AdjustedEarnings

I think this is now more important and concrete. I think the way I asked the question last time must not have been clear because the responses, while good, did not address the issue directly (except for one response). I'm resurrecting this issue because I think it's probably of more interest to people now. The reason I had debated this issue earlier was the expectation that a particular situation might occur. This situation has presented itself: Apple is down from 225 at 9/30 to 171 today. On their 252 million shares, BRK now has a "loss" from last reporting date of $14 billion, less taxes in their BV. This is Apple alone. Then you've got BAC, WFC, etc. which are all down varying amounts from 9/30. Having set the stage, now the question is: If WEB thinks buying back at 207 was a good idea in the quarter ended 9/30, is the buyback threshold now: 1. Lower, because (a) securities per share amount is lower (the two-column people), (b) alternative uses of cash are more available or, at least, visible on the horizon 2. The same, because intrinsic value (and look through earnings) of those securities probably has not changed 3. Higher, because, (a) intrinsic value of BRK increases a little each quarter, (b) for companies in which they can't go over 10% they can still increase the per-BRK-share ownership of those companies in the hands of continuing shareholders by buying back stock from other shareholders, © rates are lower which serves to increase financial asset values including BRK intrinsic value? There could be other reasons for choosing either of 1, 2, or 3. Please feel free to suggest them. PS: If the fall in the market continues, it's possible that BRK BV growth is negative for the quarter. If that happens, it'll help display in the coming Qs how much, if any, of WEB's IV calculation is based on BVs. On the one hand he says BVs are now not appropriate (and I tend to agree with this). On the other hand, he's not one to change his mind/methods too quickly.

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down. The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else. With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you. Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here. AdjustedEarnings, Frankly, to me, you appear indisposed right now. For Mr. Buffett, the taxes on a dividend would reduce his donation capacity, measured in absolute USD [his 2006 pledge with amendments does not - as far as I can see - exclude him from suggesting a dividend though]. -Where do you think Mr. Buffett wants the money to go? - To the five foundations, or to the US IRS? I don't understand what you're saying. I'm serious. I said dividends are a bad idea because of taxes. You said the same thing. WE ARE AGREEING. Yet, you are saying that I'm in disagreement with you somehow and indisposed? I am lost.

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down. The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else. With regard to taxes for the in fact controlling shareholder, globalfinancepartner's point is far from moot. It appears evident to me, that you're most likely holding your Berkshire position in an account, where you're not subject to taxes on dividends, and that this fact is indeed perhaps blinding you. Sorry, I don't understand what you're saying. My point is exactly that taxes make dividends a bad idea. My math I showed supports that. So I'm not sure why I gave you the impression that I don't care about taxes. It's the opposite. Of course, to a policy question of what BRK should do, how I own my shares shouldn't matter... but even so, I do own them in a taxable account. In fact Berkshire is the type of thing you'd WANT in a taxable account (at least if you live in the US).... no dividends, long term gains, etc. all play well with the current tax law here.

This is mathematically true but it is actually a chicken and egg issue. It trades above book because, among other reasons, there's an expectation that these dollars will be worth more than a dollar. If that expectation/assumption was removed or proved wrong by one or two mistakes (let's say, just for a hypothetical consideration, that all of the excess cash was invested in IBM-like stocks), it could well trade (and deserve to trade) below book. Another way to point it out is to say that this excess cash built up to an extent that was 95% of assets (again, thought experiment) would the stock still be worth 1.4x book? At that point, aren't you just paying 1.4x for mostly cash. The multiple would have to come down. The way I think of opportunity cost here is: If they pay out $1, you'd get $0.85 (in most cases). To make it $1 again, you need a return of 17.64%. Then you are even and you have to earn about 10% p.a. after that which BRK is likely to earn over time on their investments. If you can get that return (or better) outside of Berkshire, you probably deserve a dividend. I think WEB/CM think that for all shareholders taken as a whole, that is not achievable. When viewed mathematically like this, I tend to agree with their conclusion even though, I'd love a large special dividend of cash as much as anyone else.

I have a slightly different number, but similar conclusion to you. Total B-equivalents of 4,476,692 repurchased for $928 million during the quarter, for an average price of $207.2. I'm not sure where you are seeing the October numbers. It seems you are drawing conclusions from the reported share-count at Oct 25? I think that's reasonable, but there could easily be other factors that affect share counts aside from repurchases, as there were this quarter as well. Buyback was a little underwhelming. The rest of the earnings are rather good though. So good report overall, IMO.

Thank you to both the responses. You have given this particular issue more thought than I have. My question mainly arose because so many times we see something along the lines of... "the portfolio is down 2% since quarter end... so tax-effect and subtract that from the prior BV... add in earnings from operations, etc. etc." We know that BV has been disowned by WEB... but, on further thought, I also have doubts about whether they use the MV of the securities. Not that they'd use IV either. But it definitely seems frequent adjustments would not be made based on weekly or even monthly moves in stocks. That would require moving the purchase threshold given to their broker (I think it's Citigroup) on a daily or weekly basis. I don't think this is happening (definitely not in a restricted period if they're operating under a 10b-5). So, to me, some of the very-fine tuning... ("Where has IV gone since quarter end") seems like work that would provide little additional information on which to base decisions. What do you guys think?

Last night, as I was drifting off to sleep, a question occurred to me... does WEB count the market value of the securities portfolio or intrinsic value when calculating the IV of BRK? Theoretically, intrinsic value would make more sense because those securities are (presumably) owned because they're at a discount to IV. In practice, if this difference was large enough, they'd simply buy more of those stocks. On the other hand, they own others like KO, where I'm pretty sure WEB wouldn't buy more stock today. Also in practice, float is often an issue (10%+) as are taxes. It's not a huge deal, just something fun to think about. So I figured I'd ask the group's thoughts. Thanks!

Thank you for your thoughtful response. I'd say we ought to ask the question, is EV/Sales really a valid metric? P/E shows kind of a rough 'yield' equivalent. P/FCF is similar. How can we interpret P/S? And, by extension, why should they be comparable across companies? Google, FB can serve as examples of how large companies can get but they've also been profitable right from the beginning, which confounds the comparison a little. E.g. Google is a monopoly by the nature of their business and execution whereas Uber/Lyft are engaged in cutthroat competition, not dissimilar from airlines or auto manufacturing. The multiples on those industries have not been high for that reason. It's not even looking like they could be a peaceful duopoly. Secondly, it's true perhaps based on your numbers that P/S multiples were higher in 98-99, but is that the only level acceptable to call something a bubble? Many of those companies then fell 90-95%. So, instead of 35, let's say, we're at 10, would then a fall of 83% be expected to reach the same end place? Could we then call it a bubble? This of course assumes that P/S is an acceptable touchstone, which I have my doubts about (though I'm not ruling it out completely, I have yet to hear anything about why it is a logical metric.) I'm not simply trying to be difficult. I'm really trying to find reasons to believe. Just haven't found something worth believing yet.

Another day, another (paper) dollar: https://techcrunch.com/2018/10/16/instacart-raises-another-600m-at-a-7-6b-valuation/ InstaCart is up 80% in 8 months.... if they were a public company raising money to fight off Amazon, I can imagine the direction the valuation would move and that direction would probably not be up 80%.

Sell-side analysts (and 'Mr. Market'?) at work... if you are GOOG, you can get credit for undistributed cash in your valuation and your unproven 'moonshots'. But, if you are BRK, you get no credit for undistributed cash (thankfully, now being put towards the buyback) and only partial credit for your investments. https://www.cnbc.com/2018/10/17/jp-morgan-berkshire-hathaway-shares-look-really-cheap-using-buffett-method.html

Hi all - I don't mean to go from one battle ground to another, but I wanted to put out there my observation that when many economists/regulators are looking for problems in real estate, credit, banking, etc. they're really fighting the last battle, as often happens. It seems to me the new bubble is in VC (particularly late-stage VC, and similarly situated public technology companies - i.e. not AAPL, GOOG, FB, but more like NIO, TSLA, NFLX, OKTA, etc.) Here's a link to why I think there's a bubble. It's 4200 words long, so I have not reproduced it here, but you can read it over at that link. I have tried to explain the entire incentive system and capital machinery and how it works to cause these overvaluations: https://adjustedearnings.blogspot.com/2018/10/my-last-memo-on-vc-bubble-now-is-time_13.html My main hope in posting this is to find out the DISSENTING views, i.e. what would argue for there NOT being a bubble. What am I missing? I understand this could be a 'battleground', so I hope everyone will keep the discussion civil and limited to investment merits of the companies involved. Thanks! Since this is CoBF, I figured we could get more participation if I point out that Charlie Munger and Buffett appears to have a similar view on VC (although I don't think what they think should matter to us in determining our own conclusions based on the facts presented. So I'm purely point it out just to stimulate dialogue.). See video below starting at 2:33 mark: https://www.cnbc.com/video/2018/01/10/charlie-munger-i-think-promoting-greg-abel-and-ajit-jain-is-a-very-good-idea.html

She tweeted that she'd post her presentations on her blog. I've been waiting to see them as well. She's been around for some time and this is not the first time she's said something about BRK. I recall seeing her criticism of BRK's deal for BAC preferred/warrants as well. Still want to see the presentation though. If it's about purchase price allocations and amortizations for Marmon, I'd be really disappointed.

Yeah, no question about it. The stock is below the now-infamous August 30 ("we bought back a little" day). $224 was better if one was looking to sell. But frankly, LT holders have to love the price drop. Now that they're no longer hoarding cash, it's nice to know that every price drop works in our favor if you just sit and let them shrink the equity (if Warren Buffett and John Malone had a child...). Better than waiting for that 'elephant' acquisition which comes every few years and hasn't come for a long time now. I do not think they're stopping at $210 either. My guesstimate (and that's all it can be) is that the buyback will continue to $220-$225 at least and that limit will move up as IV increases (though it could move down if rates were up a lot? But I suppose WEB uses higher than prevailing rates for his discounting, so maybe not by much). If we have a -20 or -30% on the S&P, BRK buyback will be epic. And you could sit on your position and not have to buy more to take advantage of the dips (if you don't want to or don't have the funds) because they'll be buying it in. Buyers at $206 really have, again if they're in it for the LT, almost a one-way bet. You can be as sure as you'll ever be in stocks that there won't be a permanent impairment of capital. Plus, there's upside from here from valuation growth and business growth. Just my 20,600 cents.