Munger_Disciple

Parsad, Merry Christmas and a happy 2016 to you & family!! Thanks for this wonderful site.

scorpioncapital, I would add a fifth item to your list: 5. Any additional capital expenditures that earn good returns on invested capital. For instance, $1 of capex in utilities or BNSF are worth more than 1 x book.

Like many others on this board, my own background was in engineering (prior to becoming an investor). I recently met and chatted with a money manager who got his MBA from Columbia. I asked him whether he thought getting MBA was useful. His answer was that it was just a "Union Card". In terms of its use in investing, he thought it was a total waste of time. If the MBA is not from top five schools, my impression (after talking to him) is that it has no use whatsoever even as a "Union Card".

I am very optimistic about the prospects for Berkshire going forward. I think it is great that they have the ability (thru' BNSF and Energy) to automatically reinvest earnings at a decent, almost guaranteed rate of return.

Buybacks increase the IV/BV ratio and as jay21 points out the probability of a large scale buyback is very small. Moreover Berkshire will only buyback stock if it is the most attractive option available (compared to internally reinvesting earnings/buying other businesses). If buyback is the best option available to Berkshire over an extended period of time (5 or more years), it will be a signal that the days of internal growth for Berkshire are over (not great news for shareholders).

I agree with Vinod. My own analysis of IV/BV ratio over the past 10 years shows that the ratio is remarkably steady over time. Here is my attempt at an explanation for this phenomenon. At a high level, Berkshire owns two types of businesses: (1) ones that can only grow earnings with additional capital, for example BNSF and utilities, (2) those that can grow earnings without much capital being added, ex: KraftHeinz, See's, Businesswire, etc. The first type of business commands a constant IV/BV ratio over time, say 1.6-1.8 range, given the rates of return allowed in these businesses. The second type commands increasing IV/BV ratio over time (consider See's example). However, increasingly larger and larger portion of Berkshire BV is being allocated to the first type of business to a point where these dominate at the present time and will continue to dominate over the next 10 years or more. Also any new acquisitions mostly command a IV/BV ratio closer to 1 at the time of acquisition given that Berkshire typically pays a large premium. Due to all these factors, I believe that IV/BV will at best grow at a very low rate (under 1% per year) over time. It would not surprise me if IV/BV does not grow at all over the next 5-10 years.

Retained earnings increase book value.

Even for a novice this is not a good book to understand Munger in my opinion. Almanac and Dam Right are far better. Then top it off with Berkshire and Wesco AM transcripts.

I too did not think much of this book. There is really nothing new in this book and it was a big disappointment for me. I think Poor Charlie's Almanac and Damn Right are by far the better books about Charlie's life and his philosophy.

Happy Birthday and thank you for the site!

It was 11% a couple of days back. As of 6/25/15, total return of S&P 500 index was 3.12% whereas Berkshire was down 7.26% which means that the index outperformed Berkshire by 10.38%.

YTD Berkshire has underperformed the S&P 500 index by 11%.

Enjoyed the excellent interview.

You should probably talk to a lawyer (I am not one). If it is in the sole discretion of the manager it is probably ok. But if it is in the advisory agreement it is probably considered a performance based fee. For instance if the agreement states that the manager must refund the fee if the performance is below some threshold.

It's a performance based fee as I understand it.

Another problem with going from close to 100% invested to 80% cash and back to 100% invested is taxes that are incurred in the process by the investors. I would like to see the after tax returns of this fund vs. an appropriate index.

There is also tax paid on distributions to shareholders (dividend tax) or upon sale (capital gains tax). These need to be taken into account for DCF estimation.

Warren says in the 2014 AR that buying control stake in Berkshire was the biggest mistake of his investing life.

Yes, that should be obvious by now although I would change it to "attractive female reporters", not just blonds! Betty Quick, Poppy Harlow, Betty Liu, and on and on...... Even the Chinese TV interview he did around the last annual meeting was with an attractive female reporter.

Superb talk! Howard Mark is simply awesome.

A great man who made Singapore what it is today. His accomplishments are truly stunning. The wisest world leader of our time. May he rest in peace.

All I know is that this 1.2 threshold of book was publicly announced in 2013 and was never removed. So both the statements may still be valid: they can purchase below 1.2 times book, which is a price that is well below intrinsic value at the current time. In the new letter, Buffett mentioned "well below intrinsic value" when discussing The Next 50 Years at Berkshire. He does not want to tie the hands of future management for the next 50 years to the 1.2 number. But I still think they will not buy above 1.2 times book for the next few years.

The weird thing is that the buyback threshold is still left in place as 1.2 times book value despite the new argument that book value is no longer a good yardstick to measure Berkshire's intrinsic value. Edit added: I think it is because book is still way below intrinsic value, and easy to calculate.

Schroeder has her opinions but she is definitely not part of the Buffett inner circle. The only people who know are the Berkshire board members.

NBL, I certainly read it as either Ajit Jain or Greg Abel. But, Buffett specifically said in this letter that (1) the next CEO is not likely to retire at 65, (2) Berkshire will operate best if its CEOs average well over ten years (Jain can serve into his early 80s, thus easily satisfy this wish of Buffett) (3) Warren raised the possibility of him stepping down (for the first time in his letters I believe), and (4) We know Buffett talks to Jain daily. Due to these reasons, I still think there is a good chance that the next CEO will be Ajit Jain.