vinod1

It is tough to value these companies even accounting for growth and come up with a price. So I create more of an upper bound, lower bound and a more realistic one based on my expectations of what operating margins such a business is likely to generate, what its addressable market would be and what it might expand into, likely dilution, etc. A huge amount of value is being created by this industry and it would be good to keep an eye out even if you do not end up buying something right away. Vinod

Kaegi2011, So much has changed in software with rise of cloud computing and SaaS. 1. In the past, packaged software sales era, companies used to get paid a lump sum right up front when they sold the software. SaaS companies get paid over a long period. When there is rapid growth it can obscure profitability. 2. Costs also were different in the past when companies used to do a big waterfall releases. Also for many SaaS companies costs are much more incremental than in the past due to use of cloud. So I would not use 1980s or 90s earnings multiples, operating metrics to compare with SaaS. Also you would want to differentiate between consumer based SaaS provides with enterprise focused SaaS providers. They have different types of moats. Enterprise SaaS is lot more sticky for reasons mentioned in the thread. Just pick 30-40 SaaS companies and go through the AR's and presentations. You would pick up from the links. I used to work in enterprise software so it is a bit easier for me or not (tough to get rid of biases). Vinod

I read the Q1 Transcript to hear what Trump of the North has to say. - Bleach could be effective antidote to Covid. We expect to generate a 15% return for our shareholders over time. - One day it would go poof and we would have a big celebration. The best is yet to come. - We are doing a fantastic job at the federal level to respond to Covid. Our investment team operating in a stock pickers market.

Still getting an error. Uploaded here. http://vinodp.com/documents/investing/BRK%20Key%20Questions.pdf Vinod

I went through the Berkshire meeting transcripts from 1994 to 2019. Copied the most interesting ones into the attached document. Getting an error. Will try later. Should go some way towards mitigating your 4 hour loss :) Vinod

He discussed this in his CNBC interview on Feb 25, 2019. It has a fantastic discussion on consumer goods industry. I am clipping a small part of his answer. He commented further in the same or a later interview, something to the effect that it would very difficult to exit without moving the prices. BECKY QUICK: But if you see better places to deploy money, why don’t you sell? WARREN BUFFETT: We-- well, A) we can’t as a practical matter move around tens of billions of dollars that easily. But beyond that I mean, if we’re working with a million dollars or $10 million, would I have a position in it? No. You can move around with a million or $10 million. And Ted and Todd can move around reasonably well with $13 billion. But that can be difficult. $173 billion, I mean, you dance like an elephant. Not like some guy on Dancing With the Stars. Vinod

Transcript of the Annual Meeting. https://www.rev.com/blog/transcripts/warren-buffett-berkshire-hathaway-annual-meeting-transcript-2020 Vinod

This is a much better critique than saying the old man is getting scared. Good points and many are valid. It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline. If you look at the critique and negative case for Kraft, the most incisive and best bear case came from... wait for it... Buffett! No one put the competitive challenges it is facing better than Buffett. Also read his explanation on why he would not be exciting it. Or look at the airlines and see how quickly he changed his mind. On the other hand, I can imagine Bill Miller loading up on them as we speak. So I do not think he is in denial. Far from it. Vinod

Regarding buybacks he also mentioned the option value of the cash is now higher (if I heard it right). Vinod

How can you value an airline at this point? So much of the value is dependent on the kindness of Government & Politics. So the fact that he sold them, to me shows how good he is. How many investors have we seen, where the stock goes down 50%, they say oh, IV only went down 20% and I am going to buy more. This guy is pretty consistent. Cannot estimate IV. Do not buy. If bought, sell. Always keep an eye on risk/reward. Add doubly to the problem, the businesses he and most of us know and love well were completely decimated by this and still look shoddy, meanwhile the ones he doesnt know or understand well hold up tremendously and even rebound right back to highs. For these reasons I think there is good likelihood he gives a materially negative market outlook that may in the short term move markets a little bit. At least this is how I read the tealeaves and positioned myself going into the weekend. Yes the stocks that are in his circle of competence got impacted a lot and those that are out had not been impacted. The guy is super rational. So that would not have an impact. When is the last time you saw him act or say anything irrational? Vinod

If Buffett thought that Intrinsic value of BRK dropped a lot and stop doing buybacks at 160-170-180 when he was willing to do it at 220, then it's fine otherwise S&P level makes no difference. Sorry, I was not clear. My point is that some of us could be evaluating Buffett based on what the market has done. I am saying if instead the market kept going down, it is possible that we would be applauding him on patiently waiting for the pitch. Just a thought. Coming to buybacks. It is instructive to look at his purchase of Mid-Continent Tab Card Company. He really wants proof that he is not going to lose money before doing anything. During the sharp drawdown in March, and before Government came up with the $2 trillion relief (and I would argue even now), the economy could have been severely hurt with many companies going bankrupt. To someone like Buffett being 100% certain that Berkshire is safe is vastly more important than say increasing IV by 2% with a quick buyback. Vinod

How are you getting 15% with portfolio investments returning 2.5%? I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%. Vinod For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price. I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%. Vinod

Buffett is behaving just like as had in the past. He is pretty consistent in that respect. Did not buy in 2008/9 nor in any of the dips. From where he sits, putting a few billion here and there during a dip, does not move the needle and he does not even bother. Assume instead that the S&P 500 slowly fell down to say 2000 from late February till today. Would that change your view of how Buffett acted the past couple of months? Vinod

You are right. I misread it. Too early in the morning. Looked at the negative sign in CFI and mentally filed it away as sales. :) Vinod

How are you getting 15% with portfolio investments returning 2.5%? I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%. Vinod

Q1 results are out. Pretty much in line. Trimmed equities by $4 to $6 billion. No big buys. https://www.berkshirehathaway.com/qtrly/1stqtr20.pdf Vinod

Taking a quick look: Valuing associates at fair value, book value is $390 per share as of Q1. Bigger hit than expected. How in the world are they able to lose money on the shorts in Q1? Shorted Amazon? Vinod

Yes, I see it now: intravenous bleach infusion, bombardment with UV rays, gamma rays, etc etc and patients will be straight up cured! And his apologists were out defending hydroxychloroquine because this guy was behind it... We now proudly celebrate ignorance in our culture--and you see the manifestation here on this forum and in the population at large. The consequences of said ignorance unfortunately does not merely fall on the ignorant, but spreads to the wider population via collateral damage. Oh well. A really sad state of affairs. When he was just being elected, some smarter republicans argued that Trump's rhetoric was a deliberate case of playing 3d chess to win the election and anger the libs. And that he would soften, that they could right the ship from within, etc. Gradually this line of thinking disappeared and rather than acknowledging their mistake it morphed into something else: tacit and complicit acceptance of utter idiocy. Very astute observation. I did believe that logic that Trump talks that way but would not act stupidly. But with the way he is responding to Covid it is now glaringly obvious that this is sheer madness. I do credit Trump, whether for right reasons or not, that he is the only president to address the threat of China and the threat it is posing. His actions with regard to Covid are absolutely retarded. Who tweets that he might seal off New York ahead of time and then say there is no need? Who retweets that a crucial member of his Covid team (Dr. Fauci) to be fired? Injecting bleach? Vinod

Good points and I agree with most with one exception. In Q4, 2008 and Q1, Q2 of 2009, Buffett hardly added 2% or 3% of the portfolio directly in stocks. He did the preferred deals that he got invited, but otherwise nothing much. He did buyout BNI at the end of 2009. Checking dataroma, from Q4 2008 to Q4 2009 and including both those quarters, Buffett actually sold about 4%-5% of the stock portfolio. I would not call that swinging for the fences. Vinod

Banks looking at roughly 2 years of lost earnings (20% fair value loss with a 10 PE) and a couple of years if not permanently lower earnings power . It’s not too hard to come up with a 40% fair value loss. Maybe give back some for lower discount rates,but still. I don’t think the share price losses have been much in excess of the fair value losses. They area only a bargain when above assumptions are incorrect and we reverse to the mean quicker. It is going to be path dependent and that is the main problem. Losses are going to be concentrated into a couple of quarters and that raises the potential for dilution. Vinod

Take a simple scenario where we do not have a cure or vaccine for the virus until middle of next year and the virus mutates and becomes more virulent. Is this an improbable scenario? Not to my mind. Then GDP would be at say 70% in Q2, 80-85% in Q3 & Q4. Likely around 90% in first half of 2021. Many banks would have difficulty coming through without severe dilution in this cases. Vinod

Not directed at you, but the general question you raise: Well, then what is a good buy? A month ago the entire market tanked. OK - let's say BRK has totally sour views on banking, energy, and anything travel-related. What about the rest of the economy? Surely there were some bargains in unrelated industries? I think if they are holding their breath for desperate business owners to call them up, begging to sell out, then they will go blue in the face before that phone rings. If they can't find bargains as investors in public markets during a viral market rout, then go run a PE shop. My comments are directed specifically at banks. I put 50% of my wife retirement account into BAC in January 2016 at about $12. I would not do something like that now, because the risks are quite different. I did buy a bank but sized the position accordingly. There are lots of other things to buy during the lows like Booking as its long term survivability is not in doubt. Would Buffett be buying up stocks at the stock market bottom? I wish he would do it, but it is very likely he would not. The way I am thinking about it is, Buffett is close to 90 years of age, and at that stage of his life, he is not going to be like a 30 or 40 year old. He has billions and nothing more to prove to anyone. He just not going to be that aggressive. It is not like he is going to be watching the stock market prices, see Citi hit $32 get excited and issue a bunch of buy orders. That is what many of our fellow COBF board members would do. I do not have much hope that he would ever get aggressive going forward. He had so many opportunities to do so right from 2008 onwards and he did not do so. I think if we expect him to change you would be dissappointed. Vinod

I do not think banks are a layup right now. If you line up some scenarios of how virus/economic situation could play out, there is a scenario which involves heavy dilution and/or government bailout to banks. Not likely but a lot more than a zero chance. I would be really shocked if Berkshire backed up the truck on banks at this time. Vinod

Peggy Noonan in a WSJ post https://www.wsj.com/articles/needed-a-little-give-and-a-lot-of-integrity-11587079973?mod=hp_opin_pos_3 Here’s the part about integrity. Our federal government has to stop making empty and misleading claims about testing. Leave to history how much the Centers for Disease Control and Prevention and the Food and Drug Administration were allowed to screw up. Since then, White House announcements on testing have been all showbiz. Tests are always coming in 10 days, they’re in the pipeline and being shipped next week, we’re scaling up. Wednesday Mike Pence crowed at the daily White House briefing: “We have conducted and completed 3,324,000 tests across the nation.” That’s barely 1% of the population three months into a crisis. That’s not an achievement, it’s a scandal. President Trump said, “We have the best tests in the world.” If so, poor world. There’s a complete disconnect between the numbers with which Washington mesmerizes itself and facts on the ground. Operatives give credulous cable hosts excited reports of new tests: You spit in a vial and results are immediate—it’s like a gender reveal, they shoot cannons with colors! We’re developing a home test that’s a pinprick. Elizabeth Holmes comes to your house; Theranos is on the case! Ha ha, kidding, not true I think. Testing is a national responsibility because a pandemic is a national problem. From the beginning it needed to be priority No. 1. It was never priority No. 1. If it had been, we’d have tests. The federal government’s lack of integrity has been destructive. No opening of America will be sustained until it’s got right.

Net losses on investments of approximately $1.5 billion will reflect unrealized losses on the Company’s equity and equity-related holdings and bonds. Is my understanding correct that the $1.5 billion loss in equities/FI is understated by about $0.5 billion loss on the Eurobank? Yesterday, I was going through the portfolio to size up the losses and I approximated to about $1.5 billion decline, so the above would be a much bigger hit than I expected. Who would have imagined in 2009, the come the next major crisis, a dot com stock (Amazon) would be a pillar of strength while Fairfax would be tapping the credit lines? Vinod