longterminvestor

Look at Microsoft after Ballmer left or Apple post S. Jobs era. Monster returns. Different horses, but it can be done. I believe there are A TON OF LEVERS for Greg Able to pull when Mr. Buffett is no longer with firm. You've got use of data from phone app on GEICO to better underwrite policies (Progressive has been using for years), precision rail-roading with BNSF, those are 2 HUGE softballs for Greg Able to use and deliver positive earnings growth ORGANICALLY in already very profitable businesses. Optionality of cash has drag on returns however if proper allocated, possibilities are very good for compounding returns. Tedd/Todd have shown they have larger circle of competence than Mr. Buffett. I understand and think about S&P, 10 year comparison is not pretty - S&P is outperforms. I just like the business - so for me its easy.

My thoughts going into the week were “ok, probably not much change” considering Mungers comments. Then I read Bloomstran saying 1 yrs worth of FCF on buybacks and my mind starts to change my thought process. As I sit in my kitchen reviewing quarterly report, I initially found myself extremely mad. Then I said, what is Mr. Buffet teaching me right now? And that lesson will be different for everyone. For me, couple hours after calming down - it’s confirmation bias can take over. I was calm coming in to earnings, then I read 1 article speculating a monster buyback and my mind melted. Great lesson. And many more. But that’s one for today.

Small item caught my eye. 0.2% increased ownership in BH Energy business. Ownership split has always been 90.9% and shown now at 91.1%. Wahoo, I’m so starved for deals I’m getting excited about 2 beeps increase in equity!!

Here is some insight (video and transcript) from Morningstar's Greg Warren regarding Berkshire titled "What the Pandemic Means for Berkshire Hathaway": https://www.morningstar.com/articles/981005/what-the-pandemic-means-for-berkshire-hathaway

wonder why Greggory Warren (Morningstar) got the boot from being on the panel asking questions?

Net Income for Energy & Railroad: $8.3B @ 16X P/E= $133B Cash = $130B Portfolio = $200B (Portfolio+Cash = rough valuation for insurance business of $330B) Total = $460B Current Market Cap = $455B LOOK WHAT YOU GET FOR FREE!!! KHC (26% Ownership) mark to market is ~$9B OXY Warrants – up in the air on value All the operating Subs shown below with # of employees per subsidiary: (Conservative estimate of value for subsidiaries $125B ) MANUFACTURING BUSINESSES: Acme ..............................................2,117 Benjamin Moore ............................1,848 Brooks Sports . . . . . . . . . . . . . . . . . .872 Clayton Homes ............................. 18,533 CTB ............................................... 2,910 Duracell ........................................ 2,659 Fechheimer . . . . . . . . . . . . . . . . . .. 431 Forest River ................................. 11,131 Fruit of the Loom ......................... 29,263 Garan ........................................... 5,311 H. H. Brown Shoe Group . . . . . . . . 960 IMC Int Metalworking Co …………. 13,414 Johns Manville ............................. 7,769 Justin Brands . . . . . . . . . . . . . . . . . 755 Larson-Juhl ................................... 1,193 LiquidPower Splty Products, Inc.. . 460 Lubrizol ......................................... 8,691 MiTek Inc. ..................................... 6,159 Precision Castparts ....................... 33,417 Richline Group ...............................2,668 Scott Fetzer Companies .................2,159 Shaw Industries ............................ 21,094 Marmon ....................................... 22,307 SERVICE AND RETAILING BUSINESSES: Affordable Housing Partners, Inc. . 21 Ben Bridge Jeweler . . . . . . . . . . . . . 923 Berkshire Hathaway Automotive .. 10,805 BH Media Group ........................... 2,793 Borsheims . . . . . . . . . . . . . . . . . . . . 151 Business Wire . . . . . . . . . . . . . . . . . 472 Charter Brokerage . . . . . . . . . . . . .. 160 CORT .............................................. 2,735 Dairy Queen . . . . . . . . . . . . . . . . . . . 476 Detlev Louis ................................... 1,360 FlightSafety .................................... 4,872 Helzberg Diamonds ........................ 1,995 Jordan’s Furniture ......................... 1,092 McLane Company .......................... 25,820 Nebraska Furniture Mart ............... 4,634 NetJets ........................................... 6,476 Oriental Trading ............................. 1,438 Pampered Chef . . . . . . . . . . . . . . . .. 353 Precision Steel Warehouse . . . . . . . 124 R.C.Willey Home Furnishings .......... 2,834 See’s Candies .................................. 2,488 Star Furniture . . . . . . . . . . . . . . . . . . 606 TTI, Inc. ........................................... 7,046 WPLG, Inc. . . . . . . . . . . . . . . . . . . . . 190 XTRA . . . . . . . . . . . . . . . . . . . . . . . .. . 398

https://www.berkshirehathaway.com/sharehold.html Meeting starts at 3pm CST. Unaware of "format" however starting at 3pm doesn't leave much time for Q&A with reporters. Unfortunately.

Observation on BRK regarding buybacks and "real time" book value. In the event BRK did purchase lets say $10B in its own shares, the asset cash account would be debited by $10B. There is no offset on the liability account on balance sheet hence Book Value would actually decrease by $10B. Its like the $10B evaporates from balance sheet however the equity owner's share is increased proportionally. This observation occurred to me when I was looking at some companies who have aggressively re-purchased stock and have negative shareholder equity. As owners, we all like the concept of ownership percentage rising without laying out a dime, however the cost is a reduction in Book Value. Only way to dig out of the hole would be to have more net earnings. I guess the other side of that coin is whatever the earnings are, the owner's have a higher percentage of those earnings and the reduction in Book Value is a trade off. Anyone else have thoughts on this?

Cokes moat is the fact that they have a huge distribution system that would take years to create and all coke does is make syrup. The hard work is done at the bottling plants - coke has started to buy those up because they are profitable. But for me, it’s the fact that coke could create a new product today and have world wide distribution immediately. That is a serious moat. See’s is pure brand. Seasonal business and little to no capex make it a wonderful business. If it was scalable, it would be like Mars or Wrigley.

Regarding a Boeing pref shares deal or complete take over, wouldnt Berk have to sell the airline stocks in that event? Mr. Buffett is not a fan of conflicts of interest. Owning Boeing and the airline customers would be difficult.

BREAKING: Chuck Norris tested positive for COVID-19. Doctors say the virus is in critical condition.

Just saw news that Rent-a-Car company Enterprise is possibly seeking aide from Government. I know Mr. Buffett has coveted that business for a while and could never get owner to sell. That would be a nice buy. Large, private, and great culture.

Regarding Delta - only spent $45MM on shares at $45. Not the end of the world. I remembered an interview and watched it again for some "words of wisdom" in turbulent times. Quoting his words he was a little early in '08. Not even Warren Buffett can catch "the bottom" however LETS HOPE HE IS WAITING FOR HIS PITCH ON THE BIG BUY!!! Excerpt from Buffett's interview with Andrew Sorkin regarding 2008 financial crisis (https://www.cnbc.com/video/2018/09/10/warren-buffett-talks-to-cnbcs-andrew-sorkin-2008-financial-crisis.html): Sorkin: "When you look back in retrospect, is there any thing you wish you had done that you didn’t do? Any investments that you wish you could have made?" Mr. Buffett: "I can look back on any week and come up with that. The situation, ah, we’d have been better off, considerably better off at Berkshire if we had waited 4 of 5 months to buy anything. I mean, the low was set in March, and it was much lower…I wrote that Op’Ed for the NY Times in late October while it was right on a long term basis but it was way off for 3 or 4..4 or 5 months at least."

From a liquidation perspective, US laws for bankruptcy are questionable. Royal Caribbean is a Liberian Corporation. Carnival is domiciled in Panama. And NCL is domiciled in Bermuda.

Regarding Business Income Insurance, or what brokers call BI, is written with a trigger for "Direct Physical Loss". Meaning the business needs to sustain physical damage. To be clear, a business losing revenue because their clients are not buying because of fear of disease - IS NOT "direct physical loss". There are policies written for Continent Business Income (Continent BI) to insure supply chain or reliance on other business to produce profit of insured business. Continent BI is also written on Direct Physical Loss basis. Meaning, BI or Contigent BI does not cover Pandemics. Standard policies exclude this exposure. Any large losses from Pandemic would come from Ajit's book who has capacity for large "un-insurable events" like a pandemic but it would have to be specifically endorsed and guidence on Ajit's book is not gonna be disclosed so we won't know. Only product I am aware of in the market for Pandemic cover is written by Munich Re/Metabiota brokered by Marsh. (I bet their phones are ringing off the hook!) Workers Compensation exposure is also limited due to exclusions. Some insureds will have draw down in payrolls and thus premium collected will be down however there is STRONG data over time that shows in economy down cycles less claims are reported due to employee wanting to keep their job. GEICO should perform well - less cars on road = less accidents. From an insurance perspective, this type of panic is when Berkshire will outperform the market and with an already hardening market - these are great tailwinds for a great business to continue to operate from a position of strength. In other parts of business, Mr. Buffett's Equity index put option contracts with expiration in Feb 2023 will need adjustment. As per 10-K, a 30% move to downside would result in a change of $1.8B in value. Annual report does cite conditions could fair worse considering concentration of puts. Good news a large portion of the outstanding puts were retired in Feb 2019. Some impairment will be applied in coming quarters. The cash pile is a HUGE option for Berk and hopefully being deployed wisely. I also believe the value of Tedd/Todd as capital allocators will be tested here and hope they show significant strength during this opportunity.

Dynamic - out of respect for your work I feel obligated to be as exact as possible. When reading your note I noticed my numbers were misleading. Dates I used were Feb 13-March 4. I should have included Dec 31 - Feb 13 purchases. There was an additional 847,574 Equivalent B shares purchased during period. Dec 31, 2020 Annual Report (page K-103 on Annual Report) A Share: 701,970 B Share: 1,384,481,533 Equivalent B: 2,437,436,533 Feb 13, 2020 Annual Report (Page 1 of Annual Report): A Share: 700,396 B Share: 1,385,994,959 Equivalent B: 2,436,588,959 Total Buyback from Dec 31 to Feb 13: A Share: 1,574 B Share: (1,513,426) - Some A must have been converted to B for the increased share amount Equivalent B: 847,574 TOTAL Buyback from Dec 31 to March 4: A Share: 2,847 B Share: 2,229,163 Equivalent B: 6,499,663 Outstanding share count reduction was more like 0.26666%.

For context - last year's repurchase doing the same math from annual report and proxy amount of the B shares (A converted) was 2,617,280 shares. Roughly a 110% increase YOY.

Proxy filed today gives shares outstanding as of close of business March 4, 2020. We already have shares outstanding as of Feb 13, 2020. That's 14 trading days. Heres the math: Feb 13, 2020 Annual Report: A Share: 700,396 B Share: 1,385,994,959 Converted to B: 2,436,588,959 March 4, 2020 Proxy: A Share: 699,123 B Share: 1,382,352,370 Converted to B: 2,431,036,870 Total Buyback from Feb 13 - Mar 4: A Share: 1,273 B Share: 3,642,589 Converted to B: 5,552,089

Buffett's Berkshire says former AmEx CEO Chenault nominated to board, replacing Bill Gates https://www.reuters.com/article/us-berkshire-buffett-pay/buffetts-berkshire-says-former-amex-ceo-chenault-nominated-to-board-replacing-bill-gates-idUSKBN2103A7?il=0

as of 12/31/19. Outstanding Shares are 2.436B (Converting 700K A share and adding 1.385B B share) with BV of $428.563B equates to BV per share price of $176. 1.2X BV would be $211/share however portfolio is down so actual BV is also down since 12/31. Wonder if WEB actually does the realtime math on that?

Here are the share buybacks for the year (Converted A to B using 1 A Share@1500B equivalent): Q1: 8,406,830 Q2: 2,187,640 Q3: 3,488,363 Q4: 10,140,577 Ackman's Pershing Square acquired the following shares in quarters listed: Q1: N/A Q2: 3,512,997 Q3: 502,597 Q4: N/A Interesting to see Buffet was competing with Bill Ackman during Q2 & Q3 (less so for Q3) for shares. Data above supports conclusion shares are tougher to buy back with competition. It shows in data above. Anyone else know of other funds acquiring large blocks of BRK during the year 2019? On the other side of the coin, what funds were net sellers of BRK in 2019? Large blocks.

Page 123: "Berkshire saw its share price grow in line with intrinsic value in 2019. Given the 47% (or 40% with Kraft Heinz) gain in the stock portfolio and 24% advance in book value per share, you’d think based on the media’s take that the sky finally fell. Chicken Little will miss out on the shares being nearly as undervalued as at any time, not only during our 20-year tenure as shareholders but over the entire 55-year history with current management behind the wheel." Shares most undervalued in history under Buffet? Being undervalued at $5Bil market cap and growing 100X to $500Bil is WAY DIFFERENT than being undervalued at $500Bil. 100X from here would be $50Trillion. This is where size really does hinder return. We may have to get used to Brk being undervalued. Might be par for course at size. Unless it Re-Rates on something other than BV.

Traditionally BRK's proxy for fair value has been Book Value. Buffet himself said BV is not a good proxy for valuation for BRK moving forward however market is still using. Recent example of market changing its valuation methodology is AAPL. AAPL had no material change in YOY earnings however market just doubled the multiple because revenue for Services has large run-rate and renewed love for iPhone revenues. Post from earlier this week talking about the goodwill value on balance sheet of businesses acquired years ago being outdated got me thinking - When does BRK get "Re-Rated"? What are the catalysts for this re-rating? Reasons why BRK has not been re-rated: #1 - Market sees BRK as an insurance business with operating subsidiaries rather than operating business with insurance subsidiaries #2 - Permanent Owners in public market: The share float in BRK does not trade like other public companies. I estimate there is an overwhelmingly large amount of forever holders. Homegamers, Institutional Funds, and Berkshire Insiders have no interest in selling. IE - there is no exit price on my shares that I own - I am looking to buy more. On the other hand, Bill Ackman's Pershing Square probably has an exit price. So stock just sits where it sits. #3 – Dead money: cash earning nothing is a HUGE drag on ROE #4 – Size hinders growth #5 – Market loves leverage. Only leverage on balance sheet is insurance company float and regulated leverage on balance sheet of utility/railroad not hypothecated to parent. #6 – Insanely low interest rate environment: low borrow costs allow acquirers to buy businesses that otherwise couldn’t afford or didn’t have cash to sit at the table Reasons why BRK could be re-rated: #1 - Dividend: with a dividend mutual funds with requirements for dividend payers could be owners #2 - Significant re-purchases of shares #3 - Large Acquisition that puts an exclamation point on BRK being an operating business with insurance subsidiaries #4 – Market values investees “look through earnings” as a real number (Big thanks to Dynamic for spreadsheet – man do I look at that a lot) #5 – Market understands Berkshire has become the “World Bank” of public markets. I view BRK as a bank of sorts (this comment does bring BV back to conversation on how to value). BRK is willing to finance any transaction to a size that would make most BOD’s of banks skin crawl – and FAST! #6 – ORGANIC GROWTH: If Able/Jain look inward to BRK and figure a way to incentivize managers for internal organic growth would be a monster boast #7 - Market figures out a way to value earnings on a multiple basis taking into account for the change in stock portfolio mark to market running through Income Statement I don't believe enough work has been done on #7, hoping someone can help me better understand implications of this change (I am no accounting expert - I know enough to be dangerous). Could BERK ever trade using a new valuation method that would cause a significant change in value of the business? Other public companies would hire teams of consultants and advisers to educate the public on why they should value their business using the classic "Multiple of Eyeballs" & “Adjusted EBITDA”. Part of me thinks Buffet intentionally lulling the market to sleep and will buy back 30% of the outstanding shares after his eventual departure from firm. The more I write the more I think of Charlie Munger laughing at me saying “we are not gonna change” and I totally understand sloth like management has gotten BRK to where it is today. Hoping to strike interesting conversation here with people who follow inner workings. I am ultimate fanboy and have humility to say so. I just hear the same people saying the same things about BRK on TV or annual letters and hoping to discover new ways to think about valuation and learn how to read the tea leaves. Poke holes in above - enjoy the fun of valuation - really interesting exercise. I would talk for hours about valuation with anyone just to learn and get better. Cheers!

Next chairman is Howard Buffet. Quote letter from Buffet on Berkshire "Past Present & Future": "To further ensure continuation of our culture, I have suggested that my son, Howard, succeed me as a nonexecutive Chairman. My only reason for this wish is to make change easier if the wrong CEO should ever be employed and there occurs a need for the Chairman to move forcefully. I can assure you that this problem has a very low probability of arising at Berkshire – likely as low as at any public company. In my service on the boards of nineteen public companies, however, I’ve seen how hard it is to replace a mediocre CEO if that person is also Chairman. (The deed usually gets done, but almost always very late.) If elected, Howard will receive no pay and will spend no time at the job other than that required of all directors. He will simply be a safety valve to whom any director can go if he or she has concerns about the CEO and wishes to learn if other directors are expressing doubts as well. Should multiple directors be apprehensive, Howard’s chairmanship will allow the matter to be promptly and properly addressed."

The beauty of him "nailing Apple" is more than just the increase in dollars. Its the fact that after years and years of saying he doesn't understand tech, that he actually spent the time to learn it and find an opportunity to allocate capital to the new found knowledge. He failed with IBM, and instead of never going back, he found a new opportunity with Apple. An amazing achievement and its still early innings with Apple which is great to see. On that thought I was disappointed to see them sell 1MM Shares but that probably had to do with Ted/Todd having to sell for something they liked better. To have the discipline not mettle shows the discipline. If asked, Warren probably wanted to say, yeah, just allocated those APPL shares to me and I will give you fresh capital. They didnt do that - others might have. Just amazing to watch.