aryadhana

I think the tax efficiency of buybacks over dividends, while real, is vastly overestimated. We can get into it if you'd like. 2014 is very different from 2022. At the end of the day, an investment made for its intrinsic value is good if you are happy with what you get if all markets were closed. And that eventually requires a dividend. An undervalued to intrinsic value Berkshire is a bad investment in the world where I am right and the marginal buyer and marginal seller do not agree that I am right. A dividend is a forcing mechanism, enabling the person who is actually right to reap his rewards in due time. Repurchases are only a forcing mechanism insofar as there is a real and definite plan to eventually begin dividends, by increasing the dividendable amount per share. I don't really care if there are no dividends for a decade, just that there eventually will be one.

Yeah, I guess. I’d like to see more in the way of a tender. Or they can dividend out inverse warrants to shareholders to put the stock back on them, or sell the puts. And I think they could have started buying back much sooner and more aggressively, but were hoping for an opportunity to make a big acquisition. Fine if they want to err on the side of caution, but that’s why I’d like to see a dividend. There are a lot of people out there who reasonably see this as worth a lot more than the price, and I don’t think that gap is going to be closed with buybacks at the level they are comfortable with. Dividends are a good way of ensuring that intrinsic value is actually realized over time, whatever happens to the price. Dividends are the only way a strategy of “I don’t care about the price, so long as I can keep buying it for less than it is worth” actually ever works out. And it’s pretty clear the value of the marginal dollar to them really is very low, and in this case that marginal dollar is earning interest that is unnecessarily being double taxed.

I think that's probably the right attitude, but without a lot of market makers energetically balancing supply and demand, it's rather possible you buy enough to move the market and plenty of people you would have sold to on the way haven't been paying attention to their portfolio to enter an offer, and come to remember and do so over a period of days as the price goes up a bit. If people are willing to sell at X, good chance a sizable number are willing to sell well below the prices you would end up buying at if you bought in too quickly. Presently trying to balance this with AMBC warrants, which have shockingly low volume for a pretty well-known situation. (500 shares traded today, a few thousand last Friday).

the sources of Berkshire's "synergetic value", what makes it worth more than the sum of its parts are: 1) It can acquire businesses for cheap using its stock, in ways few other corporations can since selling for stock isn't a realization event. Doesn't work with companies most people wouldn't feel comfortable having their entire net worth invested in, forcing some degree of realization. So Berkshire can buy for call it 25-30 percent less than other bidders, and that doesn't include the value of remaining involved if you so choose. 2) Cash flow is worth as much as the best reinvestment opportunity you have, with the highest incremental ROE. Theoretically, you can just dividend your real earnings and the cash will find itself put to its best use. In practice, there's a 23.8 percent tax on getting money out the door and a venture fund or investment banker involved in matching that dollar with its best corporate use. This might cost 20 percent of what you have left over. Which comes to a ~40 percent tax. the work the banker and funds do might mean the allocation is a little better than what Berkshire can accomplish on average, but chances are you don't get to invest in Sequoia or at IPO price either. 3) A culture of spending money wisely, in shareholders' best interest, with management well-aligned, or at least acting and behaving like they are well-aligned. You just don't get this with most other businesses, and have to suffer shared ownership with index funds run by people who actively hate shareholders. A relatively engaged shareholder base and a management who thinks there is a relatively engaged shareholder base is worth a lot. 4) The science of how and why Berkshire works isn't a secret, but they are good at herding cats and other people are not. How exactly are the managers of the businesses under the umbrella compensated? How exactly do you reallocate cash from one to another? Etc. A lot to be had from doing this for decades, and it's not like you can find the answers to these questions online. Probably only a few people that actually know. Each of these constitute durable sources of excess return that probably scale until Berkshire is an order of magnitude bigger than it already is. And none of them require any better-than-market investing prowess, though it is likely that the people investing at Berkshire are better than average, so you would benefit from that as well. Question is the extent to which this is priced in. At 1.5x price-to-book, I think the answer is "nowhere near fully". After all, a lot of the book value is considerably below replacement cost. Hard to compare it to the market-weighted median or mean S&P 500 price-to-book given tech companies with balance sheets that do not reflect the very real assets created by their research, development, and engineering -- and other accounting oddities. THAT SAID- if it's going to be perpetually cheaper than it is worth, it has to pay a dividend (and not just a token) or commit to repurchasing itself when it is less than fully priced. Otherwise going to be a bad investment.

Yeah I agree that it ought to be a great business. In New York at least, cabs are actually pretty good competition. They're cheaper, usually more comfortable, and more convenient about 30-40 percent of the time. And with Curb have their own app too. In other cities this probably isn't the case to the same extent, but major cab routes (to/from airport) probably does have a fair bit of competition that puts a limit on how profitable Uber can be. For local players, the entry and exit costs are very low. This is all by way of suggestion that the total market is probably quite a bit smaller than many people think (still leaves plenty of room for it to be a great business), and even if it's a duopoly there's enough threat of competition for a big enough chunk of its revenue that would deprive them of monopoly- or duopoly-like profits. But I agree it's a plausible multibagger. It's up considerably from when I bought, but Rivian was awfully cheap for a while, with a close to zero (and plausibly below zero) enterprise value not even considering the value of whatever was wrought from all the money burned to date. Which felt like a good option on a CEO with almost all of his net worth in the company investing $20bn judiciously enough to deliver something real. No reason it can't be a tenth as valuable as Tesla. There are several hardware despacs with real revenue, good gross profits, and 50-100 percent growth that have a plausible shot at having a good share of a huge market, but at this point probably require a little too much tech due diligence to warrant a large position.

Yeah, and it may be passé to complain about this at this point but I just don't get how an operation like Uber so reliably fails to make a lot of money this far into the game. Everything tells you that they ought to be making a lot of money: the dominant player in a market with not insignificant network effects collecting the spread in solving a non-trivial problem of coordination and matching. And so much of the money-losing competition forcing non-economically low prices are long dead. And yet... I would be into it if large corporate activism wasn't dead in the water, and if wasn't already priced as if it is going to start doing things well. Now I haven't studied the business in any remarkable detail and am very open to the idea that there's a wonderful case, and leadership has a great plan for the next few years. But it irks me they don't make money. Just like it irks me that Snapchat, which collects gobs of revenue from its mobile app used by million does not make money (or makes very little money).

3 percent 10 year rates are aggressive?

I'll quote this one, but in response to several of your points. The problem with inflation is that unstable price levels foul up business planning and bookkeeping, making it rather hard to tell how much value your business is creating. And as far as this is concerned the situation is more troubling than just an 8 percent headline rate. Since the beginning of the pandemic used car prices are up a little over percent whereas new car prices are up about 14 percent. But the observed prices of used cars are firm and fixed whereas the MSRP isn't actually a real offer you can accept. So inflation measured in prices you can actually buy at today is probably appreciably higher across the board. The problem with low rates is that considerably negative real interest rates are very bad and encourage the destruction of value, and over a period of time inculcate bad psychological habits. I think it's bad for real rates to be negative period, but it is strange and unusual for them to be so far negative for as long as they have been. We will see but I don't think this is a problem that corrects itself without nominal rates rising to a point that real rates are positive enough for long enough, and absent that the problem will compound itself. Nor do I think bringing rates up enough will destroy the economy, just considerable parts of the economy that deserve destruction. Coinbase said in its recent presentation to shareholders, "we may make a profit when revenues are high, and we may lose money when revenues are low, but our goal is to roughly operate the company at breakeven, smoothed out over time, for the time being." This is the sort of thing that has got to go, and will go when non-dilutive access to further sources of wasteful spending become a tad bit too expensive. Temporarily rather high, and over a decade moderately elevated nominal interest rates will not destroy actually and intentionally profitable concerns, nor allow the rich and well-connected to grab productive assets on the cheap. I do not want economic destruction, just want a sane monetary and corporate order. There are also supply-side problems, yes; and positive real rates and stable price levels help there as well. It is hard to invest in stuff when you do not know how much money you are making. It is hard to invest in stuff when ESG schoolmarms might come and confiscate or cause substantial impairment to your assets a few years down the line. It is hard to invest in stuff when you are going out of your way not to give good jobs to certain races. But considerably easier to do a lot of this stuff when money is not cheap.

Shame but our laws are designed to make sure people don't learn to steward their money and think about spending and investing. So much of our wealth is locked up so that we can't spend it until we are frail and weak, and the rules are such that this all has to be professionally managed. People would be better off if they could use all the money they are owed (in retirement plans, pensions, and future entitlements) to pay off their mortgages and invest what they have left over carefully. Fewer people would own stocks, but who cares? The people with enough money leftover after paying down a house and other expenses can take the time to learn a little about investing in stocks or indices; or learn a little about actually identifying honest investment advisors. Prices would be better and make more sense if people actually had to shop for things with their own money. This applies to assets and goods as well. You think maybe bandaids cost $500 at a hospital because no one -- absolutely no one, at literally any point of the supply chain -- is spending anything with their own money, and shopping around as a result? It's an outrage.

What if they dividended puts? Strike price doesn't matter so much, as long as he's happy about being exercised at that price, since they would go out to existing shareholders. Doing this solves the tension between appropriate consideration for selling versus continuing shareholders.

Sure. At the same time a genuinely risk-free premium of 2.5 percent to market rates is an exceptional deal. That $10,000 every year -- $20,000 if you're married -- is a sizable chunk of aftertax savings for a lot of people, and knowing what you put in will double by the time you retire lets you put much more of everything else in investments a heck of a lot more attractive than IG bonds without undertaking any additional risk. It's also especially attractive as a call option on current yields, useful when the secular decline in long-term rates has lasted 40 years unperturbed by the various crises in between.

TreasuryDirect. Nominally, they are 30-year Treasuries with abysmal coupons: 10bps for bonds issued since at least 2015, and even that only because they probably run into floating point errors if they paid any less. They also can't be sold, and incur a penalty if redeemed within 5 years. But! Individuals are limited to a maximum purchase of $10,000 every calendar year. That's a government-guaranteed yield of 3.5 percent over 20 years, sold at a 40 percent discount to fair value, and yielding a 2.5 percent premium to the equivalent duration Treasury bond. (i) Purchase $10,000 of Series EE Savings Bonds for 20 years; (ii) thereafter, recycle half of each maturing bond to satisfy that year's purchase limit; (iii) use the remaining proceeds to fund your Roth contributions for the rest of time (which contributions will be capped at $10,000 by then). Start buying these for kids when they are born and they will be vested into their own $10,000 universal basic income by the time they grow up.

Continuing the convo from the Q2 thread... A somewhat interesting, if obvious, fact about repurchasing shares at a discount: further repurchasing at a similar price becomes relatively more attractive. There's also a lifecycle to investing. I don't know what the weighted average age of Berkshire investors ex-Buffet is (that is, the expected age of the owner of a randomly selected share outstanding), but I would guess it's a lot higher than the market average, which is already quite high, and the company might be abstaining from repurchasing now in contemplation of a secular increase in natural sellers of its stock. My guess is that any hint of an increase in capital gains taxes would be a catalyst here, given how substantial unrealized gains on this company must be.

How would we go about studying whether holding equities beyond what's needed for insurance capital in a corporation leads to some or much of the discount? I agree that it doesn't feel like it does, but I think it follows logically and ultimately informs market prices. A nice thing about market prices is that they can be set in recognition of some fact about which individual participants themselves are quite unaware. Many times market prices can be set in recognition of some fact about which individual participants are themselves unaware? I'm not convinced of anything I've written. I just feel that it is by definition impossible to be adequately compensated appropriately for the risk of owning companies at prices set between non-corporate taxpayers without an amount of "edge" that isn't possible from holding the kind of portfolio he does forever. That he doesn't sell doesn't matter, I don't think, since the tax liability accrues anyway. At best what we can say is that the effect will be mitigated by the dividends received deduction, and so only half of the income from his investments is subject to the double tax -- but that really relies on an investment realizing its value primarily through dividends. I think Berkshire is an "investment partnership or fund" to the extent it has investments well beyond what is necessary to satisfy its insurance obligations. I completely agree that Berkshire is exceptionally-positioned to invest in stocks insofar as managing its float effectively is concerned, especially in concert with cash flow from its consolidated operating companies. I would say that to the extent it needs its equities for insurance obligations, it may need to sell them at any time and so the deferred tax liability isn't illusory; conversely it is strictly suboptimal to compound within a taxable entity anything it holds it would never need to sell. As an aside, the "convexity" of taxes makes it such that the suboptimality of holding for investment something like bonds within a corporation is less severe than holding stock. Ironically tho, I think short-term trading would be pretty tax efficient even inside a corporation if they kept reinvesting their profits (or put them towards buybacks / dividends to long-term owners).

I mean top marginal corporate tax rate has been going down for decades, so this might be the first time one might reasonably anticipate much higher taxes in the future. Doesn't seem political to the extent circumstances suggest it's reasonably possible (e.g. D control government). Is there a reason the depreciation tax benefits need to be paired and offset with capital gains as opposed to his other operating income? I too wish he would sell out of Apple (we can get all that embedded risk without the corporate taxes through a few good index funds). Who wouldn't pay a much higher multiple on the rest of the business without all the equities. The exception might be some bank stocks with a good dividend profile (where capital appreciation isn't as much the point), since I think there's a dividends earned deduction for corporations).