vinod1

We go on long walks in the evenings and today I thought of an experiment. I put two one dollar bills prominently on the grass right beside the walking path that is frequented by a lot of people. The dollar bills are quite visible to anyone walking on the path. I wanted to check if people would pick up the dollar bills or are worried enough that it might have coronavirus and leave them alone. After putting them at the start of my walk and returned about an hour and half later. Both bills are still on the ground. I would think atleast about 30-40 people must have passed by. Just as I was about pick them back up, I thought what if someone has sneezed or handled it somehow and just left them where they are. Same size of one, so does not really mean much, but might point to the level of risk tolerance at least in the local community. Vinod

Good luck with your new job! Learned a lot from your posts and hope you do visit the board occasionally. Vinod

At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate. Pre-covid I used to buy this at 0.95x and sell at 1.05x. Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit. I think it is good to remember what Buffett mentioned: When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do. Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck. Vinod

Kaegi2011, I think you have identified the key problems. I do not think I would be comfortable putting up an excel to model the vast majority of these companies. The main thing for me would be to nail down the competitive advantage. So it is a case by case basis. Why it it sticky? What are the switching costs? What is the alternative? I am still learning about many of these and filling in the missing pieces. So for some I have someone I know who works at the company or works at company that uses this product and that is the only way I am able to make progress. So it is slow going. So it is easier for me atleast if the company had a software license or some legacy background that is transitioning to SaaS. These which have a longer history are a good starting point. Adobe being the canonical example. So a firm like Guidewire is a good example. The company provides software for P&C companies. So pretty niche. Leader in the space by a smallish amount. A couple of competitors. If you read up it is not too difficult to see the competitive advantages. So you are really talking about what % of market it can capture and what normalized operating margins would be at some time x in the future. That is the extent of my modelling to see if it makes sense. I get a wide range and even in this case not really actionable most of the time. Vinod

I am getting Buffett flashbacks reading this letter. In general, our experience with a commodity business that has virtually no pricing power is to be cautious when management talks about investing in new equipment or upgrades that would significantly lower the cost structure compared to its competitors. That may be true for six months to a couple of years, but in time, competitors will have a new cost structure that is as competitive if not superior to the company. It is the same treadmill where hardly anyone in the industry can make a decent return on the assets invested in the company. Chou Over the years, we had the option of making large capital expenditures in the textile operation that would have allowed us to somewhat reduce variable costs. Each proposal to do so looked like an immediate winner. Measured by standard return-on- investment tests, in fact, these proposals usually promised greater economic benefits than would have resulted from comparable expenditures in our highly-profitable candy and newspaper businesses. But the promised benefits from these textile investments were illusory. Many of our competitors, both domestic and foreign, were stepping up to the same kind of expenditures and, once enough companies did so, their reduced costs became the baseline for reduced prices industrywide. Viewed individually, each company’s capital investment decision appeared cost- effective and rational; viewed collectively, the decisions neutralized each other and were irrational (just as happens when each person watching a parade decides he can see a little better if he stands on tiptoes). After each round of investment, all the players had more money in the game and returns remained anemic. -Berkshire, 1985 Annual Letter

We believe the intrinsic values of airline stocks have been worsened by roughly 30%, but the stock prices have dived by more than 50%. This goes to the core of the problem. Take a look at his stocks and see how many times this situation played out. Nokia, MBIA, Sears, Blackberry, Valeant, Posco, Endo, Teva... The majority of the time if you have to cut down IV estimate but it still looks attractive, you are just fooling yourself into rationalizing the error. Vinod

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