mattee2264

https://www.researchsquare.com/article/rs-21211/v1 Ensuring adequate vitamin D levels also seems to be helpful. A vitamin D deficiency would also help to explain why the elderly and those in care homes and nursing homes are suffering so much. And more anecdotally in the UK where I'm from we've had a massive heatwave and true to form Brits have ignored lockdown regulations and flocked to the parks and beaches and getting as much sun as they can and cases have continued to drop.

https://www.newscientist.com/article/mg24632804-000-why-itll-still-be-a-long-time-before-we-get-a-coronavirus-vaccine/ Interesting article pouring a bit of cold water on all the vaccine hype. Pretty easy money for pharma companies if governments are willing to expedite from early trials to scaled up manufacturing pouring billions into producing vaccines only to find out they don't work or they aren't safe.

I think training/supervision will be the main stumbling block. That has been less of an issue during coronavirus because companies have been able to lay off or furlough staff most in need of training or supervision to be productive. And similar to a war effort the staff that are left are willing to pick up the slack without too much complaint (in part because massive unemployment makes them feel lucky to still have a job). A lot of people slack off a good deal at work already. But having other colleagues and managers around creates social pressure that curbs this tendency to some extent. Remote monitoring is unlikely to be as effective and productivity is not always easy to measure. And especially when people start out they like some hand holding until they build confidence and competence and that is less effective remotely...in the same way you can't parent remotely. Also I am not sure WFH all the time is psychologically healthy. It is a pain commuting to the office but it gives some work-life separation. You can leave your life problems at home and your work problems in the office (to some extent). I agree it is difficult to create a good working environment at home-not everyone has the luxury of a home study. And while some workplaces are toxic generally people like the social support that comes from working around people and feeling like part of a team. And especially in creative industries it helps having people around to bounce ideas off. WFH might also create downward pressure on wages because if someone is working remotely they can be from anywhere in the world and the trend of outsourcing back office type jobs to low wage developing countries might accelerate. But even within a country as WFH allows workers to drive down living expenses by not having to live in big cities with expensive rents employers could take advantage and offer lower salaries.

The way I think about Berkshire is that it will probably earn no more than its cost of capital over the cycle. So say a 10% ROE. So if you buy around book value you can expect 10% returns. I think the main risk is that a conglomerate discount could emerge although I would expect aggressive share repurchases should temper that risk. I also think that if a conglomerate discount did emerge then steps would be taken to spin off divisions to unlock value. So I think that you'd probably end up with 7-10% shareholder returns with a reasonable degree of certainty which is quite attractive. Another attractive feature is that rising interest rates will hurt returns a lot less than they would for the S&P 500. S&P 500 returns are a lot less certain. You could get double digit returns if a) there is some multiple expansion because of low interest rates, confidence in growth prospects and less perceived risk because of supportive monetary and fiscal policy b) the winner takes all scenario in tech continues to play out for some time allowing S&P 500 earnings to grow appreciably faster than GDP c) The economy recovers pretty well and gets back to a Goldilocks scenario of non-inflationary growth You could get zero returns or even negative returns if a) there is multiple contraction because of rising interest rates, stagflation etc b) tech companies run into difficulties as their markets become saturated and they start competing with each other or start to get disrupted by new upstarts c) The economy does badly and you either get deflation or stagflation and it becomes apparent monetary and fiscal policy is either powerless or painful Or of course something in the middle. So I can see if you are investing for capital preservation or are a conservative investor happy with moderate returns Berkshire remains an attractive vehicle.

That is reassuring and should create an opportunity if the market tars all insurers with the same brush. How are Markel and Fairfax positioned in terms of their exposure?

Interesting. I guess the difference with natural catastrophes is that most businesses probably have grossly inadequate coverage. For example most property insurance policies only allow claims in the event of damage to the property. But it is a shame no one properly questioned Buffett about the impact of coronavirus on the insurance operations. That would have been quite illuminating.

Lloyds' of London is projecting 2020 underwriting losses of $107BN and falls in investment portfolios of an estimated $96BN bringing total projected losses to $203B for the industry. These sound like pretty big numbers but I am struggling to put them into context and assess the implication for the valuation of my insurance holdings such as Berkshire, Markel and Fairfax and AIG. Where are the underwriting losses coming from? Loss of rent and business interruption and health insurance and life insurance payouts are the most obvious examples that come to mind. But I would have thought for most P&C insurers these are not a large chunk of their business. 9/11 triggered a bad year for the insurance industry as well. What was the scale of the losses then and what was the impact on Berkshire, Fairfax and Markel's stocks and how quickly did they recover?

I think it is easy to forget that Buffett is primarily an owner-operator rather than an investor. Most businesses out there are exercising caution. Even the ones with strong financial positions. Also Buffett is opportunistic and I think he is right in saying there aren't really that many attractive opportunities at the moment within his circle of competence that offer the mixture of quality and certainty and reasonableness of price that he looks for. Most of the stuff which looks cheap is justifiably so given the future uncertainty e.g. financials, energy, media, real estate Most of the stuff which looks bulletproof and likely to prosper is either expensive and/or outside his circle of competence and/or doesn't offer the long term certainty he looks for e.g. consumer staples, healthcare, technology And just as most homeowners aren't selling their houses until the situation becomes a bit clearer I cannot imagine many businesses are putting themselves up for sale either.

Yup I think it is the conglomerate discount and perhaps also the "key men" risk and the unwillingness to court Wall Street resulting in a lack of analyst coverage. And yeah taking losses on the airlines and refusing to buy the dips or buyback shares isn't helping at the moment either. Not to mention insurance is a large part of the business and insurers are out of favour because of lower interest rates and policy losses. If anything it is a wonder that Berkshire is not trading even more cheaply and I also think there is the prospect in the future of a true conglomerate discount. I am not familiar with US politics but I think generally governments can do whatever they like especially when they can justify their actions by reference to the virus. And with QEI they have the Fed as a willing buyer for any additional debt they issue.

I can foresee a scenario where you get mild deflation followed by moderate to high inflation. Initially a combination of excess capacity and weak demand not to mention low energy and commodity prices is pretty deflationary. But demand will recover faster than supply and I think that there are likely to be supply constraints in the future as resilience will take precedence over efficiency and companies are too busy deleveraging to invest in new capacity etc and government is also budget constrained so unable to invest in necessary infrastructure etc. Also energy prices will probably go up after the shakedown because some production will be permanently lost or require much higher prospective returns to get back online.

I think Greg is a safe pair of hands and a humble guy who won't go on an ego trip if he became #1. Given the size of the empire that Buffett has assembled that isn't the worst thing in the world. He will probably make sure the businesses continue to run well and make sensible bolt-on acquisitions. But it is difficult to imagine him stepping into Warren's shoes and making transformative acquisitions that really move the needle for Berkshire. I assume that is where Ted and Todd are expected to contribute more but it is a big step up from being hedge fund investors. Perhaps the idea is the three of them work together?

As I remember what really got Graham into trouble during the Crash was leverage. Like a good value investor he sold too soon and bought too early but the combination of modest use of leverage and an unprecedented further decline in the market wiped him out. I like the idea of doubling the high grade interest rates to get to a multiplier. It is a lot more conservative than the Fed model especially as Treasury rates have been very distorted by monetary manipulation. And it also builds in a margin of safety because I don't think the current AA bond yield of just under 2% adequately reflects the risks in corporate credits. On the other hand at very low interest rates it translates into a very low absolute risk premium of only 200 basis points. I would probably want at least a 500 basis point premium to the risk free rate (which is currently close to zero) so would be more comfortable with a 20 x multiple. Also difficult to figure out what earnings number to use. The Shiller 10 year past average is just over 100 while the 2019 trailing number is 140. Probably the correct number is something in between. Slap a 20 x multiple on 120 and you get to 2400 for a fair value. That feels about right. Of course usually bear markets bottom well below fair value. But I think at 2400 you could expect decent long term returns.

I am curious to what extent price increases can offset to some extent the decline in passenger volumes. If the industry has become more rational it makes sense to charge very high prices to take advantage of the fact that it is mostly going to be essential travel taking place over the next few years.

Good summary Nomad. I think it was very significant that Buffett referred to the option value of money and it ties in which his earlier comment that there was still a very wide range of economic outcomes. My interpretation is he feels the option value of having cash has gone up significantly. I think that is a very interesting way of thinking especially as most investors assume that cash has a static value and therefore whenever stocks decline 20% they assume that stocks have automatically become a lot more attractive relative to holding cash.

On the 2nd of March the S&P 500 was at 3,000 so I do not think Buffett was alone in thinking this would just end up being like the other pandemics and blow over pretty quickly without a major economic impact. It is a shame that Charlie wasn't in attendance as he is a lot more plain spoken. But I think you can usefully combine his comments last month with those of Buffett to make a reasonably good guess at their collective thinking. I think it is pretty clear that they think that stock prices (including BRK) have not fallen enough to adequately reflect the heightened risks and uncertainties. I am pretty pleased he hasn't followed Ackman and Tilson's advice to do massive buybacks. The upside from buying Berkshire stock at these levels is pretty limited while the downside is still pretty high. I think that what they are really hoping for is the chance to do a big acquisition. But as Charlie says the phones are not ringing. However it says something about their discipline that even at their advanced age they would rather be patient and wait for a fat pitch. I do not know what to make of the history lesson. I don't think he thinks a depression is on the cards. But I think he believes that it could take some time for consumer and business confidence to return and therefore a V shaped economic recovery is far from guaranteed. In that scenario having a lot of cash on hand is going to be incredibly useful and putting it to work will set Berkshire up for very good prospective returns. In the event that there is a V shaped economic recovery then shareholders have not really lost anything. The share price will recover to pre-Covid levels.

I think that it makes much more sense to allow them to postpone mortgage payments. I can understand the argument for payroll grants to hotels because you are preserving jobs which makes a return to normalcy smoother and it is basically just a pass through. But Airbnb for most people is a side gig rather than their sole source of income. Also people losing their homes is a regular occurrence in recessions and is why it is a good idea to have an emergency fund and any prudent landlord factors in vacancies and other unforeseen expenses. I understand that this is unprecedented and the government does not have much time to think and is having to be reactionary. But there is a lot of social injustice. The sensible thing would be for any funding to be on commercial terms. You get a loan to help you through these tough times. But the loan has a high interest rate so you do not enjoy as high profits when the economy recovers and learn your lesson and in future make sure you have rainy day funds and lots of debt capacity. Or you get to postpone your mortgage payments but get charged penalty interest that accrues and is added to your outstanding loan balance. I still cannot quite see inflation on the horizon. Unemployment is going to remain elevated for some time so wage inflation is not on the cards. Monetary inflation only seems to get reflected in asset prices. We are service economies so less reliant on raw material inputs and in any case commodity prices remain muted. I think we are just going to continue to see financial repression. Very low interest rates will remain for some time to allow governments and corporations to service huge debt loads.

I think it is a combination of things. What I think Buffett really wants to do is make a big acquisition before he retires. Most companies are frozen by the uncertainty and aren't going to do anything hasty like put themselves up for sale especially as they believe they would get much more favourable prices for their businesses when things get back to normal. So I think Buffett is being patient and hoping that there will be opportunities down the line. As for the stock market again Buffett wants to take meaningful positions that move the needle and has very strict buying criteria. The speed of the crash and the recovery does not lend itself to those kind of operations. I am sure Todd and Ted were a lot more active as they are able to operate under the radar and are much more active investors. Also Berkshire Hathaway is a business and he needs to consider the cash needs of the operating companies and maintain Berkshire's fortress balance sheet which is a huge competitive advantage. There are multiple possible scenarios. The market seems to be pricing in the most favourable one. In a less favourable scenario where the economy stagnates for some time then not only will there be better investment opportunities but the cash will also ensure that the operating companies are not forced into decisions that will erode their long term competitiveness such as asset sales and taking on too much debt and so on.

I think Charlie's position is very reasonable and rational. A lot of their businesses are going to be affected by the recession and will need support from the parent. Meanwhile their competitors are having to depend on the kindness of strangers. So the large cash position serves a good purpose especially if the recession is more prolonged than anticipated. While it is true that a lot of their existing stock positions are 20-30% cheaper the fundamentals have deteriorated by an equivalent or greater amount. For example the banks are going to see a rise in credit losses and lower interest rates are bad for their margins. The airlines balance sheets are deteriorating and there could be a race to the bottom if demand doesn't pick up sufficiently and they are all competing for a small number of customers. It also takes time for them to build a position and markets rebounded so cheaply off the bottom most of the bargains disappeared as quickly. And besides the stock market portfolio barely moves the needle. More importantly because banks and governments are being so accommodating businesses see no need to come for Warren and offer him sweetheart deals. By keeping cash on hand if things get a lot worse and businesses have got all they can out of their banks and governments then Berkshire will be well positioned to lend or take equity stakes on very attractive terms. And perhaps there is an element of trusteeship going on. Berkshire is best suited for those looking to preserve wealth and I see nothing wrong with being conservative given all the uncertainty about how this could all pan out. If the stock price does take a dive Berkshire will be one of the few companies able to take advantage by buying back stock and that will create a lot of value for existing shareholders.

It is difficult to tell what will happen to consumer spending. On the one hand a lot of people are going to lose their jobs with low-income workers and self-employed most vulnerable and those people tend to have the highest marginal propensity to consumer. Their might also be more caution going forward with people more inclined to save for a rainy day having been caught short when this hit. You saw that in the USA after the Great Depression. That change in attitudes could persist for quite a long time. There might also be a housing market downturn which will have negative wealth effects that are a lot more meaningful than those emanating from the stock market as most people still have the majority of their wealth tied up in their homes. On the other hand for the vast majority of people who kept their jobs or got transfer payments from the government lockdown massively reduced their living expenses so they have probably built up a fair amount of savings and will have a lot of pent-up demand for entertainment and travel when restrictions lift. Also unlike other recessions there is a lot more pressure on banks and businesses from the government. That means there is unlikely to be a credit crunch and unemployment won't as fall as much as it otherwise would. In addition coronavirus is the perfect justification for unprecedented government spending and money printing which is picking up a lot of the slack. Provided inflation doesn't explode this extra debt will be manageable to service in the same way it was after WW2. I agree that the stock market may well go a different way as there is still the bull market mentality of looking ahead and not putting too much emphasis on a single quarter's or single year's earnings. With interest rates this low the market is trading at a very reasonable multiple of normalised earnings power even if you decide to haircut 2019 earnings on the assumption it will take a while to get back to full speed. The main worry for me is whether inflation makes a comeback. This will have a very negative impact on the economy and also force the Fed to raise rates. It seems unlikely because wage pressures will be muted and technology continues to have a deflationary effect and quantitative easing just seems to inflate asset prices and enrich the wealthiest people who tend to hoard rather than spend. The most likely source might be commodity prices. There is likely to be some supply destruction as production takes a while to come back online so if demand recovers ahead of this then once inventories are used up prices could spike. But even this effect is likely to be relatively short lived and likely to be accommodated by the Fed.

Interesting perspectives and the calculator was very useful. I plugged in some numbers and came to some interesting conclusions. Basically with the illustrative numbers I mentioned (studios rent for around £1,000 a month and sell for around £280,000) then if I assume a 6% mortgage interest rate I need over 5% annual house price appreciation for buying to work out cheaper. This does not seem outlandish. While above the rate of inflation I think that can be justified for two reasons. Firstly, housing demand growth in London is likely to continue to outpace housing supply growth for at least the next few decades. Secondly, London is likely to remain an international city so a house price appreciate rate somewhere between UK GDP growth and world GDP growth seems reasonable. Although UK house prices stand at over 10 times average incomes probably in good part because houses are made a lot more affordable by a) historically low mortgage interest rates and b) a weak pound (helping foreign buyers). So multiple compression will offset to a good degree the natural increase in house prices in line with nominal incomes and inflation. I guess that is the big uncertainty. In the bubble in the late 80s London house prices peaked at around 6x average incomes then bottomed in the early 90s at just under 3x average incomes. By 2000 they breached 5 times average incomes and pre crisis they reached just over 7 times average incomes before falling back to around 5.5 times income. But between 2008 and today they have risen to over 10 times income! Probably no coincidence this has coincided with Bank of England base rates stubbornly close to zero throughout the last decade! You can also see the impact of foreign buyers because over the last decade the spread between multiples in London and the rest of the UK has widened significantly since 2008. But no idea what a reasonable house price to average income multiple would be. And agree that there are non financial considerations. I am happy in London. I work in finance so London is where all the job opportunities are. I cannot see myself living outside of London. Most Londoners feel like that. And if my future SO doesn't like London then she probably isn't the girl for me! As for personality factors I am fairly indifferent between renting and buying. Although I do like my area and could see myself spending the next decade here. Although if I did get married in the next 5-10 years realistically I would have to upgrade to a bigger place. But that would be easier to do if I had some equity in an existing property.

I am struggling a bit to get my head around the way of thinking about this. I understand the general logic of buying a place. House prices generally increase in line with inflatiion (because the incomes used to pay rent also rise in line with inflation). And with leverage even a modest inflationary increase of say 2-3% a year can result in double digit returns (although these returns obviously fade as more of the mortgage is repaid). And returns will also be diluted if the "imputed rent" isn't enough to cover interest + property expenses. I also understand the case against renting. The money basically goes down the drain. Whereas when you buy you would hope to recoup any principal repayments when you sell the house and probably a good portion of the interest paid as well. But I am struggling to translate this into a sensible framework for making an informed decision about whether to buy or rent. Obviously you can compare what you'd pay to rent each month versus what you'd pay to buy (i.e. principal repayments + mortgage interest ). But this seems oversimplistic given as mentioned above you'd hope to recoup mortgage repayments and even interest when you sell whereas the money you pay in rent is lost forever. And also you'd want to factor in that any excess of monthly principal repayments + interest payments over rent could be invested by a renter in the stock market and earn returns of say 7-10%. Also this analysis does not factor in leverage which amplifies returns in most instances. What is the correct way of thinking about this and working it out based on the numbers? For example currently I am renting paying around £1,000 a month for a studio flat in a nice area with a fairly stable demographic of young professionals attracted by the fast transport links into the City of London and the West End which has a market price of around £280K and you can get a fixed rate mortgage for 5 years for about 3% per annum (in the UK we do not really do longer fixes). UK base rates are 0.5% which obviously isn't likely to persist over a typical 20-25 year mortgage term. The Bank of England is currently stress testing by adding 300 basis points to a typical introductory rate. And for buy to let investors the stress test is the higher of 5.5% and 200 basis points above a buy-to-let mortgage rate. Given the above what would be a way to translate this into a buy vs rent decision? Obviously not expecting a definite answer but would like to gain a better handle on the correct thought process.

A correction is healthy and probably inevitable after such a strong start to the year. But basically we've just retraced the 2018 gains and are back to where we were at the end of 2017. And predictably we are already starting to see the "buy the dips" mentality kick in. After strong returns in 2016 and 2017 it wouldn't be surprising if the S&P 500 went sideways this year with more volatility than we've been used to. But unless inflation really kicks off or growth really disappoints it is difficult to see anything resembling a market crash. Even if interest rates drift up towards 4-5% that would still support a PE ratio of around 20 and by the time interest rates get there S&P 500 earnings will probably be more like 120-130 so I can't see us drifting too far from the current level of 2600-2700.

I think a lot of people assumed the impact of quantitative easing would be inflation. Well it was. But inflation in financial assets rather than real assets. Presumably there will come a point where wealth effects drive consumption (although I think a lot of the beneficiaries are the very rich who have a low marginal propensity to consume) and also a point where companies start believing returns are better from capital investment than financial investment. Also it is usual at this stage of the cycle for commodity prices and wage inflation to start to push up prices and that hasn't really been a feature. Although you would think that could change. And as was pointed out it is not the appearance of inflation but the anticipation of inflation that will set things off. I think a lot of actors out there are suffering from a money illusion believing in the death of inflation which makes sub 3% nominal bond yields and 4% stock earning yields (adding maybe 2% for autonomous growth) seem reasonable. But over any medium term holding period you would expect inflation to eventually eat into those returns.

I think the other point to mention is that in competitive markets if everyone has lower taxes they will reduce prices accordingly so consumers will be the main beneficiaries.

1. With Brexit a lot of UK companies have an earnings tailwind as a lot of their revenues are from overseas while costs are mostly local. While management usually provide some colour on what revenue growth is on a constant currency as opposed to a reported basis I am not quite sure how to take this all into account when trying to arrive at some notion of normal earnings power. Is the best way to focus more on five year revenue/earnings past averages which will average out FX fluctuations or to use management guidance to try and get some sense of constant currency revenues and then proceed with margin assumptions etc to work your way down to earnings? 2. Some of the companies I've been looking at recently have been involved in various restructuring efforts, acquisitions over the years as well as selling off businesses and discontinuing operations. As a response to this they report "headline" numbers in addition to statutory numbers as well as splitting PAT between continuing and discountinuing operations. The issue is whether such charges are really one-off or likely to continue to feature going forward as competitive pressures and the greater of economic and techonological change continue to force these companies to reposition themselves, buy and sell operations, etc etc. Again other than taking a past average of such charges or being conservative and accepting the charges as part of current year earnings I cannot think of a satisfactory way to make this judgement call as I do not want to rely on an ability to have superior business insights especially concerning the future to make money. 3. When analyzing free cash flow for businesses what is the best way to take working capital needs into account? Simple formulas for FCF take cash from operations and deduct capex or an estimate of maintenance capex. But for some businesses a lot of the resulting cash is not really free in the sense that it is required to meet working capital needs of the ongoing business. But the change in working capital number can be very volatile year to year due to timing differences etc so I am finding it difficult to get a normalized kind of number to deduct in calculating FCF. Thanks