omagh
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Posts posted by omagh
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On 7/1/2021 at 3:16 PM, Monsieur_dee said:
I hate being Canadian
Get a VPN. It's 2021.
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On 6/15/2021 at 7:43 AM, wachtwoord said:
Why would you hold cash if you are expecting high inflation? Sounds like a larger hurdle to argue for holding cash as you'll need to overcome the loss of purchasing power implied by the higher inflation too.
https://lonecapital.com/wp-content/uploads/2017/09/e38090margin_of_safetye38091seth-a-klarman.pdf
Klarman often sits on 30-40% cash. He has a vulture-like multi-year approach patiently waiting and looking for significantly mispriced assets. His chapter 13 (starts at pg 219) on portfolio management walks through his framework. It's simple, but brilliant thinking. Holding cash is about managing duration and maintaining liquidity. Portfolio management transcends the inflation question and begs the question of whether current asset prices are sufficiently priced in an inflationary environment.
An improved question would be "Why is Buffett maintaining upwards of 30% portfolio at zero-duration with full liquidity?"
And "Why in the normal range of capital allocation options (1) purchase undervalued growth assets, 2) invest in internal growth, 3) repurchase shares) is Buffett allocating spare capital to share repurchases as a preference?"
And "Are today's prices providing a sufficient margin of safety?"
And lastly "Why is Buffett preferring to hold sizeable amounts cash as an infinite duration call option on future asset prices and liquidity events?"
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On 5/30/2021 at 8:12 PM, Xerxes said:
Indeed,
Excerpt from the 2012 letter "Long treasuries have outperformed common stocks over the last 20 years as rates have declined from 7.4% in 1991 to 2.9% in 2011. This will not be repeated in the next ten years. The game is over for long treasuries (almost!). Even if the rates go to zero, long treasuries can provide a compound annual return of only 6% in the next ten years compared to twice that by stocks, if we assume no change in P/E multiples and historical earnings growth. If P/E ratios revert back to their mean, shares of companies like Johnson & Johnson can provide compound growth rates of 20%+ in the next decade. We have already sold half our long treasury position at a yield to maturity of 3.0% (realizing a gain of $271 million) and we expect to sell the remaining soon. In time, we will remove our equity hedges as the risks that we see get discounted in common stock prices. The major risks we see are in the next three years, as we expect common stocks to do very well in the next decade"
My conspiracy theory is that, in 2012-2013, they had no choice but to sell out their Four Horsemen (Wells Fargo, J&J, Bancorp and a fourth one if there is one) to fund closing the losing shorts. Kind of like a long-short position that was unwound. It is possible that if they were not constrained by the losing shorts, they would have kept those higher quality entities, instead of climbing down the quality ladder.
Excerpt from the 2013 letter "
A summary of our 2013 realized and unrealized gains (losses) is shown in the table below:
Realized Unrealized Gains Gains Net Gains (Losses) 1,324.2
(Losses) (Losses) Equity and equity-related investments (1,350.7)
The table above shows the realized gains (losses) for the year and, separately, the unrealized fluctuations in common stock, bond and CPI-linked derivative prices. With IFRS accounting, these fluctuations, although unrealized, flow into the income statement and balance sheet, necessarily producing lumpy results (the real results can only be seen over the long term). This table is updated for you in every quarterly report and we discuss it every year in our Annual Report. In 2013, with common stock prices going up significantly, we sold over $2 billion of our common stock holdings, realizing $1.3 billion in gains, offset by the realized loss on our hedges as we reduced our hedges proportionately. Net net, we realized $29 million in gains from the sale of common stocks and bonds and we had unrealized investment losses of $1,593 million (including almost $1 billion from bonds and $0.5 billion from common stocks), for a net loss of $1,564 million on our investments. Our defensive hedges of our common stock portfolio cost us approximately $2 billion in 2013 because of rising markets – a significant portion unrealized of course, in the sense that we continue to be hedged. Given our concern about financial markets and the excellent returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%)."
@Xerces...FFH has so much under their control, yet they put themselves into forced outs continuously. It's capital structure, portfolio structure, and lack of overall financial strength. Thanks for the catch -- it was WFC and not AXP that they held way back then.
Those excerpts from the 2012 and 2013 letters exactly nail the problem at FFH where they incur portfolio risk that is obvious to outsiders. It's like someone driving a car without a seatbelt and having their mother claim to the press "Who could possibly have foreseen this tragic accident?" (!hand up!)
The 2013 letter was a turning point for me personally as the investment team showed how they couldn't be trusted. I exited after the annual meeting run-up. The cash pulled is worth multiples more.
The speculators hanging around today in FFH are looking for mean reversion to some premium to book value. Good luck to them.
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On 5/26/2021 at 11:14 PM, Parsad said:
How come no one is talking about Fairfax's stake in Resolute Forest Products? The one that everyone was hacking apart 2-3 years ago, and now sits at nearly $20 per share as lumber prices soar! Up $5 a share since the end of Q1 and up over 300% since the end of 2019.
Owning 40% of a $1.5B lumber company sounds pretty good right now...alongside a 40% stake in a rapidly growing $3.3B shipping company...10% of a $6.5B telecommunications company...30% of one of Greece's largest banks valued at nearly $3B...some pretty interesting large stake turnarounds that are taking hold for Fairfax.
Combine that with a very hard insurance market, tons of dry powder and soon to be $1.3B in holding company cash after paying off the revolver...looking like $700 CDN at the end of the year looks reasonable. Especially if India's 2nd wave drop takes significant hold and the Indian economy starts churning again over the next few months. Cheers!
@Parsad RFP is a cyclical, capital-intensive business, so it's ultimately a trade unless Fairfax round-trips on this investment like they just did with BB. Assume 35% goes to govt in capital gains taxes. It's hard to get excited about an investment that's still underwater and you get to keep 2/3's of the capital gain. Fairfax investment team has been really bad over the last ten years and really have only had 1 large winner in the last 20 years -- which they had to pay 1/3 cap gains on.
Imagine that they had actually stuck to their pronouncements back in 2010 that they were going to be buy-and-hold investors in blue-chip franchises like JNJ and AXP -- no cap gains, multiples of original purchase, dividends. Imagine further if FFH cut their debt load and had the financial strength to execute when others need cash instead of having to sell assets to raise capital, often at inopportune times. I walked out on Fairfax long ago and made multiples more with the proceeds than remaining with Fairfax.
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Resolute Forest Products (RFP
The large (top three) RFP stake is now at ~12% of the portfolio. The position was first established in Q4 2010 when it was named Abitibi Bowater and the stake has since been more than doubled. Over the years, their net investment in RFP was $745M ($24.39 per share) and the current value is ~$455M ($14.89 per share) – in the books, the carrying value listed is ~$134M as they wrote down losses. Their ownership stake is just under 25% of the business.
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Resolute Forest Products (RFP
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23 hours ago, Xerxes said:
No hope. It's dormant call option with shareholder patience as its only expiry
Permanently out of the money
How silly to round-trip on BB and be unable to sell. Who could have possibly foreseen this?!
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3 hours ago, gfp said:
https://www.ft.com/content/2438b16f-c4ca-4a5e-b1c2-07b3fbc0bc35
It's been rare to have David Sokol comment publicly on Berkshire since his resignation, but here he speaks to the FT about Abel. Worth a read. I believe you can skip the paywall a few different ways. Answer some survey questions or something like that
Interesting bit as well. It speaks to his involvement in analysis of deals and to his grounding in accounting. He'll work well with Ted and Todd given this background. Buffett is so smart in the selective quality of people with which he surrounds himself.
Abel found his way to the company through one of its many acquisitions. After working as an accountant at PwC in San Francisco, in 1992 he went to work for one of the firm’s energy clients, a small business known as CalEnergy. “Anything I asked him to do he did 125 per cent and then looked at things around it to do better as well,” Sokol said, who was running CalEnergy. “Greg needed very little mentoring. What he required was just being given the opportunities.” CalEnergy under Sokol and Abel went on a dealmaking spree before Berkshire bought the company in 2000. Before he had turned 40, Abel had been elevated to president and chief operating officer of the energy unit, going on to own a valuable 1 per cent stake in it. It was there where he gained much of his dealmaking chops. The division has accounted for some of Berkshire’s biggest takeovers, a fact that has not been missed by shareholders who grumble about the mammoth $145.4bn cash pile the conglomerate has amassed. -
Some decent AGM notes...
https://www.moomoo.com/en/news/post/4908363/the-2021-berkshire-agm-meeting-notes -
On 4/20/2021 at 10:43 AM, wescobrk said:
This is a quote from Calpers:
“It remains unclear if any portion of [executive] pay is tied to company performance,” ISS said. “The continued lack of transparency raises concern as to whether the compensation committee is providing adequate oversight.”Calpers lacks insight. Proof is trivial to find.
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I think it was possible, in the last 10 years, to produce investing profits by playing the long duration game (even with ‘risk-free’ instruments) and there may be an ultimate puff left but humility suggests to wait for a full cycle (whatever that means as the new to-be Treasury person who used to promote Fed put instruments has suggested that true financial crises are a thing of the past, at least for this generation) before reaching the conclusion that there is little comparative optionality value in BRK’s fixed income portfolio and that Mr. Buffett has become passé.
Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF. The yields are better and the risks are better than long duration bonds at this point in the bond market cycle. Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows. As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.
This is not all black and white but the big asset allocation shift of the last ten years (see attached) has been the movement of funds from longer term fixed income to cash and equivalents.
This movement raises two questions (the indirect one raised by wabuffo and a direct one).
The indirect (and retrospective) one: Returns would have been better if the longer term fixed income portion would have grown proportionally to float.
The direct one: Does the current (and growing) allocation offer potentially significant optionality value? (my answer is yes)
Part of the decision in shifting from bonds to other assets (cash, owned income producing assets) is about expected future returns. The move seems correct, but the unexpected happened during the recent COVID panic -- government became a lender of first resort where normally Berkshire would have had its pick of distressed assets.
A similar crossroads is appearing now for Berkshire. AAPL is starting to flatline in terms of its EBIT growth and topline sales growth, but it's priced for some large expectations out of the business. Does Berkshire exit, partially exit or hold due to the expected tax hit? In 1998, Berkshire was facing a similar question with very sizable paper gains in Coca Cola, Gillette and American Express in particular. Berkshire had an out where they turned a ~3x BV share price into General Re with a merger where they acquired a substantial amount of float and a bond-heavy portfolio that they turned into cash. So, giving up a bit of equity to acquire a cashable asset was enough to de-risk an overvalued portfolio without incurring a very sizable capital gains hit from selling KO, G or AXP. Do they interrupt compounding at lower rates going forward and take the sizable capital gains tax hit? History says no, but the new answer may be something creative just like the last time.
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^So could BRK have done better by ‘managing’ duration in its fixed income component of float? This is a relevant question going forward, whoever is in charge of capital (asset) allocation as the present posture can be seen as a drag or as an optionality feature.
Thanks to Brooklyn Investor:
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I think it was possible, in the last 10 years, to produce investing profits by playing the long duration game (even with ‘risk-free’ instruments) and there may be an ultimate puff left but humility suggests to wait for a full cycle (whatever that means as the new to-be Treasury person who used to promote Fed put instruments has suggested that true financial crises are a thing of the past, at least for this generation) before reaching the conclusion that there is little comparative optionality value in BRK’s fixed income portfolio and that Mr. Buffett has become passé.
Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF. The yields are better and the risks are better than long duration bonds at this point in the bond market cycle. Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows. As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.
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There may be some useful observations for some in this piece by MS in their outlook for the P&C industry for 2021.
Covid, catastrophe losses, declining investment yields, rising litigation ... were just some of the big issues insurers dealt with in 2020. The silver lining is that the pricing momentum that began prior to Covid should be here to stay – at least over the near term. That leads to one of the biggest debates facing investors right now – the duration of this hard market. Some say well into the next 24 months; we think that’s a bit too optimistic, and expect a plateau sooner. Regardless, core underwriting margin gains should persist throughout the year. We’re not in the camp of blindly overweighting the commercial lines space, rather leaning toward more selectivity in our preferred names, as we still see balance sheet (namely, reserve) concerns for most of the industry. Our top picks are AIZ and HIG.•Commercial lines: becoming more attractive, as pricing power continues – but caution needed. Commercial pricing power still has some legs. While core margin expansion still in the cards for most of the near term, prior year reserves still need to be monitored. We’re cautious on reinsurance given casualty loss trends.• Personal auto: getting more competitive on pricing. Expectations on strong near-term margins from lower driving are fully baked into stocks, in our view. Next up is where industry pricing heads over the ensuing 6-12 months. We fully expect a more competitive environment through at least the first half of the year. We have a keen eye on the space and will look for valuations to pull back a bit before we become more incrementally positive.
• Other highlights for the coming year: Covid litigation concerns should continue to fade; disruption from new entrants to be actively monitored; valuations are near long-term averages, having recovered from Covid-led trough, but are still below pre-Covid levels.
Happy New Year all
Cheers
nwoodman
Slide 32 shows that P&C M&A transactions (2016-2020) have been done at P/B multiples from 1.2 to 2.0 (throwing out that 6.0). So, Fairfax at 0.8 P/B is well below a private buyer's transaction level.
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Timely equity purchases? Improved underwriting at GEICO/market-share growth? improved margins at BSNF/PCP/Lub? continued energy/utility integration? aggressive buybacks? Need I continue?
I have fair value pegged at around 68-70 cents right now.
Seems about right. Share buybacks at a 5-10% of float along with 8-10% toplline growth will be just fine; should push share prices north at a 15% annual clip. They have ~$2B / month coming in along with the current cash on the balance sheet. As well, the utilities will add generation capacity which creates accelerated depreciation credits. There is a long reinvestment runway and lots of optionality.
The negative Buffett / Berkshire pieces are good for selling online ads, but often precede a decent run-up in the stock price.
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For the record, there is that billionaire in BC (Jim Pattison) that is also called Warren Buffet of Canada by BNN now and then. And then sometimes BNN also called Prem that as well when they are talking about FFH. Not sure how it started, but BNN is fanning it ... always ... non-stop.
I think that is just marketing for an American audience. At the 2018 AGM in Toronto, there was this person in the audience in the FAH portion of the AGM that said something along the line "you are warren buffet of Canada" as a complementary gesture. It was clear from Prem's face that he didn't like that ... and frankly i would find that moniker offensive if I were Prem. Everyone follows a different a path and have a unique story to tell.
PS: for the record, i find it ridiculous, Alibaba is called Amazon of China. Not it isn't. Or how iQiyi is Netflix of China or etc... each company is unique.
Now to more interesting stuff (moving away from FFH's shorts that sets me off):
John Chen's interview on Bloomberg.
I believe this is his first interview in a while, and i believe he skipped BNN. Good riddance.
I haven't watched BNN in years. Didn't know it was still a thing. Cutting out crap is satisfying.
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They are distributing cash now through buybacks.
That's not what I meant because it doesn't raise the issue that I mentioned of the shareholder not knowing how to allocate the cash. I had my head stuck in the past when I remember he had addressed the topic back when dividends were asked for. But yes, beginning the sentence the way I did was prone to confusion.
My point is that the shareholders similarly wouldn't know what to do with the shares distributed.
Fair point. Shares distributed would encounter the same issue of the shareholder doing a worse job of cash allocation than BRK. Spin-off shares could easily get flipped where retention is probably the better option.
On distribution of cash vs buyvacks, Buffett has always leaned to repurchases. Chris Bloomstran laid out the hierarchy of decisions using DIS as the example:
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Distributing cash is another simple method, but in the past I think he has argued that the shareholders would rather have him manage the cash, or be better off if he did so as opposed to leaving them to make the decisions. He could make that argument again in the case of spinoffs.
They are distributing cash now through buybacks. Sopping up some of the undervaluation will gin up the price which is what most folks are really complaining about. Berkshire is a growth company, but priced like a BV multiple play.
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Anybody else but me taking notice of the difference between the ending of this Press Release :
... Contact Investor Relationsinvestorrelations@brka.com
402-978-5413
, and basically all others ending by :
... ContactMarc D. Hamburg
402-346-1400
?
August 31st on that press release. So Marc Hamburg was likely on vacation and a general number was provided. I wouldn't read too much into it.
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what amazes me is BERK got a pass from CNBC/news outlets. Clinton sends a few emails and its a feeding frenzy, BERK negotiates with Iranian business and you dont hear a sound.
I feel like I am back in High School when the teachers pet gets away with sending spit balls to the chalk board and when teacher questions class, everyone looked at me (haha).
Seriously though, I don't know implications of this settlement and from limited research OFAC is willing to allow trade with Iran - you just need permission. Small blemish on the record of a great company however not the end of the world. The operating sub was out of Turkey so doubt the sales guy doing the deal cared about trade sanctions, probably just wanted his commission. Act was self reported so that is a saving grace.
Importantly, Berkshire's reputation is still intact. With 400,000 employees, the odds of 1 of them doing something shady get pretty high to the point of certainty in any given year. Find it, stamp it out immediately and move on. Wells Fargo learned the hard way about letting shady practices fester.
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Basically any brokerage should be able to register the shares in your name. There would be a fee.
We did that ages ago. Shares were bought and then registered with certificates being couriered to us by Wells Fargo who is the trustee. They were held as collateral for a collaterialized loan that we put in place. The value of the shares dwarfed the initial loan amount after a few years.
If you hold shares that split, then the trustee has to mail out new certificates. The banks get a bit jumpy as the collateral suddenly goes down by the factor of the split. One time, we were away for the weekend and Purolator helpfully left $250K in share certificates under our front doormat late on Friday afternoon. Sunday night when we returned home, there they were...heartstopper!
Would the stolen certificates not be worthless or are they not numbered in anyway like bearer bonds?
Were you able to get favorable terms on a loan using the shares as collateral? Was it with a mainstream lender?
So, yes, they are numbered and electronically registered, but it's a good story to tell after a couple of drinks. There's a narrow case where a forged signature can 'transfer' the shares between owners, so best not to let them wander too far. On the back of the certificates, there is wording for conducting a sale or transfer.
For the collateral, it depends on the lender. If I recall, the rate was prime or prime+1% and the borrowable amount was 50% which kept climbing as the bank did an annual revaluation of the collateralized shares. Most banks discourage it because of the handling costs (vault storage, tracking, etc), but you may still be able to find a lender willing to do it. We used blue-chip stocks and kept the actual borrowings at low levels. It could be a useful low-cost way to raise tax-free funds when the amounts are substantial and let the heirs figure it out later.
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Basically any brokerage should be able to register the shares in your name. There would be a fee.
We did that ages ago. Shares were bought and then registered with certificates being couriered to us by Wells Fargo who is the trustee. They were held as collateral for a collaterialized loan that we put in place. The value of the shares dwarfed the initial loan amount after a few years.
If you hold shares that split, then the trustee has to mail out new certificates. The banks get a bit jumpy as the collateral suddenly goes down by the factor of the split. One time, we were away for the weekend and Purolator helpfully left $250K in share certificates under our front doormat late on Friday afternoon. Sunday night when we returned home, there they were...heartstopper!
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Barron's had some really interesting comments on BRK in this weekends paper. I'd suggest you read it. Nothing we already dont know. Said BRK is cheap on a P/BV basis @ below 1.2x; comments on more buybacks from WEB, and an estimated 2% divy yield after WEB is no longer around. Pegged A-share b/v $267,000; which would put the B's @ $178 or so.
https://www.barrons.com/articles/tech-tesla-and-apple-star-as-stocks-keep-rising-51598052420 -- a couple of 'fair use' quotes below:
Berkshire’s class A shares (BRK. A), at around $311,000, look appealing, valued at under 1.2 times estimated Sept. 30 book value of about $267,000. That’s up from a recent low of 1.1 times, but below an average of about 1.4 book value in recent years. The class B shares (BRK. B) trade at about $207.The book value estimate comes from Edward Jones analyst James Shanahan, who has a Buy rating on the shares. “The stock is cheap here,” he says. “Some of the businesses that are struggling are poised to start performing better later this year and in 2021.”
Lately, however, investors have been encouraged about Berkshire’s stock buyback activity. It repurchased $5.1 billion in the second quarter—more than in all of 2019. And buybacks remained strong in July, at an estimated $2 billion-plus, based on Berkshire’s 10-Q filing.Apple’s surging stock is another plus. Berkshire’s stake is now worth about $120 billion, or nearly 25% of Berkshire’s market value.
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Bearprowler,
so that I don't understand the logic,
Low interest rate, takes away the incentive to write insurance, because the float has less alternative 'safe' investment options.
Less underwriting capacity means fewer underwriting not fore market share sake but for return's sake.
Did the low rate regime that first started in 2008-09, also caused similar behavior
If an insurance company writes consistently at 100% CR and makes 5% on the float after tax, it should report roughly 5% AT profit assuming no leverage. So, with treasury rates down to 0.5% or lower, the way to report a similar profit as the previous simple example is to raise prices to ensure that the insurance business writes consistently at 95% CR; again with no leverage or change in portfolio mix. Prices just went up in a hard market to help the company and its industry peers maintain profitability. In the old days, one could write insurance at a loss (CR>100%) and make it back to profitability through investments and leverage. Bill Berkley and Warren Buffett have talked extensively about these mechanics if you look around.
In the post-2008-9 period there was a short hard market 2010-11 if I recall correctly. I had shares in Odyssey Re which Fairfax bought out in this timeframe as cat insurance was becoming very profitable to write at that point. We're probably in the middle of a similar hardening as the industry's going forward financial picture has diminished greatly due to bond pricing getting whacked.
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Fairfax Held Talks to Acquire Remaining Shares of BlackBerry (BB) - Source
Surprised? Not really. Positive? Probably.
Thoughts?
It looks like due diligence is going on from BB side. Not much news...
BlackBerry (BB +5.2%) surges as much as 7% after Street Insider reported Fairfax Financial recently held talks to acquire the remaining shares it did not already own.
According to the article, BlackBerry has formed a special committee and hired bankers to assist in the potential acquisition.
More to come...
Buffett prepared for inflation with cash position of 32.5% of liquid portfolio!
in Berkshire Hathaway
Posted
@scorpioncapital Sure, but inflation had been going on at a high clip from 1965 (1%) through to 1979 (15%) when Volcker took his measures shortly after assuming the position of Fed chair. It's a little early to be calling for drastic measures as the length of the run was the inducement to act. With better information in today's environment, we'll probably see action sooner, but still it seems early.