zarley
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Posts posted by zarley
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A long time Berkshire owner and former Sequoia fund manager shares an interesting perspective on Berkshire and life after Buffett:
Let’s assume that Mr. Buffett is no longer the CEO. Several changes will be made over the ensuing year or so, with some immediately and others taking longer, but which will inevitably take place.First, a new CEO will be appointed. I believe that will be Ajit Jain with two backup candidates. Second, the Board of Directors will be reconfigured over time. Third, several of the CEO’s of subsidiaries will retire. Fourth, new CEO’s and leaders will need to be chosen to replace the departing CEO’s. Fifth, a dividend will most likely be instituted to reduce the need to invest the prodigious cash flow coming into headquarters. Sixth, while historically, divisions were managed to generate excess free cash flow to send back to Omaha, going forward some of that free cash flow will be redirected toward building the enterprise via bolt-on acquisitions and internal growth. Seventh, the stock price will probably decline 10-20% or more, which, in my view, will present an extraordinary buying opportunity.
It's a good read and I tend to agree with it in broad strokes. It may reflect a sort of conventional wisdom of long-term Berkshire owners.
He does hit on one issue that is among my big concerns about Berkshire after Buffett. Not succession at the CEO level, but succession at the one or two levels below that.
My biggest concern relates to the new generation of operating subsidiary management teams and keeping them in place. Many of the original managers that sold their companies to Berkshire Hathaway were in unique positions, very different from those the next generation of leaders will face. These original managers sold their firms to Berkshire Hathaway for many reasons: avoid going public, avoid private equity which would need a liquidity event in the years ahead (going public or sale), liquefying their wealth from the firm for cash to diversify and for estate tax planning purposes, maintaining autonomy, finding a permanent home, and being “knighted” by Mr. Buffett an enormous honor. These original managers love Mr. Buffett for these as well as other reasons. However, the new generation of managers will likely not feel the same loyalty or, frankly, love for the new CEO that their predecessors felt for Mr. Buffett. We are concerned as to whether the new management teams will remain as loyal to the new Berkshire Hathaway as the prior leadership.Although I'm not sure he fully answers what this might mean for Berkshire going forward, it is certainly an issue, directly related to the importance of Buffett to the organisation. He does lay out one vision of Berkshire, with Ajit as CEO that seems quite plausible and ruminates a little bit on the durability of the Berkshire culture and the history of conglomerates. All in all a very good read.
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I've recently been reading the Aleph Blog after adding it to my RSS feed. It's a great blog, written by an advisor named David Merkel.
In the last couple days he's posted a bit about the corporate structure at Berkshire.
Part 1:
http://alephblog.com/2014/03/12/on-the-structure-of-berkshire-hathaway/
Part 2:
There's an interesting bit in Part 2 which discusses the structure of National Indemnity and something called the Harney Investment Trust . . .
But more of it is due to BRK’s lack of willingness to discuss/mention the Harney Investment Trust. I did a lot of digging on this, and found little that was definitive. One seemingly intelligent opinion I found here. I will quote the most relevant portion from “globalfinancepartners” . . .Now, I was reading quickly, so I didn't think anything of that the first time through. But after finishing I went back and looked at the quoted part in that section again and followed the link he was helpful enough to provide. Which lead me to a thread right here at the corner: http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/insider-quarterly-article-on-ajit/10/
The globalfinancepartners noted in the post is, of course, a regular here. Although somehow, I managed to miss that particular thread.
The two part discussion at The Aleph Blog are well worth reading for owners of BRK. the circle-back reference to this board was just a nice cherry on top.
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zarley, not trying to disagree just pointing a few different perspective.
sometimes investing full time is not just about earning more, even if you earn the same, some people enjoy it. its just like job A vs job B, a and b might be 2 completely different profession/job and they might make the same amount of money but obviously some folks would prefer A vs B do to the job itself etc.
i do share your sentiment on now vs 1999. maybe its an indication that we are a top or not, who knows. but i do worry and trying to de-risk my portfolio.
but i do have to say, for me i needed a lot more time to determine if i am good or if its just luck, jury is still out (I think its prob 60% luck and 40% skill). but i guess that didn't really stop me from doing it.
the way i see it, the worst case scenario is, if i hate doing this i'll go look for a job, at least i won't be always wondering what it could of been. then again i already have enough where i don't need to work, but we all know most people on this board will be bored out of their mind if they did nothing.
there is always something to learn, improve, and do.
Please don't get me wrong. This sort of choice is very much an individual choice and very dependent on the specific circumstances of each person. In my case, I've convinced myself that I am adding value over just buying and holding the index, but for a few reasons, the prospect of quitting my day job and/or running OPM doesn't make sense for me. There are certainly people on this board who I would consider if I needed an investment advisor (Ben Hacker for one).
Perhaps I'm too cautious, which causes me to see parallels between now and 1999 when it's inappropriate. Mostly just thinking out loud that year 5/6 of a raging bull market is a dangerous time to project out your 5 year investment returns as part of an early retirement plan. That may work out just fine for some people, but . . . again, I'm pretty conservative.
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On Friday I just put in my notice to work that I would be leaving the company. My personal targets were always to leave once I got to ~$5M in AUM (reached last year, around $6.5M now, but some of that is mine).
I basically figure(d) if I could make $40-50k off of the RIA business, then I could live modestly and my portfolio would be untouched and it could grow for the future without fear of withdrawal rates, etc. Of course in general I expect the business to grow in time at a good clip but that is all upside.
Some Thoughts:
1) I do worry if additional work doesn't help returns - I think it will, but I am putting some things in place to firewall "activity" and make sure my incremental time is spent reading.
2) My goals are not to do this because it's entrepreneurial at all... I like the challenge, I enjoy the fact that it is mine, no one else is responsible for my record. I also most enjoy the freedom of time / location that it affords me.
3) I believe I have a decent # of potential clients who have hesitated to sign up with someone who is "part time" over the years, so I think a few new clients may be in the making (in addition to folks at my work who weren't aware of what I do, and now will be).
Just a few thoughts for me. We'll see in a year of actually doing this exclusively what additional lessons or insights I will have.
Ben
Congrats Ben. I've followed boards you've been active on for quite a while and have always been impressed by the quality of your thinking. Good luck to you.
Like many here, I've considered a similar path, but at this point haven't followed it. I'm not at all certain that investing as a full-time endeavor would be better for me financially than working full-time and investing as a hobby. Investing part time over the last 6-7 years I've managed to beat the VFINX by 2-3% per year. A balanced asset allocation leading into 2008, good timing on SHLD and BRK, and buying lots of WDC in 2011 account for most of the outperformance. I'm quite pleased with that result, but I'm not sure if that would have been +5% or more per year if I was doing it full time. Honestly, I doubt it. Plus, having OPM to deal with may have changed my perspective on risk taking (I'm already rather conservative) and left me with much more pedestrian results. I'd have a hard time charging x% of assets if I'm not doing much better than the index.
Barring economic catastrophe or serious health issues for my family, my status quo trajectory is quite good. Sure, I'd rather quit my job and spend my days reading and researching stocks, but it's not clear that I'd improve my lot much, if at all.
One final observation (directed at no one in particular): this thread reminds me quite a lot of the cubicle conversations I'd hear back in 1999. Everyone was just one more good year on the NASDAQ away from retiring early. This is a savvier group of investors, but the sentiment doesn't seem all that different.
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Pretty sure it's Saturday actually. March 1. You get 60 days to file so that would put it on that Saturday.
http://www.businessinsider.com/warren-buffett-shareholder-letter-date-march-1-2014-2
Interesting. I was under the impression that the saturday release practice ended in 2012.
In any event, I apologize for the bad information. Looks like I'll read it with my coffee and not a glass of wine. ;)
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does anyone know when the letter & results will be published?
I think Friday after market close is the base expectation. Friday of the last week of the first quarter is the standard, IIRC.
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Graham Holdings' pension fund has the BRK shares you are describing, but don't forget that Graham Holdings directly owns about $423 million (at current price) in additional BRK.A & B shares as an investment. There is an opportunity for a great stock swap here.
That was my initial thought too. It might let Berkshire eliminate the position in Graham Holdings in a tax efficient manner and retire some BRK shares in the process. It's not huge numbers, but a billion here and a billion there . . . pretty soon you're talking real money. :)
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There's an excellent lecture about derivatives and Buffett's use of derivatives here:
I think that the journalist who wrote the bloomberg article is mistaken. The derivative deals are a good deal for Berkshire.
You get float upfront. You can invest that float and make a return on it.
In 20 years, it is unlikely that the derivative contract will pay off. These indexes are of publicly-traded companies that are all trying to make money. Over time, those companies will probably make lots of money. Their share price will likely be much higher than today even if there is a market crash.
And then you have the float, which should make more money than what you'd lose on the derivative contract if it happens to be a loser.
If there is worldwide inflation, then the contract is less likely to pay off. If one index goes to hell because of a Germany-style hyperinflation, the derivative contract won't pay.
Outstanding link. Thanks for sharing.
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Well, his specific suggestion was an equity index, not a fund of funds target retirement fund. So, I should qualify my original reaction. Using a target retirement fund wouldn't be a terrible choice, certainly better than a straight stock index. My biggest objection would be the "forget it" part. Just ignoring your savings/investments is how you wind up nearing retirement in 2008 with all your assets in stocks and wondering why half your money disappeared at such an inopportune time. Any advice that doesn't include suggesting someone be actively engaged in understanding what they're investing in and why is incomplete at best.
What's wrong with sticking it into a single index fund and forgetting it? As for 2008, it was not a predictable event that a naive investor could have planned for and adjusted his allocation to deal with.
A naive investor that can follow one or two simple asset allocation rules could prevent being 100% anything at the worst possible moment. I'm not talking about predicting 2008, but adjusting your holdings for your time frame. Being 100% stock at age 28 is different from being 100% stock at age 58.
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Stick it in one fund and ignore it is pretty terrible advice.
Why? Apart from 401k's and other stuff that I don't understand being non-American I would say this is excellent advice for 90% of all people. Just pump excess money in a Vanguard targeted retirement fund (or something similar) and forget about it.
Well, his specific suggestion was an equity index, not a fund of funds target retirement fund. So, I should qualify my original reaction. Using a target retirement fund wouldn't be a terrible choice, certainly better than a straight stock index. My biggest objection would be the "forget it" part. Just ignoring your savings/investments is how you wind up nearing retirement in 2008 with all your assets in stocks and wondering why half your money disappeared at such an inopportune time. Any advice that doesn't include suggesting someone be actively engaged in understanding what they're investing in and why is incomplete at best.
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Stick it in one fund and ignore it is pretty terrible advice.
If you don't want to advise her directly about what to do, but still want to give helpful and actionable advice, encourage her to . . .
1) start contributing now to take advantage of her age and her employer's matching (stash it in cash for the time being or some sort of balanced asset allocation fund)
2) talk with her employer's 401k advisor about her plan's options
3) read Bogle's little book on investing
4) read up on asset allocation (e.g., Ferri's All about Asset Allocation)
5) own her financial future by being proactively involved in understanding and choosing her own financial path
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The boglehead forum can be a great resource; I've been a member there for a while. I'm ambivalent about it though. So many posters there are strictly dogmatic about EMH that they can't even conceive of someone using a value approach to investing and achieving market beating returns (it's cult-like). For example, the perspective on Buffett there is mostly that he's lucky, using inside information, and/or otherwise doing things that individual investors can't (buying whole companies and doing GS or BAC type deals). Anything other than pure efficient markets and indexing is pretty much non-existent, or drowned out by sheer volume. There is great information there, but the blinders most choose to wear make it somewhat inhospitable to open discussion of anything other than indexing.
In a way it's interesting that there's even a forum since it all boils down to choosing your asset allocation and then using some mix of ETFs and/or index funds to execute it. What's to talk about? May as well take turns quoting from Bogle's Little Book of Indexing.
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Daily tracking of prices and overall performance vs. benchmarks is in a google spreadsheet. I use Feedly as my RSS reader with feeds for all of my existing positions, general investing and industry feeds, and companies of interest.
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Great read. Thanks for sharing.
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Probably best to think about it as AUM rather than portfolio size. I have several personal accounts (retirement, education, personal brokerage) and a couple family retirement accounts. While they tend to have different constraints and purposes, I'm managing them all, even if they have different types of assets.
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He had some luck, including a $9,000 win from a sports bet. But he lost all of that over the course of a year and decided he needed to quit gambling. So he took a shot at investing day-trading.
The unintended irony of this bit is outstanding. ;D
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One problem with the Coverdell's is the contribution limits -- $2,000 per year IIRC. But they do benefit from the flexibility.
I've gone simple for my kids with 529's at Vanguard. Simplicity and higher contributions won out. Nothing stopping you from doing both, but I don't need two extra accounts to manage.
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Ouch for the USA. Hoping Portugal will underperform and perhaps a replay of 2002 where the US won 3-2.
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Great read - love Montier's writing. Thanks for sharing.
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Josh Brown reproduces a note he got from an institutional investment advisor regarding the mentality of institutional clients. Interesting perspective on the forces driving the investment of huge pools of capital. One might think that illiquidity and high fees would make some of these "investments" non-starters, but it doesn't seem so.
http://www.ritholtz.com/blog/2013/12/confessions-of-an-institutional-investor/
So why do most institutions in invest this way?1. It’s Interesting
What sounds more stimulating as an allocator of capital?
a) Traveling to New York, Silicon Valley and London for “due diligence” trips to meet with hedge fund, private equity and venture capital managers, getting wined and dined with free food and booze while getting to hear about complicated strategies, alpha, new technologies and ‘what sets us apart.’
or
b) Finding undervalued asset classes, markets and sectors at a low cost, to achieve a broad diversification and earn multiple streams of beta. You can imagine why most institutional investors choose option a). Don’t get me wrong, these trips are a great perk of the job, but I’m not sure how valuable they are for the organization.
2. They Think It’s Their Job to Outperform
Most institutional investors assume, “My job is to outperform the markets or my benchmark and earn a performance bonus.” This is the wrong way to look at a portfolio. Setting a broadly diversified asset allocation, making good decisions, rebalancing to undervalued assets even when it doesn’t feel right, reaching the goals of the organization, reducing fee drag, ensuring liquidity for short-term needs and remembering your time horizon and risk profile should be your job.
You can add value without constantly searching for uncorrelated alpha with low downside volatility.
The boards at most pensions, endowments and foundations don’t help either. They all go right along with the herd mentality. Most are very successful in business, ultra-competitive and want nothing more than to beat the performance of Harvard and Yale. Everyone wants to beat everyone else even with different agendas and somehow complex becomes the norm.
3. They Assume Complex Must be Better
The investors that run these portfolios are highly educated individuals who are very intelligent. It’s hard for them to admit that the simple solution makes the most sense. Being able to understand complex strategies makes them think they are superior to index funds and ETFs. There is false sense of security when you spend your time talking with brilliant, wealthy alternative managers.
I’ve been in a number of meetings with active managers or consultants who have said the only clients they have lost left to invest with index funds. They wear this fact like a badge of honor. Everyone shares a laugh at the poor investors earning low-cost, market returns. They fail to acknowledge study after study that proves index fund superiority.
The author might be painting with a broad brush and projecting the decisions of a few onto the whole; but it rings true to me in a lot of ways. Interesting read.
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Listen to Kraven and Onyx.
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The quantity of money injected into the system is replacing what was lost earlier during credit contraction. It does not necessarily mean that the aggregate money supply has increased.
Furthermore, if V increases, it should be very easy to soak up liquidity given the size of the Fed balance sheet. And if V does increase, it doesn't necessarily mean it will be a giant spring, it can be a gradual increase in velocity.
Good points. Although, it does depend on what measure of money you're thinking of. M2 as tracked by the Fed is certainly higher now than several years ago. Private estimates of M3 (since the Fed stopped officially tracking it a few years ago) are closer to what you describe from what I've seen (e.g., shadowstats).
Now imagine that this bow isn't being held by a human archer at all but by a machine where one human can pull the string back as far as he wants, but has no control over when it is fired.
I think this takes it too far. One person does not have the power to do anything of the sort. If your one person is Ben Bernanke, he's the head of a board that has the power to influence things. Your immeasurably complex system works on both ends of the transaction. The Fed (not Bernanke solo) can push some levers in the system, but cannot control it in either direction. You can't have it both ways.
But, none of that gets to why the misuse of the term inflation to describe monetary expansion is in any way helpful or anything other than misdirection.
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If I were less charitable, I'd propose that this confusion is intentional so as to sell things like gold and gold funds and to maintain a level of fear in segments of the population when actual economic outcomes aren't what you expected.
Is there significant inflation in the US economy at the moment? No, not really. Has there been a broad-based decline in purchasing power over the last 3-5 years? Not really. I haven't seen it. My cost of health care has gone up. my cost of housing has gone down considerably. Food costs are up in spots, but not egregiously so across the board.
I agree with everything you said. Regarding the bolded, I agree there are vested interests in selling gold investment products, but I think that is secondary to this criticism being 100% politically motivated - the usual "Evil government (and Obama) is debasing the dollar and inflating us into poverty!".
I tend to agree with that as well. That's the bit about fear in my post.
You and I hold what I would consider the conventional view of inflation. We probably won't disagree much on this particular issue.
I think another way to put the conventional view would be to compare monetary easing to potential energy. Money growth isn't inflation, but it does provide some of the raw materials for inflation in the future. So, we can't dismiss the risks of inflation inherent in the system, but that is not the same as actually experiencing inflation. A drawn bow has potential energy, which can be released in the firing of an arrow at high speed. But, that is not the only possible outcome. The archer can relax his bow in a controlled manner, resulting in no fired arrow at all. So, standing in front of an archer with a drawn bow is not the same as actually being shot with an arrow. Even so, it's not a great place to stand.
Are you both an engineer and investor?
in General Discussion
Posted
INTP; not an engineer. Not detailed enough to be an engineer. I'm very much a "roughly right" kind of guy. ;D