jay21

Please do! I'm reading MidAmerican's annual report and it will take me awhile to get through. A few interesting things so far. Should I post them as I come across them or should I wait until I get through the whole thing?

The buybacks are going to be far more effective than the dividends as far as increasing shareholder value. They actually did the right thing here...buy back shares under book, even tangible book maybe...and retire high interest preferreds. If they just wanted to keep the stock afloat, dividends may have been better. But if they want to permanently increase the value of the shares, then this was the way to go. Also, dividends tie you down to the large institutional shareholders...doesn't matter if loan losses are up, capital levels down...you pay the damn dividend and it's double taxation. You buy back shares and it's permanent...done...more tax efficient and accretive to book and earnings when done right. The Fed cannot cancel your share buyback after it's complete, but they can stop you from paying a dividend. Cheers! Yes, "when done right" is the key here. The only buyback I have seen done right in the last number of years is Seaspan. The list of badly done buy backs far outweighs those done well. SHLD, JPM, Potash corp, are three that immediately come to mind. And Moynihan said there would be more money toward dividends. You think JPMs buybacks is bad? Dimon stresses price vs. value when doing buybacks and noted he is a buyer in size around TBV. Sounds like a great plan. It was unfortunate that they had to scale down during the whale incident, but that was partly due to regulation.

Isn't debt reduction accretive to equity holders? I'm fine with what they are doing.

http://www.federalreserve.gov/newsevents/press/bcreg/ccar-2013-results-20130314.pdf

I didn't care too much for Skyfall. The Hobbit was probably my favorite so far, but I need to watch a lot more movies: Lincoln, Argo, Zero Dark Thirty, and probably a few others.

Kiltacular, yes, agreed. You can look at the difference between the GAAP tax expense and the taxes paid for cash disclosure to see how big of difference this can make. Thanks for doing this, I've been very curious. As I'm being lazy today, what did the return on newly invested capital (or return on tangible equity) get to on MidAmerican with the adjustments you just mention? It's in the 10% to 15% range, which seems like the target return Buffet would want to see for this type of business. I plan on reading the filings for BNSF and Mid American in the near future and may give a more detailed answer later if I find something interesting.

My initial analysis did not include a breakout of the deferred taxes (BRK reports one deferred tax line item as opposed to by operating segment). When looking at MidAmerican's filing: http://www.midamerican.com/include/pdf/sec/20121231_99_mehc_annual.pdf We get a much better understanding of the ROE: 15,910 equity and 5,120 of goodwill. Much better than the ROE I was showing before. The deferred taxes of BNSF equals 16,319 and Mid-American is 7,903 so that should help us better understand the capital that we should allocate to the Regulated Business segment of BRK.

Sure, here's BNSF. $5,377 pre-tax over tangible equity (34,329-14,836) is a whopping 27.5% http://www.bnsf.com/about-bnsf/financial-information/form-10-k-filings/pdf/10k-llc-2012.pdf That means Mid-American is 40,310 in equity minus (20,056-14,386) 5,670 in goodwill for tangible equity of 34,640 and a return of 4.74%. Wow, did i do something wrong?

He's still bullish http://finance.yahoo.com/news/fund-manager-tepper-stocks-may-170317453.html;_ylt=AsUg3okkoegiZPyGarigGh.iuYdG;_ylu=X3oDMTQ4YjFqZGVxBG1pdANDTkJDIFRvcCBTdG9yaWVzBHBrZwNmYjA3MjEwYS1lY2QzLTMxOTItYTVhYS01NGE5ZjMwN2FkMjkEcG9zAzIEc2VjA01lZGlhQkxpc3RNaXhlZExQQ0FUZW1wBHZlcgM4MmNkZmQ5MS04YzAxLTExZTItYmZmZC04M2E5M2Y2Y2Y3ZTU-;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

BNSF pays out a bunch to Berkshire proper as well which reduces equity at the subs. One of the points that I am making here is that these businesses earned 9.78% on beginning of the year equity. That seems very low. But it also makes me think about how high the ROE the other businesses had. Now let's try to estimate the returns on capital/equity going forward. Let's deduct the 20,056 in goodwill to come up with a tangible equity number: 51,725. The return on tangible equity is 13.57%.

Can you discuss why you think so? Obviously you think we aren't taking into certain risks. Which in particular do you have in mind?

Also might be worth noting that a lot of the big banks are changing their forecast of home prices this year. About 1% higher appreciation than the beginning of the year forecast. This could impact a lot of underwater borrowers and we might see some more prepay activity.

I want to take a quick look at this year's results: BNSF pre-tax income: 5,377 Mid American pre-tax income: 1,644 Combined: 7,021 EOY 2011 Regulated Business Equity: 71,781 EOY 2012 Regulated Business Equity: 74,639 Equity excludes any deferred tax allocation. These are from BRKs filings. I'll probably look into BNSF's filings later.

Declining profit margins may not necessarily be bad for equity valuations. Margins could contract because the economy accelerates and more people are hired and corporations pursue more projects and research.

Do you guys consider Einhorn unethical? I get why people don't like Ackman but I still learn from him and think he is pretty good at what he does. Although, he is even better at making Powerpoints.

Klarman is a very media shy person. If he had a political agenda, I think he would go about his promotion differently (these letters aren't even supposed to get out to the public. This was only published after someone asked him [i guess you could say he is only disseminating his political opinions as a counter to my response, but I don't think that his primary agenda]). As I mentioned before, the bulk of his investments are fixed income and real estate, which are hugely affected by yield curves. It is fine that he thinks and talks about easing a lot. Also, his saying is "We invest bottom-up, but worry top down." He's done his due diligence on his positions and is worried about what could turn what he thinks are 50 cent dollars into 50 cent quarters. A shift in the yield curve could do that. OP, thanks for the link. Also enjoyed Ackman's interview. He's another guy who mentioned he could have permanent capital in the future.

I'm in the exact opposite camp. Margin of Safety is the closet thing to a Holy Grail in investing imo. Also, Klarman has fantastic quotes/paragraphs on investment process that sum up successful investing so well.

BAC, BRK, MKL, LUK are all good options here off the top of my head. I'm sure there are still some housing and auto plays if you want to diversify away from financials.

This begs the question though, if it's so obvious, why aren't most people here doing something like that? Actually, twacowfca made a thread on the idea and a lot of people followed it.

I disagree with this because he is heavily involved in real estate and bond markets. Interest rate environment is very important to him. I also love the way Klarman can distill the important facets of value investing in a few paragraphs: We clear a high bar before making an investment, and we resist the many pressures that other investors surely feel to lower that bar. The prospective return must always be generous relative to the risk incurred. For riskier investments, the upside potential must be many multiples of any potential loss. We believe there is room for a few of these potential five and ten baggers in a diversified, low-risk portfolio. A bargain price is necessary but not sufficient for making an investment, because sometimes securities that seem superficially inexpensive really aren’t. “Value traps” are cheap for a reason – perhaps an inept and entrenched management, a poor history of capital allocation, or assets whose value is in inexorable decline. A catalyst for the realization of underlying value is something we seek, but we will also make investments without a catalyst when the price is sufficiently compelling. It is easy to find middling opportunities but rare to find exceptional ones. We conduct an expansive search for opportunity across industries, asset classes, and geographies, and when we find compelling bargains we drill deep to verify the validity of our assumptions. Only then do we buy. As for what we own, we continually assess and reassess to incorporate new fundamental information about an investment in the context of market price fluctuations. When bargains are lacking, we are comfortable holding cash. This approach has been rewarding – as one would hope with a philosophy that is painstaking, extremely disciplined, and highly opportunistic.

You can read the results here: http://www.federalreserve.gov/newsevents/press/bcreg/DFAST_2013_results_20130307.pdf

I can't recall if that is true or not, but I think that subprime lenders do a lot better when backed by a capital allocator entity like BRK. Another example is LUK and Fairfax backing ACF. When companies are locked out of a debt market, that's when you want to be making loans. Can't wait to see what LUK and JEF do.

Compare margins from companies in the same industry.

From what I remember, BRK issues the debt to get the low rate. They then add 100 basis points for Clayton to use the funds.

I don't think its that hard to come up with the value of float. The way I look at it is you have the ability to borrow at below market rates, which is an asset. For example, let's say BRK can borrow 100m at 7% for 10 years. Instead, BRK underwrites a 100m liability with a 0% cost. If we assume the float is bond-like, the NPV at the market rate of 7% is around 50m. If the liability is stated as 100m on the balance sheet, there is an offsetting asset of 50m on the balance sheet. That's a very simplistic way of looking at it and you may want to play with a lot of the assumptions, the biggest being that the borrowings can fund nearly anything whereas the float can only fund certain things.