Munger_Disciple

This is precisely the sort of trap that Ben Graham advised us not to fall into. Like Berkshire in the 80s? And Markel now?

This doesn't make any sense to me. By definition, book value includes any cash held by the company. There is only one single stock price for the whole company at any given time and there is no separate stock price for its cash. If the company has sensible things to do with its earnings, it should retain it. Otherwise it should pay it out. But it is idiotic for the company to pay a dividend when it can internally compound capital at a high rate. When you need cash, you can manufacture your own dividend by selling a portion of your stock holdings if the company is internally compounding at high rate (w/o paying dividends). In this case most of the time the stock trades at a premium to book (example: P/B of FFH currently 1.3-1.4) because of good rates of return on incremental capital invested.

Why not? When a company pays dividend of $1, its cash account as well as its book value immediately get reduced by $1.

KinAlberta, Dividends can be thought of as selling a portion of your holdings at 1xBook. If the stock trades at a premium to book, you are better off selling shares instead if you need cash. There are exceptions to this of course. Some companies may not be able to earn good rates of return on incrementally reinvested earnings (tobacco companies for instance), in which case they should either buy back stock or payout earnings as dividends. But by issuing dividends you are forcing all shareholders to pay taxes whether they need cash or not. I would rather decide it for myself.

Great job!

Yeah, but you don't expect them to keep making the same mistake year after year. This is why I think it is bad capital allocation decision as opposed to an honest one off mistake made by management.

+1

To me it shows poor capital allocation skills on the part of management to on one hand issue a tax disadvantaged dividend to shareholders (who are forced to pay tax on it) and then turn around and raise new equity diluting the same shareholders. If they need cash for acquisitions, why bother paying a dividend?

"Man is too soon old and too late smart." -Old German Saying

More details on Charter Brokerage acquisition: http://finance.yahoo.com/news/berkshire-hathaway-inc-acquires-charter-220000293.html

New Acquisition Announced: http://www.marketwatch.com/story/berkshire-hathaway-acquiring-charter-brokerage-2014-12-12-17911452?siteid=yhoof2 Susan Decker on Berkshire succession: http://www.bloomberg.com/news/2014-12-09/berkshire-s-decker-sees-ceo-pay-becoming-issue-for-board.html

By the way, it seems that Anupreeta Das of Wall Street Journal is the new go to reporter for Buffett. She is a great reporter and I enjoy reading her articles.

I can't wait to read the 2014 annual report. We will get both Buffett's and Munger's vision for the next 50 years.... http://blogs.wsj.com/moneybeat/2014/12/12/warren-buffett-looks-ahead-to-berkshires-next-50-years/?mod=yahoo_hs

I thought it was a strange interview, without much meat on the bone.

As I pointed out before, Berkshire is not in the stock picking game anymore. Even inside the stock portfolio, 2/3 of the portfolio consists of permanent holdings like Wells Fargo, Coca-Cola, American Express and likely IBM. I think Buffett views these as partially owned operating businesses he never intends to sell (as I recall he did not sell KO at 40-50 times earnings back in 1997) which is why look-through approach makes sense. Even with the remaining portfolio, you run the risk of double-counting by looking at capital gains in addition to look-thru' earnings from investees. Another data point we have along these lines is that Buffett has been exchanging the stock in companies like Graham Holdings and P&G for fully owned operating subs like Duracell or Berkshire stock.

It does not make sense to include capital gains in the calculation of operating earnings. Berkshire's business model shifted in the past 15 years to a point where it is now primarily a collection of businesses. If you want to be really conservative, you probably should exclude underwriting gains from operating earnings as Buffett pointed out that they generally try to underwrite insurance to achieve a 100% combined ratio.

One problem with mechanical quantitative type investing (assuming it is working in beating the indices) is that investors incur significant capital gains tax costs which do not show up in the performance numbers of most funds. After tax performance numbers still may be better but tend to be closer to the benchmark indices.

This is my first post in this thread. The problem with FFH is that it is highly levered relative to Berkshire. Because of the excess leverage, FFH is always forced to play defense, and hence all these hedges. This is very much unlike Berkshire, which is swimming in cash ($55B at the end of Q2-2014) and very under-levered relative to their capital. In effect FFH is similar to a highly levered hedge fund, so it does not deserve much of a premium over book.

Here is the pdf. geicoletter.pdf

+1

According to Vanguard S&P500 index turnover is 3.4%, much less than Wintergreen.

After-tax performance of Wintergreen is likely to be substantially worse than that of the S&P 500 index due to portfolio turnover.

The bottom line is that Winters subtracted value for his fund holders by not outperforming the index whereas Buffett added enormous value to Berkshire shareholders.

From the report, cumulative performance since inception (10/17/2005 to 12/31/2013, approximately 8 years): Wintergreen: 84.40% S&P500: 84.99% Wintergreen shareholder probably incurred more taxes in this period than index fund holders. I would also note that Berkshire shareholders had a cumulative return of 109.66% during this period.

If the company stock is considerably overvalued, they can announce a tax-efficient buyback the following way: If the dividend taxes were zero, we would rather pay out this capital as a dividend. But since the taxes on dividends are not zero, we are announcing a buyback of x% of total shares outstanding at this ridiculously overvalued stock price just so that all of you shareholders can sell x% of your holdings back to the company and create a very tax-efficient dividend for yourselves.