Munger_Disciple

Perhaps you are confusing supply/demand for an asset with net outflows and inflows? If there is a huge demand for business equity then the price people are willing to pay goes up. But it is still a zero sum transaction (ignoring trading fees) because for every buyer there is a seller. Same dynamic exists for currency trades. The exceptions are when a company issues additional shares or buys back existing shares. Bogle was right.

We shall agree to disagree. I don't think your extreme example makes any difference. All that happened is that you transferred $1M to someone else so the net inflows are zero. Just as a thought experiment, let us say that in your "extreme" example, you sold your stock for $1 to someone else the day after you bought for $1M. So now we are supposed to think there are massive outflows the next day after having massive inflows the previous day? I don't think so.

Seems neutral to me. In your example when you buy stock for $1000 you sent $1000 to someone else. Your inflow to the market is balanced by the outflow to counter-party. The same thing in reverse happens when you sell for $900. I don't see why supply/demand for a certain stock affects the net inflows or outflows. In private markets (for example) such as real estate, you could have a freeze in the market (similar to very wide blown out bid/ask spreads in public markets) with very few transactions taking place as we had in 2007-2011. Even in that scenario, outflows = inflows = approximately $0.

If you redeem a mutual fund shares and there is no offsetting inflow and no cash buffer at the fund, the mutual fund sells the underlying portfolio stock to raise cash to satisfy the redemption. So there is no net outflow out of equities because (as others pointed out) for every seller there is a buyer unless a company bought back shares and retired them.

A truly great man! Best example of a no-nonsense, competent and dedicated public servant and a patriot. May he rest in peace.

+1 Excellent post. The only argument I would have against JPM is that Berkshire already has a big exposure to banks. However you are 100% right about buybacks (or the lack thereof). Just the whole buyback drama (announcing a P/B threshold, upping it & then finally getting rid of it) is poorly executed in my opinion.

I just started reading Zuckerman's book. So far very interesting. There is a table in the appendix showing Medallion fund results & they are stunning. Medallion however is not the only fund Rentech manages. I have the following comments on Rentech performance: 1. The first 10 years of Rentech results (1977-1987) which were not so good were ignored in the performance table (this table starts in 1988). 2. Medallion fund is an internal fund. Only founders & employees can invest in it and no outsiders are allowed. They use it as an incentive to hire talent. From the book it looks like Simons kicked out investors and even friends out of this fund. So Rentech's best ideas go to this fund. Given that they don't manage outside money in Medallion, I don't understand why Medallion has massive fees. Who is earning these fees? 3. In addition to the $10B Medallion fund, Rentech also manages $55B for outside investors and no performance data for these funds is shown in the book. One has to look at the aggregate performance of all assets under management, not just a portion of it to get a better picture of Rentech capabilities. I heard that the results of the outside money are not that good (perhaps someone more knowledgeable can comment on this), certainly not as good as the Medallion results. 4. If I recall correctly, Zuckerman said in an interview Medallion is levered 10 times?

Diller was laughing his a$$ off when Andrew asked him about Stankey & ATT's HBO Max announcement. He thinks it is doomed and I agree.

You are welcome!

This op-ed piece is a better description of what happened, LOL: https://www.bloomberg.com/opinion/articles/2019-10-23/how-do-you-like-we-now?srnd=premium Excerpt: Son: What does your company do? Neumann: We lease office buildings, spruce up the space and sublet it in small chunks. Son: Hmm I invest in visionary tech stuff, this doesn’t really sound like my thing. Neumann: Did I mention we are a state of consciousness. A generation of interconnected emotionally intelligent entrepreneurs. Son: Okay yeah that’s more like— Neumann: The world’s first physical social network. We encompass all aspects of people’s lives, in both physical and digital worlds. Son: You’re crazy! I love it! But could you be, say, ten times crazier? Neumann: You’re going to invest $10 billion in my company, which I will use as kindling to light the whole edifice on fire, and then when we are both standing in the ashes you will pay me another billion dollars to walk away while I laugh at you. Son: All my life I have dreamed of meeting someone as crazy as you, but I never really believed this day would come. Neumann: I’m gonna use your money to buy a mansion with a room shaped like a guitar, where I will play the world’s tiniest violin after all your money is gone. Son: YES PUNCH ME IN THE FACE. Neumann: Also I’ll rename the company “We” and charge it $6 million for the name. Son: RUN ME OVER WITH A TRUCK.

1/3/07 is also an arbitrary date. I was just looking at peak-trough numbers for BRK during 2008-2009. If you take the last 10-17 year time frame (long enough for most people) BRK either slightly under performed or over performed the S&P 500 index depending on the the start date. I don't think BRK is a financial so the comparison to financial ETFs gives you much information. Buffett himself compares BRK to the S&P 500 index, not financial ETFs. Our collective time is probably better spent looking into possible future returns of BRK than the past.

Master at work! It is like watching Roger Federer play tennis.

Excellent observations wabuffo! Similar to your rule of thumb, Buffett mentioned an overvaluation P/B level of 2.0x in the 50th anniversary annual letter in 2014 and of course Berkshire used to have <1.2x level for repurchases. I didn't sell any Berkshire in late 2007 but I increased my BRK allocation quite significantly during the Feb-March 2009 period. I thought it was too cheap at those levels and was lucky to have dry powder around. I would note however that an investment in the S&P 500 index at its bottom in March 2009 would have returned 5.5 times the original investment today. BRK stock increased still an excellent 4.34 times in comparison (314,250 vs 72,400). However for me it was easier to value BRK than the index in 2009, so I have no qualms and am very happy. At the present time I would rather own BRK than the index. I remember a life lesson taught by the great Charlie Munger: The secret to success in marriage and life is to have low expectations. In that spirit, I would be happy if BRK just matched the index result in a tax efficient way going forward. Anything else will be icing on the cake! -Munger_Disciple

First let me preface my response by saying that I am a huge Buffett+Munger+Berkshire fanboy (obvious from my username) and have owned Berkshire for > 17 years. And I would be delighted to be proven wrong if Berkshire crushes the index by a huge amount in the future. I went through and looked at the quotes over time a few months back and my judgment was that he was maybe more conservative/pessimistic back then (in the 50's). The beta and drawdowns of BRK are definitely lower than SPX or total market over history. I think the last 25 years are more relevant to the future as Berkshire has naturally evolved into a very different company now than in the distant past. I agree that if rates stay low and valuations stay high then expected future returns for all assets including those levered with float will be lower than history. There are pretty much no tax advantages for holding the public securities in the c corp as Buffett just stated in the last AM, but I suppose there are tax advantages to investing in private businesses/PE generally. I am not referring to a C-corp structure being a tax advantage. It is obviously a disadvantage. Buffett minimizes this disadvantage by investing in public security holdings in a concentrated manner and holding these almost forever. The tax efficiency instead comes from (1) being able to allocate earnings from businesses with few reinvestment opportunities to the most promising parts in terms of ROIC w/o any frictional costs, (2) no dividend policy means no dividend taxes to be paid by shareholders, (3) buybacks are naturally tax efficient and (4) some businesses within Berkshire have PE characteristics w/o any fees paid to GP as you pointed out.

If you look at peak to trough Berkshire was down more than 50% during this period. Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher) Trough: 3/5/09 closing price 72,400 (intra-day low was lower) Drawdown: -51.3% Source: Yahoo Finance https://finance.yahoo.com/quote/BRK-A/history?period1=1193900400&period2=1238569200&interval=1d&filter=history&frequency=1d

We can only go by what Buffett says. It is clear he changed his tune recently. A few years back he used to say that Berkshire will beat the index by a tiny amount (by which I took it to mean by 1% or so per annum). So he may very well mean it this time as he is kind of proving it based on the last 15 years. We have two other data points which point towards convergence with S&P 500 performance: 1. There is a perception among investors that Berkshire beats the index during bear markets and lags during bull markets. So the theory says that Berkshire will outperform massively in the future if there is a bear market. History does not support this argument. Berkshire beat the pants off the index during the great 1982-1998 bull market. Similarly Berkshire suffered the same fate as the index during the 2008-2009 bear market. But unlike the past, it didn't beat the index during the 2009-2019 bull market. Without a doubt, size has become an anchor during the last 15 years and this very much had a negative effect on Berkshire's relative performance vs the index. In addition Berkshire has become more correlated to the overall US economy and hence the index (as other have pointed out). It is hard to make a logical argument as to why Berkshire will outperform the index very long term going forward. It doesn't mean it cannot outperform over the next five years, but if you look ahead to the next 10-15 years, I cannot see how it can beat the index. But investors should be happy to own it as opposed to the index due to tax advantages as long as it doesn't meaningfully lag the index over a long time. 2. If the low interest rate environment persists, float loses at least some of its advantage. Plus public and private asset prices are likely to remain high which will make acquisitions very difficult for Berkshire. Buffett pointed out IIRC at the 2019 AM that 10% growth in IV is basically off the table unless rates increase from the current level.

https://www.cnbc.com/2019/04/25/buffett-says-investors-would-be-served-equally-well-by-sp-or-berkshire.html “I think the financial result would be very close to the same,” Buffett told the FT when asked if it would be better to own the S&P or Berkshire over a lifetime. FWIW Buffett did the FT interview in April 2019 just before the AM.

Based on my calculations Berkshire stock price roughly matched the S&P 500 index over a 10-15 year holding period (end date being 10/11/19). For a saver in taxable account, Berkshire is still a better holding than the index because no dividend taxes are payable. Thus Berkshire is a tax efficient alternative to the index. While Berkshire could outperform the index say in the next 5 years if there is "turbulence", very long term results are likely to match the index going forward.

I see many PAHs and MAHs in addition to RAHs when I drive (P= poor, M= middle class). I think AH-ness is a normal probability distribution independent of wealth. People notice RAHs more because they drive nicer cars in general. Also one cannot ignore the sub-conscious envy/jealousy factor at work. RAH may bother people more than a MAH or PAH.

Parsad, I never told you or anyone for that matter that the items I listed in my previous post were the reasons for Fairfax underperformance during the last decade. I can only assume that you are mixing up my comments with someone else's. Added: I also don't understand how you can claim their equities have done well by excluding puts and derivatives. That is like saying a long/short hedge fund did well on the long side if you ignore their short positions. Doesn't make much sense to me. -MD

Good points vinod1. My own reservations regarding Fairfax are as follows: 1. Leverage: FFH has roughy $3 in insurance liabilities for $1 of common equity and another $0.50 mostly in debt. With so much insurance liability leverage, I think they are forced to keep most of the float in fixed income or cash. Obviously when it works, leverage produces great results but the reverse is true also. One major CAT loss, a huge portion of common equity will be wiped out. I really don't like the way annual letter shows underwriting results with and w/o CAT losses as if CAT losses were not supposed to happen and are highly unusual. It is as if management wants shareholders/readers to ignore these insurance losses when they are normal part of being in the insurance business. 2. Invested Assets: Just the fixed income portion of assets is larger than common equity. And it is highly unlikely that FI portfolio will produce great results going forward. And common stock selection has been awful during the last 10+ years. As others pointed out, they like to go for the crappy stuff all the while completely avoiding quality long term investments. 3. Macro Calls: A big negative in my book. One can easily see them making a 2020 US election macro bet for example if past is any indication. 4. Sub-optimal capital allocation: The dividend policy doesn't make any sense especially because they immediately issued more stock many times in the past right after declaring dividends. If they need more capital why not retain earnings? Why force shareholders to pay tax on dividends and immediately dilute them with new stock issuance? 5. Board governance: Too much Watsa family involvement without a clear benefit to the company or shareholders.

Going forward I think Fairfax's insurance & reinsurance businesses will find it harder to generate profits in a low interest rate environment. Their float is not earning much which makes good underwriting even more important and harder to achieve (because of competition). Berkshire has an advantage over Fairfax in this regard. For example GEICO is a low cost growth machine in a commodity auto insurance business and they don't rely as much on earnings generated by float because GEICO float is short-tailed anyway. GEICO cost advantage stems from direct distribution channel. Berkshire is building their primary commercial insurance biz along similar lines and have reduced reinsurance exposure significantly in recent times due to insufficient premiums. Finally, Berkshire is no longer primarily an insurance company with a much stronger balance sheet and very low leverage compared to Fairfax.

From S-1 filing: We dedicate this to the energy of We- Greater than any one of us but inside each of us https://www.sec.gov/Archives/edgar/data/1533523/000119312519244329/d804478ds1a.htm WTF??? They are dedicating the S-1 to the energy of We??

Good post. Given there were no distributions, it was a very sub-par return.

2x return in 13 years! Not a great return unless Applied upstreamed a whole bunch of dividends to the mother ship over the years. Ajit & Warren are probably just getting rid of a "problem child".