rb

Yes I think you're misunderstanding what I'm trying to say. First of all no insurance company would just keep their float in cash. Secondly, I think there's some confusion around the words asset and liability where you're thinking more of a figurative sense of the words and I'm saying more of the financial sense of the words. Let me clarify my A and B example a bit more by adding a couple more assumptions. 1: Both companies are behaving like insurance companies and the float is invested in a diversified portfolio of bonds and stocks. 2: Lets assume that both companies have floats of 100 billion. I know my example is a bit extreme but it's so for a reason. Basically what i was trying to get with my example is that the financial performance of the two companies is essentially the same. Because one has a perpetual underwriting profit makes it a bit more valuable than the other which has a perpetual underwriting loss. But perpetual underwriting profits do not vanish a float liability which in my (updated) example would mean that one company is $100B more valuable than the other. Obviously incorrect. Also if that were true then a hot stock tip: Progressive has had an underwriting profit for at least 10 years. Take out float liability and it's trading at 1/2 book. Happy days! Basically, the quote from WB in the AR is spot on. All that means as I've been saying is that float is less then book but still a meaningful liability for BRK. I actually like this discussion because I've been thinking and struggling for a while to get to a good model to discount BRKs float. I hope this thread will help me get closer. Final thought. If float was an asset rather then a liability then it means it has financial value. In turn that means the someone is willing to pay BRK to have those obligations taken off their hands. Obviously not true. There's nobody there, and WB would agree to that deal in a second. In fact large chunks of BRK float are made up of the obligations of other insurance companies that BRK took over. However those companies paid BRK (handsomely?) to do that.

No LC. You could capitalize the underwriting profits in the valuation, which Slow Appreciation did. But that comes nowhere near to cancelling the liability. Let me put it this way. As sure as the sun will come up tomorrow, a tiny part of that float is a payment that GEICO has to make to a body shop in the next week to pay for work that was done on John's car, because John got into an accident 2 weeks ago. Is that payment an asset or a liability to Berkshire? The float is made up of thousands examples like this spread out over time. Let me put it another way. Let's say that you have insurance company A which has a consistent total ratio of 100.01% and insurance company B which has a consistent total ratio of 99.99%. Does A have a float liability and B have a float asset, thus making B way more valuable than A? Of course not. Berkshire's present value of float is less then book. But it is still a huge liability and should not be ignored when valuing Berkshire.

It would have been in the 2011-2014 period. As with everything WB says he says keep it in perspective. 14x pre tax is a very generic multiple. If you asked me what a US based company is worth without telling me the company I'd say about 14x pre tax. Let me demonstrate: Take a hurdle rate of 9% (4% for risk free + 5% risk premium), US GDP growth will be about 4%, assume earnings growth will match GDP, and say a tax rate of about 30%. Throw that into a DCF and TADA!: you get a valuation of about 14x pre tax.

I think that maybe when Buffett does it, it's more of a rough sketch. He has no intention of spoon feeding a valuation of BRK. But I'm also pretty sure that when he looks to acquire an insurance company he doesn't count the float liability as zero. Basically the float has to be discounted in some way. It's less then book but still a significant number. Also in reference to your write-up. At a meeting in years past he did mention in passing that the basket of businesses BRK owns are probably worth about 14x pre tax.

Just read slow appreciation's piece. It's pretty well written. One big flaw is that in the valuation it ignores the float. While the value of that liability is less then book, it is definitely far from zero. There's more than one way to skin a cat. I know one can do a float-based valuation of BRK, but felt it was the least-approachable from a casual reader perspective and also the one I'm least confident in doing accurately. So I left it out. I don't think it changes things all that much, and there's nothing wrong with baking in further conservatism to one's model. Well you count the securities per share but ignore the associated liability that finances those assets. Under this method every insurance company, indeed every financial institution on the planet is grossly undervalued.

Just read slow appreciation's piece. It's pretty well written. One big flaw is that in the valuation it ignores the float. While the value of that liability is less then book, it is definitely far from zero.

I don't think it makes sense to even look at P/B of any of the techs. I mean.. what's the book value of Google's search algorithm?

BRK mathematically should outperform a broad index. Even assuming that the investment decisions weren't very good - obviously an erroneous assumption. Because of its size its holdings are basically an index. However it would be an index in an insurance wrapper, with 100B worth of leverage behind them. Due to this leverage BRK underlying performance beats the index. Now what i've just said over there is also why BRK's P/B multiple is >1. In the end the relative performance vs an index is influenced by the start and end points of your measurement. If BRK's fully valued it should more or less match index performance. If it's undervalued it should beat. If it's overvalued it should under perform. One reason why the index beat BRK in 2009-2014 is because the index got really cheap in 2009. If BRK's P/B was 3, then I'd be pretty sure that the index will beat BRK no matter what BRK does. I hope this makes sense.

Yep, pretty much agree with everything he says. Let me offer a sage vision: Things won't improve any time soon. It sure would be sweet to have a Sherman Antitrust Act for politics and take those parties and cleave them off into 2 or 3 pieces.

I think it's a bit of both. I think there's a cyclical part to it. Part of it is the end of a long bubble, sort of you had your fun with it but you took it way too far and now we're gonna step in before you break any more things. The other cyclical thing is that the regulator probably wanted to step in for a while but they weren't sure if the economy could take it. You don't want to pop a housing bubble on top of an oil crash. But now maybe they feel that the economy is in better shape and they went for it. But a big part is the cultural thing that you just weren't aware of. Why is it this way? Tradition has a lot to do with it. It's always been thus and it's worked pretty well in the past. The government/regulators are very powerful (when I was at RBC in London we were kinda worried about the FSA but terrified of OSFI) and they care about the stability of the system. From a stability perspective it's easier and more elegant to do it this way as opposed to naming names and triggering bank runs. Yes, you and I can't make the profits on our shorts that we want. Then there's gonna be dumb investors that put money into these guys and are gonna loose a lot. But our gov't can be pretty ruthless that way in the name of stability of the system. HCG is a case study. They were made an example of. The regulators (mainly OSFI) were probably all over these guys for a while (Canadian style) to clean up their act. But most likely due to hubris and/or stupidity they didn't listen or cooperate. So they had a regulator, in this case the OSC, drop a bomb on them. Now if this was in the US and the SEC issued the letter you would had maybe a 5% stock drop and nobody would have cared much. But over here on that action you're done, cause it's not just an OSC letter. Yea, it's murky, and you, I or the next guy may not like it. But it's just the way things work here.

TBW, that's part of the Canadian style, they'll sort it out behind closed doors, not on the front pages of newspapers. But to answer your question, they were all bad actors. Some more than others. But all the FIs wrote shit mortgages, and all of the "massaged" an application every now and then. Again, some more than others. OSFI just kinda/sorta turned a blind eye until they didn't. At the big guys it was kinda wink, wink, nudge, nudge, it's ok to massage an application every now and then to get it trough. Now they'll get a memo from the top brass saying that massaging an application is a capital offense. The subprime (alternative) guys are probably just totally screwed cause those are just massage parlours.

I've read your piece. Interesting. But I also think that OSFI effectively fired a shot across the bow of financial institutions. It really looks like the government decided to basically decided to pull the plug on the real estate party. If we're gonna have a crisis let's have it now before things get even worse. Today's weird rate hike was another ominous sign. That's it, no more music. The only people still dancing are the ones totally wasted and/or high who still hear the music in their heads. When the new OSFI rules come in (September?) they will have effectively tightened real estate credit in a big way. On top of that OSFI is not actually reminding banks to do their job. What OSFI is really saying is that they're gonna make damn sure that these rules are strictly followed. No messing around. Under new rules and current prices, very few people will be able to qualify for mortgages. Good luck having a bubble without credit. This is bubble popping -- Canadian style.

Now that we're on POVs and anecdotes let me share mine. On my street 3 semis went on sale around end of march/beginning of April. First one goes on sale, lots of traffic, sells in 3 days for 850k, 100k over asking. Number 2 goes on sale the day number one sold. Listed for 750k same as number 1. A week later number 3 goes on sale listed at 875k. Crickets. Subsequently the price on number 3 was lowered to 850k then lowered again to 800k. Still crickets. Not only are these 2 houses not selling, nobody is coming to look at them. Elsewhere in the hood. A detached listed for 1.5M didn't sell and was pulled. A 1.375M detached with a huge lot is getting some visitors. A bunch of 1.3 M detached have been sitting on the market for months (I'm guessing crickets territory). A really, really nice 3 bed detached that came complete with a good tenant in the basement just sold after being on the market for 3 months. It was listed at 1 mil don't know what it sold for. This market right now reminds me of that scene in the Big Short where they're in the car with the realtor and she keeps saying that the market's just in a gully.

The charts are so nostalgic.... remember the innocent days of 2008

Depending on the country.. here investment income is only taxed for dividends, not realized gains. ... And they call you socialists.

Woodbridge, ON. Just a hair north of Toronto.

Well as long as EVs don't become price competitive you won't have mass adoption. Let's put it this way, I wish I could drive a Tesla instead of my BMW. But I just can't justify the cost. Now unpack that: 1. I already drive a rather expensive car so I'm further along cost wise than other people. The proposition in much worse for the guy driving an entry level Chevy. 2. I actually want to have an EV. But there are many others for whom an EV is against their religion (think rolling coal types). Once EVs become price competitive it'll probably take 15 years or so to replace the existing fleet. So yea, while I personally wish for this process to happen quickly, the realist in me knows It'll take a long time.

Because that time is many, many years in the future.

Don't know the particulars for Oncor in Texas, but for transmission assets in the US they're generally allowed 12% ROE on a capital structure that's about 1/3 equity, 2/3 debt.

That's true. That's why I haven't rushed to buy them. They've had a very good run for years. My comments were more about how the business works. But even if these have had a big run and they're overvalued. Usually things that had a good run correct kinda sorta slowly over time. It's weird to see these big compressions where you see a 20% valuation correction in one day. You kinda expect that to happen more over like 6 months or so.

In every single society that has ever existed historically for which we have good records or been observed directly by anthropologists its always been the case that men dominate all roles with high formal social status and power, regardless of what those roles are. My view is that the simplest explanation is that men are biologically wired to strongly desire to ascend status hierarchies. Thus they are much more willing to sacrifice to do it than women are. Given all the restrictions that have been imposed by women by most (all?) societies is this a little like saying that the reason why there is a lack of female leaders today in Saudi Arabia is that men are biologically wired to strongly desire to ascend status hierarchies.

That's the thing, when you're talking auto parts 1 day excess lag time is forever in this world. Here we're talking more like 20 minutes delivery time. 2 hours is a long time and it's usually for a part that needs to be ordered from a DC. 1-2 days is for really weird/really expensive parts. The parts at the part stores aren't badly priced so there's not that much headway to be made there. Also many times you realize you need some part after you started the job and opened the car up. So you're talking either order after the job is started or multiple orders per job. Either way lag times are killers. People don't like to have their cars incapacitated for days and the pricing just isn't there to make it worth it. Plus the part stores offer a whole bunch of ancillary services (such as borrow a tool, diagnostics, etc) that's hard to do online. I'm not saying that Amazon won't sell more parts in the future, but it's not a field they're set up for, and they don't have a competitive advantage over the parts people.

HAHAHA! Jurgis perennially hating on IB because it lacks turbo tax integration.

I think Amazon could do a great job with auto parts. A piece of my car fender broke a few months back. Step 1 was to find the part # from the manufacturer's website, Step 2 was to go on Amazon and see what prices looked like. Much cheaper to get the part from Amazon and have a body shop (or yourself) install it. I remember my father used to do this, he would bring the car to the body shop, get the part # he needed from the mechanic, and went to the auto parts distributor to buy the part and bring back to the mechanic. Saved the giant markup from the body shop (who were just ordering the part and adding a markup). Online manuals/Amazon (or Ebay) make this a lot easier. I don't think that's really relevant here. These parts stores serve 2 kinds of customers: DIYers and mechanic shops. They also have all the parts catalogues, you don't need to go on the internet to search for it. For both kinds of customers it's important to get the parts quickly.

I think that when thinking about female investors, for people on this board Meryl Witmer should quickly come to mind. While there are less women than men in the industry there are plenty of women. Many do not own large headline seeking hedge funds, but they're out there managing money. And just like with any other profession there are brilliant and dumb female investors just as there are brilliant and dumb male investors. Unfortunately, just like in any other profession, in investing the dumb outnumber the brilliant and that's not restricted by gender. A personal anecdote for what it's worth, before i went out on my own I worked in banking my whole life and I've only had female bosses, and some of these were at some seriously senior levels. They were all super smart, sharp, and professional and I've learned a lot from them. Personally I would love it if we could get some more female members on this board cause you know... nobody likes a sausage fest.