netnet

Well there is no way to value it, so basically you are trying to estimate demand, hence it is Keynes's beauty contest problem. In that case you are not judging what contestant you think is beautiful rather, you are try to guess what contestant other judges will deem beautiful, then trying to assess what they assess others will find beautiful, and so on recursively. In hindsight everything is of course is obvious, but prospectively....

Very interesting discussion. Some are confusing anti-fragility with robustness. Nevertheless, let's look at the model itself, anti-fragility may be generally, highly specific, in biological terms, say like vultures feeding on carcasses as a result of some massive ecological disruption or mammals taking over niches once occupied by dinosaurs. In business, SD's example of a labor exchange for disrupted workers, is much like the vultures, as are retail liquidators. As far as occupying niches: early post war Japanese car manufacturers both in Japan and eventually in the US, had enormous niches open to them. These 'organisms' profited from the disruptions, they were anti-fragile. Now to think about the model a minute, really some companies are both. I would argue that ready cash and great capital allocators go a long way. (with the ready cash, i.e. liquidity is necessary component of both robustness and anti-fragility.) BRK arguably was both robust and in Buffett's deployment of cash anti-fragile. Taleb's barbell's cash component is similarly robust, it's proper deployment is anti-fragile. Note: After all, some of BRK's businesses were hurt by the great recession, would you argue that BRK was stronger during the recession? I wouldn't, except comparatively. It was slightly weaker, but so robust that Buffett could make his anti-fragile investments work, so there is a bit of a timing issue too. My argument here may be a little weak as I will concede that Buffett's reputation, buttressed by cash was or became an anti-fragile asset that companies craved, and that his reputation grew with recession or the value of his reputation grew. (Hence Goldman would be far more likely to give Buffett better terms on his money than say you or me or even David Swenson of Yale endowment, had any of us offered Goldman a few billion!) I would call BRK both robust and anti-fragile, at least as long as Buffett is competently at the helm! One could argue what the exact spread between the two qualities are, which is perhaps interesting to many (but not to me)

Thanks Liberty. And thanks Racemize (I don't think I had this epic tome and it definitely has some materials that I had not seen.) I did send the letter and Huber's commentary to my kids. Despite my inclination, I did refrain from dropping Racemize's encyclopedia on them!

I guess the only way to hedge this is to own some real assets? 1. Prebuy RE once announced 2. ... 3. Profit? 8) For the real estate folks out there. How would you play Amazon's decision this once it is announced? (If it's NYC or Boston, i.e. a large expensive market, really nothing to be done, but a smaller market, like Austin or Indianapolis, there could be some interesting opportunities.

for the true value investor, this is available online ;) https://www.edge.org/contributors/what-scientific-concept-would-improve-everybodys-cognitive-toolkit

Just got the book. Seems very interesting.

The original question is interesting, as are the responses. Both Sharper and Jurgis are spot on but there is really a fundamental analysis that is lacking here. You have to know the limits of a model before you use it. To paraphrase Gerald Weinberg(Systems, excellent book), you need to know at least 3 examples of a tool's (model's) failure or misuse to begin to understand when and how to use it. Hence Sharper's point about missing excellent businesses. The concept of margin of safety in finance is a particular application of the structural engineering concept: don't put a 3 ton load on a bridge, structure, or rope rated for 500 pounds, in fact only put 250 on it! See Buffett's commentary. Margin of safety is generalizable to the portfolio itself, hence half Kelley, etc. So on those low probablity, but positive EV positions your portfolio itself should have a margin of safety. To paraphrase Munger, you do not want to go back to go, i.e. zero. Hence, the worst super cat will never threaten BRK. Or succinctly, unlike Godiva, don't put everything you have on a horse. The above imply that you can use all of the suggested tools in your MoS, but judiciously. All of the above also might imply then price substantially less than worst case, unless you are making low probability high return bets, in which case >1% type bets might be in order.

At the current levels, i.e. above cash and liquidation values ex Cline, MAR is a levered bet on met coal, right?

Never let facts get in the way of a good story. ;)

+++1

I also used to be a subscriber. I generally find that you can get as many investing concepts and way more potential name to invest in elsewhere. I like the quarterly out of Columbia.

This is a very good and interesting question. You should always be asking the most basic and elemental question to get to first principles, BUT the question itself may mean that you should be careful investing, because frankly I can not think of two more dissimilar business models by large retailers. In fact, somewhat aping Vegaseller words, I would say that they are really orthogonal to each other, i.e. not opposites but different, but let's start with the similarities. (I do disagree with the infrastructure play analysis though, Amazon started out without infrastructure and depended a great deal on third party sales, new and used. Analysts questioned the wisdom of them building warehouses, rather than a lighter capital model.) Similarities Among the greatest wealth creators in retail in respective generation Both consciously started competing in 'Palookaville' until they could compete in other markets Started by intelligent fanatics Best in class logistics and IT infrastructure Emphasis on pricing and crushing everyone else's margin Differences Although they are quintessential companies of their generation, given the different generations, they are vastly different Third party sellers, Amazon Location based vs online, Walmart Prime, Amazon note this allows for lower margin on purchases, See Sam's Club and Costco, (I know Sam's Club is Walmart.) For awhile Walmart drove US industrial policy, in demanding it's manufactures source offshore Because of supplier structure, Amazon does not care where manufacturing occurs. Larger % of store brands, Walmart Amazon benefits from highend brand purchases Walmart is a 'every day low price' company Amazon is a 'everyday low margin' company, Bezos--"Your margin is my opportunity". Because Bezos is relatively young (and alive) he is still innovating on business models, hence Prime, Echo, private label, AWS (By the way, Munger was talking about Mental not Business Models.)

Isn't this the same as the pdf of his principles that is floating around?

Playing devil's advocate here, but are LEAP's prudent when the overall market is so high, i.e. should there be a big correction it would probably affect BRK; (And the BV of held securities would fall as well.) You admittedly have the Buffett put, but suppose upon a crack up, he sees an investment that is 'better' than buying BRK at 1.2 (or say 1x on the old book?) In the depths of the great recession, BRK was down 50%, what was the P/BV then?

Tom, I will PM you

O Canada, 150 years of being (mostly) nice! Canada great attitude, bad latitude! (Had Canada a bit more southerly, I would have moved there years ago. Can't take the winters.)

I'm a big fan as well. I have not read his most recent book (nor have I re-read his older books recently). I do read his WSJ Saturday column and have his new book on my to read list. Are those quotes from his new book?

Gio, So you have been trading in and out between 1.1 and 1.4 book? I have never been in FFH, nor have I tracked the P/BV ratio. How often does in hit the top and bottom ranges? once per year? Do you trade around 20%-30% of your position? I have done that with other names myself. (Speaking out loud, mostly to myself, but I know that some would really pooh, pooh this as a strategy, as in if you like the name then you should just buy and hold it, I am inclined your way, that is to trade a portion of the holding, which really would work when you are trading off of a set variable, like P/BV.)

I'm pretty sure that Todd and Ted both invest without supervision, at least in 'their' accounts.

Bump. Is there any way of investing in Indian stocks as a non-Indian? Maybe setting up a partnership with non-resident Indians?

Here it is, enjoy: Berkshire Hathaway’s annual meeting and love fest in Omaha, Neb., earlier this month drew fawning attention to the wisdom of Chairman and CEO Warren Buffett and his sidekick, Vice Chairman Charlie Munger. But the big question for investors is where this formidable conglomerate, with almost $20 billion of annual earnings, goes from here. Berkshire’s Class A shares (ticker: BRK.A), now trading around $245,000, look reasonably priced and could have 15% to 20% upside through the end of 2018, based on likely growth in the company’s book value. That’s a decent return potential, considering the Standard & Poor’s 500 index is at a near-record 2381 and trades for 18 times projected 2017 operating profits, its highest valuation since the tech bubble of 1999 and early 2000. Berkshire’s advantages, notably its diversified earnings stream, long-term focus, and a balance sheet laden with $96 billion in cash and marketable securities, make it a good bet to beat the S&P 500 over the coming years, with or without Buffett, who turns 87 in August. Berkshire, now valued at $400 billion, is the market’s sixth-largest stock. “Berkshire should benefit meaningfully from a recovering U.S. economy,” says Barclays analyst Jay Gelb. “It generates substantial free cash flow that can be deployed in its operating businesses, acquisitions, or investments, and it offers an attractive valuation at 1.4 times book value” of about $178,000 a share. Gelb sees book value rising at a 9% or 10% annual rate in the next two years. The stock historically has appreciated in line with book value. Gelb carries an Overweight rating and a price target of $286,500. Berkshire’s B shares (BRK.B), now $163, carry a corresponding price target of $191. Buffett’s genius for capital allocation has driven the 884,000% rise in the stock—19% a year—during his 52-year tenure at Berkshire’s helm. His successor, however, should get some relief from that reinvestment challenge because the company is likely to pay a dividend in the post-Buffett era and be more aggressive in repurchasing stock. The company doesn’t pay a dividend and has bought little stock in recent years. Buffett hasn’t revealed a successor, but our best guess is Greg Abel, the 54-year-old head of Berkshire Hathaway Energy, the company’s big energy-transportation and utility business. Abel has overseen Berkshire Energy’s growth for most of the past 19 years and is an experienced manager and deal maker—two important qualities for the next Berkshire CEO. Buffett singled him out at the company’s recent annual meeting for his “extraordinary” accomplishments. BERKSHIRE STOCK is flat this year after gaining 23% in 2016. Berkshire surged in the postelection Donald Trump rally—ironic, given Buffett’s support of Hillary Clinton—because of its economic exposure and its status as a major beneficiary of a lower corporate-tax rate. Berkshire is down 8% from its early March peak, reflecting the waning prospects for President Trump’s legislative agenda. Book value is the easiest way to value Berkshire. Indeed, Buffett for years used it as a favorite yardstick. Berkshire’s price/earnings ratio, now 21 based on estimated 2017 net income, makes the company appear richer than it is. Berkshire’s earnings capture only the dividends, as opposed to the underlying earnings, of the companies in Berkshire’s $134 billion equity portfolio. Adjust for this factor, and Berkshire’s P/E is closer to 15. Book value admittedly had more relevance two or three decades ago, when the bulk of Berkshire’s value was lodged in its equity portfolio. The current holdings are dominated by six stocks: American Express (AXP), Apple (AAPL), Coca-Cola (KO), IBM (IBM), Kraft Heinz (KHC), and Wells Fargo (WFC). The company’s wholly owned businesses now loom larger, and many—including the Burlington Northern railroad, Berkshire Energy, auto insurer Geico, and Lubrizol (chemicals)—are more valuable than their carrying value on Berkshire’s balance sheet. Its dozens of other operating businesses include Shaw Industries (carpeting), Benjamin Moore (paints), Dairy Queen (ice cream), and NetJets (fractional jet ownership). The company’s property and casualty insurance operations include Geico, reinsurer Gen Re, and a specialized reinsurance business focused on big-ticket policies that cover events like hurricanes and earthquakes. The catastrophe-insurance business is headed by Ajit Jain, one of the best underwriters in the world. In all, Berkshire had $223 billion in revenue last year. Buffett’s preferred valuation measure is what he calls “intrinsic value,” which is based on the projected discounted cash flows that will be generated by the company. He has said intrinsic value “far exceeds” book value, but won’t reveal his estimate of the figure. Longtime Berkshire holder David Rolfe of Wedgewood Partners estimates it at about $300,000 per share. At the meeting in Omaha, Buffett estimated that intrinsic value has risen at a 10% annual clip for the past 10 years. And he’s hopeful for a similar result in the coming decade. If Berkshire can achieve something close to that growth, the stock could double in the next 10 years. Barron’s has written favorably on Berkshire several times in recent years, including a cover story (“Berkshire Hathaway’s Bright Future,” July 25, 2015), when the stock traded at around $214,000 a share. Since then, the stock is up 15%, trailing the S&P 500’s total return of 19%. An engaged Buffett shows no desire to retire and seems intent on finding what he has called an “elephant”-size acquisition to put a dent in Berkshire’s cash hoard and boost the company’s earnings power. Munger, his longtime Berkshire partner, said at the annual meeting—perhaps jokingly—that Buffett has seven good years left. Buffett has said his longevity model is the biblical Methuselah. BUFFETT’S ALWAYS ASTUTE OBSERVATIONS on business and investments were on display at the annual meeting, where he and Munger, 93, answered shareholder questions for five hours. Among the high points was Buffett’s comment that he may re-evaluate Berkshire’s refusal to pay a dividend or lift the current cap on stock buybacks from the current 1.2 times book, if Berkshire’s cash continues to grow. Buffett said it would be hard to come back to the shareholder meeting in three years with Berkshire sitting on potentially $150 billion in cash and say that the company should not return some of it to shareholders. Rolfe considers this a “first-class problem” and thinks the company should lift its buyback threshold now, which would still allow it to repurchase stock at a discount to his estimate of intrinsic value. The current buyback threshold of 1.2 times book, now about $214,000 per Class A share, has effectively put a floor under the stock, since investors figure that Berkshire stands ready to aggressively buy stock at that level. Looking out toward the end of 2018, book could hit $200,000 a share, putting a potential floor on the shares around current levels if book-value growth pans out. Barclays’ Gelb projects year-end 2018 book at about $204,000 a share. Munger said Berkshire could do a $150 billion deal. Buffett responded that he’s a “little more conservative,” but allowed that Berkshire is capable of a “very, very big deal.” Finding a big deal won’t be easy, given Buffett’s valuation discipline, an elevated stock market, and the company’s refusal to participate in auctions. Munger said Berkshire probably needs to look on “higher branches” because there isn’t much low-hanging fruit. Risks with Berkshire include a sharp stock market selloff that would depress its equity portfolio and book value, although Berkshire probably would hold up better than the market in a downturn, due to its financial strength and ability to invest when others are fearful, as was the case in 2008. Buffett also addressed a longstanding investor fear: that the stock will plunge immediately after his death. “I think the stock is more likely to go up if I die tonight,” he said, explaining that Wall Street might start speculating about a breakup of the vast, decentralized company based on the view that the sum of the parts would be worth more than the whole. Buffett has resisted unloading businesses. The unwritten compact that Buffett has made with business sellers is that Berkshire would treat their operations like the Mona Lisa, in contrast to what he and Munger see as the more rapacious, buy-and-flip approach of private equity. The likelihood is that a post-Buffett Berkshire won’t break up, given a Buffett-friendly board that includes Microsoft co-founder Bill Gates. BUFFETT ALSO COULD CROW about Berkshire’s big, new successful investment in Apple, now worth $20 billion. That’s a nice change, given that Berkshire’s longstanding major equity investments, including American Express, Coca-Cola, IBM, and Wells Fargo, all trail the S&P 500 in the past five years. Berkshire has cut its IBM stake by a third. The company’s $28 billion investment in Kraft Heinz has been a big winner and now is worth almost three times Berkshire’s cost. “Berkshire exemplifies, better than any company I know, a willingness to make investments that involve short-term pain in return for long-term gain,” says Thomas Russo, a partner at Gardner Russo Gardner. Russo, a longtime Berkshire holder, says that approach is illustrated by Berkshire’s recent move, in Buffett’s words, to “put our foot to the floor” and rapidly expand Geico’s customer base this year. Geico expanded its policyholders by 700,000 in the first four months of this year—compared with roughly 300,000 in all of last year—to a total of more than 15 million because of favorable conditions in the auto insurance market. Premiums are rising to reflect higher claims, in part the result of texting drivers. Berkshire is willing to accept losses in the first year of the policies, reflecting acquisition costs, including advertising, to get customers who should be profitable over the long term. Russo estimates the loss on a new policy at $250 annually, but the subsequent payback could be $2,000 per policy. “Nothing in life distracts him from building Berkshire’s intrinsic value on a per share basis,” Russo says. The per-share emphasis is critical to Berkshire’s success. Barron’s tips Greg Abel to step into Warren Buffett’s legendary shoes as CEO. Daniel Acker/Bloomberg BUFFETT IS LOATH to issue stock for acquisitions, preferring cash. In his latest annual letter, Buffett highlighted an impressive statistic: Since the company began redirecting its cash flow to buying businesses in 1999, its net income from operations has risen to almost $18 billion from under $1 billion, with just an 8.3% rise in the share count. Berkshire remains underrepresented in institutional portfolios. Many big investors want direct access to management, and Buffett rarely obliges. The company holds no earnings conference calls or investor days, aside from the annual meeting, and has little analyst coverage, a reflection in part of the company’s complexity. Buffett has said Berkshire’s ample and diversified earnings and financial strength ought to make it an ideal choice for pension funds and endowments, but there’s scant interest. And Berkshire is a bargain compared with hedge funds, with Buffett still earning a salary of just $100,000 annually. His net worth is over $70 billion in Berkshire stock, despite his having given away 40% of his shares, mostly to the Bill and Melinda Gates Foundation, since 2006. There’s understandable concern about the post-Buffett Berkshire, given his incomparable record. The likely leadership structure will involve an as-yet-unnamed CEO, with Buffett’s son Howard as nonexecutive chairman. Two current investment managers, Ted Weschler and Todd Combs, who oversee more than $20 billion of equities, will probably take control of the entire investment portfolio while playing an advisory role with the new CEO. Buffett, who has been highly critical of professional money managers, particularly those who run hedge funds, for their fees, favorably noted at the meeting that Combs and Weschler earn a relatively modest $1 million annually, getting a bonus only if they beat the S&P 500. WE HANDICAP GREG ABEL, the head of Berkshire Energy, as noted above, as the favorite to take over for Buffett. Berkshire Energy had net income of $2.5 billion last year, making it one of the largest utilities in the country. The other oft-mentioned candidate is Ajit Jain, who is 65 and lacks experience running a large organization. Buffett indicated at the meeting that his successor could be named while he’s still alive. The longer he stays CEO, the higher those chances. While prospects for corporate tax reduction have dimmed with Trump’s fortunes, Berkshire would be a big winner if it happens. At a 20% corporate tax rate, Berkshire’s book value could see a 9% boost from a reduction in its deferred tax liabilities, and its earnings could rise about 15%, estimates Barclays’ Gelb. Those tax liabilities stem largely from unrealized gains in the company’s equity portfolio. A lower tax rate would reduce the liability, boosting shareholder equity. With a combination of offensive and defensive qualities, Berkshire is a good bet to top the S&P 500 in the coming years—although the gap is apt to be closer to one or two percentage points, which has been the experience over the past 10 and 20 years, than the staggering 11-point advantage over Buffett’s 52-year tenure. Berkshire doesn’t need Buffett to remain a good investment.

What are you thinking about BRY from here? This is already a lovely trade. Normalized 6 x EBIT or .33 P/S?

Munger is 93 and he is slowing down. I noticed this at the Daily Journal meeting. He missed one or two questions, etc. But on the decline he still has more cognitively than most Nobel Prize winners. Not to be a rumor monger, but my suspicion is that he has cancer. Over the years he has said don't feel sorry for yourself, even if your child dies (his child did die). At the last Journal meeting, he said don't feel sorry for yourself if you have cancer. So, making the inference...

He has an interesting perspective. Thanks,

Re the 21% ? Do you mean 11.5 annually, plus the 8.5 fee (hopefully one time only) for not paying the principal this past year. Interesting company Cardboard. Basically a levered bet on North American drilling, which is not bad with a net-net (said Netnet ;)) There is financing risk with the debt due this year however.