treasurehunt

You need to set hard exit criteria for these kind of trades. In case of BH, I think you would need to set a date by which the position is sold. If you don’t do this, you let the botched short term trades become a long term investment, while you know they are not potatoes really. Beware of changes in the investment thesis, they rarely work out. Easy to say, but hard to do. Good point. My exit criteria for this trade aren't completely set in stone. My idea was to wait until trading volumes are back to normal levels and the impact of index selling has died down, but it's hard to know how long this will take. My estimate was two weeks, but it could be three weeks or four. The other thing I am paying attention to is whether there is some other reason for the substantial drop in BH stock. After the release of Q1 results, which were horrible, it appears that the drop reflects at least in part a real decrease in the intrinsic value of BH. So I am much less sure about the reasoning behind my trade. I will probably sell the stock this coming week. Now to think about exactly what lesson I should learn from this. :-)

Valid posts about BH from several fellow board members here - but not based on the time horizon applied by treasurehunt for this move. To me, it's more like SharperDingaan buying DB back in September 2016. Thank you, John. I don't disagree with Ballinvarosig's valuation either (except for the market cap error in his first post). But my thesis is just that the sudden drop in price was due mostly to index fund selling. Of course I am down about 7% on this trade so far, so this isn't looking like a hot idea so far. :-) But I am going to hold on for a couple of weeks unless some other reason for the drop surfaces. I don't think DanielGMask's concerns about management integrity are very meaningful to my trade (not to say that management integrity is completely irrelevant here, but it's a risk I am comfortable taking). Also, I hardly ever do any short-term trading, and I consider this an experiment where I might learn something.

I may need to duck and cover after posting this, but I bought some Biglari Holdings today. I know, Sardar is the worst partner money can buy, but this is just a short-term trade on the assumption that the 20%+ drop in the price of BH is due mostly to the company getting dumped from the Smallcap 600 index. Reading reports of the annual meeting that was held last week, it doesn't look like Sardar dropped any unexpected bombs that would explain the cratering stock price (the dual class stock structure was a foregone conclusion). Volume in the stock today was about 30 times normal volume, which is probably due to index funds selling. In any case, the next couple of weeks will either make me some money or teach me an expensive lesson.

That is an excellent foreword by Li Lu. Makes me want to re-read the Almanack. Thanks for posting the link.

I only get growth of 20.54% over the same period, using the numbers given in Berkshire Hathaway's press releases from Feb 27, 2016 and today. Book value was $155,501 per class A equivalent share on 12/31/2015 and $187,435 as of 9/30/2017.

I think NPLs and loss rate history during a period of consistently rising home prices have limited value in predicting what might happen if home prices dip significantly. Pre-crisis in the US, Golden West Financial had incredibly low charge-offs for fifteen years or more. For eight consecutive years from 1998 to 2005, they had 0% charge-offs! Wachovia acquired Golden West in 2006. Fast forward two years and Wachovia, which was one of the biggest banks in the US at the time, was destroyed by the losses in Golden West's option arm portfolio. I am not saying the Canadian lenders are like Golden West. But historical loss rates might be very bad predictors of future losses.

Yes. FRFHF is the ticker I use to buy or sell Fairfax in the US. I think the company delisted from the NYSE some six years ago.

My mistake. I blithely ignored your parenthetical comment explaining that the $52B equity number was after adding back deferred taxes. Given this, I have nothing to add to your post. :-)

ThePupil, Where do you see equity of $52B for Burlington Northern? Looking at the latest 10-Q, I see equity of $34.7B: http://www.bnsf.com/about-bnsf/financial-information/form-10-q-filings/pdf/10q-llc-2q-2015.pdf Goodwill + intangibles is about $15.3B, so tangible equity is $19.4B. Pre-tax earnings for the last six months are $3.2B, which annualizes to $6.4B (not sure if seasonality is a big factor). Pre-tax ROTE works out to 33%. UNP has equity of $21B. I don't see any goodwill or intangibles, so tangible equity is presumably around $21B as well. Pre-tax earnings for the last six months are $3.8B, or $7.6B annualized. Pre-tax ROTE works out to about 36%. Looking at these numbers, it seems Burlington and UNP are pretty comparable. Maybe Burlington's value is 80%-90% of UNP's? If UNP is fairly valued at the moment, Burlington is worth $60B to $67B. If it's on Berkshire's books at $34.7B, there is a big gap between book value and fair value. If it's on the books at $52B, not so much. But I haven't found this $52B anywhere yet.

My thought is that I am dumber for having read these comments by Dan Loeb. And I can't afford to get much dumber than I already am. :-)

Viking, I like your take on JPM and BAC. I used to own roughly equal amounts of the two companies, but now my JPM position is about 70% bigger than my BAC position (mostly JPM warrants). JPM's various businesses are in wonderful shape; they just need to deal with litigation and capital issues, which at this point, don't seem so huge. BofA's improvement has certainly been much slower than I anticipated. The stock looks cheap though. But speaking of cheap financials, what do you think of Goldman? The business is less predictable than JPM and perhaps BAC, but the stock is cheap and Goldman is a best-in-class investment bank. They have earned about 11% on equity the last three years, but could earn 15% or so over the cycle. Recently they reworked their performance-based awards for top executives to pay out only if the company achieves decent ROE targets (one award requires 11% ROE over three years, another 12% over 8 years): http://www.ft.com/intl/cms/s/0/3e4de7e2-df8e-11e4-a6c4-00144feab7de.html#axzz3Xc2ZCOUH. I assume management thinks these targets are achievable. If Goldman can earn 15% ROE in a normal environment, their normalized earnings right now would be about $24 per share. A P/E of 12 would put the share price at $288, which is about 40% higher than where the shares are currently trading. Goldman has also been buying back shares at a faster clip than either JPM or BAC. I suppose there is the risk of very volatile earnings and some of their trading operations being regulated away.

Alan Greenspan thinks a Greek exit from the Eurozone is inevitable: http://www.bbc.co.uk/programmes/p02jkn9f Greenspan sounds sharp and alert for a guy who is 88. In the interview he basically predicts that all the Southern European countries will eventually leave the Eurozone.

I think your two assumptions are reasonable, but even cash parked in a savings account typically provides some return. Or in other words, even the shortest-term treasury rate is usually not zero. Of course this rate has been zero for the past six years or so, but that is atypical. For instance, in 2006, the overnight rate ranged from 4.15% to 5.32%. (https://www.treasurydirect.gov/GA-FI/FedInvest/selectOvernightRateDate.htm)

Racemize, A couple of questions about your study. 1) Did you assume that cash earns 0%? From the paper, it seems to me that you do, but it is not entirely clear. If so, I think it understates the returns from a portfolio that is partly in cash. 2) You mentioned that you are willing to share your calculations. I'd like to take a look at them. Could you let me know how to get access to the calculations?

I am fully invested as well. I have about two years of expenses set aside as cash; it would take 2009-like bargains to get me to go lower than this amount of cash. I have been fully invested for quite a while, but have been wondering if I should raise more cash given the sense I have that the market is overvalued. But the studies that racemize did made a convincing case against doing this. At least some of the stocks I own -- such as the financials -- are still under fair value I think, so I'll just hold them and not be too concerned about raising cash because the market looks frothy.

Wow, this is really impressive work! Any plans to get your paper peer-reviewed and published? Or to share your calculations for independent verification? I think your results are very relevant to investors -- I have to rethink my cash strategy after reading your paper, for example -- so it would be nice to make sure that there are no errors in calculation and such. In any case, thanks for sharing your work.

I'll bet that this won't happen. Not Buffett's style, I think. When the deal with 3G for Heinz happened, someone asked Buffett -- or perhaps Munger -- if this signified a change in how Berkshire treats its acquisitions. The answer was a very clear "No". My take is that if it's a deal initiated by 3G, then Buffett will let them manage operations as they see fit, but acquisitions done by Berkshire will be no different than before.

A couple of questions. 1) Does the cost in this cost curve include items such as land acquisition, exploration etc? In other words, does the curve show the marginal cost of producing oil or the does it also include the amortization of upfront costs? It seems to me that it might make economic sense to produce oil as long as the oil price is substantially higher than the marginal cost of production. 2) Natural gas prices in the US have been less than $5 per MCF for almost six years. Do you think the highest cost gas producer has a cost of less than $5 per MCF?

Indeed. I remember Bruce Greenwald, esteemed professor at Columbia University, claim that the BNSF purchase was a crazy deal. "At $100/share we think he has lost his mind." is a verbatim quote. Not so insane, it seems. There is probably some element of luck in how well the BNSF deal turned out, but we should also give Buffett credit for understanding the railroad business better than many others.

From the 10Q, I see that Heinz had pre-tax income of about 214 million in the 3rd quarter. Expenses included about 138 million of "one-time" items (severance, restructuring charges, asset write-offs etc). If we take out these expenses, pre-tax income was about 352 million. The income tax rate was about 18.7 percent this quarter. I don't know if this is close to their long-term rate, but let's assume a 20% tax rate. Then after-tax income amounts to about 282 million. After paying Buffett 180 million in preferred dividends, that is still 100 million in quarterly earnings that belong to common equity. Since 3G paid 4.25 billion for their 50% share of Heinz common, it looks like they are getting an annual return of about 4.7% on their money at the moment. I think this is pretty impressive progress in just a year or so. I am sure 3G will be wringing out more costs as time goes by. I am not sure how happy the employees are, but the numbers look good. :-)

I don't have any quarrel with the claim that profit margins will probably decline at some point, but James Montier's argument appears dubious. You are talking about the article where he uses the Kalecki profit equation to "prove" that government deficits are the main cause of high profit margins, right? I remember reading this two or three years back and finding it pretty convincing. Unfortunately for Montier, the deficit in the US has declined from about 10% of GDP in 2009 to less than 3% of GDP in the most recent fiscal year, and profit margins have not gone down at all. I think 3% of GDP is a sustainable level, so it doesn't seem to make sense any longer to say that high government deficits are required for high corporate profit margins.

I don't think this is Shilling's original idea; many others have suggested it. Here's a paper that discusses the issue in detail: http://qz.com/88781/after-crunching-reinhart-and-rogoffs-data-weve-concluded-that-high-debt-does-not-cause-low-growth/. The paper contains the following sentence in bold: But the two of us could not find even a shred of evidence in the Reinhart and Rogoff data for a negative effect of government debt on growth. You may also be interested in the paper by Herndon et al that first pointed out some major problems with the analysis done by Reinhardt and Rogoff: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf

Yeah! I agree with you 100%. But this faith in human ingenuity shouldn’t prevent you from seeing the truth. Einstein once said: So, let me ask you: How is all this printing of money and increasing of public debt supposed to solve a debt accumulation problem that started 60 years ago? In other words, to solve a debt problem with even more debt is all that human ingenuity can conceive? ??? Gio Did anyone -- including the folks printing money and issuing public debt -- actually claim that these actions are supposed to solve "a debt accumulation problem that started 60 years ago"? And why would you imagine that issuing more debt is all that human ingenuity can conceive? Also, my point was not that I know how to solve particular economic problems that affect the world; rather, I was pointing out that a solution may exist even if you or I don't know of one. The fact that intelligent, thoughtful and fairly objective observers like Buffett and Munger cannot see the end game clearly tells me that looking at the current economic scenario through a filter like "more debt cannot solve the problem of too much debt" is way too simplistic. Does anyone even know with reasonable certainty what a safe level of total debt is for a diverse economy like that of the US?

My experience is that the pessimists are almost always more persuasive than the optimists. My theory is that pessimism is easily supported by a coherent narrative that shows a path to disaster, but optimism often requires belief in the ability of human ingenuity to solve problems in ways that are not obvious in the present. And I am not just talking about economics; peak oil, the long-term effects of climate change, Malthusian predictions of overpopulation etc are also examples. Of course sometimes the pessimists are right. But in general, I would discount predictions of doom quite heavily.

It seems to be a common assumption that increasing mortgage rates will lead to lower house prices, but recent history does not support this seemingly obvious conclusion. Take a look at the following article from Forbes: http://www.forbes.com/sites/billconerly/2012/12/18/when-mortgage-rates-rise-will-home-prices-fall/. About midway, there is a table that lists the six instances since 1976 when mortgage rates increased by one percent or more; in every case, house prices -- as measured by the FHFA index -- increased during the period of increasing rates. Maybe the next time will be different, but given the historical data, it won't be a surprise if house prices continue rising as mortgage rates increase.