Munger_Disciple

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.

Charlie's annual meetings (Wesco, DJCO) have always been open to public. You do not need to be a shareholder to attend.

This does not change the fact that paying dividends leads to sub-optimal capital allocation at Fairfax. Given his net worth, I figure Prem can sell a few shares every year to pay for his lifestyle and this should not change his control of the company. Buffett has been giving away 5% of his stock (he converts them to B shares first) to charities for several years now, without any effect on his ability to control Berkshire. I am sure Prem can do something similar w/o forcing a penalty of additional share issuance on all shareholders.

I don't understand why Fairfax pays dividends to shareholders. They are issuing more stock at the same time they are declaring dividends. This part of capital allocation does not make any sense to me. Also, if they need cash to pay for the hedges, then why not use the cash for that instead of dividends?

Excellent work, AZ_Value!! One of the best posts I have read in a long time.

Very strange letter for a portfolio manager. No discussion of any of the securities the firms owns or recommends. Just repetition of quotes from others.

Palantir, Buyback can be thought of as a tax-efficient way to pay dividends to shareholders. If the stock buyback is done below IV, then you are increasing the per share IV of the remaining shares. If taxes were zero, you can do your own buyback if the company paid only dividends.

Yes, you have to exclude share repurchases from FCF yield because the share repurchases contribute to the FCF per share growth. If not, you are double counting the effect of share repurchases.

Congrats!!!

May be. See page 18 in the proposal: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/strengthening.pdf "The Budget would limit an individual’s total balance across tax-preferred accounts to an amount sufficient to finance an annuity of not more than $205,000 per year in retirement, or about $3 million for someone retiring in 2013."

Looks like Obama is proposing all kinds of new taxes including higher estate taxes: http://www.bloomberg.com/news/2013-04-11/obama-squeeze-on-savings-of-wealthy-muddles-estate-plans.html

I think there will not be another BRK in our lifetime.

I read it many years ago. Great book.

Happy New Year to all & thanks to Parsad for this fantastic site.