Dynamic

Personally, I don't think a BRK dividend is likely in the next 5 years. Nor do I want one. In my circumstances and tax-exempt account, capital sales would be no worse (apart from dealing costs) as a means of withdrawing cash from BRKb, especially now it's in smaller chunks, not that I envisage sales except when very attractive opportunities arise elsewhere. The opportunities to permanently deploy capital will always be concentrated in periods of market distress and shortage of capital. I think a series of significant but smaller acquisitions is likely. Larger acquisitions of BN&SF (BNI) size are likely in the future, but will necessarily occur very sporadically. Obvious and recognisable brands (especially those that are publicly traded) might be tough to acquire at an attractive price (as whole companies) except in unusually adverse circumstances, perhaps at fairly high multiples of temporarily depressed earnings (thus offering an apparently high bid P/E) which Berkshire's CIO will recognise as attractive on the basis of more typical future earnings averaged over the following decade or so (and likewise a sound senior management team at risk may be glad to support an acquirer oriented to long-term performance, not quarterly earnings growth) The profile of Berkshire Hathaway and Warren Buffett internationally has been raised enormously in the general business press since the global economic crisis, which ought to significantly expand the universe of potential sellers aware of the possibility of selling their private businesses (such as Iscar) and becoming part of the Berkshire family. I'd imagine we could see 2 or 3 such acquisitions by 2015, perhaps including smaller traded entities akin to Clayton Homes.

Thanks Ericopoly - the loans themselves. I see what you mean. Would that competition in the tax free part of the marketplace impact on the desirability of municipal bonds, do you think? I'm not sure about one part of the mechanism and exactly how US mortgage securitization works. If banks sell on their loan book as securities, receiving cash in return, I'd guess this improves their balance sheets and frees them up to lend more freely, lowering their creditworthiness requirements at little, thus increasing demand for housing, and when the new debt is issued, that's money creation, right? The only question is, would the banks sell on their loans as securities if the cash received is less than the purchase price of the houses when purchased or the money that was lent, presumably crystallising a loss on the P&L account and a write down on the balance sheet? Aren't most 2007-8 mortgages in negative equity, and aren't these still carried by the original lending banks who couldn't securitize? How many other mortgages are retained with the original lender? It might still make sense to crystallise a loss if the cash received lets you lend a multiple of that cash profitably to willing borrowers.

Enjoyed it. The full interviews available via the links beside the video, such as Arthur Levitt's, were also enlightening, giving a lot more background to it. At the time it was only interest rate swaps she wanted to regulate. He says, in hindsight, he should've said, yes you're right, there shold be regulation and there should be an open, transparent market for them, but the existing swaps will be disrupted by sudden regulation, so let's grandfather them and apply oversight and transparency to new issues. This could have appeased both sides. Then again, Greenspan was such a deregulator, and there may have been such lobbying pressure/regulatory capture that they'd have still opposed vigorously.

I guess that's another reason to try to focus our thinking on what happens in the micro level regarding incentives to spend/consume versus pay down debt. And at macro level, it's important to consider what happens to the money supply as a result. Koo implies we need to avoid a shrinking money supply, and my take is that a shrinking money supply, with increased purchasing power per dollar, would reduce the nominal-dollar value of assets and increase the constant-dollar value of nominally-fixed dollar-denominated debts, thus making the incentive to repair the balance sheet greater, exacerbating the lack of spending and investment). So, I guess the basic prescription is fiscal stimulus sufficient to counteract the excess savings (thus maintaining the money supply or possibly slightly expanding it, if indeed lending to government requires lower capital adequacy ratios at the fractional reserve banks). Modest expansion of money supply has the effect of reducing each debt in constant dollars, and increasing asset values in nominal dollars, thanks to their reduced purchasing power. The money supply is inflated, but "inflation" is wrongly used today to refer to its usual effect on prices, not the cause. Excessive inflation of money supply must be avoided as it undermines confidence and can lead to disastrous hyperinflation. This spending trickles down and sustains GDP in nominal dollar (which are roughly constant-dollars, given the stable money supply). Any macro-level means to reduce the level of excess saving and improve people's balance sheets at the micro level will reduce the quantity and/or duration of government fiscal stimulus required by shifting the stimulus spending to the public's own spending financed via government incentives, many of which will provide long term paybacks (which makes it easier to sell to the public). Energy efficiency and R&D tax breaks can provide long-term advantages to businesses too, if the business can see the advantages outweigh the need to pay-down debt. So I think Koo says, you're gonna need fiscal stimulus in any case. By all means do anything else to encourage more normal spending and less excessive debt pay-downand/or or improved asset values at the micro level, which may themselves reduce the scale of fiscal stimulus required to keep the money supply in balance. (Though he doesn't talk about money supply as much as I do!). On a side note, debt-for-equity swaps suggested for balance sheet repair imply a need to admit the impaired value of assets (measured in nominal dollars), which might be hard. Then again, big-bath corporate accounting has its advanatges for quoted companies in future earnings statements, if GAAP rules allow it. But swapping debt for equity will dilute shareholders with a real current cost to each of them that may not be offset by a boost in earnings once calculated on a per-share basis over more shares. That isn't the case when writing down goodwill on expensive acquisitions or writing down excessive inventory in a big hit, and if everyone wants to swap debt for equity at the same time, would the lenders really accept that much equity?

I agree. To that problem specifically I think a tax policy can help. {deletia} I suspected you were on the same page there, from what you'd said. Yes, I guess you're right (I'm not 100% au fait with US taxation, being in England/UK where in the 1980s we had Mortgage Interest Relief At Source - MIRAS - later withdrawn, which reduced the monthly interest bill, rather than having to wait to reclaim from the tax return), and such policies may reduce the public's need to save rather than spend, especially if asset prices do rise, thus supplying a secondary boost to businesses that benefit from consumer spending, and presumably a rise in sales taxes (local in the US?). I can certainly see that should reduce the number of mortgage delinquencies and defaults, and so may remove some repossessions from the housing market. Prices may rise from a reduction of supply and a possible increase in demand (through greater affordability, although fear and tight credit standards will hold back feverish demand from returning). The supply, I believe, includes a rather large overhang from excess housing build that Warren Buffett has mentioned in BRK's Chairman's Letter 2008, published Feb 2009, so supply-demand might not shift quite so much. If it prevents the dollar from appreciating in purchasing power so much, the nominal dollar value of housing assets should avoid decline. I don't suppose it would help businesses directly with their balance sheet problems, because commercial interest costs are usually deductable from profits for corporation tax purposes in most countries. If it led to higher consumer spending there would be secondary benefits to business. If business debt is a major component of the credit side of the equation, potentially the "money-destruction" process would continue through lack of takers for loans, but at a lower level. Perhaps the government could partly offset that process through borrowing from the banks both to offset the lost revenue from tax-breaks and to provide fiscal stimulus (including help to municipalities) in sufficient measure to sustain the circulating money supply (cash plus credit). I'm not 100% convinced that market values of housing would immediately soar in response to your proposal (I can't see a definite mechanism of cause and effect to account for soaring), but it wouldn't do any harm, and should help lift them somewhat (which may feed back to provide a positive mood among potential homebuyers). There's also the possibility that existing mortgagees would use the amount by which their interest payments had effectively declined to overpay on their mortgage (if allowed without penalty by the terms of the mortgage) or to increase their savings, being still-fearful, rather than to boost spending. If so, this still isn't 100% effective in solving the declining rate of borrowing, which was Koo's criticism of the Bush tax cuts too. (I'm aware that US mortgages are typically very different from UK mortgages in their terms, especially fixed rates for the duration, which is rare in Britain, so you may spot errors, and feel free to point them out) Tax relief on home improvements and household energy-efficiency improvements should fully produce consumer spending with long term benefits and improvements in intrinsic house value and market value as it directly encourages spending, rather than money (or savings) to do with as you wish.

I've also just picked up my economic knowledge via the internet, but think I've distilled enough that makes sense and discarded a lot that doesn't work or is unhelpful for gaining understanding or is specific to certain types of economic condition but otherwise fails to account for things. Yes, but also that the balance sheet is out of whack because of the current market value (rather than carrying value) of the assets against which those debts are balanced. So the new uninflated/depressed market value of those assets is also a major concern, causing people/firms to irrationally* pay down debt (*according to conventional economic wisdom it's irrational, given that interest rates are near-zero, though Koo explained a very plausible rationale at the micro level) In addition to the severe short-term pain mentioned by Zorro, the do-nothing scenario would probably see more money go out of circulation (a crucial part of Koo's thesis) as it sits on the bank's books remaining unlent-against. If I recall correctly, Koo said that this reduces money in circulation and thus reduces GDP, thus causing people to become more fearful and reduce asset prices (e.g. property market valuations) further. This, he said, would increase the incentive to go on paying down debt rather taking on more debt at supposedly cheap rates. I'm inclined to look at this unlent money from another angle, which I'd suggest might reveal some underlying truths. This effect reverses the money-creation role of fractional reserve banks that exist in the economy we have (see centered text below), causing money-destruction instead, thus reducing the money supply (meaning cash plus credit), which means the same as "deflation of the money supply" (which does not necessarily imply a reduction in the consumer price index, in case you locked in on the word deflation alone and used its modern meaning - see below). This would actually increase the value of dollars in their asset-purchasing power, commensurately reducing the nominal-dollar value of assets further, while the debts remain constant in nominal-dollar terms, thus making the balance sheet problem worse, and increasing the incentive to pay down debt even more! So do-nothing might be worse, given that we have fractional reserve banking. It's easy to think that surely a piece of real-estate must have an intrinsic value that can't keep going down like that, and indeed it may not vary so much in real value, but then the intrinsic value needs to be measured in constant dollars, not dollars that are getting more-valuable-by-the-month thanks to the money-destruction going on by the debt pay-down and deposit increases at the banks! To clarify, in an economy like we have today, fractional-reserve banks (as opposed to savings-and-loan style banks) have a "money-creation" role in that they are allowed to lend out a multiple of what they hold in deposits, effectively printing new currency. Money creation is not value-creation, I should add, as it inflates the money supply, reducing the value of each nominal dollar/euro/pound/yen rather like a stock split reduces the value of each share, thus redistributing the value away from people holding cash (unlike a stock-split where the holders receive commensurately more shares to compensate). In reverse, as banks hold more deposits and have a reducing loan book, previously created money is no longer in circulation - i.e. fractional reserve bankng results in "money-destruction". This is "deflation of the money supply". I use that phrase in full, because the terms "inflation" and "deflation" which originally meant this, have been bastardized to refer instead to their most common effects on prices, without recognizing the cause of price change has its roots in the money supply. In an economy like we have now, companies overall may be able to save costs yet increase or sustain prices in nominal dollars to restore profitability and help pay down debt, so we might have, for a time, deflation of the money supply accompanied by an increase in the consumer price index, which people might call "inflation" (only in the modern bastardized meaning of the term), and fail to understand the stagnation of GDP (in nominal dollars) that accompanies it, which may well be caused by "deflation of the money supply", meaning that 'real GDP' may be growing in constant dollars while it appears stagnant in nominal dollars. That's a possible Austrian-theory or Austrian business cycle theory style explanation of stagflation, a portmanteau word coined from stagnation and inflation. To call it 'stagcreasing' would reflect the price increasing with stagnation, yet doesn't sound so nice, though it would remove that misunderstood term of inflation or deflation. Anyhow, Koo's idea (as used in Japan) is that the government could borrow from the fractional reserve banks at attractive rates in an amount at the usual multiple of excess deposits that fractional-reserving allows. In my way of thinking, this reverses the money-destruction role of the banks during a balance-sheet recession with an equal and opposite amount of money re-creation, thus ensuring that the supply and value of nominal dollars (cash+credit in the system) remains roughly of constant amount and thus constant purchasing power. People and business leaders think in nominal dollars (or yuan, or yen or euros or pounds), not in constant-dollars, so maintenance of the money supply may avoid too many erroneous capital allocation decisions that could be caused by varying dollar purchasing power. This fiscal stimulus should approximately sustain the nominal valuations of real-estate assets and the like, ploughing the re-created money into the economy via the private-sector firms who are providing work and materials for the public good in exchange for the fiscal spending money, sustaining GDP in nominal-dollar terms through the trickle-down effect and reducing unemployment (by sustaining total production), while providing or improving public assets that ought to be of benefit to the economy for some years to come, and may in part be ripe for sale in future years, helping to pay down government debt in future, especially when interest rates aren't so favourable to such investments. Certainly, realigning some of the productive capacity of a nation to producing for government projects is a distortion of free-market economic signals carried by free money flow. But then, so is a debt-fueled boom, so were the bail-outs and so is a do-nothing hangover with an abnormally concentrated level of debt pay-down and saving. Regardless of whether the first-order distortion is less or more than any other course of action, the second-order effects and beyond caused by trickle down spending of that money through the spending and consumption of the people thus employed and the profits/dividends of firms carrying out and supplying the projects ought to be relatively normally distributed in supplying for the varied consumption of these perfectly normal people, so the overall distortion of the economy might be less than usual, especially while home-building and the like are in major decline. The spending keeps many of the small and large businesses who are close to the public occupied in providing goods and services to them, and the people thus employed or earning profits thereby will be able to spend those in normal patterns also. The businesses most remote from public spending who can't adapt to supplying the fiscal stimulus projects will be those that suffer most decline, just as in any recession. Others, perhaps in certain raw materials may be unexpectedly buoyed by fiscal stimulus, only to decline when the stimulus is eventually withdrawn. I note that in Charlie Munger's interview for Stanford Law (reposted on these forums a few days ago) he was talking about how Japan engaged in fiscal spending to maintain employment and GDP during their collapse, and certainly you'll hardly find a pothole on a mountain let alone in a Tokyo street. He seemed to be clear that that sort of fiscal stimulus would do more good than harm in the USA, and now I understand a lot of where he's coming from, thanks to Koo.

I'm sure there are various flavours of Austrian economists, from the completely dogmatic laissez-faire types to those with a pragmatic desire for regulation, albeit with a preference for a light touch and the damping of mass-participation folly. I'm certainly no expert, no economist, and not much of a macro guy. I hope to be a pragmatist. I think there's a lot to be said for eliminating manipulation of interest rates, keeping the state out of sponsoring projects that ought to be commercially viable and keeping spending of other people's money (i.e. taxation) to those things truly necessary. I also believe it's important to give people a step up onto the economic ladder if they fall on hard times or ill health rather than be callous and lose their productivity. Equally, it's important not to be so generous we remove the incentive to work or create poverty traps and waste of government manpower through excessive means-testing. Hong Kong (before the British lease expired, reverting to China in 1997) was an economic powerhouse under light touch regulation in the period after Japanese WWII occupation. Via Chris Leithner's Austrian-centric newsletters, I found this remarkable Québécoise Libre obituary of Sir John Cowperthwaite, reportedly the main figure behind allowing the Hong Kong citizens to get on with this remarkable transformation with a minimum of government interference or assistance/favour to certain projects. It is difficult to break the dependancy we have on large government, credit/leverage, inflation, and what Leithner calls the Welfare-Warfare State. I think there are ways to gradually strip away layers of complexity and government waste, simplify the tax code and cut taxes (putting many bureaucrats and tax-avoidance experts into productive work instead), making the changes slowly enough to allow people to adjust their long term planning accordingly and to transition the economy slowly but relentlessly without major disruption to one of light government, low taxes, low-to-zero inflation (if the money supply = cash + credit can be made constant by gradual elimination of fractional reserve banking), ever more natural (free-market) interest rates as the central bankers ease off the levers, more personal responsibility and freedom. In the long run, higher quality investments should be made by businesses able to obtain debt at realistic interest rates, raising the hurdle. With natural interest rates, asset bubbles and malinvestments would have a lot less fuel from artificially cheap debt. I do, however, believe that certain focused government expenditures are essential. Defence, education, basic welfare and healthcare, policing and the maintenance of law and order, firefighting, judiciary, libraries, public infrastructures. It's also important to regulate for safety, against unsound financial practices with systemic implications, to reflect environmental costs and free borrowing of other resources from future generations economically and so on. Really, I'm in favour of leaning towards Austrian School principles, towards smaller government, simpler rules, regulations and taxes to eliminate layers of people doing nothing for society's productivity other than work around them. I'm in favour of freeing money's signalling properties to do their silent work with far less state distortion, a large part of which is to avoid printing new money or allowing a favoured class of banks to lend large multiples of what they receive in deposits, thus printing money with our approval and earning disproportionate profits by such leverage. I'm also in favour of disincentivising governments from layering on new regulation and tax complexities in future and providing policies that favour certain groups at the expense of the taxpayers at large. Interestingly, rather than making central control (government) forcibly take people's money to spend on "improving the lives of the majority" at the majority's expense and on their behalf, it leaves those monetary resources in the people's hands to improve their lives as they wish, with money free to signal supply and demand without distortion. It makes saving a good thing, rewarded by natual interest rates and lack of inflation of the money supply, rather than penalised by artificially lowered rates, and it makes speculation using cheap debt rather more difficult and less incentivised. I believe some Austrian economists miss one thing, that money that's out of circulation (e.g. saved in a jar or under a mattress) effectively deflates the current money supply and strengthens the economic signals and economic value of each currency unit that remains in circulation. However, without it all coming back into circulation or leaving circulation at the same time, if it remains in dynamic equilibrium over the economy as a whole, it won't cause major fluctuations in the value of money, but there would still be some scope for individual actions to coincide and cause disruptive economic events, just as deposits and lendings by banks on different terms can allow a run on a bank for withdrawing deposits while their loans can't be called in as fast. (With fully-reserved banks, the effect is much smaller than in fractional-reserving that's commonplace now) Finally, the mess we're in now, certainly doesn't need a sudden move to Austrian School policies, which ought to be better at prevention, but make a very poor cure for the current malaise, if Koo is, as I suspect, largely right about its hidden balance sheet properties en-masse at the micro level.

That's a very enlightening read, txlaw. Thanks! (and an awesome Phil Fisher quote, BeerBaron!) The savings rate is another guide to how much fiscal stimulus to apply (an exact match, as Koo put it should put that saved-and-not-lent-out money back into circulation). An exact match should also stop true inflation (properly defined as inflation of the money supply, where money supply = cash + credit). I dare say there is plenty of published data to get it roughly right, rather than precisely wrong. If there were a free market for interest rates (as suggested by Austrian-school economists), rising interest rates on government debt would be a signal also, demonstrating more competition for the loans from private sector. However, we don't have a free market for interest rates thanks to the monetary policy makers of our economies (The Federal Reserve, The Bank of England Monetary Policy Committee, etc.) who decide instead to set the interest rates, apply Quantitative Easing and distort the market to meet politically set objectives, and the vagaries also of fractional reserve banking, which accompanies our fiat currencies, and can expand the supply of money rapidly when people are prepared to borrow. Where we go from here certainly needs to be taken in the context of the mess we're actually in, rather than from the point-of-view that "we shouldn't be in this mess, and wouldn't be if, say, we'd followed Austrian School prinicples and fully-reserved banking and currencies with nobody pulling interest rate levers to steer the economy (and distort the supply and demand messages that money propagates so effectively when unfettered)." (the part in "quotes" is the sort of thing I'd imagine an Austrian school theorist might say, as an example of something that may have validity but won't get us out of this mess) I agree that if fiscal stimulus is used, it should aim to get long term productive economic value with as little extra bureauocracy as possible (avoiding a growth of big government, at least in manpower, by tendering all work to the private sector). It could aid environmental developments, economic efficiency developments (e.g. road improvements and maintenance, rail, sewers, airports etc without overburdening the taxpayer with, for example, roads that we cannot afford to repair and maintain in ten years' time), and educational improvements (e.g. new schools & hospitals to replace run-down and impractical buildings, new technology and more textbooks for schools etc.). China clearly has great need for new infrastructure so should get long term benefits and few wasted yuan in this way. In getting on with much-needed maintenance, fairly full value should be achieved in the developed countries (the downside being the upward pricing pressure if demand exceeds supply, though at least the excess profits will spread through the economy in other ways). Already-planned and approved infrastructure projects are clearly thought to be useful / valuable to the economy or the public services in the long-run and can put contractors to work in short timescales. New projects (e.g. bridges-to-nowhere-that-we'd-seriously-planned-building-one) will take time to commence, but should be considered and prioritised early so planning & approval can be done. The prioritising will ensure the most valuable (rather than digging with spoons!) will be commenced out of the budget created by offsetting the savings rate exactly, as Koo suggested. If government-owned entities are set up to own the projects, those that can be privatised in years to come could be (e.g. an airport operating company could later be privatised to pay-down government debt and perhaps show an investment return, or perhaps the government could use its debt finance to make an partial equity capital investment in an existing operator keen to add a new runway & terminal now, and be able to sell the shareholding at a later date to pay down debt and make an investment return). Major projects in viable renewable energy could also be undertaken, and with a bottom-up view, underutilised sectors could be matched up with government spending (e.g. a shipyard with a dearth of private sector contracts in light of reduced world trade may agree attractive rates for producing naval vessels that would need replacement soon anyway). As mentioned, tax-break could be used, in particular with a view to long-term investment, such as R&D tax breaks, that help strengthen product mixes to position for the upturn. On the whole, I'm averse to such meddling with market forces and distortion of the economic signals of free-flowing money, and have a lot of sympathy with the Austrian school and with small government, little bureauocracy and simplified taxation. However, given that we have a meddlesome system at the moment and have to unwind a lot of malinvestment it helped create without crippling the economy, it seems necessary to take such actions with a view to obtaining long term value for money and avoiding corruption and waste as far as possible. I think it's important that the government doing the spending is as businesslike and investor-like as possible.

Thanks, twacowfca, that makes sense. I'd been wondering how I'd been able to sell my shares in a pizza chain for a percent or so above the private buyout price 8 years ago, days before their de-listing, and I suspect you've given me the answer. I made a good return in about 8 months, but was still bought out well below intrinsic value. Thank goodness for margin of safety!

Further links... Most about medical aspects comes from Taleb's colleagues rather than his own work (though he has questioned some genome research statistics in the NEMJ). If you visit this link, clicking through to his colleague Dan Goldstein reveals more on medical decision making. http://www.decisionresearchlab.com/mission.html

This is a major interest . Can you refer me to some of his publications on this topic. Would be much obliged. I'm only starting to get into Taleb and colleagues' take on it myself, but this link is one I came across and appears to be a good starting point. I grabbed the Flash Video from that page partly to view it full size, and partly to remind me where I'd found it. http://knowledge.insead.edu/Dancingwithchance090504.cfm You can also look into their book via its own website. http://dancewithchance.com/

We ought not to discount all that Taleb says because of this, though. I think he has some valuable lessons for society and not just in connection with finance. In many areas the research that he and various colleagues are doing into the effectiveness of professional decision-making could be extremely beneficial. For example, in medicine some of the evidence they've looked at seems to show that excessive general check-ups or running of tests on symptom-free individuals can result in statistically worse outcomes because they tend to be overdiagnosed and given treatment with greater risks than anything they might have or appear to have wrong with them. Potentially, some statistically informed Bayesian decision making guidance could improve health outcomes and save expeniture at the same time. If it's in the doctor's financial interests to run the test, however...

Taleb's warnings about blow-ups actually mirror Warren's and Charlie's. Stories like the hubris and eventual collapse of "Long Term Capital Management" (LTCM) assuming that Black-Scholes was exact and that six-sigma events couldn't occur. Warren also warns of the use of excessive debt leverage to juice returns because of the probability of spoiling a long series of great returns by multiplying just once by zero! These blow-ups they refer to wiped out all the equity of the entity concerned. Did Gen Re and Salomon really have the chance of blowing up to the extent of destroying all or most of the equity in Berkshire Hathaway? Sure, we spent large sums unwinding complex derivatives at Gen Re whose consequences, correlations and probabilities weren't understandable. That's part of Warren and Charlie's focus on limiting the single-event loss and all correlated losses to amounts we could cope with, be they mega-cats or derivative-related losses. Who knows how much the recent economic downturn might have cost if they hadn't unwound those Gen Re derivatives. I don't think that in the last 20-30 years there has been a set of correlated remote risks that threatened Berkshire with as much as a permanent loss of 50% of its capital, let alone 100%. To have achieved so much growth with no appreciable debt leverage is quite remarkable. If I'm wrong about a risk of blow-up of BRK as a whole, please point me to information I ought to digest. I don't think Taleb is criticising Buffett, just stating that he's more confident in asserting that Soros is possessed of skill not luck, than he is of stating the same about Buffett. That may be more to do with what Taleb understands and what is in his comfort zone than what is supported by evidence and logic in a sometimes-inefficient market model that all of us here accept. He also probably considers the concentration (large bets, lack of diversification) in Warren's portfolio to be the plausible mark of someone in an Efficient Market trading "risk" (= short-term volatility in our language) for the chance of a better return. The fact that he also made fewer bets (but bigger ones), might imply to Taleb that he's potentially just a statistical outlier in a random system. I think the recently posted PDF (in this post by Parsad:

I guess it strategically does no harm to patent the drugs because it gives control to maximise options. The freedom to license an AIDS or HIV vaccine in the developed world to raise funds for more research is then an option, to raise more money for research or whatever use is deemed most effective. It's possible to offer a free license on certain conditions to allow low cost distribution in the developing world.

From their foundation's annual letter it's rather inspiring. In particular they showed evidence that reducing infant mortality rates perversely, and beneficially, has the effect of population control, so good vaccines will have a double benefit and be surprisingly cost-effective. Once people know their offspring are highly likely to survive to adulthood, they will tend to choose to have fewer children. This will stabilize population and tend to reduce food shortages and consequent suffering and concentrate resources into providing a better future for those children. This has been shown in a number of cases in recent history where reduced infant mortality in numerous countries goes hand-in-hand with reduced family size. There's not a large natural funding consistency toward research into third-world disease prevention and vaccine distribution, so a program of this size will in all likelihood produce cost-effective results and avoid duplication of anyone else's efforts.

That's an interesting thought, twacowfca. Presumably if the price were to rise substantially faster than the general market thanks to relative scarcity, motivated buyers regardless of price, reluctance to sell among current owners (Intr.Val is possibly between $130k and $160k per A share subject to adjustment when annual report comes out), it might conceivably put greater pressure on S&P trackers to purchase BRK to reduce tracking error. Some of the index tracking is done using software, and I guess it depends on the weighting applied to index tracking accuracy to determine the strength of the imperative to purchase. Of those index funds I looked at some years ago (including quite a few FTSE100 / FT All Share in London), tracking errors of 0.3% to 0.5% per year were perhaps typical, from memory. If BRK makes up 1.1% of the index or so, and gained as much as 50% in price, that's about 0.27% gain in the index that's potentially missed if a fund has only half the "correct" amount of Berkshire stock. Many trackers can omit entirely certain small-weighted stocks, holding only a representative selection, but would hold roughly 'correct' positions in the largest 10 to 30%. I don't see why a tracker shouldn't begin building a position now, prior to planned inclusion in the index, but they'll probably do so only once the inclusion date (BNI acquisition date?) has been announced or has passed.

I'd imagine, on average, a significant proportion of companies added to the S&P 500 Index are added because of significant up-rating of their market price, often because they are "flavor of the month" - e.g. by sector, such as Telecoms, Media & Technology in 1999. Another significant portion may enter the index after a large merger increases their Market Cap. Their weightings in the Index would often be minor, given that most new entries are in the 401-500th largest market caps. I'd suspect that many such upratings will be reversed in a matter of a few years (e.g. the TMT crash), and a few of the mergers will not deliver the promised synergies and cause subsequent downrating. Likewise, a number of companies that had been in 499th place, say, would have been marked down by Mr. Market for temporary impairments to operations, and would subsequently overcome their troubles and return to previous profitability and multiples. This is typical reversion to the mean statistics. BRKb is an unusually large-cap new-entry, having been excluded in the past by a high stock price and being thinly-traded, rather than a market cap at the margins of the index. Equally, the weighting will be more substantial than most new inclusions and the proportion of willing sellers may well be less, so it may experience a significantly different "inclusion effect" to the average of all newly-indexed companies. Of course, a proportion of the BNI stock held by index funds will convert to BRK stock, so it won't require as much extra BRK to be purchased as it would if BRK had entered the S&P without purchasing BNI and replacing BNI in the index simultaneously.

I used to work as an R&D Engineer in the leading company in a certain niche of component production in the optical data communications field, with market share over 50% in both leading edge (low-volume, expensive) and mature (high-volume, cheap) products and healthy margins in both. The products contained photodiodes (high yield, not a problem) and semiconductor lasers (yield hits from wafer testing where they're cheap are high, then on subassemblies yields may still be in the 70-85% range for some products). Final testing to ensure compliance at start of life with margin to remain spec-compliant at end-of-life would scrape off a few percent too. We had one line of products we sold in the millions over a few years and had designed almost everything to work with automated manufacture. It was technically difficult to perfect and achieve high yields and actually prevented our customers from second-sourcing because our competitors couldn't do it, especially on their lower volumes and perhaps subject to our patents as obstacles, so our advantage was a double-edged sword that dissuaded customers from wholeheartedly adopting that platform. A similar product range was made using a lot more human input as that was the most cost-efficient approach with our far-east manufacturing operation. Choosing where to take the optional yield hits was an optimization process, i.e. a tight spec and high yield hit at chip level (low cost per item, but more sacrificed) or sub-assembly level (medium cost per item, but fewer sacrificed) or a finished product level (high cost per item, but fewer still sacrificed). Naturally, we took a large hit at chip level, a medium hit at optical subassembly and a small hit at product final test. Sometimes we'd choose a more expensive component in the subassembly that would yield, say, a higher proportion of devices meeting the required power into the optical fiber. Sometimes we'd use a cheaper component if a known proportion of subassemblies would have to be rejected on a laser measurement that could only be made at sub-assembly level, even though a few more would be rejected for insufficient launched power. In the very cheap, very short-range data comms arena, automation was higher, target specs were broader and yields and volumes were higher. Some of the automated manufacture techniques we discontinued were used by our colleagues in this arena and some were used for later product in our group. Conversely in the very expensive long-haul telecommunications arena, automation was lower, yield was far lower, so was volume, and human input was often greater. Additionally, specs were so tight that lasers had to be temperature controlled, contributing to their greater unit cost. It's not necessarily vital to be fully automated or to have the very highest yields to be the leader in terms of volume, costs, profit and quality of delivered product. It may also allow greater flexibility in adapting to demand if a smaller amount of complex capital equipment is required and human resources are readily available. You may also choose to set more demanding limits on measured parameters to afford a higher standard of quality control and prevent reputational loss. In technical products it can also be the right thing to delay launch of a new product by some months to iron out yield and uniformity rather than take liberties with quality control parameters just to start getting the products out of the door (and have to deal with recalls later). After all the the cost isn't proportional to the percentage you reject, it's inversely proportional to the percentage you keep, so 95% yield means unit cost x 1.053, 85% yield = unit cost x 1.176, 70% yield = unit cost x 1.429, not such a high ratio as you might guess by comparing 5% reject rate to 15% or 30%, a factor of 3:1 to 6:1, rather than 1.12:1 to 1.36:1). As products mature over a few years, yield ought to rise, as would production volumes, and selling price is likely to decline. Sometimes, the mix of automation and human input can be adjusted throughout the life cycle of the products to optimize unit cost and volume. Any company can be the leader on one metric, but overall yielded cost is among the most important, not yield by itself. In fact, if yielded cost is already lower on poorer yield, any improvement in yield will create significant further savings. In summary, neither technical leadership nor low cost manufacturing are enough on their own. You have to have sufficient technology to develop acceptable products (which will NOT be exotic and enormously expensive batteries in BYD's case, unless there's definite scope to make them cheap by economies of scale) and then be the low-cost provider of all those. If you can be the volume provider, you get to spread the innovation costs over more products and can hope to make significant advances in technology leadership. The very highest yields are not essential to be the leader in final cost and volume, if the product is significantly cheaper and quality is maintained by product testing screens and a constant focus on yield improvement in the early years of production. Another lesson from my experience - you can be the leader in your field on all these aspects, but you're not immune to the hangover after your customers' binges, or indeed their customers' binges. My job was made redundant a few years after the early 2000's telecom crash when it was clear it was more than just an inventory correction. Reduction in demand was permanent, the boom in investment around Y2K was excessive and there was excess infrastructure and lots of unlit fiber that would take some time to absorb through increased internet usage.

Completely agree about this, and that BRK will use the optimal accounting treatment to allow for long-term cash retention / tax-deferral to the extent allowed rather than to boost present-day reported earnings, potentially somewhat offsetting the advantage to present-day earnings that ensues from BRK's lower cost of borrowing (a minor synergy that effectively increases the FCF/earnings yield on the BNI purchase price once it's wholly-owned by BRK). Outside the short term, I can't imagine OPEC, the most important oil cartel, will seek to reduce oil prices by increasing production too much, though I doubt there's likely to be much of a carbon tax in the USA for a few years at least enough to really extend rail's advantage. I'd say that BNI fills a low-cost, non-time-critical niche principally for low-value-per-ton product where transportation costs (fuel, intrastructure and labour costs per ton-mile) could easily escalate to a large proportion of sale value. I'd imagine that alternative energy cargo planes are a long way off (though diesel conversions for turbo-props might continue to grow), and the same alt. energy technology is likely to be there sooner for rail, with options for track electrification if it happens to be more cost-efficient to transmit the alternative energy to the train than to carry it on board - not an option available on a plane. If we're right about no significant long-run decline in oil prices (downside protection, moat protection, plus upside if oil costs rise) then stable to growing imports from eastern ports (i.e. Far East) should provide significant growth prospects. Exports (e.g. coal, minerals, chemicals) to the eastern ports (so the ships don't return empty) could also increase. Sure, it's not deep value or massively powerful intangible assets like a See's or Coke.

I think there's a lot of "conventional thinking" used by ratings agencies (and conservative accounting within Berkshire's filings), which doesn't necessarily provide the most accurate picture when applied to Berkshire's penchant for long-tail insurance and indeed long-term derivatives that put a lot of cash in Berkshire's hands for a long period in exchange for a chance of substantial loss events spread over various far-off maturity dates (and to be paid in future dollars, not current dollars). For example, those $37.1bn equity index puts in various parts of the world (Annual Report 2008, page 18) maturing no earlier than 9th Sep 2019 have raised $4.9bn in premiums versus a $10bn balance sheet liability based on the Black-Scholes formula (which is conventional, but misleading for such long term options) resulting in a $5.1bn mark-to-market loss at year end 2008, which is partly offset by higher indexes now, though greater historic volatility might counteract some of that thanks to Black-Scholes. Such amounts of notional loss are not negligible and I'd assume they could easily contribute to a rating decline in conjunction with, say, major declines in equity market prices. And frankly, apparently wild fluctuations in reported earnings/loss aren't conventionally seen in a positive light. Equally, the fact we're about to take on $8bn in debt (albeit on a fast repayment schedule) for the BNSF acquisition could reduce our ratings (and our apetite for taking on more debt anyway). We're in the minority by greeting major market declines as a great opportunity and a source of far higher rates of return and far lower risk of permanent loss than are available normally. The higher future returns we can get from lower market prices will more than compensate for a slightly higher cost of capital, but that's not accepted by conventional wisdom. We're also in the minority by putting little-to-no premium on quarter-to-quarter smoothness of earnings, particularly when they contain mark-to-market paper gains and losses based far more on Mr Market's mood swings than on changes in IV. Anyhow, a reduction of our last AAA rating by one notch to a still-very-good rating will add a little to the cost of debt capital that we probably don't wish to borrow in large amounts anyway and it may reduce how "good-for-our-promises" we appear as insurers by a tad. But if we remain the highest-rated of insurers and reinsurers, particularly for long-term deals, we retain our competitve advantage for those who must be sure of getting paid promptly after an insured event.

This article illustrates the sort of price-to-book-value and price to sales ratios at the time of MidAmerican's purchase decision, and the fact that while automotive sales have doubled since (denoted in declining US Dollars, I guess), the USD share price has shot up ten-fold: http://seekingalpha.com/article/168656-a123-vs-byd-and-other-irrational-battery-investments So the final element of attractive price provided good downside protection and improved upside potential just as with any Buffet/Munger purchase. But it also looks like it has on of Charlie's lollapolooza effects of numerous favourable factors to encourage growth. • great technology with potential to sell/licence to others or force them to use more expensive alternatives while patents endure. • a low-cost high quality R&D pipeline, an impression probably reinforced by Philip Fisher style scuttlebutt in both the mobile phone market and the automotive R&D departments looking at hybrids/EVs. • a nascent & somewhat patriotic native market for cars with a need for low cost and utility above style and fuzzy warm feelings, with few competitors entrenched there (though some will doubtless have great mindshare among those who aspire to "western" luxury) • honest and capable management with, we're told, the technical & business acumen of a great industrialist. That implies great scope for economies of scale later, and until then there's plenty of talented manpower available cheap. • a need worldwide to reduce tailpipe emissions in cities and overall energy usage everywhere, including subsidies and tax-advantages for electric vehicles. • no large existing capital base to hinder the adoption of better techniques (such as aluminium chassis for example - something Audi could only really justify on lower volume luxury models and few carmakers have adopted for any models thanks to their existing plant and machinery). • no significant lobby of vested interests within the Chinese market who wish to protect their petroleum or diesel filling stations and service networks or oil revenues, in fact there's a government keen to reduce reliance on foreign oil imports. • Then there's a currency that could very well increase substantially relative to USD in years to come. A bonus, but small potatoes against the growth potential. • I'm sure that most carmakers from India and China recognise (from Japan's experiences for one) that they must achieve a very high standard in handling, comfort/NVH, economy/emissions, standard equipment, safety features, styling and build-quality to make good inroads into today's European and North American markets, and indeed to tailor the set-up to each market (e.g. softer suspension in USA, tauter handling in Europe is typical). Fortunately once the handling and Noise-Vibration-Harshness is tuned, a lot of the active safety systems (airbags, electronic stability control systems) are mature and readily available from many Tier-1 suppliers as are the entertainment and comfort systems. They can keep the core business vertically integrated and outsource these other items. • Diminishing cost, greater simplicity. While high capacity automotive batteries are a huge cost now, that will surely diminish rapidly as the market expands, and the overall complexity of the vehicle should be far less than for internal combusion engine drivetrains with so many components in engine, transmission and emissions-control. The simplicity potentially enables higher production levels for the same sized plant, i.e. better capital utilisation, possibly better labour utilisation and simpler automation and the option to take larger profits or to seriously undercut internal-combustion competitors and grow market share, and make cars affordable to far more of the people on the planet (just the sort of thing that mobile telecommunications has done). • A disruptive technology that is highly likely to see the decline of a century-old internal combustion industry or force it to change to EVs if it can change its ways fast enough to survive. • Lack of union problems that still blight many large car manufacturers today and may hinder them from making the changes necessary to compete with BYD and other Chinese/Indian competitors. Get one or two of these effects and it might not be enough, but together they could reinforce each other and different advanages could help in different environments/markets and against different competitor decisions. I'm happy that the downside is minimal at the purchase price and BYD can safely continue to supply batteries profitably for the mobile technology market. The almost "free" upside at BRK's buying price, while far from certain to the best of my knowledge, is of a skilled company with the right ambition at the right time in the right part of the world to take advantage of a major demographic change in China, and quite possibly of the even greater change that India may provide shortly afterwards, as its population overtakes that of China and similar personal mobility and prosperity improvements take hold there (and possibly the price - or man-hour cost - of making each vehicle decreases). If it does outstrip Toyota and does so profitably (even if equivalent cars are half their current price in real terms in 2025) it could be an astonishingly successful investment. Even if it doesn't, there's such a massive upside until that point that it could still be enormously profitable. In addition, MidAmerican/Sokol can possibly see the potential for future improvements in battery performance and cost to impact in energy-storage applications in the power supply industry, especially as wind power is somewhat variable in its availability (though it can be forecast a few days in advance). Equally, it's plausible to plan/control the charge cycle for millions of parked electric vehicles (capital investment that's owned by the public, not the supply companies) to take advantage of excess electricity supply, smooth demand spikes (even brief ones, such as commercial breaks during popular TV shows as well as those caused by higher winds) and reduce demand during peak hours, which could be an additional incentive for those bodies/governments with an imperative to reduce global emissions to encourage EV ownership and encourage the provision of EV charging points. P.S. I've re-presented some of the excellent comments from previous posters who clearly know more of the details than me, but I thought it was worth pulling together the ideas I see as relevant in one place.

Well, I'm sure there's a secret fear of a sudden quotational paper loss in the event of Warren's inability to continue, which some people wouldn't handle with the serenity they profess in public. I think some of us are genuinely not wholeheartedly long-term owners or 'lifers'. The group of most pessimistic owners and the most optimistic potential buyers can be said to overlap at the price where trading volume is maximized, i.e. the current market price, in a rational market. Some BRK shareholders are keener on trading than they might admit and feel they ought to get out of a share that seems to possess sharp downward momentum in the hopes of buying back in later. That might even override rational capital gains tax considerations that encourage buy & hold. There may also be a proportion who might actually need to cash-in their shares rather soon, who might react more to short-term events than those who know it's going to remain invested for decades. Among the group of shareholders as a whole, there are some that don't appreciate (or perhaps doubt) the true strengths of the Berkshire culture (and the conviction of successors to sustain it). There are some who don't 'get' the advantage of decentralization, such that each constituent business is free to conduct its own business as well as possible as if independent and privately-owned, growing their competitive advantages and long term results without pressure to meet quarterly targets or even pressure to find good uses for their profits. Sure, it's going to be terribly sad when Warren can't continue, and many of us have a strong emotional connection or love for the man and what he stands for, which would make an event such as his death or permanent incapacity far more sorrowful than for any other Chairman with whom we invest. Leaving aside the emotional aspect, I'm convinced Berkshire's culture is uniquely ingrained and strong and that the company will continue to prosper. Doubtless some of the Buffett factor contributes to advantageous buying opportunities, especially when money is fleeing markets and Warren has the ability to commit large sums very quickly in good situations. Losing Warren could somewhat diminish those opportunities until a successor has established sufficient reputation over maybe a decade or two. Thankfully the Board will help to protect us from wrong decisions caused by external pressure. For example all those calling for dividends a couple of years back will be harder to resist if you don't have Warren's reputation and powers of persuasion and logical explanation, but having all that cash on hand is always vital for the value investor who seeks to make large bets on the rare occasions that the odds (prices) are firmly in their favour (usually in the event of a major financial shock to the system). When all the money was leaving the table last year, Goldman Sachs and GE offered excellent terms for substantial capital injections and knew that the cachet of Buffett's substantial backing for their fundamentally sound businesses would benefit their businesses when the public were starting to doubt the stability of even the finest companies, and indeed it could help them to gain a stronger relative market share amid the failure of some of their competitors.

Charlie Munger's interview is enlightening too, and is the last embedded video in the programme summary article, http://news.bbc.co.uk/1/hi/business/8317072.stm

Hardly any of this interview with Don Graham (Washington Post Chairman, son of the late Katharine Graham) was aired on the TV show, but it's a fascinating first-hand insight into Warren's mind, mental approach, and shows Don's understanding of what's unique about B.H. http://news.bbc.co.uk/1/hi/business/8322961.stm There are also links below the embedded video to extended interviews with Warren (much of which was in the TV show), plus David "Sandy" Gottesman and Bill Gates some of which were in the show's final edit.

The programme was produced my the Money Programme team, http://www.bbc.co.uk/moneyprogramme The following link includes some embedded videos which were included in part or in full in the programme (possibly UK-only, but you can try) http://news.bbc.co.uk/1/hi/business/8317072.stm and a summary of many of the ideas explored. The programme was enjoyable (pronounced Berkshire Hathaway like Warren, not like the English county of the same name, pronounced BARK-SHEER), though contained little factual that one of us wouldn't have known already. For me, seeing some of the people and places, even some of the products I'd never see in England (DQ, the Geico ad), was interesting, and I thought that a good deal of the principals of Buffett and Charlie's processes were well explained with both being interviewed. Charlie mentioned the checklist: easy to understand; run by trustworthy, competent management; with durable competitive advantage; available at an acceptably attractive price. Warren talked of Ben Graham's Mr. Market in a way which is potentially enlightening to a good number of people who haven't come across it. The difference between investment and speculation. Buying the business not the stock certificate. For me, I'd always aim to explain and mention Graham's maxim, "Price is what you pay, value is what you receive" - best understood in the Superinvestors of Graham-and-Doddsville essay, but on the whole, it was a good summary of the man, his humble attitude, the apparent contradictions, the unconventional but supremely rational thinking, the power of compounding, of avoiding debt leverage and that disastrous multiply-by-zero effect. In summary, while we can't all have the investing results of Warren Buffett, perhaps he can show us how to have the happy life he has. Included were interviews with daughter, Susan (commissioned to buy his last car, a repaired hail-damaged, thus cheaper, SUV), son Peter, and a couple of excerpts from the 2004-ish interview with his late wife Susan (I saw this in full on the web some time ago) including the story of their unconventional but happy marriage where she introduced him to Astrid Menks - partly illustrating the unconventional contrarian aspect to Warren. Various other interviewees included Berkshire CEOs Kevin Clayton, Tony Nicely (saying WEB is GEICO's lovable grandfather-figure), Cathy Tamraz, the Fed regulator with whom Warren pleaded for a Sunday ruling change at the height of the Salomon Brothers affair, where his honesty and fair-dealing reputation won the reprieve and he set about changing the culture for the better - cut to video clip "If an employee loses us money I'll be sympathetic, but if they lose us a shred of reputation I'll be ruthless." Another interviewee was one of the senior Salomon executives who recalls the unpopularity of Warren's attempt to curb excessive compensation at the firm and a story of the Arbitrage desk asking if the firm could buy him out to stop his meddling with their bonuses. All this echoes with today's public concerns. It even went a little unconventional to illustrate how Warren finds out what agrees with him and sticks with it. Such as the regular visits to Gorats, the minimal consumption of fruit and vegetables (save for banana cream pie or strawberry cheesecake!) or even a glass of water when T-bone, hash browns and Coke are available, with say peanuts and coke for breakfast. Bill Gates was also interviewed regarding how he learns from Warren, about bridge and the charitable foundation - giving it all away etc. There was also the story of how Warren bought Nebraska Furniture Mart from the redoubtable Rose Blumkin with a personal visit, a handshake, no due diligence and a simple typed-up agreement with no lawyers involved. He didn't even check out the title deeds to the store. A fair flavour was given of Berkshire's unique culture and how it still feels like a friendly family business despite its size and wealth, and how he charms and praises the CEOs so they still love their jobs while saying "I can do better investing Clayton's profit in this other company over here, than you can reinvesting it within Clayton". This section ended with Warren revealing how the Dale Carnegie course and "How to win friend and influence people" changed his life. Anyhow, it covered a lot of interesting stuff in the space of an hour with no commercials (except Coke and GEICO ad excerpts for illustration) and I'm glad to have seen it. I'll probably watch it again tomorrow night 11:20 PM (GMT) on BBC One.