longterminvestor

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.

IMO, this would be Greg Abel's call rather than boys in Omaha to do some deal in form/fashion on the assets of PG&E. Whatever is decided - it will show what kind of deal making/risk tolerance the new guard has versus the old. Wonder who calls who? Does Warren call Greg or does Greg call Warren? Maybe Greg calls Ajit and they conference in Warren........These are the fun things I think about when bird dogging a nice sized deal with some hair on it.

EWM joining Berk Real Estate is misleading. Berkshire acquired EWM in 2003. The story should be more about branding as EWM is changing their brand to match the ownership.

Quoting 2018 annual letter, page 11, "By my estimate, Tony’s management of GEICO has increased Berkshire’s intrinsic value by more than $50 billion." Can we back into this off the cuff remark to analyze Buffet's intrinsic value of GIECO? Does this mean GIECO is worth $50B in Buffet's eyes? Or more than $50B?

Article Printed Charlie_Munger_Unplugged_-_WSJ.pdf

1 share of BRK.B represents $84 in value from the portfolio of stocks ($206B Portfolio Value with 2.4529B shares of BRK.B equivalent). 1 share of BERK.B represents $46 in cash ($114B cash with 2.4529B shares of BRK.B equivalent). $130 value for portfolio+cash for $205 share price today means you get all of Berkshires Operating businesses for $75/share. Can someone please poke some holes in this? Seems like an incredible "margin of safety" vs. other available marketable securities. (credit Dynamic for the google spreadsheet - nice tool).

Actually the question is I would ask is the opposite, how to decrease the Berkshire Share Price? Especially in the context of share repurchases. And the answer is pretty simple. Continue to run a boring, long lasting, enduring enterprise, do not offer quarterly guidance, run up an absurdly large cash horde that drags on Return on Assets, and smartly purchase assets that are undervalued compared to the risk free rate of return. Look at BNSF 9 years later - no one talks about this. BNSF has returned $33B in earnings to Berkshire and the cost of BNSF was $34B (Total Value of transaction was $44B) – so the cash outlay 9 years later has been returned and the only cost was the 6% of shares issued. Best part of that deal is I speculate value of BNSF today is worth somewhere in the $150B-$175B. The stock component of BNSF deal makes the real rate of return a little messy because 6% of shares outstanding to pay for BNSF in addition to cash. Warren created $150B-$175B in value that is not listed as “an asset” on the balance sheet while giving up 6% of shares outstanding. (I wouldn't even know how to evaluate the opportunity cost of the 6%, :-X). This is radically simple and really doesn’t show. Breaking down the BNSF deal with small numbers but keeping the % intact, this is what I believe Buffet & Munger try to do everyday. Buy a business for $100 that earns $5. 9 years later the same business earns $11.67 annually and growing. If Berkshire can do that, then the value of the company SHOULD INCREASE but maybe it wont. As someone said earlier in the thread, stock market value is a weighing machine. And if the weighing machine becomes out of balance, that is when re-purchases of countless shares will be bought in. But to have the patience to wait, wow. Really tough when you have a cash pile of $114B and growing. When the right deal comes along, they can deploy capital and do the same thing – if you could re-create today what happened with BNSF, Berk could buy 2 BNSF’s with cash and 9 years later add $300B-$350B to the value of Berkshire. That equates to a 60% increase in enterprise value. History shows that Berkshires value will not match what is truly at the earnings level. I personally prefer to see the price GO DOWN, not up so shares can be purchased at a lower amount. I think the bigger Berk gets, the more difficult it becomes to value for “The Street”. And that’s just fine with me.

Anyone in the group ever addressed 16,000 people and countless via internet webcast? I noticed it more as nervousness but health is always a concern. Heres to hoping leadership at Berkshire has Alligator blood in their veins.

Should have been more clear - Competing for acquisition in public is unlike Buffet. No doubt, the terms of the deal are very Buffet - its actually pure Buffet with the accounting treatment of warrants. Seems like he is having to get more aggressive. When have we seen him using a pawn like OXY to do his bidding for him.

I reviewed the annual reports dating back to 1996. Each report contains a section titled "Acquisition Criteria" which defines what Berkshire looks for in a target for acquisitions. I have always read this section with complete awe and amazement because Buffet makes it seem like it is so simple to do business with him. And when you have something, he wants, I'm sure it is! The section contains 6 talking points about size, consistent earnings, return on equity with little leverage, good management, simple biz, and an offering price start the section and further paragraph reads a sentence, "We will not engage in unfriendly takeovers....We don't participate in auctions.". As a business person myself, the line promising an answer to whether there is any interest "customarily within five minutes", is astounding - especially with the size and scope of the deals Buffet wants to see. When I was reading news about the Occidental deal, I thought to myself - this seems a little unlike Buffet. So I quickly went to the 2018 report to look and see if he changed the Acquisition Criteria section. To my disbelief, the Acquisition Criteria section was omitted in the 2018 annual report - it is no where to be found. WOW. Did he just edit this out on purpose? Why was this section omitted in the annual report when acquisitions are a vital part of Berkshire's allocation of capital - I am waiting on baited breath for insight from the group. Reason for the post is more speculative, will Berkshire make some hostile takeovers? Remember the snubbing of the Unilever deal?

Pretty funny how we all complain about leadership not deploying capital at a rate in which we wish. Most leaders of companies at the stage Buffet/Munger are at would be looking for the "Deal of a Century" to capstone their legacy. No business ever went out of business from having too much cash around. I am grateful they are not reaching for yield, overextending capital allocation. When I sit back and wish more money was spent to breed more money - I have solace in the fact Buffet/Munger have not failed us to date and the lessons of Graham are just as prevalent today as they were in 1950. Just more people chasing more deals with information VERY readily available make the opportunities more difficult to find. I too am curious on thoughts regarding asset allocation and share buybacks. Echo thoughts on hearing from Ajit/Gregg. I speculate more of the same chatter on how insurance is more and more difficult to gain market share. My day job is an owner in a commercial insurance agency - Agent in my office just moved a large trucking account - $1.8MM premium - away from NICO because their premium was too high. Would enjoy if he discusses Berks efforts to cut brokers out of distribution system and go direct in the commercial market. I am seeing some of that on a national basis.

WEB/CM don't give away anything for free - they run a business, not a charity. WEB reimburses BRK for postage annually regarding his personal mail sent by the firm. Why would they give free advice if they could wait until the humble CEO is begging them to buy the business for 60 cents on the dollar? I believe WEB and CM’s first devotion is to the shareholders of BRK. Combined they own close to 40% of the firm ergo it’s their money more than most. My theory is the 100 businesses who need help, financing, advice, or otherwise, are attracted to the shadow of integrity/character that BRK casts and if they can align - their (for example GE's current situation) sins can be washed away. Goldman is another example of this. There is a price for that shadow(washing of sins) and WEB/CM value the shadow more than anything which is great for us shareholders. WEB/CM should be cold when discussing business but in my experience, that is needed when a deal is on the table. No emotion, just business. I don't believe the "Oracle from Omaha" or affable old men routine to be a ruse, it is genuine no doubt but the Solomon deal really changed how WEB/CM operate. The Solomon deal was very close to ruining their reputation and now BRK knows how to navigate shark invested waters much better. Reputational risk is a major factor in BRK's deal making and we entrust WEB/CM to evaluate ALL aspects on deals or ongoing business concerns. WEB still has a rankle with how the insurance claims for 9/11 could have been avoided if they would have priced for Terrorism in the property reinsurance placement. WEB advised on the risk and underwriters didn't price for it. WEB thinks at such a high level it is scary. Soon enough we will entrust Ajit/Gregg/Todd/Ted with the deal making process. They won't give anything away for free either, in my opinion. I believe they have the character and business acumen to satisfy the shareholders ongoing concerns of running the existing businesses of BRK and do deals. For example, reportedly the Precision Cast deal came from Todd Combs - however WEB still wrote the check. I'm like everyone else in the market asking what will happen post WEB/CM but that risk "is what it is" and believe the BOD has done everything they can to ensure the BRK will endure into perpetuity. And I will be reading the footnotes to see if Ajit/Gregg/Todd/Ted reimburse BRK for personal postage - if they do - then us shareholders have much to be thankful for. The culture of BRK instilled by WEB/CM will have endured knowing nothing is free at BRK.

Float can be viewed many different ways. 1 way to think of float is in 2 equal functions. #1 - Dollars deposited in the form of Premiums arriving for new/renewal policies being written & #2 - Dollars leaving in the form of claims being paid. For example, claim settled today could be paid with premium collect today. Yes, a liability comes with premium collected today but claiming on that collected dollar could take years to pay out - or may never be paid out at all. With actuary models where they are now (be fearful of computers modeling risk/underwriting), and the conservative actuarial nature of BH Insurance as a whole, the individual carriers like NICO, Berk RE, GenRE, Berk Specialty and Berk Prim have as close "to the penny" understanding, leads the industry, of what the cash needs could be for the foreseeable future - 120 days minimum - probably longer. GIECO only comes into play on CAT/SUPER CAT due to the Comprehensive Coverage exposure (cars/trucks damaged due to wind/hail/quake). Pretty sure Ajit & Warren are keenly aware of the large renewals and large claims under negotiation that could adversely affect cash on hand - doubt it is ever an issue. I'm not concerned about Float to Cash ratio. Float is "Long Enduring" as WEB says. Especially when its profitably underwritten. And if WEB could deploy $80B today on a business with strong moat at his price, he would wire funds on a handshake and Charlie would be cheering him on the whole way! Float to Cash conversation would not enter the room. IMO. First post.