples and features types of businesses you are looking for. Also some U.S. and European Companies are dominated by EM assets: Carlsberg comes to mind (majority Russia + Southeast Asia). There are lots of country(or region) specific subsidiaries of multi-nationals out there. For example, Coca Cola Icecek in Turkey, and Coca Cola Femsa in Mexico, the brewers have tons of subsidiaries in Africa, as do other staples companies. India is full of them: Hindustan Unilver, Nestle India, etc. Lots of snack companies throughout the world too. Many of these are not accessible to the individual investor. Good luck opening accounts in Nigeria and Pakistan to buy them ;D I would also check out the holdings of GMO Emerging Markets Domestic Opportunities Fund. This is similarly themed but more EM than Frontier. There is also a EM Domestic Demand ETF, so you can look at the holdings there http://www.emergingglobaladvisors.com/pdf/holdings/EMDD%20holdings.pdf https://secure.wasatchfunds.com/Our-Funds/Portfolio-Details.aspx?fund=WAFMX Page 55 http://hosted.rightprospectus.com/Wasatch/Fund.aspx?cu=936793819&dt=AR Brewers Carlsberg Brewery Malaysia Berhad (Malaysia) Delta Corp. Ltd. (Zimbabwe) East African Breweries Ltd. (Kenya) Florida Ice & Farm Co. S.A.*** (Costa Rica) Guinness Anchor Berhad (Malaysia) Guinness Ghana Breweries Ltd.* (Ghana) Guinness Nigeria plc (Nigeria) Lion Brewery Ceylon plc (Sri Lanka) Murree Brewery Co. Ltd. (Pakistan) Namibia Breweries Ltd. (Namibia) Nigerian Breweries plc (Nigeria) Phoenix Beverages Ltd. (Mauritius) Societe de Limonaderies et Brasseries (Ivory Coast) Societe Des Brasseries du Maroc (Morocco) Tanzania Breweries Ltd. (Tanzania, United Republic of) Union de Cervecerias Peruanas Backus y Johnston S.A.A. (Peru) Packaged Foods & Meats Agthia Group PJSC (United Arab Emirates) Cadbury Nigeria plc (Nigeria) Centrale Laitiere* (Morocco) Dairibord Holdings Ltd.* *** (Zimbabwe) Delice Holding (Tunisia) Dutch Lady Milk Industries Berhad (Malaysia) Edita Food Industries-REG S GDR* (Egypt) FAN Milk Ltd. (Ghana) Grupo Herdez S.A.B. de C.V. (Mexico) Juhayna Food Industries (Egypt) Ledo dd (Croatia) National Foods Holdings (Zimbabwe) Nestlé Lanka plc (Sri Lanka) Nestlé Malaysia Berhad (Malaysia) Nestlé Nigeria plc (Nigeria) Nestlé Pakistan Ltd. (Pakistan) Olympic Industries Ltd. (Bangladesh) PT Indofood CBP Sukses Makmur Tbk (Indonesia) Rafhan Maize Products Co. Ltd. (Pakistan) Vietnam Dairy Products JSC (Vietnam) Tobacco British American Tobacco Bangladesh Co. Ltd. (Bangladesh) British American Tobacco Kenya Ltd. (Kenya) Ceylon Tobacco Co. plc (Sri Lanka) Eastern Co. (Egypt) Pakistan Tobacco Co. Ltd. (Pakistan) Household Products Colgate Palmolive Pakistan Ltd. (Pakistan) Unilever Ghana Ltd.* (Ghana) Unilever Nigeria plc (Nigeria) Pharmaceuticals Abbott Laboratories Pakistan Ltd. (Pakistan) DHG Pharmaceutical JSC (Vietnam) Egyptian International Pharmaceutical Industrial Co. (Egypt) GlaxoSmithKline Bangladesh Ltd. (Bangladesh) GlaxoSmithKline Consumer Nigeria plc (Nigeria) GlaxoSmithKline Pakistan Ltd. (Pakistan) Hikma Pharmaceuticals plc(United Kingdom) Searle Company Ltd. (The)* (Pakistan) Square Pharmaceuticals Ltd. (Bangladesh) Traphaco JSC (Vietnam)

Just starting DD, feel free to opine Price: 60 / 62 Yield: 8.57% YTM, 7.99% CY, Treasuries + 565bps Issuance Spread: t+120 Duration: 11.5 Rating: Baa2 / BBB+ Not liquid Capital Structure $493MM commercial paper $1,500MM Revolver, fully undrawn $2000MM Senior Unsecured Bonds $500MM 5 7/8% of '19 ($101) $250MM 3.45% of '23 ($82) $500MM 5.7% of '39 ($71) $500MM 4 7/8% of '43 ($61) $2,493MM of total debt $2,603MM of Market Cap $5,000MM EV Assets: $840MM of current assets, mostly receivables (Note: 16% of which is Petrobras) $6,800MM of offshore drilling rigs Current Assets=Current liabilities, With the assumption that the receivables are adequately reserved against (maybe they aren't), you basically have $2B of long term debt here and the possibility of $1.5B of the revolver getting in front of you. Collateralizing you is a bunch of crappy old rigs for which DO is famous, as well as some brand spanking new drillships and stuff. It's not all super old, they've spent like $6B+ in the past 4 or 5 years, but my rudimentary understanding is the company owns one of the worst fleets in the industry. They have $5B+ of backlog, but who knows what that means. Loews owns 53% of the equity, worth $1.3B at current market, so they have something at stake here. My initial thoughts on these is that at $61 / $100, you are creating the rigs at an undemanding valuation and that the overcapitalized sponsor (L w/ $3B+ of net cash) who is below you in the cap structure provides a little bit of extra protection. I'm not quite sure if the L parental support is enough to get me interested though. And I probably wouldn't lend to the company at 8-9% without the L backing, so I'm hesitant to hang my hat on that. If I can get comfortable w/ the downside, I'll buy them, making 8% cash carry and 11% for every 100 bps of spread tightening when (if ever) energy improves is not a terrible return. Still not there though. On my watchlist, would appreciate anyone telling me why I'm an idiot for considering them.

My highest conviction (though certainly not highest upside) idea for 2016 is to go long the Leucadia 6 5/8% of 2043. On IB: $134K Bid @ 81.97 / $500K Offered @ $82.05 At the offer price, the bonds yield 530 over the 30 yr (8.28%) to maturity and trade well wide of Jefferies, significantly wider than other BBB- financials, and about 300 bps wider than higher rated more liquid financials like MS and GS (which I regard as just as risky). The bonds were issued at 300 over and have since widened out by 230 bps, particularly in the last few months on no apparent news other than general market/liquidity concerns and mediocre operating results from JEF/LUK. I simply don't think the mediocre earnings of Jefferies and Leucadia warrant the spread widening or make LUK a worse credit risk. Perhaps I'm the patsy at the poker table, but this is the safest bond I can find that offers an equity rate of return. Duration doesn't bother me (it's about 11). I'd welcome long rates going up, though I don't think that will happen. Ya it's boring.

Taxable +1.9%, 4.7% ann. since June 2013 Roth +12.4% 13.4% ann. since Oct 2013 IRA +27.2% 21.0% ann. since Oct 2013 Taxable has lots of shorts/options/etc. that have significantly detracted from performance. IRA's are long-only and VERY concentrated pretty much the same story as last year with different names

LaCroix is everywhere and growing nicely. http://www.bloomberg.com/news/articles/2015-08-12/how-lacroix-beat-coke-and-pepsi-in-the-sparkling-water-wars http://mobile.nytimes.com/2015/03/08/magazine/letter-of-recommendation-lacroix-sparkling-water.html?referer=&_r=0 http://nypost.com/2015/12/03/sparkling-lacroix-sales-drive-acquisition-talk/

said it much better than i could

I don't run a fund and don't short much. Rukawa just asked how making 8% a year on a short book would lead to one being a billionaire. I answered. Sorry if that was confusing.

I'd like to see that math. Making 20% a year it would take you 52 years to turn 100,000 into a billion. Making 8% a year it would take 121 year or so. Good luck! -you aren't including the returns from a long book. Very few hedge funds run with less than 100% gross (i.e. a short position does not crowd out a long position). So the rate of compounding would be much higher. build a spreadsheet. for any given time period, take the s&p, put in 100% long exposure and then add a 50% short book that makes 8% / year (you would obviously need to make it have some sort of negative correlation to the s&p to approach reality, but making 8% a year from shorting is certainly not anywhere close to recent reality so this is kind of a useless hypothetical). rebalance to 100% by 50% monthly quarterly, whatever. the compounding will be very high and it will have lower drawdowns and vol, the track record would be great. -you aren't including management fees and incentive fees, 8% / year from a decently diversified and scalable short book would make my fund incredibly attractive as a high return, high alpha strategy. If I couldn't raise money from institutions, I'd walk into Izzy Englander or Steve Cohen's office and be running a big book in no time. -your starting value is too low ;D If you can make 8% a year shorting over the next 20 years, you'll be billionaire too. But it's not happening. That's really really really really hard.

just to be clear, the book was about Allied Capital; ACAS is also a slimy DC based BDC but is still very much around.

Again, you can make that argument for Chanos, as he has made his living primarily as a short manager, but not for Einhorn. That being said, compare Chanos numbers for the last five years against the S&P 500 and you will see the stupidity in paying a hedge fund manager to protect you on the downside. Cash worked in 2007/2008 and cash would have killed Chanos over the last five years if you were worried about downside risk. Absolute returns over the long-run are all that matter if you plan on becoming wealthy! Ask Ericopoly! Cheers! Sorry, I don't understand. Are you saying Einhorn shouldn't short? He's built his spectacular track record on doing well on both sides of the book (though judging by his recent performance, short alpha has probably been close to 0 lately). I agree that absolute returns are the most important thing to creating wealth. Very good short selling increases absolute returns. Very good short selling is difficult though and most hedge funds don't add much value on the short side and have too high of fees.