Munger_Disciple

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.

Yes, I too got that impression after reading Charlie's piece. It is almost as if Charlie is assuring us that Ajit will be the next CEO and Abel will be the backup.

Prem is a great guy with integrity. That is not what this discussion is about, nor is it about people giving unsolicited advice to others about buying/selling FFH. I am currently not a shareholder, but owned FFH in the past. Regardless I don't see any contradiction in owning shares and voicing a differing opinion (to management) on an important issue such as capital allocation. It is done all the time, for example Buffet's disagreement with KO's comp policy last year.

I know it is considered blasphemy to ask the following question on this board, but I will do it anyway: Why can't Prem and his family "survive" by selling a tiny portion of their family holdings in FFH in stead of forcing a taxable dividend on all shareholders? Let us see the damage done just from dividend taxes imposed on all shareholders: 22M shares times $10 per share dividend means $220M in dividends, and at average tax rate of 28%, shareholders are poorer by $62M a year. Then you consider that while on one hand they are paying a dividend of $220M, they are turning around and selling additional stock almost simultaneously to raise $650M. How can anyone defend this as rational policy?

By the way, even if stock is trading around intrinsic value, it is better to buyback than pay a dividend because shareholders avoid dividend taxes. In California, federal+state dividend taxes can add up to as high as 37%. So this is not some theoretical issue we are discussing.

The first priority for management is to reinvest in the business if they can earn good rates of return on newly employed capital. If this is not possible, then they should buyback shares if they are trading at a meaningful discount to intrinsic value. If the stock is trading well above intrinsic value, then they should payout as a dividend assuming no reinvestment opportunities.