jay21

Good thoughts. The problem I have with the "hedges" is their speculative nature and a strike set when prices were depressed. Also, they seemed to be long duration on their bond portfolio as well when they were putting the hedges on. That clearly is a deflation position to me and not a "hedge". I don't follow FFH as closely as others so please let me know if my assessment is off.

Nice. Anyone know what the carrying value of Iscar is?

Stumbled across this quote for Charlie Munger, which is great: It's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go.

I have heard Charlie use the "mental model" phrase before, but I don't know if I ever grasped what he meant. Does anyone have a link to where he gives a detailed explanation? Or can someone give me examples of different mental models and how they are being used?

I know Buffet wouldn't answer those questions. It would probably be a bigger issue if he said he would buy it than if he actually bought it.

Is this summary of Prem's thesis on deflation accurate?: The private and public sectors have very high Debt/Income (Debt/GDP) ratios and this is unsustainable. There will need to be de-leveraging. There is tepid growth currently and de-leveraging will exasperate the situation which could lead to deflation. Also, I am re-reading the new letter. Loved this quote: "The long term is where it’s at!"

If the stock tanks, it will be a good opportunity. Question: Could there be some discount already applied to the stock due to Buffet's impeding "retirement"?

If you take delivery, do you incur any taxes?

I was thinking about this delta return today. Implicitly it means they have confidence that their delta will exceed what they could otherwise earn in fixed income. Otherwise, why not just buy bonds instead? Yup. They go by the balance sheet, giving it a lot more weight than I would when it's a crappy business. For this reason, there is huge basis risk in their "hedging". Nevertheless, It's hard to argue with their long term success. You also had that "Buffett put" strategy with Berkshire trading down near 1.1x book value. Fairfax bought none! That seemed to be a possible holding for them that wouldn't require too much (if any) hedging, and could compound away tax-deferred for a long time. Perhaps they think they can do better than Berkshire with their delta? Or they don't believe in the Buffett put, or they don't want to own Berkshire. Or they believe the hedges won't take long to be wildly useful. Hmm... It's got to be better than JNJ as a defensive blue chip holding, either way. It depends. If you think that the US economy will experience deflation, BRK might not be such a great holding. JNJ operates in one of the areas that they probably view as inflating.

What is the source of this? Are you talking about this from the 99 letter: We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it’s the market’s view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments. If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities that are dramatically less than most investors have either experienced in the past or expect in the future. If investor expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated.

I think I might dig a little into FFH. Their bond duration seems to be pretty long, which makes their hedges feel more like positions rather than hedges. Eric might be right that these might not take too much more of a MTM loss though.

He should start a holding company, not a fund. 0% tax by owning Berkshire till death (which is what you do if you are a billionaire, because you aren't going to spend the money). Owners of Berkshire enjoy dividends from equities taxed at 14.5% rate, dividends from subsidiaries taxed at 0% rate, and capital gains taxed at 28% (under Obama's proposal). I know you are thinking that 28% on capital gains is no sweet deal, but considering that California has a 13% capital gains tax rate on top of the 20% Federal capital gains tax rate as well as the roughly 5% Obamacare/medicare tax, then 28% seems like a pretty sweet deal after all! Trust me, I'm waiting to double my Berk holdings. I consider not buying enough Berk to be one of my bigger investing mistakes. What's stopping you?

Found a fixed income presentation on BNSF website: http://www.bnsf.com/about-bnsf/financial-information/fixed-income-investors/pdf/fixed-income-investor-presentation-3rd-quarter-2012.pdf - Maintenance Cap-Ex looks to be about $1.6b (half of Cap-Ex). They booked about ~1.8b in DA. - Buffet has been receiving dividends from BNSF - There was a good overview of oil by rail in the presentation

Does this mean you think they have weak moats?

Burger King CEO will become Heinz CEO. Anyone familiar with him or know how he did with BK? http://finance.yahoo.com/news/burger-king-ceo-heinz-reins-122855221.html;_ylt=Ah5TxHIuK7quQDgWrlGub.KiuYdG;_ylu=X3oDMTIxaWEyYTRjBG1pdANXaWRlIFF1b3RlcyBNb2R1bGUEcG9zAzI5BHNlYwNNZWRpYVJlY2VudFF1b3Rlc1BvcnRmb2xpb3NXaWRl;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

Reading Snowball made me realize how much contact Buffet has with executives. He knows the people extremely well. I think he also said that he has a better track record with hiring managers than investing. So I am not too worried about the executives he brings into his company through stock purchases and acquisitions. He does have owner operators to some extent in Marmon, MidAmerican, Iscar, WMT, etc.

I am looking at value my expectations of cash flows and returns on capital. A MTM based upon comps is a datapoint. I noted some qualitative factors as to why I believe that the insurance co is worth 2x BV (history of underwriting profits, high auto multiples, and high proportion of equity investments). Some insurance cos do trade at a discount. However, MKL, WRB, and RLI trade at 1.26, 1.41, and 1.95 respectively. Given that BRK's investment portfolio will have higher returns due to the equity weighting, a higher than market multiple may be appropriate. PGR (as a comp to Geico) trades at a 2.55 BV I am open to more criticism as the point of the thread is to look at the actual businesses that are owned by BRK and develop CF and return expectations about them.

I read the Annual Report this weekend and came away with a few notes and comments on valuation. The main reason why I am starting this thread is to try to do a SOTP valuation as I think the investments plus 8 to 10 times multiple of earnings is an insufficient valuation method. The most telling comment in the shareholder's letter was in the Manufacturing and Retailing section, where in reference to the businesses in that segment he wrote: "Furthermore, the intrinsic value of the businesses, in aggregate, exceeds their carrying value by a good margin. Even so, the difference between intrinsic value and carrying value in the insurance and regulated industry segments is far greater. It is there that the huge winners reside." So those are the businesses that we should focus on. I'll start with the regulated business entities. There's some background info here: http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/bnsf-and-midamerican/ BNSF made $5,377 million pre-tax and recognized $2,005 million in income tax. However, only $1,194 million was paid in taxes. Tax advantages such as these are reasons why I think that the 8 to 10 pre-tax multiple applied may be low. I think UNP is the most appropriate comparable and is trading at a 16.7 P/E (which compares to the 19x Buffet paid). This would imply a value of $56,312 million. I think the railroad industry may be slightly undervalued, but the $56 billion value seems reasonable and I believe Buffet paid $34 billion. MidAmerican enjoys tax benefits as well, but the reinvestment opportunities appear to be worse. If we were to mark this to market, we would use a pretty high multiple given the low interest rate environment. I think there is some merit to using a higher multiple given the weaker correlation to economic conditions. I am going to use a 12x multiple even though the market may use a 15 - 20x multiple. This gives us a $15.9 billion valuation. A MTM valuation using the low multiple would be $19.8 billion. $56 billion plus $16 billion is $72 billion for the regulated business value as what I would consider a low point. I don’t think this is much different than a 10x pre-tax number but I also think it is a low point. I am valuing the insurance companies on a P/BV basis. Using insurance assets of $278 billion minus the $42 billion in cash and liabilities of $120 billion (doesn’t include deferred taxes), leaves equity of $116 billion. Backing out the $48.6 billion of the Retailing segment’s equity leaves $67.4 billion. I think that the insurance ops are worth 2x BV given the history of underwriting profits, high auto multiples, and high proportion of equity investments. That gives a value of $134.8 billions and add back the free cash to get $176.8 billion. Total value now at $248.8 billion, which is close to the $256 billion in market cap today. If the retailing and financial products are only worth book, then the value tops $300 billion. I believe this is a conservative valuation and I think it’s close to the investments plus 10x pre-tax multiple.

Some questions: Who manages the bond portfolio for BRK? Will BRK hire an investor specializing in distressed debt as this appears to be a very large market that could help BRK compound at a hire rate despite its size? Can you give a summary of the Rescap situation? I understand Tedd was involved in that deal. Do those kinds of deals count towards his capital that you have given? What type of authority do Tedd and Todd have in making deals? Can other managers write annual letters? It would be nice to hear the thoughts of some of the many outstanding managers at BRK. This will also help the succession at BRK as we may learn more about the new CEO before he/she takes over.

Why is reasonable to have tax advantaged retirement accounts at all? Or the mortgage interest deduction? Or the earned income tax credit? I don't like this move because it's consistent with what I perceive to be Obama's demonization of the rich and socialist slant.

Yeah, don't you have to have earned income to contribute. And then it could only grow from your own investments and contributions. Something seems off here.

Companies don't have full control over their dividend yield, only the payout ratio. Companies should pursue the highest and best use for their funds.

Isn't BAM huge? Don't they a ton of AUM between all their entities?

GLRE, FFH, MKL, LUK, and Third Point's insurer are not huge imo and are a good starting place to look. FRMO is something I am looking into as well. It's hard to catch them when they are small because they are still building a track record.

I don't know too much about title insurance but, I would think it's a question of severity rather than frequency. Don't these guys pick up a bunch of small premiums on each transaction? It's the few that go bad that will end of costing a lot. Title insurance could be an interesting way to play the housing recovery.