SCMessina

I actually chatted with the guy who owns the property across the street. I think his name was Phil. He says he rarely sees him and that most in the neighborhood don't really know him. He sees Buffett driving out in the morning and driving back from work into his garage later in the day. But that was about it. And I think the guy had lived there for many years. There wasn't any security until not too long ago when some guy came by trying to rob the house or something. Now there is security and there is a camera that takes a picture of every license plate that drives by, in case there is a car that keeps driving around or just to keep records of who's driven by. So even if you bought the property it doesn't seem like you really bump into him. You'd probably have a better chance walking around town.

The ValueWalk link someone already posted is from us. Technically a buddy of mine took them, as I couldn't hear as well since I wear hearing aids! Buffett and Munger are mumblers...

Jurgis- Agreed. The cynical part of me says it was on purpose. That is, to drive the stock price down so Buffett could buy more stock back for his own sake at lower prices or to buy the shares of his LPs that were cashing out. The optimist in me says it was an honest mistake. It's probably a little of both. I think Buffett is a contradiction on many levels. For instance, to say he had the emotional temperament to buy safe, compounding cash flows is true. But, it would be inaccurate to attribute 100% of that behavior to his own amazing self-control. He had to buy these stocks within a very defined funding platform that we call the insurance company - with the eyes of regulators and the double-edged sword of leverage always peering down on him. I understand even then many of us with our margin leverage still act stupidly in our portfolios, but to say he was exercising self-control in a vacuum is absolutely incorrect.

Got a copy. Awesome stuff man.

Right - I understand what you are saying and agree. I guess it would be like extending accounts payables significantly. To me it's a matter of degree. If you extend payables by months if not years, it's a source of liquidity that gives you a massive amount of flexibility. And in the hands of certain managers, that is worth much, much more. For most CEOs/CFOs that aren't capital allocators, it may be more of a burden than anything to have all this extra cash lying around earning a measly return that starts to weigh down on your ROE. Like Apple, when it had all that cash, many shareholders were complaining to Tim Cook to do something with it besides investing it in money markets. But having extra cash in the hands of a great capital allocator like Buffett, I think it's worth something. How do you value that excess liquidity - do you put an expected return on? I am not sure. If the DTL proceeds are invested in the exact same way the insurance float is invested, do you discount and NPV the liability to estimate the residual equity created from investment ROE? I am not sure. Also you would then have to adjust for the underwriting ROE/profitability in the case of insurance float whereas for the DTL...is it equivalent to having a 100% combined ratio, meaning 0% underwriting profits? Not sure. It's not exactly insurance float, you're right. The way I look at it is if a company like AutoZone, which I believe has 60 days payable (I think) which has been used to buy back shares aggressively (I think share count is down 50% or more in last 5 years?) and fund new store openings, this is in my opinion a form of float or just more liquidity. But the reason why it works for them is because the margins and turnover are high enough and their days receivable short enough (one week?) to pay back their vendors with new, incoming cash as the original cash paid by the vendors is long gone, used for some other (hopefully) value-creating purposes. But this extended AP in other, less crafty capital allocators would not have been as value-creating.

There's what's reported as tax payments in GAAP and what was actually paid as cash taxes, as reported to the IRS. One way to think about the concept is to think about it in extremes as it could apply to you. Say you bought a super fast lawn mower for $10 million. Say you rent it out for $20 million per year as revenues. Say it has a life of 2 years. Assume the tax rate is 40%. Straight line D&A would mean depreciating $5 million per year. Year 1: $20mm revenues -$5mm D&A =$15mm pretax -$6mm tax =$9mm earned Year 2: $20mm revenues -$5mm D&A =$15mm pretax -$6mm tax =$9mm earned Now assume 80% depreciated in the first year as reported to the IRS Year 1: $20mm revenues -$8mm D&A =$12mm pretax -$4.8mm tax in cash ($6mm-$4.8mm=+$1.2mm DTL) =$7.2mm earned Year 2: $20mm revenues -$2mm D&A =$18mm pretax -$7.2mm tax in cash ($6mm-$7.2mm=-$1.2mm DTL) =$10.8mm earned So in the first year $1.2mm was deferred as a liability and this liability increase was a source of $1.2mm of cash in the cash flow statement. In the second year $1.2mm more than what was reported in GAAP taxes was actually paid to the IRS. This decrease in DTL is a use of cash in the cash flow statement. So in the end, the paid amount "catches up" to the deferred amount as the same amount of cash taxes are paid out on a cumulative basis as the reported taxes paid in the straight line depreciation scenario which is $12mm in aggregate over two years. But the lag in cash tax payments is the float. While it's technically a liability, Buffett at the BRK meeting just now called it an asset and he also just called insurance float an asset. Accountants won't like it when I say this but liabilities and assets are synonymous in this case because due the time lag, a return can be generated within the timeframe or duration of the float. Now imagine that $1.2mm was invested and yielded a return, or you bought back undervalued shares, or used it to finance working capital. Now imagine you bought a new super lawn mower every 2 years or spent the same capex to restore it to the previous full replacement value. In this case, the duration of the DTL float could theoretically be eternal with little room for error. Imagine what this could look like if we said the life of a depreciating asset was 20 years. The power of compounding returns over a longer period of time using this longer duration float could provide a larger margin of safety with regards to the eternal nature of this float especially if capex is recurring.

I saw some posts on here looking for old BRK 10-Ks. I couldn't find any online or on the message boards, so I had to go digging for them. Over the past few months I've tracked them down from various archives. The 1965 10-K was the hardest for me to track down because a lot of microfiches start in 1967! So, for those wanting to look at the first 1965 10-K, I finally found it and have attached it as an appendix to the back of this file. The 10-K starts on page 17: https://www.scmessina.com/wp-content/uploads/2015/04/Analysis-of-the-1965-BRK-Shareholder-Letter_vfc.pdf The coolest part in the 1965 10-K I think is the footnote re: the acceleration in depreciation schedule (double-declining instead of straight-lining) for PP&E immediately after gaining control of BRK. Why? It's exactly what Buffett is doing now with BNSF but on a much, much larger scale, to generate deferred tax liabilities or free, 0% long-duration float borrowed from Uncle Sam. So much for Buffett saying his secretary should pay lower taxes than he does... For those in Omaha now, see you in a few hours!

Re: the point about wanting to sell it in 1968: https://www.scmessina.com/wp-content/uploads/2015/04/Prologue-Why-did-Warren-Buffett-buy-Berkshire-Hathaway-in-1965.pdf "By the middle of 1968, Buffett even tried to sell Berkshire Hathaway. He attempted to “jettison the intractable Berkshire Hathaway” by attempting to sell it to Charlie Munger and David “Sandy” Gottesman, but after three days of discussion neither Munger nor Gottesman wanted it."[10] [10] Alice Schroeder, The Snowball: Warren Buffett and the Business of Life (New York: Bantam Books, 2009), p. 274.

Was wanting to get some feedback on this question. I recently did some analysis based on my reading of some books and looking through the BRK 10-Ks from the late 60's. The full analysis (https://www.scmessina.com/2015/04/why-did-warren-buffett-buy-berkshire-hathaway/) which includes the below valuation figures and and further details is summarized as follows: - My interpretation is that BRK was originally a cigar butt play that started in 1962 then turned into something else for emotional reasons. - It seems like he could have sold it in the Graham cigar butt M.O. in 1964 at a healthy profit via a tender offer but decided to gain control in 1965 after being low-balled for 1/8th of a dollar per share by the then BRK CEO in the actual tender that came in the mail. - He tried to sell the darn thing in 1968, but no takers. - What made Berkshire an attractive investment in 1962 when shares were trading around $7.50? - The investing opportunity for BPL in 1962 resided in the fact that the company’s shares in 1962 were trading around $7.50, significantly below, not only the value per share of the company’s book value or net assets as a whole, but also at a huge discount to the value per share of the most liquid asset items on the balance sheet other than cash: working capital. - From the 1964 annual report, working capital of $16.4 million ($10.25/share) in 1962 made up about 50% of book value at $32.5 million ($20.20/share). - So how much of a discount to working capital per share and fixed assets (plants and equipment) per share did the purchase price of $7.60 represent in 1962? - Berkshire ended 1962 with $10.25 per share in working capital, meaning that BPL first started buying shares in 1962 at a 26% discount to working capital per share. This is even before attributing any value from plants and equipment. - If stockholders’ equity per share or book value per share at the end of 1962 was $20.20, the purchase price of $7.60 per share represented a 62% discount to book value per share. That means $9.95 per share ($20.20 book value per share - $10.25 working capital per share = $9.95) is more or less attributable to the carrying value of plants and equipment on the balance sheet, net of liabilities. Note, the carrying values of the plants had also been periodically marked down to what accountants deemed as their impaired, fair values. - As the fixed assets and inventory were being wound down and liquidated, the proceeds were being used to repurchase the shares aggressively. This value on the balance sheet was being RETURNED to shareholders. A major repurchase included the tender offer from BRK that Buffett turned down in 1964 at $11.375. Accepting the tender would have enabled BPL to exit its entire position with 40% annualized gains. - Instead, BPL started to buy shares heavily in its ambition to gain control. Due to heavy share purchases in early 1965, prior to taking formal control in May, BPL’s ultimate average purchase price of Berkshire shares almost doubled from $7.60 to $14.86! Would be great to hear any feedback.

Hi guys, I wanted to see if others had thoughts on whether this is the correct interpretation of Buffett's fee structure for his first investment partnership: https://www.scmessina.com/2015/03/what-was-the-fee-structure-of-warren-buffetts-first-investment-partnership-started-in-1956/ I know the fee structure changed subsequently for following partnerships (25% above 6% hurdle rate with other variations), but for the first group of investors, close family and friends, would be interesting to hear feedback on whether this interpretation is correct or not. Appreciate any color or insight.