Munger_Disciple

Yes. I also think he is more frustrated about BHE than BNSF in the bigger scheme of things: "Our second and even more severe earnings disappointment last year occurred at BHE."

Excellent point. Plus BHE projects tend to be very long term projects like the transmission project Buffett referred to in the 2023 letter.

Yes, I pointed out the possibility of a dividend in an earlier post. I hope they don't have to pay a dividend, and find some decent opportunity to reinvest the earnings. But the reality is that if investing big sums in BHE is off the table, Buffett is signaling that they may have to pay a dividend (instead of buying back a ton of shares) if the stock trades closer to its intrinsic value, as it seems to currently.

On BHE there was a big change in Buffett's thinking from 2021 to 2023. 2021 AR: "Berkshire will always be building." 2022 AR: "And yes, our shareholders will continue to save and prosper by retaining earnings. At Berkshire, there will be no finish line." 2023 AR: "Berkshire can sustain financial surprises but we will not knowingly throw good money after bad...... I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so."

I found the following comments from Buffett's letter noteworthy: Buffett basically declared that the days of acquiring large private businesses is over due to Berkshire's size & increased competition from PE. He said "Berkshire does not currently pay dividends". Perhaps preparing shareholders for the day they might have to given the potential issues facing BHE? He especially seemed negative about BHE's prospects (and perhaps a bit less so about BNSF though he pointed out labor wage increases driven by President & Congress). If Berkshire can't reinvest huge earnings into more capex at BHE at decent regulated returns, it would indeed be a negative for Berkshire. Buffett said Greg is ready to be CEO tomorrow in all aspects; not a surprise but perhaps preparing shareholders for the eventuality. Given the problems at BHE & BNSF, he seemed to appreciate the virtues of Coke & Amex holdings even more than he used to. He really seemed to have a high opinion of Vicki at OXY. I thought it was funny Buffett was trying to entice shareholders to attend the annual meeting by dangling the prospect of getting to meet his very rich & attractive nieces in Omaha.

Perhaps Buffett has become more mindful of the advantages of long term holdings Coke & Amex which keep chugging along in light of new problems at BNSF & BHE.

This guy is seriously funny!

The most important thing to remember is that the alternative has to be far superior to an existing good holding because (1) tax drag when selling the current position takes away a good chunk of 2-3% per year assuming one is holding the new investment for a decade and more if holding for a shorter period, and (2) there is a possibility one doesn't understand the new position as well as the prior holding, so this creates additional risk.

Thanks for the great points made. I sold Berkshire in my tax deferred accounts and swapped it for FFH last year but taxes are a significant consideration for me (I live in CA) in taxable accounts. I agree we shouldn't let taxes completely dictate our portfolio. I think BRK is fully valued now (but not overvalued).

@gfp What do you think is a decent allocation to BRK in one's portfolio? I agree with your views. I think tax considerations make it very hard to sell BRK (for long term holders) even if it is at intrinsic value which it appears to be at currently because the alternative needs to outperform BRK after paying taxes on BRK sale if one diversifies. And the S&P 500 index is trading at a high valuation.

+1 Book value & its growth are good proxies for the intrinsic value of FFH for this reason I think assuming FFH's marks are conservative. GAAP accounting is the main reason BRK's intrinsic value far exceeds book and likely one of the main reasons Buffett abandoned the book value metric (that and significant share repurchases above book but below intrinsic value).

Thanks

I am thinking of attending the AM. It would be my first time. How long does the meeting last? I know it starts at 9:30am EST.

From a slightly more trusted source (FT): https://www.ft.com/content/18a264f6-2205-47fa-88f3-4f351edfc01e

In the third quarter 2023 FFH interim report, Note 6 shows the carrying values and fair values for investments in associates. So the total fair value of these investments exceeds the total carrying value by 940mm. In other words, book value is understated by 940mm for these investments. Instead of taking a wholistic view, MW focuses only on those investments like Quess whose carrying value exceeds its fair value. Moreover Carson Block starts out his short thesis by claiming that BV only grew 9% instead of Prem's 15% goal. If this is headline of short thesis, those of us who are long have nothing to worry about. MW is report is very disingenuous & misleading to say the least. Blessing in disguise for those longs looking to increase their position.

Even if he is negative on Fairfax, you would think there are far better short options for him after this huge run up in tech stocks.

I am not an expert on IFRS, but doesn't it also have to do with discounting the insurance liabilities to come up with current fair value? In GAAP, the liabilities are un-discounted as I understand them.

And it is not a particularly good book either.

I don't know much about the location of these builds; could be in very underserved areas with little competition. In general, the "good' locations" for overbuilds get decent numbers initially, and incrementally returns get harder and harder after the initial uptake. This is especially the case with an incumbent.

One could argue they practically exited fiber.

It takes a long time for a new entrant to get anywhere close to 50% penetration (if ever) and that time dramatically reduces IRRs. It took CHTR & CMCSA more than 25 years to get to 50% penetration in broadband when they were monopolies for high speed internet & already had a customer relationship thru' cable video & phone. The new entrant has to fight for every sub against an incumbent who is offering an equivalent broadband service plus cell phone bundles. It is a very tough fight & I think you will see most overbuilders go under or sell to the big boys. I used to think overbuilders were the biggest threat to incumbent cable but it turned out the real threat came from FWA despite its far poorer service and that appears to be moderating. The reason for the initial uptake of FWA was the bundling with cell phones IMO & lack of mobile traffic on 5G bands (no longer the case).

This is a big deal.

I am happy with the way GenRe worked out. It was a brilliant deal (Buffett swapped a totally overvalued Berkshire stock for incredibly undervalued GenRe bond portfolio w/o cap gains) but Buffett didn't foresee the deterioration in GenRe underwriting standards prior to the purchase. Joe Brandon took over as CEO and fixed the problems by 2005. Overall it worked out just fine.

GenRe had problems and they cost Berkshire money and focus in the 2000-2004 time period, yes. But they were fixed by Joe Brandon and it has been a good business since. Hardly a disaster IMO. You make it sound like the AOL-Time Warner deal, or Altria-Juul deal. Anyway if you disappointed with Berkshire, it is very easy to exit.