Munger_Disciple

I wonder what "margin of safety" Todd sees in Snowflake. I don't like Combs/Berkshire chasing IPO pricing on this one. Seems like a radical departure from the past.

First of all, the asset base of FFH is not that small (though much smaller than BRK). FFH also faces competition from PE and others for deals in the $1-5 billion range. Second being smaller in no way guarantees success; the lackluster investment performance of FFH over the last 15 years is a prime example of that.

There is really no comparison between FFH & Berkshire. Berkshire is so much better in every aspect than FFH that it is like comparing Roger Federer to a club player. In this interest rate environment it is crazy to have a 15% compound return target for intrinsic value with tons of leverage. That just won't happen. I prefer companies that under-promise and over-deliver.

Looks like 100 million more shares of WFC sold after June 30, 2020: https://www.sec.gov/Archives/edgar/data/72971/000119312520240131/d84250dsc13ga.htm

In the video (around 22:40 min mark) Pabrai actually says that he is "fighting to get 50.1% odds vs 49.9%" which makes me wonder even more.

Thanks for the detailed response wabuffo. It is clear that Buffett moved most of BCS's portfolio to common stocks after he took over. We also know (now) that inflation was raging in the 70s. One side effect of it was rapid erosion of the real value of stamp liabilities so it is possible that Buffett was more aggressive on the asset side by moving capital to "safer" common stocks in addition to selling fixed income instruments. Obviously we don't know for sure what was on Buffett's mind at that time, but it is a reasonable guess. Still common stocks were much more volatile than cash/short term bonds and it is hard to argue that Buffett was covering 100% of the liabilities with "safe" assets. We also have Buffett on record repeatedly saying he needs to keep only $20B cash on hand for covering insurance needs and he could use the rest for acquisitions/investments. Though I agree that Buffett's actions during the last decade seem to belie this. In any case the current interest rate environment is almost diametrically opposite to that of the 70s though it could change at any moment without warning. Perhaps this is the reason Buffett has been covering 100% of insurance float with cash + ST treasuries for the last 10 years. -MD

Great post CB. I didn't look closely at "Investments" held by BSC in the 70s until your post. You are 100% correct that most of BSC's "Investments" were common and preferred stocks and are not comparable to cash and very short term treasuries held by Berkshire today. Your finding actually makes me more optimistic that Berkshire will use its large cash holdings to buy a really attractive business in the future (if they find one).

Wabuffo, Excellent analysis of BCS float! Do you think the banks that gave loans to BCS for purchase of businesses like See's and Wesco ignored the stamp liabilities and just looked at metrics like EBITDA? It appears Buffett mostly funded the purchase of businesses in the 70s with debt without touching the marketable securities which were earmarked for stamp redemptions. But it seems he did get the (perhaps indirect) benefit of float because the reason he was able to fund 100% of purchase price in some cases (ex. Buffalo News) with debt was due to the highly liquid balance sheet. If the reasoning is correct, then the main advantages of zero cost float are: (1) income that can be generated with (mostly short term, highly rated) bonds, and (2) the ability to raise funds for large acquisitions via new debt issuance. Given the zero interest rate/MMT environment we live in, the first advantage goes away. But the second advantage remains. * (see below) If interest rates turn negative, (1) becomes a liability. Interestingly BNSF purchase was partly funded with Berkshire stock and debt (rather than dipping into liquid funds for earmarked for insurance liabilities). *Interest rates were much higher in the 70s so the cash equivalents on BCS balance sheet were generating significant income which was used to raise debt for purchases of wholly owned businesses. Given the zero interest rates, this is no longer the case. -MD

IIRC (at one of Wesco shareholder meetings) Munger said something to the effect of: Warren should have resigned from KO board in the nineties and sold the stock.

2020 Form ADV: https://reports.adviserinfo.sec.gov/reports/ADV/157594/PDF/157594.pdf $13.9 billion AUM

One thing I found interesting is that Berkshire's equity portfolio returned approximately -12% (vs. total return of -3.1% for the S&P 500 index) during the first half of 2020 despite heavy allocation to AAPL. Result of the carnage in financials and airlines this year.

As we know, Fed is also purchasing securities other than govt bonds; corporates (including junk), short term muni debt and mortgage backed securities. It seems to me that this activity has the potential to create asset inflation/bubbles by reducing the spread between US treasuries and such securities due to an implied "fed put". I am especially bothered by the purchase of munis: suppose a municipality defaults. What recourse does the Fed have in that case to recoup the funds?

wabuffo, Thanks for the Meta example; it is very helpful in understanding how the Fed operates. Your posts and Bill Dudley's op-ed pieces have been quite educational to me. Does this mean that the main risk to inflation comes from US government spending as opposed to the large Fed balance sheet? MD

Green makes some valid points about the indexing phenomenon. But his theories don't explain why indexing doesn't push up all the component stocks in the S&P 500 index. For example, all the financials are down a lot in 2020. So it must be the active managers who are pushing up tech and pushing down Wells Fargo for example.

Is it my impression or Munger's yacht looks a bit dated now especially compared to Pattinson's?

Thanks for the review wabuffo. Ordered it.

Interesting, thanks.

I understood it as: aim a bit long, a bit short and in the middle to hit the target. It means (as it applies to business & life) when you are estimating something, try to upper bound and lower bound tightly and your answer will be the middle.

https://www.npr.org/2020/07/06/887593775/court-rules-that-dakota-access-pipeline-must-be-emptied-for-now I am not sure this news is relevant to the Berkshire deal but it is scary that a US judge ordered an existing and flowing pipeline to be shut down.

Thrifty3000, It is clear to me that you don't understand (and perhaps don't want to understand) how to think about retained earnings that enable future growth and free cash flow that can be distributed to shareholders. I belatedly realize that there is no point in replying to your posts and I am sure the feeling is mutual. So let's leave it at that. -MD

The $10 of current earnings are not distributable earnings, but retained earnings. In other words, the only way Berkshire can achieve growth rate of 6% in your model is by retaining the earnings. So you should re-work your model to come up with an intrinsic value estimate that incorporates this fact. It is not equal to $10/(10%-6%) = $250 per B share as you seem to be implying. The company earns $10 in year 1. It retains and reinvests that $10 earned in year 1, and as a result, it earns an additional $.60 in year 2, for total year 2 earnings of $10.60. It does the same in year 3. It reinvests the $10.60 it retained in year 2, and earns $11.24. That pattern continues in perpetuity. In 24 years, for example, it will be earning $40 per share according to the model. Why does that need to be reworked? Seems straightforward. Your’re capitalizing retained earnings rather than distributed earnings. The value of $10 in earnings growing by 6% a year depends on how much has to be reinvested to produce the 6% growth. Your economic assumptions ($10 initial earnings, 100% retention, 6% growth) and your valuation assumptions ($10 initial earnings, 0% retention, 6% growth) are not the same thing. Using your 10% discount rate, you get the following present values for Berkshire’s operating earnings (i.e., the value of Berkshire excluding cash and securities): (a) $10 earnings, 100% retention, 6% growth (using your terminal year of 24): ($40.49/.10) / 1.10^24 = $41.11 (b) $10 earnings, 0% retention, 6% growth (in perpetuity): $10 / (.10-.06) = $250 Under your economic assumptions of 100% retention, 6% growth and a 10% discount rate, Berkshire would be destroying value. In fact, each dollar retained would be worth only 60 cents. Here’s another way to look at it: If Berkshire needs to retain 100% of its earnings to grow by 6% a year, they’re earning 6% on equity. Berkshire is levered 2:1 and the liabilities cost zero (roughly). You’re therefore assuming Berkshire will earn just 3% on the asset side. Of course, assets that produce operating earnings only make up half the balance sheet, but you get the idea. +1 It is really dumb for a company to retain 100% of earnings and grow at a lower rate than its discount rate (alternately, the opportunity cost for shareholders). Such a management action destroys shareholder wealth. This is the main reason Buffett said the condition for earnings retention is to be able produce more than $1 of market value for each dollar retained.

<i> In 24 years, for example, it will be earning $40 per share according to the model.</i> Ok, what is your estimate of intrinsic value then? Please show the steps you use to arrive at it. You cannot use the standard DCF model because there are no cash flows that accrue to the owner during the 24 years; they are reinvested back in the company.

The $10 of current earnings are not distributable earnings, but retained earnings. In other words, the only way Berkshire can achieve growth rate of 6% in your model is by retaining the earnings. So you should re-work your model to come up with an intrinsic value estimate that incorporates this fact. It is not equal to $10/(10%-6%) = $250 per B share as you seem to be implying.

+1

A good op-ed piece in Bloomberg by Bill Dudley, former President of the Federal Reserve Bank of NY: https://www.bloomberg.com/opinion/articles/2020-06-22/fed-s-balance-sheet-heads-to-10-trillion-to-support-u-s-economy Dudley's description of the inner workings of the Fed parallels the posts by wabuffo. He seems to imply that despite the rapid expansion of the Fed balance sheet, it can control the inflation by raising the interest rate paid on bank reserves. Does this mean the Fed will drive the ST treasury bond yields to 0% while at the same time raise the rate paid on bank reserves to control inflation if needed? Seems weird.