scorpioncapital

In a video to students in 2001, Buffett was asked how often he checked Berkshire stock price he said once every 2 weeks. I'm working on checking less too through a combination of post-it notes on my desk and stop loss and limit orders that I've decided upon in advance. I've settled on once a week on Wednesdays :)

Only the case if BV doesn't contract. It's a moving target, unlikely to be done instantly. He might wait 3 to 6 months to see the numbers. If the market portfolio of 100b+ drops 10%, reduce the buyback price accordingly.

I'm buying some IILG. It looks cheap with maybe a 16 to 17% initial yield on purchase price and approaching a 3.5% dividend rate, after effect of the merger. Insiders have been buying too.

S&D numbers can be found here for nat gas usa - https://www.eia.gov/forecasts/steo/report/natgas.cfm 2015 - supply 79.6, demand 76.3 2016 (est) - supply 81.2, demand 76.8 Oil: https://www.eia.gov/forecasts/steo/report/global_oil.cfm

Yes, he pretty much said it was a buy in 2012 when it was 80 or so per share.

I like EV/"Warm & Fuzzy" I.e. Is the business alive and thriving, is it a remarkable product or service with great future prospects. That will make a much bigger difference to success I think than just the numbers, even if they look decent.

Gotcha, yes, I used 50%. If the goal is to maintain a fixed number of leveraged shares regardless of how much the share price drops, then this could work. Perhaps another way to look at it is - getting a margin call at 30% might be a favour from your broker if you feel you might start to sweat - even with the put - if Berkshire hit $50 and your equity went from $25k to $6.3k, even temporarily. But one thing that did make sense in your example is that it's better to buy put insurance when you don't need it and it's cheap rather then when prices are dropping and it's expensive :)

So let's say you buy $50000 (~365 shares) and put up $25k. You buy ~2 contracts at $7 each or $1400 Over 2 years cost will be - ~$2400 (2% interest+the put) If the put expires worthless you just bought insurance for $1400. If the stock goes to say $100 ($36,500, or a drop of 36% from today's price) you have a margin call ($18.25k - 11.5k) of $6.75k. Will the put be worth $20 ($120 strike - $100 stock price) or $4000, about $3k short of the margin call? Or is the assumption that Buffett's stated buyback level is a kind of floor for the price and your assumed margin call?

If things go right - the default case - doesn't the put negate the point of doing the 2:1 margin thing in the first place? And if things go wrong, doesn't that also negate the point of doing the 2:1 margin thing? Seems to me if you hedge using borrowed money you might as well not use borrowed money at all.

I would have felt better if the line read, "We have no intention of..." instead of "we *currently* have no intention of..." Quite a way to hedge your bet!

Cliff sounds like an amateur - that's not good for Cliff. “For a guy whose reputation rests on his investing in the stock market, that’s not good,” said Cliff Gallant, an analyst at Nomura Holdings Inc. “It’s been a tough year.” It's a fair comment, the stock portfolio has not done well this year. Buffett would be the first to own up to it. Honestly I see the stock portfolio as an anchor. I wish BRK could just spin the whole portfolio off to shareholders. Then the market would recognize BRK's terrific growth as an operating company, and give it a much higher P/E ratio. How many companies are growing this fast, with such low risk, and selling at such a low P/E ratio ( I think ~13X my 2016 estimates, haven't updated it fow a while). BRK's advantages as a hunter for operating Co's seem far greater than what we can do in the stock market. I believe Buffett said he can only look at maybe 300 potential stocks now, given BRK's size. Plus, BRK is stuck with the giant stocks forever. Come hell or high water, if Buffett wanted to sell KO, WFC, AXP, or IBM, it would cause a huge firestorm...could he even sell them without crushing the price? Heresy, all of this, I know. I thought the equity portfolio was embedded within the capital of the insurance companies. Therefore a spin-off would require a separation of the entire insurance business and the engine of Berkshire's float and investment capital.

Great article! It's hard to make a buck, but it's even harder for 90% of the businesses out there that aren't semi-monopolies.

Working with the names in your post, I would hold just these two: BRK & LMCA (maybe BAM a distant third) Good luck!

Some ideas off the top of my head... - Borrow money so that the dividend income is offset by margin interest. - Do a section 85 rollover of your securities into a CCPC than dividend out profits as eligible dividends and capital dividends. If you have RRSP room, you can offset this further with a contribution in the year you do this. - Use other instruments like single stock futures that are not dividend protected, you would essentially convert dividends into capital gains - and there's no withholding taxes.

Thanks for the analysis, thepupil. Looks great. My instinct is to say that if compounding is fast enough before the next dislocation, you won't lose much at current prices. I wish it was at 1.2x book though! I've always seen the buyback as a "contingent tax efficient non-dividend equivalent". And an admission that range of outperformance options are narrowing.

"If I get a great deal when buying a car by no means did I steal that car." I would argue you didn't get a good deal then. A good deal really does feel like stealing something. I've come to the conclusion great deals are only due to the seller not being fully aware what they are giving up to the buyer. Otherwise we might call it a "fair" deal, but in no case would we call it a "great" deal. Over a long time, it may turn out either the seller or buyer was right or wrong or neither. Well, it seems all the reasons we have for Berkshire are good ones. Hence we pay more than book. But how can it be quantified? I would argue that 20-30% above book gives one a good margin of safety. After all, that is the price Berkshire will buy back, so if Berkshire demands a margin of safety of 20% shouldn't we do the same? Ok, it probably is a range. But there's no doubt that buying below what is considered fair value is going to boost your return. Berkshire was 1x book several times. I wonder if it's worth waiting for that or at least 1.2x instead of stretching to justify the current valuation as being cheap. Fair, maybe. Cheap I'm not so sure....(Oh and I hope I'm proven wrong as I own some Berkshire bought in the dips in late August. I had a large stack in 2009 and sold it at around ~$80 - that was a big mistake, so I guess one might come out ahead even if there is a compression back to 1.2x b/v or even 1x b/v for a short period of time).

Does anyone think any of these >1x b/v reasons are a bit flimsy? Okay, maybe except Buffett himself. I mean, all the reasons we could think of seem to be a margin of safety of 20-30% right? So buying at 1x book if it ever gets there gets you the safety margin. Perhaps there is something else to it. I can really see how goodwill may be undervalued if Buffett made good acquisitions at the right time, but he'd have to some degree be 'stealing it' from the sellers with the sellers not being fully aware. This is fine with me, after all, asymmetry of information creates opportunity.

So it sounds like the only way to justify a price > 1x book are: 1. Buffett premium - for a limited time only. 2. Goodwill worth more than amount on the books - there was something in the a/r about goodwill never marked up, not sure why it would be unless it was a windfall of some sort. 3. Organically grown businesses worth more than book - such as superior insurance underwriting. 4. Investments with a higher market value than carrying cost - e.g. BAC warrants ..Most investments are usually marked to market though.

Also it's not likely that value investors can control the price. In euphoria, all the wisdom that was said will be forgotten, likewise in a time of fear.

Have you considered the possibility that the buyback level will march upward? What if it marches to 1.5x in 10 years? Berkshire paid close to 3x b/v for Precision castparts. A few more deals like that and I'd be willing to pay up to "only" 1.5x.

If float is free leverage and quality businesses can compound at 15%/yr, can we get 30% IRR in Berkshire at 2x float to equity? At 1x book, 30% per year; at 1.2x book, 24% per year; at current price, 20% per year. What is the disconnect between a theoretical return and reality? We know size is an argument but if each piece can do the required lifting...Perhaps if it's so hard at Berkshire with quality businesses to achieve this target, imagine how hard it must be at less than stellar companies.

Can anyone explain this phenomenon? I have seen conglomerates that own 50% or more, sometimes 80% of a publicly traded operating company. Sometimes it's a consumer products company, sometimes an insurance sub...Yet they still trade at a conglomerate discount of perhaps 15-25%. Would buying out those publicly traded subs increase the value because outsiders have to buy the conglomerate to participate in that business? Or would it cause even more discounting due to the fact that the subs performance may be masked and can't be split out? In other words, why is Berkshire such a unique example for a premium to book - is it simply superior management running superior businesses (although many are old school average margin businesses) or great salesmanship and popularity?

Also very good and funny too -

Didn't Munger say that concentration is a killer for the know-nothing investor? Doesn't Buffett recommend buying the S&P500 index? I think they are just being polite but if they could say it, they'd say the odds of YOU being a know-nothing investor are quite high so of course diversify!

Where is the tipping point between a high ROIC business with no growth and a low ROIC business with high growth?