Munger_Disciple

What do people think the hit to book of Fairfax under a serious catastrophic event causing a total damage of something of the order of $300 billion?

I am no expert on energy business but return on capital (all things accounted for) seems to be a much better metric than GAAP earnings to evaluate the business.

BHE investments get regulated or guaranteed rate of return on capital employed, whether it is maintenance or growth capex. What you say is true for BNSF as it is the case with all railroads.

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF.

I would put it slightly differently: If the investment makes sense even under conservative (or pessimistic if you prefer) assumptions, it gives the owner all important "margin of safety". It's always the negative surprises that we need to worry about, the positive surprises take care of themselves. When comparing investment options, it is better to compare them under different scenarios (conservative, baseline, somewhat optimistic).

Thanks for the detailed response @dartmonkey. I don't disagree with you that the earnings for the next 3 years will likely be very good and perhaps well above the long term "normalized" ROE. The main risk I see in the next 3 years is a potential mega catastrophic event. Longer term, the size of Fairfax in addition to the normalization of underwriting cycle will also make it harder to earn a high ROE I think but if they can avoid major mistakes, it will be a highly satisfactory investment. As Charlie (Munger) wisely said, "Having low expectations is the secret to success and happiness in life."

This is a good point. The goal of a very successful investment should be to eventually have a huge amount of deferred taxes (which are technically due to govt but you decide if and when to incur it). Meanwhile we earn the return on the deferred taxes for ourselves. I call it our personal "float".

@Viking I don't think anyone is assuming that Fairfax will deliver a long term ROE of 20%. Earlier in the thread, when people say Fairfax trades at a P/E of 5, that's exactly what they are implicitly assuming as opposed to current earnings at the peak of the cycle. One should have some idea of normalized earning power to evaluate the intrinsic value. Today, I think there is a pretty good chance that Fairfax can deliver a 15% ROE over the next 3 years. Fair enough! However the terminal P/B of Fairfax at the end of the third year would largely depend on its normalized earning power going forward though the book should reflect the next three years worth of retained earnings. What your analysis is missing is ........ I said I would be happy with 10-12% growth in book over the next decade; I would be ecstatic if it is more than that. I don't think I am missing anything. You are misinterpreting what I said.

Excellent post! It's a folly to assume long term ROE of 20% (well above Prem's own internal target) for Fairfax. I would be happy if Fairfax's BV compounds at 10%-12% for the next decade without major screwups in investments or underwriting. In a commodity business like insurance, it is crazy to expect a long term CR of 94. Buffett repeatedly said his goal for insurance business is 100CR; meaning he just wants it generate cost-free float. Keep in mind Berkshire is a lot less levered in their insurance business with a ton more capital than Fairfax!

He can sell another 200 million shares of Apple and it would still be the largest equity holding for Berkshire at roughly $45 billion.

We don't know for sure but it's possible that Buffett may sell more AAPL shares in the future at some price if it is high enough. He generally doesn't seems to stop once he starts selling a position (although he said at the AGM that Abel will likely inherit a reduced AAPL position when he takes over). People think since KO holding is at 400 million shares, Buffett will stop at that number of AAPL shares. But my reading is that Buffett is more comfortable with KO than AAPL. Plus he never sold a single share of KO unlike AAPL. But I agree that Q3 results would be quite interesting.

I don't understand the fixation of the press and this board with the total number of shares. Why wouldn't Buffett sell more Apple in Q3? If he thought $188 was an overvalued price for Apple shares, $225 is even a better price to sell.

I agree with @Gregmal. You are not an independent board member if you need the money from the board seats. You will just become an a$$ kisser of CEOs who put you there. I really don't like "professional" board members who go on as many boards as they can because it is a lot money for little work; they just need good a$$ kissing (a.k.a. "networking") skills and promise to not "rock the boat". It is a shitty way to go about life. I would urge @Saluki to become an owner of a business and then go on its board without compensation but as a very large interested shareholder. I believe Bruce Berkowitz is doing this at St. Joe. Following the Berkshire model is the way to go.

Thanks for this recommendation; just ordered it.

It is way better to read Buffett's original letters than Cunningham's book IMO. I really don't understand the fuss about this book. For me, Buffett's letters are #1.

I would prefer a large tender offer instead at these multiples.

+1 I would just add that repurchasing shares also increases a shareholder's proportionate ownership of Fairfax's existing businesses. So management has to be sure that buying a mattress business is a better use of capital than repurchase of shares. A buyback is functionally equivalent to a (mostly) tax-free dividend that is automatically reinvested in the company by purchase of shares by the owner in the public markets.

Technically BHE has 75.63 million shares outstanding. All the numbers in the financials are in the millions which is why the number of shares has been rounded to 76. It is also interesting that capex for the first six months of 2024 roughly equals that for 2023 & double the depreciation. So BHE's capex seems steady and is not increasing. It would be interesting to see if the future Capex will decrease in light of wild fire payments.

The Scott estate should exchange their BHE shares for Berkshire stock. It seems like a poor decision not to have done so along with Abel redemption.

Mine was a tongue in cheek comment, not serious , but you are 100% correct @gfp. BYD is owned by BHE and it makes sense that they use BYD proceeds in a tax efficient manner (avoiding capital gains taxes) by paying for settlements. It really does make one wonder if utility investments are a good use of BHE capital going forward if they can lose all the equity due to 1 year fire exposure. Sounds more like a super cat business w/o any upfront premiums.

I hope this is not (to fund the ridiculous lawsuits) why Warren sold Apple .

As a long time shareholder, I would hate to see a special dividend unless it is tax-free (return of capital sort of thing). I would rather they buyback stock closer to intrinsic value even without a big discount than a dividend. I care less about what Susan Decker thinks; she owns almost nothing in Berkshire stock. Everyone else on Berkshire board owns a lot more stock & I hope they make the correct shareholder friendly decision.

Insurance is doing great! Real estate brokerage business is still doing poorly (no surprise here), lost $116 mm in the first half of 2024 due to litigation payouts. BNSF earnings were down slightly with coal revenues down a lot. As @gfp already pointed out, BHE results were dragged down by wildfire loss accruals. MSR earnings down slightly. My guess is that Warren continued to sell Apple in Q3 along with BAC. Warren probably thinks markets are quite frothy here and is clearing the deck of common stocks for Greg.

I for one am very happy the way Buffett managed through Covid.

My guesses are (1) Buffett thinks these securities are overvalued or at least fully valued & he is cleaning the house for Greg, and (2) He thinks we may be entering a recession and he is beefing up the cash pile as there may be big opportunities.