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jasonchin

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    What did Munger mean with this comment?

    in Berkshire Hathaway

    Posted

    On 7/1/2021 at 12:09 PM, MG2014 said:

    AGM 2008:

     

    Yeah. I think there’s one metric that catches a lot of people. We tend to prefer the business which drowns in cash. It just makes so much money that the main — one of the main — principles of owning it is you have all this cash coming in. There are other businesses, like the construction equipment business of my old friend John Anderson. And he used to say about his business “You work hard all year, and at the end of the year there’s your profit sitting in the yard.

     

    AGM 2003:

     

    Yeah. And if you take a business that is a good business, but not a fabulous business, they tend to fall into two categories. One is the business where the whole reported profit just sits there in surplus cash at the end of the year. And you can take it out of the business and the business will do just as well without it as it would if it stayed in the business.

    The second business is one that reports the 12 percent on capital but there’s never any cash. It reminds me of the used construction equipment business of my old friend, John Anderson. And he used to say, “In my business, every year you make a profit, and there it is, sitting in the yard.” And there are an awful lot of businesses like that, where just to keep going, to stay in place, there’s never any cash.

     

    If it's earning 12% return on capital, is he saying most of those earnings go to debt service and not to the equity holder?

     

    Is he saying something about maintenance capital requirements needing to be higher than depreciation so no free cash available?

     

    Is it something around a constant upgrade cycle for construction equipment because of the competitive low-barriers nature?

     

    I guess I don't understand how the construction equipment business actually works

     

    If you need an additional reference point, Tren Griffin included the 2003 AGM reference in his book (Charlie Munger - the Complete Investor). The reference was made to "Owner's Earnings" which takes into account the capex required to maintain the business's ROE. 

    What is Reasonably Priced

    in General Discussion

    Posted

    Ingles Markets: A regional supermarket chain. Bulk of B/S consists of PPE (asset play). GP Margin expansion (narrow moat). Normalize P/E ~8-9. Using cash to payoff notes @5%. Family-owned. No earnings call (only Wells and Gabelli in prior calls)

     

    Tiptree: 0.5 P/B. Wonderful asset in Fortegra (consistent underwriting margin). cash bal>Market cap. Hard assets earning yield of 4-5%. Sign. insider ownership. Biggest con: questionable capital allocation (not aggressive in buybacks)

     

     

    Psychology of Misjudgment #8. Envy/Jealousy Tendency

    in General Discussion

    Posted

    This is an interesting topic to me. Envy comes from comparing yourself to others which is a survival instinct. If you compare yourself to the best version of yourself, it's a growth instinct. So, envy is simply a matter of perspective.

     

    My personal view is that our society is designed such that we are "trained" to compare ourselves to others. When you attend primary and secondary schools, teachers and parents focus on grades as a measure of success. Grades are a relative comparison of you and your fellow classmates. For those who are top of the class, you get credits from everyone. For those who are bottom, you want to just be like those top students. As a result, we are step-up to develop an "envy" mentality. For those who are fortunate, you will come across a mentor/parent who will value your uniqueness and start planting the seed that life should be about the growth mentality (competing with yourself).

     

    This is probably one of the hardest weaknesses to overcome as it is ingrained in every one of us and it's a matter of "unlearning" it over time. Unfortunately, not everyone would reach that stage earlier in life.

    What are you buying today?

    in General Discussion

    Posted

    HDS. Quality business at a fair price. Expecting a spin-off towards the end of 2020 and early 2021 which should result in multiple expansion. It is in a fairly fragmented industry that provides the opportunity for consolidation. HDS has invested in technology with SAP and its online platform which places it in a good position moving out of COVID. One to keep for the long term.

    P&C insurance

    in General Discussion

    Posted

    Their investments are mainly in index fund (equity component), so they are not the usual Berkshire or Markel. The CEO has the right mindset in building for the long run. She was also in a few of the company's commercial directly which is one of the unique selling point about PGR. According to the CEO, their digital platform will be a game charger in the longer term. Lastly, quite impressed with the level of detail disclosed in their reports and highly recommend receiving a hard copy if you are a shareholder. 

    Density Of Business Operations And Covid 19

    in General Discussion

    Posted

    Recently, meat packaging plants have been in the news for Covid 19 related shutdowns due to their working conditions and densely packed setups.  What other industries have very densely packed working conditions?  Obviously, the general office buildings in CBDs and hence most of them have instituted work from home strategies.  Frankly, I have been a bit surprised that most factories are actually humming.  Most of the chemical operations have not been forced to shut down.  On the front of construction, working outdoors on a civil project is likely fine.  But working on a project in NYC doing interior installation is likely difficult as they tend to be tightly crammed.  Are there industries or business that are more or less dense than people may perceive them to be?

     

    As a side note: I feel high-density cities with skyscrapers will have an additional challenge which is transporting people in elevators.

    Buffett AGM Comments

    in Berkshire Hathaway

    Posted

    Folks, I am trying to understand this explanation.

     

    he says CAPEX > depreciation … just means depressed earnings. How is that related to the net cash produced in the covid context remaining unchanged ? if anyone got that, a quick explanation would be appreciated.

     

    thx

     

     

    "Warren Buffett: (01:27:41)

    It affects others much less. Our three major businesses of insurance and the BNSF railroad, railroad and our energy business, those are our three largest by some margin. They’re in a reasonably decent position. They will spend more than their depreciation. So some of the earnings will go, along with depreciation, will go toward increasing fixed assets.

    Warren Buffett: (01:28:13)

    But basically these businesses will produce cash even though their earnings decline somewhat. And if we’ll go to part two, at Berkshire, we keep ourselves in an extraordinary strong position. We’ll always do that—that’s just fundamental. We insure people. We’re a specialist to some extent and a leader. It’s not our main business, but we sell structured settlements. That means somebody gets in a terrible accident, usually an auto accident, and they’re going to require care for 10, 30, 50 years."

     

    My personal interpretation: he meant that earnings will be depressed relative to new capex because it takes time to ramp up the new capex (esp. in those industries). It's like building an extension to your property. You can still enjoy the fruits of your existing property, but you will have to fork out capital for your extension which may take some time to be up and running. However, your existing property is cash generative.

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