Munger_Disciple

First let me preface my response by saying that I am a huge Buffett+Munger+Berkshire fanboy (obvious from my username) and have owned Berkshire for > 17 years. And I would be delighted to be proven wrong if Berkshire crushes the index by a huge amount in the future. I went through and looked at the quotes over time a few months back and my judgment was that he was maybe more conservative/pessimistic back then (in the 50's). The beta and drawdowns of BRK are definitely lower than SPX or total market over history. I think the last 25 years are more relevant to the future as Berkshire has naturally evolved into a very different company now than in the distant past. I agree that if rates stay low and valuations stay high then expected future returns for all assets including those levered with float will be lower than history. There are pretty much no tax advantages for holding the public securities in the c corp as Buffett just stated in the last AM, but I suppose there are tax advantages to investing in private businesses/PE generally. I am not referring to a C-corp structure being a tax advantage. It is obviously a disadvantage. Buffett minimizes this disadvantage by investing in public security holdings in a concentrated manner and holding these almost forever. The tax efficiency instead comes from (1) being able to allocate earnings from businesses with few reinvestment opportunities to the most promising parts in terms of ROIC w/o any frictional costs, (2) no dividend policy means no dividend taxes to be paid by shareholders, (3) buybacks are naturally tax efficient and (4) some businesses within Berkshire have PE characteristics w/o any fees paid to GP as you pointed out.

If you look at peak to trough Berkshire was down more than 50% during this period. Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher) Trough: 3/5/09 closing price 72,400 (intra-day low was lower) Drawdown: -51.3% Source: Yahoo Finance https://finance.yahoo.com/quote/BRK-A/history?period1=1193900400&period2=1238569200&interval=1d&filter=history&frequency=1d

We can only go by what Buffett says. It is clear he changed his tune recently. A few years back he used to say that Berkshire will beat the index by a tiny amount (by which I took it to mean by 1% or so per annum). So he may very well mean it this time as he is kind of proving it based on the last 15 years. We have two other data points which point towards convergence with S&P 500 performance: 1. There is a perception among investors that Berkshire beats the index during bear markets and lags during bull markets. So the theory says that Berkshire will outperform massively in the future if there is a bear market. History does not support this argument. Berkshire beat the pants off the index during the great 1982-1998 bull market. Similarly Berkshire suffered the same fate as the index during the 2008-2009 bear market. But unlike the past, it didn't beat the index during the 2009-2019 bull market. Without a doubt, size has become an anchor during the last 15 years and this very much had a negative effect on Berkshire's relative performance vs the index. In addition Berkshire has become more correlated to the overall US economy and hence the index (as other have pointed out). It is hard to make a logical argument as to why Berkshire will outperform the index very long term going forward. It doesn't mean it cannot outperform over the next five years, but if you look ahead to the next 10-15 years, I cannot see how it can beat the index. But investors should be happy to own it as opposed to the index due to tax advantages as long as it doesn't meaningfully lag the index over a long time. 2. If the low interest rate environment persists, float loses at least some of its advantage. Plus public and private asset prices are likely to remain high which will make acquisitions very difficult for Berkshire. Buffett pointed out IIRC at the 2019 AM that 10% growth in IV is basically off the table unless rates increase from the current level.

https://www.cnbc.com/2019/04/25/buffett-says-investors-would-be-served-equally-well-by-sp-or-berkshire.html “I think the financial result would be very close to the same,” Buffett told the FT when asked if it would be better to own the S&P or Berkshire over a lifetime. FWIW Buffett did the FT interview in April 2019 just before the AM.

Based on my calculations Berkshire stock price roughly matched the S&P 500 index over a 10-15 year holding period (end date being 10/11/19). For a saver in taxable account, Berkshire is still a better holding than the index because no dividend taxes are payable. Thus Berkshire is a tax efficient alternative to the index. While Berkshire could outperform the index say in the next 5 years if there is "turbulence", very long term results are likely to match the index going forward.

I see many PAHs and MAHs in addition to RAHs when I drive (P= poor, M= middle class). I think AH-ness is a normal probability distribution independent of wealth. People notice RAHs more because they drive nicer cars in general. Also one cannot ignore the sub-conscious envy/jealousy factor at work. RAH may bother people more than a MAH or PAH.

Parsad, I never told you or anyone for that matter that the items I listed in my previous post were the reasons for Fairfax underperformance during the last decade. I can only assume that you are mixing up my comments with someone else's. Added: I also don't understand how you can claim their equities have done well by excluding puts and derivatives. That is like saying a long/short hedge fund did well on the long side if you ignore their short positions. Doesn't make much sense to me. -MD

Good points vinod1. My own reservations regarding Fairfax are as follows: 1. Leverage: FFH has roughy $3 in insurance liabilities for $1 of common equity and another $0.50 mostly in debt. With so much insurance liability leverage, I think they are forced to keep most of the float in fixed income or cash. Obviously when it works, leverage produces great results but the reverse is true also. One major CAT loss, a huge portion of common equity will be wiped out. I really don't like the way annual letter shows underwriting results with and w/o CAT losses as if CAT losses were not supposed to happen and are highly unusual. It is as if management wants shareholders/readers to ignore these insurance losses when they are normal part of being in the insurance business. 2. Invested Assets: Just the fixed income portion of assets is larger than common equity. And it is highly unlikely that FI portfolio will produce great results going forward. And common stock selection has been awful during the last 10+ years. As others pointed out, they like to go for the crappy stuff all the while completely avoiding quality long term investments. 3. Macro Calls: A big negative in my book. One can easily see them making a 2020 US election macro bet for example if past is any indication. 4. Sub-optimal capital allocation: The dividend policy doesn't make any sense especially because they immediately issued more stock many times in the past right after declaring dividends. If they need more capital why not retain earnings? Why force shareholders to pay tax on dividends and immediately dilute them with new stock issuance? 5. Board governance: Too much Watsa family involvement without a clear benefit to the company or shareholders.

Going forward I think Fairfax's insurance & reinsurance businesses will find it harder to generate profits in a low interest rate environment. Their float is not earning much which makes good underwriting even more important and harder to achieve (because of competition). Berkshire has an advantage over Fairfax in this regard. For example GEICO is a low cost growth machine in a commodity auto insurance business and they don't rely as much on earnings generated by float because GEICO float is short-tailed anyway. GEICO cost advantage stems from direct distribution channel. Berkshire is building their primary commercial insurance biz along similar lines and have reduced reinsurance exposure significantly in recent times due to insufficient premiums. Finally, Berkshire is no longer primarily an insurance company with a much stronger balance sheet and very low leverage compared to Fairfax.

From S-1 filing: We dedicate this to the energy of We- Greater than any one of us but inside each of us https://www.sec.gov/Archives/edgar/data/1533523/000119312519244329/d804478ds1a.htm WTF??? They are dedicating the S-1 to the energy of We??

Good post. Given there were no distributions, it was a very sub-par return.

2x return in 13 years! Not a great return unless Applied upstreamed a whole bunch of dividends to the mother ship over the years. Ajit & Warren are probably just getting rid of a "problem child".

Why do you think you can add something new about Berkshire/Buffett given that there is so much readily accessible information (books, annual meeting videos, transcripts, Buffett interviews, etc.) in the public domain already?

Drukenmiller is a smart guy and very much worth listening to. But it seems like his strategy is very sub-optimal from a tax stand point. If he turns over > 100% per year, he would pay a lot of taxes when he is right. When you are compounding at 30% a year I guess it is ok but he says he doesn't make anything close to it these days.

I believe that Warren's Glide lunch is donated by the restaurant owner.

https://www.bloomberg.com/news/articles/2019-05-08/berkshire-takes-tax-hit-as-victim-of-ponzi-type-solar-scheme A bit worrisome given BHE's expertise in renewable energy.

Bill Gross interview with Bloomberg: https://www.bloomberg.com/news/videos/2019-03-02/-a-conversation-with-bill-gross-full-show-3-1-2019-video

My two cents on the annual report: The buyback amount is certainly disappointing. Buffett says on page 7: "Obviously, repurchases should be price sensitive." But there were more repurchases during Q2 2018 and October 2018 (when the BRK prices were higher) than in December 2018. The most generous explanation is that Warren thinks the cash could be better spent on future acquisitions. But then he goes on to lament the lack of opportunities on page 6: "Prices are sky-high for businesses possessing decent long-term prospects. That disappointing reality means that 2019 will likely see us again expanding our holdings of marketable equities." Adding to the confusion, there were no net purchases of common stock during Q4! I am just hoping that this can explained by: 1. Buffett thinks there is a significant possibility of a large deal before 2020, and/or 2. Since Buffett changed the intrinsic value metric from being based on book value to one based on five pillars, he wanted to give sellers an opportunity to digest the 2018 letter and the annual report before he begins a multi billion dollar buyback in earnest.

Bloomberg Opinion Piece: https://www.bloomberg.com/opinion/articles/2019-02-22/warren-buffett-owes-berkshire-investors-more-than-a-memo

I am very impressed by what the guy achieved especially given where he started from. He is an inspiration to any aspiring young entrepreneur. I also agree that the most impressive thing about his investing is how long he held investments. Plus he seems like a very generous fellow and I admire this quality about him. A major portion of the Forbes article is about his stock market investments. For instance, there was a discussion on how he took on some margin debt to buy dividend stocks and strategies he used to take tax losses, in addition to success in finding and investing very early in Heiko. I did the math just for my own understanding of the underlying returns and not to take anything away from his accomplishments. I then decided to share what I found because I thought it was interesting. I am frankly surprised by some of the reaction to my post and find it bizarre. It is normal that people can have differing opinions of the same article. However we can agree to disagree respectfully. Anyhow this will be my last post on this topic.

You have to use something as a starting point. Otherwise return would be infinite because he like many on this board started with 0.

Sanjeev, I am going to ignore the jackasses comment. But seriously no one is arguing the guy is a great entrepreneur & all. My issue is with the uncritical reporting. Just wanted to show that the reporter hasn't really done her "homework" when she was using phrases like greatest investor etc. MD

So, I have done the math with the following assumptions: (1) He had $50M in 1981 and (2) added $8M per year to the account since 1981. The resulting CAGR is 7.4%, compounded over 38 years to get $2.3B.

Very interesting story. Two tidbits are interesting : he has had a "steady income of $10M a year" for many years, and Heiko is a home run (gone up 160x).

I gave up Microsoft products about 10 yers ago after using them for 18 years before that. I had initially switched to Open Office, an open source Office software and then to Google Apps. All I can say is that I do not miss Microsoft products at all and I am much happier as a result. The Google Apps are way easier to use, have better integration between desktop and mobile use, and are almost free compared to the cost of MS products. I would say that for >95% of people Google products are all they need. There might be some use cases where only Excel would do for instance but in my opinion those cases are becoming rarer every day.