Dynamic

Welcome from me too, Nell-e. I'd be interested to hear you expand on your psychological/incentive insights, which I can't say I've quite understood. I'm not sure I believe I have any ability to time the market and predict its movements within a year or judge other investors' psychology (and I'm wary that any apparent success anyone might have peering at charts or judging newsflow could either be illusory or could show a fair success for 9 times in a row but then spectacularly fail the 10th time wiping out all the profits of the other 9 trades and more). Even if it's possible for a few people, it's likely to be a negative-sum game compared to just buying and holding the market thanks to frictional costs, so the winners have to win by enough to overcome such frictional costs, which seems challenging. Value Investing with little regard to short-term price movements seems to produce more reliably good returns. I do think that disciplined Value Investing by pricing of purchases to provide a large 'margin of safety' can give the illusion of successfully buying the dips or timing the market quite often, and the bigger the 'margin of safety' you insist upon (i.e. the bigger discount from Intrinsic Value you require) the more likely you are to buy only at unusually low market prices from where there's often a good upside. If you set the margin very high, you hardly ever buy, so you'd better buy big when you have such high conviction opportunities so that you make them count! I do sometimes look ahead on the basis of fundamentals that are likely to result in increased price or increased downside protection in the near term and record these alongside my purchase notes so I can later compare what happened to my thesis at time of purchase. That might be projecting the Book Value per share for BRK.B that is to be reported at the end of February, providing a soft floor not too far below my purchase price in the near future (or even above my price, when I got some really cheap back in Feb 2016). Or in the case of Apple when I took a 25% position when it was very cheap due to unfavourable year-on-comparisons against their best quarter ever, I looked ahead to what future earnings, iPhone releases and year-on-year comparisons might do to investor psychology to 'out the value' when planning ahead, and considering how large my position might become (I considered it could potentially double within a year and I might have to trim back (tax-free) for risk management if AAPL rapidly rose to 50% of my portfolio). Fortunately, everything rose (Apple rose about 20%-40% more than the rest of my portfolio from time to time) and we brought more cash into the trading accounts, so I kept my full stake and despite rising 63% since purchase AAPL remained a 25-35%% position pretty much the whole time). Price targets from sell-side analysts are something I mostly ignore but they are very rarely lower than current price (unless they have a Sell or Strong Sell rating) so they always seem anchored to recent market prices plus some room to appreciate, and are likely to get lowered again in light of sharp the market falls and high volatility of late. They're supposed to be some kind of price that if it reaches within 12 months, you might want to sell to lock in gains. With such targets they're also providing 'simple recipes' sent from the-gods-on-high for naive investors to buy now and sell when it hits this level, that provide a reason for people to trade in and out and generate trading commissions, knowing also that they may also have a 'stop loss' to see them trade out if it falls too. A lot of their reason-for-being seems to be to encourage retail trading. I would say that $240 would be a point where BRK is not greatly discounted from Intrinsic Value, and is probably somewhere in the distribution of values where IV lies after the tax cuts, and that if there's an economic downturn in the offing, IV itself may lower a little but not enormously. There do seem to be some quarterly patterns about investor inflows and outflows from time to time, and this showed in 2015 and perhaps at least some of 2016 too (see p15 of this Dalbar "QUANTITATIVE ANALYSIS OF INVESTOR BEHAVIOR" report: https://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf ) However, I suspect such trends could easily change from year to year and for me they'd just be a distraction from my focus on buying quality compounders only when undervalued by a good margin of safety and remaining invested to reap the rewards of compounding value.

I generally agree that 1.2x BVPS is a steal for BRK and I'm normally prepared to project forward to the yet-to-be-reported BVPS, which might mean adding 2.5% to the previous quarter's BVPS much of the time. However, this quarter is different! I'd agree with John Hjorth that BVPS as reported on 23rd Feb when the Berkshire Hathaway Annual Report is published is very likely to be around $143-$145 range after accounting for the US Tax Cuts, which have a disproportionately large effect on BRK's deferred tax liabilities and profits made in the USA. For me, $172 would be a screaming buy at about 1.2x estimate 2017Q4 BVPS. I would say that at close price of $191.42, the market-value of the operating part of BRK.B is about $119 and that $72½ would be about the look-through market value of the portfolio of stocks including Kraft Heinz, BYD and Sanofi stocks that aren't included in 13-F reports. Mark-to-market losses on the portfolio of stocks since 31st Dec 2017 would perhaps knock off 3-4% from their contribution to current running book value. Maybe there is as much as a 1.5% reduction in running BVPS would knock about $2 per share off the BVPS that will be reported for 31st December 2017, so I'd reduce that $143-$145 to around $141-$143 for BVPS, setting a 1.2x BVPS "soft floor" of around $169-$172, although the authorized buyback threshold would be any price up to 1.2x the actual last reported BVPS, not the running BVPS. I personally think the US Tax Cuts have boosted Intrinsic Value of BRK.B by a little less than they've boosted Book Value, but I'm content with what I suspect will be reliable compounding at a rate that significantly exceeds our goals, hence our large exposure to BRK.B, especially in the absence of other high conviction ideas and my additions in Dec and Feb around $196 (GBP £141 - £147 depending on exchange rate) even when it appears on the surface to be priced at 1.5-1.6x BVPS. Last night we checked our household budget and brought forward and increased our usual cash subscription to add another 1.5% to our portfolio, which should be available to invest today or possibly as late as Monday. I'm also considering switching our 4% position in Wells Fargo to BRK.B, so might well do both on the same day and add about 5.5% to our BRK.B weighting soon somewhere in the $191 region (GBP £137).

Sold our entire <1% position in IBM in my wife's capital gains tax exempt UK ISA. We bought it cheap but don't see it compounding per share IV as fast or as certainly as BRK.B. Registered a total return of about 19.2% in GBP currency after costs and 30% withholding tax on dividends. Dividends contributed about 4% since 24 Feb 2016 but underperformed the FTSE100TRI (must be a little over 24.4%) and the S&P500TR. Cash in account had been about 80% of what the IBM position raised, so again just under 1% Bought more BRK.B using cash and proceeds of IBM sale. Purchase price would have been about $198 USD, but only £142.01 GBP after costs which is 3.5% less in GBP than the £147.19 GBP ($196 USD) purchase we made in Dec 2017. Portfolio now: 0% cash 67.7% BRK.B 25.9% AAPL 4.0% WFC 0.6% HPE 0.5% HPQ 1.3% Spouse's employee ShareSave option plan

Sounds like the barge was showered with spray as the center booster hit the ocean at 300mph(500km/h) nearby destroying two of its engines. This according to The Guardian. Two out of three ain't bad and hopefully they can learn from that failure thanks to all the telemetry the barge will have recorded. Hopefully the fairings too will be collected as planned.

I'm pretty adept with GIMP too (and PNGoo for PNG optimisation) so I'm happy to give it a go with the original graphics if you wish.

Playing Devil's Advocate, Charlie, you could argue that's one factor expressed three ways (referring to your Bold text). :P Tax Cut -> increase in after-tax earnings by (100-21)/(100-35)-1 = 79/65 - 1 = +21.5% Tax Cut -> increase in after-tax earnings by (100-21)/(100-35)-1 = 79/65 - 1 = +21.5% restated. Tax Cut -> increase in Book Value via reduction in deferred tax assets (and potentially by mark-to-market gains in stock portfolio due to tax-cut appreciation, net of deferred taxes on further gains) I can certainly imagine the tax cuts producing a real bull run for a year or so, possibly less, possibly more. It may lead to unbridled optimism and a highly inflated market (perhaps 2000/2001 levels of Shiller PE) ripe for a blow-up.

I have noticed that in some I follow (though I no longer own any UK shares), such as Halma plc with a ton of non UK subsidiaries and sales. I sold at 808p in Feb 2016 and it has rocketed to 1281p now. Lucky for me I was fully USD invested when Brexit came and the pound plummeted giving me 30% boost during 2016 slightly sooner than that boost hit Halma and I bought cheaply and traded up my portfolio's intrinsic value significantly. Since then the USD has weakened, providing a 10% headwind so I only beat the FTSE100 Total Return Index by just over 2% little last year. When analyzing my annual portfolio returns in both my native GBP and USD I typically look up USDGBP historical figures somewhere like Yahoo Finance: https://finance.yahoo.com/quote/GBPUSD%3DX/chart?p=GBPUSD%3DX where you can change the time scale and look up the historical data by hovering the mouse over the chart. It usually pops up with Open Low High and Close figures for the day in question, so I put the appropriate one in a spreadsheet and adjust the figures. That way I can compare my returns net of new cash converted to USD against the S&P500TR Total Return Index (a good benchmark as I mostly invest in the US at present) and my returns converted to GBP against FTSE100TRI Total Return Index or FT All Share price index and evaluate my portfolio's outperformance and annualised returns. If you take the date of the financial statements, or take an average over the accounting period, you should be able to make some adjustments to the financials in a similar fashion to convert into a currency that has been more stable over the last few years. USD would probably be OK, with no more than about a 10% move in 2017 against most currencies and no major crisis. Brexit and before that the Euro problems with Greek debt etc caused some more major currency swings. I guess the way I'd lay it out on a spreadsheet is to use the rows for various financial metrics you want to analyze, with column 1 being the name of each metric, row by row. The columns would be by date, covering a number of periods over the first set of columns, perhaps 5 or 10 columns for the figures in the native currency. I might shade the fill color of these columns so they are clearly separate from the next set. I'd then have the same number of columns to the right (perhaps the rightmost columns) used for the exchange rate to USD on each of these dates (or a typical exchange rate over the period covered by each financial report) in a different fill color. Perhaps inserting on the left or in between the native currency figures and the exchange rates I'd also insert the same number of columns to show each financial figure converted to USD by multiplying by the exchange rate (or dividing by the inverse exchange rate) using the appropriate exchange rate for the time period in question. You could also refine this as you wish, for example, taking a weighted average of various exchange rates according to the major currencies the company trades in. A similar approach can be used to adjust figures to account for heavy stock buyback programs over time or to adjust certain metrics across a major discontinuity in taxation (e.g. the US tax cut recently implemented) if you want to tease out trends in underlying earning power and not count tax break effects as if they're underlying growth. Once you've set up such a spreadsheet you could probably plug in the numbers for various stocks quite easily and have the figures normalised as you see fit.

From an investment perspective, I'm certainly looking beyond the next 5 years, even if I'm offered a company at a P/E ratio of 5 as my terminal valuation if I were to sell in 2023 will have a lot to do with the future prospects as seen from 2023's vantage point. I believe around 5 years is the time it will take for the current investment around the world in greatly increasing the kWh of lithium ion battery production (and investment in the supporting industries such as raw material mining for Lithium, Cobalt etc.) to bear fruit and substantially increase the available supply to support an accelerating shift towards long-range EVs, with more choices from more manufacturers. The vehicle fleet on the road WILL NOT change nearly as fast as the new vehicle sales, and it will certainly differ from region to region. Also, future battery technology for EVs might not be lithium ion as we know it, though lithium is a great material, being the lightest metal in the periodic table and highly abundant in nature (albeit in compounds rather than the elemental form). Other elements used at the moment, such as cobalt, might well be replaced in future. The parochial experience in one area such as Detroit/midwest adds some color to the canvas of a variety of very different environments around not just the USA but the world. Currently gasoline is cheap and it's also lightly taxed in the USA (though this varies by state), as with a good many countries around the world. I visit a city in northern Mexico every year and don't see a large uptake of EVs being likely there for a good few years. This will doubtless delay the tipping point in such jurisdictions, but it's worth looking elsewhere to see what is happening. However, there are many countries where the oil price is less significant and fuel duties are significantly higher, emissions standards are tighter (or certain taxes on vehicles increase with increased emissions) and indeed the way cars are used tends to be for shorter commutes and smaller cars have a larger market share, even among the wealthy. In most of western Europe, gasoline averages typically around USD $6 per US gallon and probably no lower than USD $5 at the lowest point in the oil market in the last 3-4 years, thanks in part to taxes levied in part to pay for road maintenance and in part to incentivise fuel efficiency and reduce CO2 emissions. Electricity costs, however, aren't much different from those in the US. Diesel is often up to 30% cheaper in much of Europe but in many countries there's a levy on the purchase cost of diesel vehicles. Additionally many populous cities and some countries in Europe offer major incentives for EVs and plug in vehicles (e.g. reduced parking costs, dedicated EV parking, free entry to congestion charging zones, use of bus-lanes or HOV lanes as well as money off the purchase price), which are helping to accelerate ownership. Although it's still the minority, even short range EVs and PHEVs are gaining ground even outside large European cities very fast compared to just a few years ago, providing sufficient growth rates in car sales (multiplied by a likely doubling or tripling of kWh capacities over coming years) to incentivise greater battery production and continue to push the cost per kWh lower faster than even the most optimistic projections made in 2010-2012. In Norway, with their oil reserves falling but plenty of oil wealth to subsidise EV sales for their population, EVs have grown to over 40% of new car sales thanks to substantial incentives both financial and in terms of use of bus lanes etc, so it's providing an early example of how things could play out elsewhere. Now that still means that far less than 50% of the car fleet on the road in Norway is EVs, PHEVs or hybrids, but as older cars are retired and current EVs move to the second hand market, it is gradually going to shift over. It's also interesting to see how Norwegians who live in apartment complexes without charging facilities at home are still able to make EVs work for them very well, for example charging while shopping once or twice a week or using on-street chargers. With the enormous cost reductions continuing to come in batteries, reducing the sticker price of long-range EVs and increasing the range of short-range EVs without an increase in sticker price, the picture elsewhere without incentives is likely to be somewhat similar to Norway's experience now with incentives. Doubtless people commuting shorter distances in congested cities will be among those who switch sooner than those who make frequent longer trips, but it seems very likely to me that the pattern will spread across various populations surprisingly fast as EVs become suitable to their individual needs and eventually I'd say they're almost certain to become cheaper than internal combustion engine vehicles and to keep on getting slightly cheaper for a fair while beyond that point. It does not require enormous extrapolation of current trends to reach parity, and as parity is neared for vehicles, home batteries and grid-scale batteries can become far more cost-effective, expanding the market even further and supporting intermittent renewable energy sources that themselves are getting cheap very fast too. China is pushing EVs and hybrids in a big way for personal and public transport, particularly in polluted cities such as Bejing. This is partly to abate pollution but also is strategic, having only a modest car industry now and the scope to take significant market share in future decades from traditional automakers in the rest of the world. With their population, what's happening in Europe would hardly matter, and the cost improvements they're striving for are crucial to adoption given the lower average wages in their economy. There is certainly scope for one or two Chinese car-makers to overtake giants like Toyota and Ford in the coming decades as the industry shifts away from internal combustion and once most people in China have a car. So yes, people with environmental problems and perhaps 'liberal' agendas may be leading the march toward EVs but this is helping provide sufficient demand to increase the supply and reduce the costs quite dramatically so that in the end a gasoline car is going to be considerably more expensive than an EV so you're going to need a special use case to choose to pay more for internal combustion (or to be an enthusiast or collector, just like horse enthusiasts now). The exact timing in different areas is difficult to predict, but the cost changes are starting to look inevitable. I could well imagine that in the face of EVs approaching parity, oil prices set by the likes of OPEC controlling production may indeed decline below the lows of a few years ago to eke out value in their reserves and delay the switch to EVs by a few years in countries with low fuel taxes. Countries with higher fixed fuel duties will see much less of an incentive to stick to internal combustion, so demand for batteries will continue to increase and price per kWh will continue to decline until EVs become cheaper than ICEVs. Eventually it's quite possible that oil will principally switch to being used as chemical feedstock, though jet fuel is likely to remain in demand for quite a while longer than gasoline, and heavy oils for shipping won't be displaced for some time either. It may seem hard to believe now, but there are many switches we barely think about now, such as the massive and rapid adoption of LED lighting or LCD displays which are better, greener and cheaper than what preceded them.

I could see autonomous cars and ride sharing changing the age profile of the vehicle fleet substantially. If cars are much better utilised there may be many fewer cars but they could clock up 200,000 - 300,000 miles maybe 500,000 miles in 3-5 years and thus the potential reduction in the number of vehicles could be offset in part by the increased replacement rate. Alternatively, they may be able to last for 1 million miles / 10 years instead of the typical 200,000 miles and 20 years of current cars. That could mean that the auto industry new car sales don't suffer so much, but maybe second-hand dealers would have a tougher time (or just take on newer cars with higher mileage for those who want to use their own car in the traditional way). I wouldn't be putting money on this now, but a lot of things could change and there will be a lot of second-order effects.

Around 18 years ago I took a position in a UK company that owns numerous local newspapers. Most towns have one weekly paper and perhaps a free paper light on news but concentrating on classified advertisements. Often these are owned by the same firm but have separate titles. Local monopolies. Numerous real estate agents, car dealers and tradespeople need to advertise their services to a local audience, so in addition to the news and advertisements each paper tends to have a Property section and a Motoring section with a few editorial articles and a lot of advertisements. The high readership is a barrier to entry for new rivals. The advertising income generally supported the journalism and kept the cover price low and this made it a negligible cost purchase for its readership to buy habitually. With regional printing centres supporting colour newsprint across numerous towns' print runs, efficiency was another crocodile in the moat allowing a paper to slash its cover price, introduce competitions a giveaways and see off a new rival while barely affecting the parent company financials then return to high profitability. The company is called Johnston Press plc and when the 2008/9 Global Financial Crisis came, I knew real estate and new car sales declines would hit it temporarily but expected it to recover and still do well across the cycle. What actually happened is that it almost breached its debt covenants requiring an equity capital raise during a bear market. A good reason to be wary of debt load even if interest cover looks healthy. The recession turned out to be a long one and deep, but simultaneously internet advertising became more local and location-aware and online real estate aggregators diminished the value of newspaper property advertising and slashed commission rates for many agents. I probably got back about 10% of my total investment by the time I saw the writing on the wall. The debt lesson is valuable. The lesson on industry disruption is more valuable. Now we see many giants of the automotive industry making sensible platform sharing consolidations and selling cheaply. There has certainly been good money made by Value Investors buying post-bankruptcy GM and also Fiat-Chrysler to name two examples. Certain revaluation and spin off gains have produced some nice gains fairly fast in recent years I have not invested. I am very interested, but particularly in the advent of Electric Vehicles, much like fellow forumite Liberty. Some TED talks have championed the coming tipping point for EVs and Autonomous Vehicles. However this very measured interview with really useful infographics on Fully Charged YouTube channel has some particularly good points. First it lays out the barriers to EV adoption: Range (most people need >200 miles/320 km) Cost (to obtain that range today you need to pay more sticker price than for gasoline cars) Performance (early small battery EVs were slow but now EVs tend to have higher performance, instant torque and low centre of mass) Choice (not such a wide selection of vehicle types and brands available as EVs) Charging (number of locations and charging speed on long trips) They discuss each of these and the trends and previous projections. EVs have about 50 moving parts compared to about 3000 for gasoline ICEV. The battery cost is key and falling faster than early projections. They interestingly discuss with will happen as 200 mile EVs reach price parity. Some manufacturers may try to retain parity and go no further but as EV prices continue to fall, competitors including EV only makes will lower prices (or offer more range for the same price) They referred to an interesting statistic that cost per mile for a horse was about £1.30 in today's money. Cars brought that down to about £0.30 including fuel insurance and depreciation and only horse enthusiasts keep a horse today. EVs and Autonomous EVs should lower it substantially really soon and by 2030 internal combustion engines may well be for enthusiasts and niche use cases. More interestingly, as most new car buyers lease, the resale value after 3-5 years makes an impact on lease cost. Before EVs reach price parity the likely resale value of an ICEV in 3-5 years will plummet so lease payments would rise for ICEVs in anticipation of price parity. They also discuss how a number of industries are simultaneously preparing to serve the EV market including mining, industrialised battery production etc over the course of the next 5 years or so. I recommend you watch the video with a view to industry disruption, potential investments etc.

https://www.cnbc.com/video/2018/01/10/warren-buffett-may-be-slowly-passing-the-baton-at-berkshire-hathaway.html Yesterday's CNBC Squawk Box Buffett interview in full - just under an hour's viewing. Not too much of Joe and his bricks!

I'd agree, clutch, that it's difficult to prove or disprove a hypothesis. Back-testing gives some indication for certain mechanical strategies but can be prone to finding false positives by data mining numerous approaches until you find things that appear to offer a statistically significant advantage. Then when applied to future data one might find they don't work and it was probably being fooled by randomness. I think the Margin of Safety approach reduces the number of decision thresholds that occur and provides hysteresis against selling on the upside to stop excessive trading, but may skew the distribution in the investor's favour. I'd suggest that a consistent record of beating the market under various conditions and over at least one economic cycle adds a good deal of evidence to support the hypothesis. The Superinvestors of Graham and Doddsville cited in Buffett's essay were pre-selected as people who learned from Graham and Dodd and people who: • applied the margin of safety principle to their investments and • considered the ownership of shares as ownership of the business and • appreciated Mr Market as a source of opportunity rather than wisdom. They invested in very different areas of the economy, from cigar-butts to quality businesses. Their returns as published showed that as a group, they all beat the market in the long run, with varying stocks held, varying volatility and varying total returns. This evidence lends a lot of support (but not conclusive proof) to the idea that Margin of Safety is a useful concept to employ. Going back to why most investors underperform: It seems that a reasonable hypothesis (one I'll run with for the sake of argument) could be that the underperformance of the majority of investors is because: • they have a tendency to buy high and sell low • presumably they believe that recent past performance and returns, and the illusion of movement of the stock price (as if it possesses inertial mass and will continue trending in the same direction unless a force acts upon it) are positively correlated with future returns, often with a short-term time horizon. • While these investors may wish to buy low and sell high, I surmise that they don't have any concept of intrinsic value other than "the stock is worth what someone will pay for it". • In Buffett's essay The Superinvestors of Graham and Doddsville, I imagine them as the majority of people for whom "price is what you pay and value is what you receive" doesn't gel in their minds, and nor does the idea of margin of safety. • If they do have a concept of intrinsic value, perhaps it seems too much like hard work to learn enough accounting and perhaps they're unwilling to put companies they can't value into the 'too hard' pile and move onto something else. Intellectual short-cuts may be used instead, such as analyst reports, newsflow and tipsheets. • So they too often buy stocks that have recently increased in price substantially and they sell after a recent decline. • Many only start investing when the markets have risen consistently for a few years and sell out after they make a loss, waiting for conditions to look rosy again before they risk investing again. • If they don't have an idea of intrinsic value a stock that was absurdly overpriced and has since declined 50% may look cheap to them when in fact it's just greatly overpriced and still likely to offer poor returns. • Many consider investing to be gambling. While it's fortunately a positive-sum game, that mentality tends to cause bad judgement. • They probably have too little regard for frictional costs in trading (fees and taxes) and how they eat into compound returns over time. • Many also anchor too much on the price they paid for each stock, rather than reassessing their best options available at any point in time. Sometimes it's sensible to sell out of a position showing a loss (or having retreated from its highs) and take advantage of an alternative with an even bigger margin of safety and prospective return. • Many have no quality thresholds and buy companies with questionable economics or excessive debt and wonder why lose money. • I think this period is almost the inversion of the early 20th century and before, when most people almost entirely focused on dividend yields or tangible book value to the exclusion of the growth component of value or qualitative business factors. • Most people know about P/E ratios but don't see how the inverse, earnings yields (E/P), are somehow commensurate with interest rates and offer at least a crude way of comparing alternative places to put your money. At least dividend yields are recognised better so high yield investors tend to avoid overpaying for growth and can remain patient. • Most people understand only superficially what things do. For example the word 'stop loss order' sounds beneficial, but it can crystallise temporary paper losses into real losses. Likewise a 'sell limit order' can take profits when available, but can prevent you realising even greater profits if the stock keeps rising. Value Investors who have a feeling for the Intrinsic Value and its long term compounding rate can be confident to hold a stock that falls further after they buy (and perhaps buy more) and to hold a stock that has risen considerably. • Many day traders get small repeated successes that really seem to work, until they don't work and they lose all their accumulated gains and more thanks to a fundamental shift, or they miss out on most of the compounding by being out of the market for those short periods when fundamental value becomes recognised. I'm sure there are many other types of folly out there that I haven't covered. It's certainly plausible to have a skewed distribution where the majority of participants greatly underperform, and it seems to roughly match the distribution of active fund returns, whereby most lag the market in the long term, index funds kept invested achieve something like 90th to 95th percentile returns (depending on time period) and the upper 5% earns returns in excess of the market. The 'kept invested' is crucial. As I understand it, many market participants including index fund investors sell out after a market crash and don't return until it's far too late, so they tend to underperform despite choosing a sound investment vehicle in the first place. Their emotional reaction to the negative numbers relative to the year before on their annual statement work against their best interests and make them sell low just when prospective returns have actually increased.

I think it's a positive move and a sensible division recognising their areas of expertise. I think both are extremely capable and will be valuable additions to the Board. It's also a nice recognition of them regardless of whether or not one of them would eventually become CEO. Doubtless Buffett will be asked if it's indicative of succession plans or whether it indicates serious health problems for him or Munger and I wouldn't be too surprised that the minor decline in pre-trading stock price is on the basis of this sort of speculation. I'm sure he will be adamant that it is entirely independent of the Board's succession planning discussions. It would be interesting to know whether Jain and Abel would be involved in discussion of succession planning at future Board meetings given that they could be candidates.

You're quite right scorpioncapital. A balance has to be struck between being too pessimistic and too optimistic and nobody can expect to make the optimal decisions. I don't want my previous post to be misinterpreted as excessive optimism, more as me trying to counter my instinctive concern to 'keep my powder dry' as trouble may be ahead, having read many articles about the dubious underpinnings of the recent market boom. Some managers, when worried about lofty valuations, can still find deep value opportunities to deploy their capital and usually shouldn't turn them down because of short term broad market worries. Some will be able to put significant amounts to work in areas such as merger arbitrage which they would usually consider market neutral but likely to achieve attractive IRR that depends almost entirely on the probability and timing of relevant events, regardless of whether the market rises or falls. I have not acquired skills in this area however. In my case, deep value opportunities in my limited circle of competence have been lacking for about 18 months, but BRK.B at $196 in December 2017 with a tax cut almost inevitable seemed to me to offer a moderately well-protected downside and a healthy if not spectacular compound growth rate, making it preferable to holding cash. In such circumstances, the expected return more than meets my long-term needs and I feel suitably compensated for the short term downside risk.

http://www.berkshirehathaway.com/news/jan1018.pdf Text of Press Release: BERKSHIRE HATHAWAY INC. NEWS RELEASE FOR IMMEDIATE RELEASE January 10, 2018 Omaha, NE (BRK.A; BRK.B) – On January 9, 2018, Berkshire Hathaway Inc.’s Board of Directors voted to increase the number of directors comprising the entire Board of Directors from twelve to fourteen. Gregory E. Abel and Ajit Jain were then elected to serve as Directors to fill the resulting vacancies on the Board of Directors. In connection with their election to the Board of Directors, Warren E. Buffett, Berkshire Hathaway’s Chairman and CEO, appointed Mr. Abel to be Berkshire Hathaway’s Vice Chairman – Non-Insurance Business Operations and Mr. Jain to be its Vice Chairman – Insurance Operations. Mr. Abel joined Berkshire Hathaway Energy Company in 1992 and currently serves as its Chairman and CEO. Mr. Jain joined the Berkshire Hathaway Insurance Group in 1986 and currently serves as Executive Vice President of National Indemnity Company with overall responsibility for leading Berkshire’s reinsurance operations. Mr. Buffett and Charles T. Munger, Vice Chairman of Berkshire Hathaway will continue in their existing positions, including being responsible for significant capital allocation decisions and investment activities. Mr. Buffett is scheduled to be interviewed later today at 8:00 a.m. Eastern Time on CNBC’s Squawk Box at which time he will provide additional information regarding the appointments of Mr. Abel and Mr. Jain to Berkshire Hathaway’s Board of Directors and their new roles at Berkshire Hathaway.

Where I see the major similarity is in the need for humility and necessity of being willing to give up our cherished ideas when evidence shows they're wrong and recognise our own errors. The need for rational skepticism. I'd also agree that in general, a degree of optimism is rational. For example, while I recognise that the market is quite richly priced in general and understand the bear case, I'm prepared to accept the drawdowns in market price that will eventually come by being fully invested in decent compounding companies purchased well below Intrinsic Value and currently selling at least moderately below Intrinsic Value. I currently anticipate that the eventual crash in the US market has most likely been pushed out by the tax cuts to at least 12-18 months away, and could well still be a few years away, and that my holdings will continue to compound IV for a while more such that the eventual crash in their prices may well come after at least a similar amount of growth in their market value and their IV, while avoiding rational investments below IV for fear of an imminent crash. Keeping the cash I've added has no upside if the crash doesn't come soon enough and I could be missing out on a few years of valuable compounding of intrinsic value. In other words I don't want to be one of those perma-bears who does great when the market does crash, but underperforms for year upon year by being far too early in acting on their pessimism and cannot make up for the time out of the market thanks to their attempt to time the market.

I agree that meeting the goals is important, but measuring whether in the long run you can outperform a strategy of putting 100% of new cash added immediately into cheap passive indexing, either in absolute returns or in some long term risk adjusted measure (over a whole economic cycle), is a helpful sanity check for whether or not you're right to be an active investor. You can feel great about your investment returns like me in the last couple of years thinking you're way ahead then find that after accounting for new cash added and currency windfalls you only beat the S&P500 Total Return Index by a few percent each year, far less outperformance then you'd have guessed from how well each decision turned out. I suspect it has a lot to do with riding BRK down to $124 in my case before going in even heavier at the market low, and seeing the whole market rise alongside it. So I made some great decisions but only affecting 15-25% of my portfolio and each only being a modest amount better than a decision to buy the index would have been.

I had a very lucky year again with a very concentrated portfolio (and my two 25%+ positions each beat the S&P500), though not as lucky as 2016 where I was able to buy quite a few things very cheaply in the first half year, which all did well by year end. Not sure I can expect the same next year and I've had some huge blunders (and compounded my mistakes) in the past. I only made one trade all year, buying more BRK.B at about $196 in mid December with all remaining cash. Only lost on one position: -9.5% on IBM (a tiny 1% position), which trails the S&P500 by about 28-29%. Cash position (GBP) was between 5-11% until mid December, which trailed the S&P500 by about 10% in constant currency. I also had a GBP:USD currency headwind that cost me a further 10% in my native GBP against my USD gains. Another apparent error judging by market valuation change, and more costly, was in having sold Agilent in early 2016 to buy what's now a 4% weighting in Wells Fargo, the former having risen by 34% more than the latter over about 18 months, though WFC rose by 10% in 2017 and paid dividends too (but still trailed the S&P500 and basically went nowhere when converted to GBP). Then again I wouldn't be happy holding Agilent at these prices, while I am happy holding WFC.

I clicked 10-20% referring to my native currency GBP. Would have clicked 20-30% if using USD. Haven't done a full IRR or unitized measurement to reflect the time value or our fairly significant cash added (about 8% of end 2016 value), but simply ran it two ways to get a rough picture: There are two ways I backed out the new cash added, one more conservative than the other when the portfolio is rising and vice versa when falling: ((Final value - new cash added) / Initial value) - 1 = 25.86% in USD or 14.68% in GBP. (Final value / (Initial value + new cash added)) - 1 = 23.79% in USD or 13.60% in GBP. Approximate average return = 24.83% in USD, 14.14% in GBP. I'd expect this to reasonably approximate my IRR for the year. For comparison, SP500TR went from 4354.05 to 5212.76 = 19.72% in USD (Total Return Index before taxes). ##modified due to incorrect figure at year end 2016## For comparison, SP500TR went from 4278.66 to 5212.76 = 21.83% in USD (Total Return Index before taxes). As a UK comparison, ^FTAS went from 3913.55 to 4221.82 = 7.88% in GBP (Capital Index before taxes but excluding dividends). For Total Return, the FTSE100TRI went from 5823.91 to 6519.85 = 11.95% increase in GBP (Total Return Index before taxes) ##This line added since original post## Using the average of the two calculations, I beat the S&P500 Total Return Index by 5.10% and beat FT-All Share Index (excl dividends) by 6.27%. Not as good as 2016, but a pleasing return in a rising market and good even after adverse currency effects. ##modified due to wrong year end figures## Using the average of the two calculations, I beat the S&P500 Total Return Index by 2.99%, beat FT-All Share Index (excl dividends) by 6.27% and beat the FTSE100 Total Return Index by 2.19%. Not as good as 2016 (+12.20% $ outperformance vs SP500TR, +36.88% £ vs FT All Share, +35.12% £ vs FTSE100TRI), but a pleasing return in a rising market with a little cash drag and only one trade near the end of the year, even after adverse currency effects. Portfolio largely static through the year except for mid December switch from 10.5% cash balance to buy BRK.B at $196 (and wife's ShareSave scheme operating for 3 months at 1% of portfolio value). Started year with 5.35% cash. Year end weightings approx: Cash: 0.1% BRK.B: 65.5% AAPL: 27.3% WFC: 4.2% IBM: 0.9% HPQ: 0.7% (outside tax-free wrapper) HPE: 0.5% (outside tax-free wrapper) My Wife's UK Employee ShareSave Options Scheme: 1.0% (having invested for only 3 months at maximum savings rate - helps that they're currently worth 35% more than the cash saved) - outside tax-free wrapper. I use a UK ISA which is exempt from UK taxes including Capital Gains Tax and Tax on UK Dividends. My only tax issue was 30% withholding tax on my US dividends. I might be able to improve to 15% withholding rate by switching broker to one that will process a W-8BEN for me, but likely at the expense of higher fees and worse exchange rates (typ 0.5% commission each way) when trading (because a UK ISA cannot hold currencies other than GBP if I sold, AAPL to buy BRK.B I'd lose 1% on the round trip). I'll keep looking into it, but currently get close to market exchange rates but lose out a bit on US withholding tax. Edit: Update on 2016 figures for comparison (with nearly 18% new cash added compared to start of year GBP valuation) plus Trades made in 2016 and 2017: 2016 returns after brokerage and admin costs and 30% withholding tax on US dividends: Native Currency (GBP): 54.19% return (average of 58.65% and 49.74% to account for new cash added). FT All Share = 17.32% + maybe 2% more for dividends (Outperformance = +36.88%). FTSE100TRI = 19.07% (Outperf = +35.12%) US Dollars (USD): 24.16% return (average of 25.76% and 22.56%). S&P500 Total Return Index = 19.88% return before withholding tax on dividends (Outperformance = 4.28%) Year End 2016 weightings: Cash(GBP) 5%, BRK.B 62%, AAPL 25%, WFC 5%, IBM 1%, HPQ 1%, HPE 1% (at market prices in same currency). 2% of portfolio outside tax-free ISA wrapper. Year End 2015 weightings: Cash(GBP) 14%, BRK.B 66%, HLMA.L 13%, HPQ+HPE 1%, A 5%, KEYS 2% (at market prices in same currency). 8% of portfolio outside tax-free ISA wrapper. No losing shares all year in 2016, and all new purchases made below both Year Start and Year End prices (in USD). Huge one-time gain from post-Brexit currency swing. Only IBM a loser in 2017 (in USD at least). Slight headwind from exchange rate except for newly added GBP buying more USD than at start of year. Trading history in 2016 and 2017: 13 Jan 2016: Buy more BRK.B @~$127 = rise to 80% weighting, cash to 0%. 03 Feb 2016: Sell all of HLMA.L @808p and Buy more BRK.B @$124.26, bringing BRK.B weighting to about 92%. Value trade. 11 Feb 2016: Buy more BRK.B @$124.56 using new cash subscribed, bringing weighting to about 95%. 24 Feb 2016: Buy 1% position in IBM @$131.70 using new cash (cash weighting reduced to near 0%) 22 Apr 2016: Sell entire A position @ $41.64 and arrange wire transfer into ISA tax-free wrapper (GBP) 17 May 2016: Buy 4-5% position in WFC @$47.72 using new cash and Agilent proceeds (cash weighting reduced to near 0%). 20 May 2016: Sell BRK.B @$142, reducing weighting to 65% and Buy AAPL @$95 - weighting 25% with proceeds. Relative value trade to take maximum AAPL weighting I felt safe with (assuming it had potential to double rapidly but certain technology risks too that might risk permanent capital loss). Whole portfolio in USD denominated equities prior to Brexit referendum and huge currency swing against GBP very luckily worked hugely in my favour. Mid Nov 2016: Sell entire KEYS position @~$34-35 and arrange transfer into ISA tax-free wrapper (GBP) increasing cash weighting by about 1-2% Cash at year end 2016 (including new savings, dividends and KEYS proceeds) 5%. 2017 New cash added + dividends received, reaching 10.5% cash by early Dec 2017 with no trades having been made. 11 Dec 2017: Buy BRK.B @$196.69, increasing BRK.B weighting to 65.5% and reducing cash to near 0%. Oct-Dec 2017: 3 x monthly additions to wife's employer's 5-year ShareSave option scheme (at year-end market value showing a 35% gain on cash deposited, with no downside if shares sold after the 5-year term). Comments The period 29 Sep 2015 (increasing BRK.B at $128.28) through to 20 May 2016 (buying AAPL at $95) was an unusually active period of trading for me as a number of decent opportunities at attractive prices came up. Perhaps in hindsight, I should have kept our cash instead of buying WFC and IBM and used it towards my AAPL purchase thereby keeping slightly more BRK.B weighting. 2017 was a much more typically inactive year. In 2018, HPE and HPQ are non-core holdings and the market price now offers me enough to consider selling, bringing the proceeds into my tax-free ISA, perhaps increasing my BRK.B position. AAPL could offer me interesting considerations in 2018, e.g. if as some speculate, they repatriate capital to the US, they might issue a special dividend. If it's very sizeable, my 30% withholding tax rate versus zero Capital Gains Tax rate may encourage me to consider my options at such time very closely.

And on those assumptions the 'soft floor' at 1.2x unadjusted Book Value Per Share is expected to rise after about late Feb 2018 to $174 per BRK.B ($261,000 per BRK.A). Compared to today's price, that's 87% of today's price, so it should provide some reasonable downside protection against more than about a 13% decline. If organic BV growth rate is 10% cagr over a further five quarters, BV would be 1.1265 x 2017YE BVPS, which would be around $163 at 2019Q1 (reported in May 2019). 1.2x BV would then be $196, meaning the soft floor would be around today's price. That's only a projection, and the mark-to-market element of the equity holdings may materially affect the actual reported BV, but to me it looks like a pretty good bet that within 18 months the soft price floor will be around today's price. That sort of downside protection may fall somewhat (perhaps by 15-20%) in the event of a market crash, but nonetheless, I feel it's a better bet than cash and I recently spent our 10.5% cash position buying in at $196 before the tax cut was confirmed.

Thanks for your opinion, Swedish_Compounder, and welcome to CoBF.

This is quite the concentrated portfolio! It sounds like you have done your research and those two are very solid companies but still, I couldn't go this concentrated. Just curious if you can disclose anything about your portfolio size. Maybe something that keeps it relatively confidential such as portfolio size relative to a year of savings? Portfolio size is 6 figures in both USD and GBP. We're saving in 5 figures (both USD and GBP) each year now, investing from our after-tax salary into a tax-free ISA (no Capital Gains tax, no income tax on dividends from within the ISA). From 2003-2014 I basically stopped adding new savings and actively investing and almost passively held about 70-80% BRK.B, 10-20% HLMA.L and 0-20% JPR.L plus some HPQ and A derived from my former employment. Despite JPR.L being a disaster - first via debt covenants then local newspaper monopolies being supplanted by online advertising, I must have compounded the pot at about 10% CAGR, probably a bit more than a triple. I was very happy with BRK's: competent, trustworthy stewardship and shareholder orientation autonomous business units rather than central command reinvestment of excess capital by the 'capital allocator in chief' - you can have non-growing businesses generating cash which is put to better use elsewhere willingness to decisively take advantage of attractive investment opportunities especially in bear markets and other distressed circumstances with meaningful sums of money at attractive rates of return fixing of the insurance underwriter's usual badly crafted incentives that reward most to write more business rather less business when it's poorly priced (so I anticipated that the float would be cost-free on average over the next 10-20 years) diversity of earnings streams and businesses in uncorrelated sectors to ride through megacatastrophe years and support the ability to write lots of profitable insurance contracts at good prices after such years focus on long-term value creation rather than reported number good chances of Buffett running Berkshire well into his 80s or 90s and good succession planning thereafter That list explains why I'm happy to hold 100% (or even a little more if I were to remortgage and invest the freed-up equity when it's really cheap) in BRK.B for the long term. I sold HLMA at a reasonably high price (though it has gone up 58% plus dividends since partly thanks to non-GBP earnings) to go heavily into BRK.B at about $124 in Feb 2016 (which has gone up 76% since when measured in GBP currency). Essentially, we're married with no kids (and no intention to have them) - I'm in my 40s and my wife is in her 30s, we own a small apartment of which we have 75% equity at current prices and the mortgage company has the other 25%, purchased in the 2009-10 slump. Our mortgage and service charge are very affordable (much less than equivalent rent), we live frugally, run one small and economical 5-yr-old second-hand car and two folding e-Bikes but still enjoy plenty of travel and fun times (and have the cash to buy or hire a large car when family visits from overseas). Our incomes are not enormous, in fact mine is below my very good 2003 income, but we enjoy our full time Mon-Fri work OK and have a good work-life balance and like the place we live, rather than moving to follow my original career path. My employers are quite old so when my wife got full time employment we decided we'd try to live within one income and invest the after-tax portion of the other towards retirement and remain resilient to potential loss of employment while also accelerating our options for secure, comfortable, worry-free, and very likely early retirement, potentially having two homes, likely in our two native countries. We could also decide to take a work break and see the world while we're relatively young if we're in a suitable financial position. When I went for AAPL at $95 in May 2016 (using cash savings plus the sale of some BRK.B at $140 to fund it), I felt it was a high conviction idea with good long-term value plus the prospect for rapid revaluation by the market. I wanted to really take advantage of such a high conviction idea with such a good margin of safety (as advised by Charlie Munger), but I am aware it's not as diversified as BRK.B, so I limited myself to a 25% weighting at time of purchase. Naturally, I anticipated it ought to grow, and might double to 50% of the portfolio rapidly, at which position I'd be uncomfortable with the weighting and would need to consider trimming back, thereby taking some profits and reducing my single-company risk at a time when it had less upside potential than at purchase. As it happens it has grown about 80% in market price since, while BRK.B has grown about 40% since and we've added more cash, so it remains at a weighting and a price I'm not uncomfortable with. However, I am monitoring the value and position size quite closely, balancing my desire to keep a good compounder with my concerns over position size an potential for decline. It wouldn't take much of a rally from here for me to actually go ahead and trim back my position size, and another possible reason I'd do so is if I found another really high conviction idea I wanted to invest a sizeable sum in. Then I'd be looking to my more fully-valued shares like AAPL at present to fund such a position, so the market price may determine how my portfolio evolves. I partly made such big bets on AAPL and BRK.B from conviction in the ideas, but partly because I knew we'd be saving heavily for at least a decade or two and could make up for potential losses due to crashes or company problems etc by investing that money well.

My intuition is that the tax cut provides a boost to BV that is higher (as a percentage) than the boost to IV, especially if some of the benefit does indeed pass back to the customers either by regulation (utilities) or by being competed away (e.g. in pursuit of market share). So I'd imagine that the gap between BV and IV, having widened gradually over time, has suddenly narrowed slightly assuming the one-time tax cut comes into law. For that reason I'd not expect the buy back threshold to be raised to 1.3x BVPS for at least a couple of years if not longer. But my intuition may be wrong.

I'd be interested too, though I tend to agree that 10-11% is about the most I'd expect for the CAGR of IV (and BV other than the one-off boost from the tax bill). For me, that's sufficient long term return with high certainty, and the limited downside and the potential for decent compounding are the reasons I felt it was better than cash for the long term and provided essentially similar 'dry powder' for any huge bargain in the short term. Even the last 14.25 years, with a deep recession and plenty of opportunism and big acquisitions has seen only 10.36% CAGR in Book Value (prior to any tax boost) but in an environment of low interest rates and low price inflation. I'm not complaining though - 10.36% over 14.25 years is 4.07x growth in total, which is very respectable, and repeated for another 14.25 years would exceed a 16-fold growth over 28.5 years.

BRK.B at $196.69 (increasing stake from 55% to 65% of portfolio using essentially all accumulated cash awaiting investment + dividends received). Portfolio is now 65% BRK.B, 28% AAPL, 4% WFC plus a few bits and bobs mostly at modest valuations. (My effective AAPL and WFC exposures are about 31% and 8% respectively on a look-through basis). See this message for reasoning: http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/2017-ye-intrinsic-value-versus-market-value/msg317834 This represents a bit of a change of opinion for me. Looks like a sound investment for long term (I'd expect 7-10% CAGR above inflation) plus fairly high probability of limited downside risk over next year or two (meaning we should be able to snap up deep value bargains when we see them by trading some BRK.B or AAPL and any new cash awaiting investment, meaning we shouldn't lose a lot of that cash optionality and may gain some buying power if BRK.B appreciates above $196), by which time the buyback threshold should have reached our purchase price (unless the tax reform bill fails to make it into law, in which case it'll be a few years longer and we might have to ride out some temporary quotational losses, but should still be in line for 7-10% real terms return long term).