Munger_Disciple

That's an excellent idea!

I trust Buffett to manage Berkshire in the best interest of shareholders as he had done for 60 years now. I am also 100% certain that Buffett thought through how Greg would potentially manage Berkshire after he takes over. If you don't believe that, you should sell your stock & move on instead of back seat driving.

Yes, I would rather Greg have T-Bills than Apple stock at 33X.

There is zero chance of that happening while Buffett is in charge. Afterwards, I hope the board considers a small variable annual dividend as opposed to a large special one as the last resort if stock buybacks are not value additive after all the internal capital needs and potential acquisitions are funded.

Just be aware that Berkshire fully participated in the market downdraft in 2008-09, so it's not quite an insurance policy against corrections (pun intended ).

Berkshire had a similar melt up during 2007 before the proverbial GFC s**t hit the fan. Rightly or wrongly, Berkshire is seen as a safe haven during potential troubles. Perhaps markets are telling us that we are reaching the top of the MAG 7 froth? If there is a major market correction, I can't imagine Berkshire not being part of it though.

Agree that it's an interesting topic .

First of all, the risk is 2% that the big one can happen in any single year, and it is obviously much higher when you expand your investment horizon. If you have a really long horizon, the probability of getting hit with at least one big one is close to 100%. So you can't just ignore it. It doesn't necessarily make Fairfax un-investable but it does affect my position sizing. Randomness (or luck as you say) is inherent in any probabilistic game including investing especially in the short run. In the long run, the stock performance should converge to the business performance.

I don't disagree that Fairfax is cheap, especially relative to others (ignoring for a moment tail risks). However I am a long term investor and I think about tail risks when I invest. I own only Berkshire & Fairfax and no other insurers (so can't comment on those). I am very confident Berkshire can very easily handle a $600B industry event. In fact Berkshire will report net profit in a year such an event happens. I think Fairfax will survive but take a hit to earnings (for two years I think at current run rate), so I am ok with it. Most other P/C insurers will go bankrupt in such a scenario.

I already provided an estimate in the earlier post based on the next three years earning visibility but after that I don't know.

Yeah aggregation makes sense. Most important is the ability of Fairfax to survive a super CAT event like a $600B loss event, which allows them to prosper in the hard market to follow the event. Let us say in the worst case, Fairfax suffers 1.25% of 600B = 7.5B loss event pre-tax. They can survive that reasonably well but it would wipe out a couple of years worth of earnings.

Buffett said in 2017 that the probability of a $400B (USD) industry loss event in any given year (in his estimate) is 2%. Adjusting for inflation and increase in the cost of construction, that would be a $600B event today. I assume that that events that have lower loss may occur at greater probability than 2%. At Berkshire, they underwrite for a long term CR of 100% including CAT and super CAT years. I have no idea what CR is achievable for Fairfax over the next 3 years (which depends on whether there is a CAT/super CAT event in the next three years or not and its magnitude) but I would think that a 10-15 year average CR of 100 taking into account a couple of really bad CAT years is prudent.

Doesn't one need to take into account the possibility of super CAT events and their effect on the "normalized ROE" and P/B?

Charlie changed my life. I had the good fortune to meet him in an intimate setting a couple of times & I will cherish those moments all my life. I miss Charlie dearly but the good thing is that he left a lot behind for us. There is so much wisdom in his teachings that reading and re-reading every year is a terrific habit. You are on the right path.

And 44% tax on realized and unrealized capital gains, not sure if it is even constitutional.

For me, the top 3 are: 1. Buffett's shareholder letters 2. Anything Charlie (Munger) wrote or said. Of course Poor Charlie's Almanack is a good starting point. 3. Business biographies While not in the top 3, I thoroughly enjoyed Luca Dellanna's Ergodicity very much: https://www.amazon.com/Ergodicity-Definition-Examples-Implications-Possible/dp/B09PHBV2HD A good addition to Annie Duke's Thinking in Bets, another excellent work.

Annualizing the first six month net premiums for 2024, we get $26 Billion in net annual premiums. So that gives us roughly $3.6 Billion loss for a Katrina type CAT event which is roughly in line with the numbers suggested by @SafetyinNumbers. It equates to roughly 12%-13% after tax earnings hit to book.

Thanks @SafetyinNumbers, @StubbleJumper and @Cigarbutt for your perspectives on the loss estimates.

What do people think the hit to book of Fairfax under a serious catastrophic event causing a total damage of something of the order of $300 billion?

I am no expert on energy business but return on capital (all things accounted for) seems to be a much better metric than GAAP earnings to evaluate the business.

BHE investments get regulated or guaranteed rate of return on capital employed, whether it is maintenance or growth capex. What you say is true for BNSF as it is the case with all railroads.

In case of Berkshire, deferred taxes also arise from accelerated depreciation (for tax purposes) of capital intensive investments in BHE & BNSF.

I would put it slightly differently: If the investment makes sense even under conservative (or pessimistic if you prefer) assumptions, it gives the owner all important "margin of safety". It's always the negative surprises that we need to worry about, the positive surprises take care of themselves. When comparing investment options, it is better to compare them under different scenarios (conservative, baseline, somewhat optimistic).

Thanks for the detailed response @dartmonkey. I don't disagree with you that the earnings for the next 3 years will likely be very good and perhaps well above the long term "normalized" ROE. The main risk I see in the next 3 years is a potential mega catastrophic event. Longer term, the size of Fairfax in addition to the normalization of underwriting cycle will also make it harder to earn a high ROE I think but if they can avoid major mistakes, it will be a highly satisfactory investment. As Charlie (Munger) wisely said, "Having low expectations is the secret to success and happiness in life."

This is a good point. The goal of a very successful investment should be to eventually have a huge amount of deferred taxes (which are technically due to govt but you decide if and when to incur it). Meanwhile we earn the return on the deferred taxes for ourselves. I call it our personal "float".