scorpioncapital

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

I just saw a TV ad by Trudeau saying something like one of our goals is to take from the rich so the middle class can live better. I couldn't believe my ears!

The only thing that will save Berkshire is the quality of their businesses over the long term after Buffett. I've seen too many succession horror stories to count on that. Perhaps it will be above average too, as are many things Berkshire does, but if it wasn't for Buffett's intelligence to allocate capital to high return enterprises and not just buy any old junk indiscriminately, I wouldn't think of putting much money into it with the investment leader at 85 years of age.

What are the odds that insurance will be around in 20 years vs the income model of a fast changing technology or biotech firm? Can you imagine if it's hard to predict where insurance will be in 20 years how hard it must be to predict where technology will be? It's hard enough with old businesses not to mention new ones. I saw a list of the top 20 industries since 1932. Computers aren't even on that list, not to mention things like online travel, etc..

Me too. But I suspect that when the 10Q confirms that they bought $32 B in securities as reported, plus the PCP deal early 2016, they could be down to the $20B cash cushion. That's not happened in a while. I'd love for the media to fixate next on them not having enough cash! No talk of buy backs, elephant deals for a while, ha! If they are down to the 20 billion cash cushion, the inability to execute a buyback for a few months or a year is a real possibility as per the 2014 annual report: "However, repurchases will not be made if they would reduce Berkshire’s consolidated cash and cash equivalent holdings below $20 billion". But of course, they can always sell securities....

Perhaps you should, so people here can avoid wasting time reading anything by the author. Perhaps I am misinterpreting the quote or likely it's talking about two separate events S&P outperformance vs absolute share price? "Between June 1998 and March 2000, Berkshire Hathaway's stock price halved in value. In the process, it unwound all of its outperformance versus the S&P500 since 1984 and did much to dim the aura that had come to surround Buffett. He was forced to make a confession to his shareholders: "We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well...My "one subject" is capital allocation, and my grade for 1999 wmost assuredly is a D."" - The Real Warren Buffett.

In 1984, BRK was around $2,000 / share. $45k was first hit in late 1997... so being at 1999 was 2-3 years of draw down, not 15. Wow thanks. Can you believe I read this in a published hardcover book about Warren Buffett? Perhaps I shouldn't list the title :)

In 1999, Berkshire stock halved to 45,000 per share and the stock was at the same level as in 1984 - 15 years earlier. It had gone back for a time to a price level that wiped out all outperformance to S&P and also absolute performance. In 2008, it halved again, but was still double 1999 price and 1984 price. Another 15 years later to today, it has returned 9% per year from that 'low'. Imagine if you had bought in 1984 or 2007. Even from the low you are getting an ok 9% per year. And this is Berkshire - a supposed fortress! Markets are really volatile. Margin will kill you, you can't even add to positions. And valuation can be quite unforgiving if you get it wrong - but not as disastrous as margin if you hold for retirement.

I was just watching an old interview with Buffett and Becky where he talks about how he asked Steve Jobs if his company has more cash than he can use and if he thinks Apple was undervalued and that he never did do a buyback. Then Becky asked him why he doesn't do a buyback for Berkshire. The answer was a highly qualified IF there is more cash than HE can use. In other words, it all hinges on ideas to invest. Look at IBM which he praises. They bought back 100 billion of shares over a decade because even at 10% return dividend included there was no opportunity they judged possible to earn 15%+ returns. To some degree, no buybacks are confidence in his belief in his ability to earn a market beating return. If he honestly assesses this is not possible, then 1.2x = hurdle rate for belief in his ability to reinvest at market beating returns. Reverse engineer that number and you know what he's thinking. During the greatest crisis of our time, Berkshire BV dropped only 10%. The 1.2x limit was not in effect and Berkshire was below this and many deals were made. Arguably, Berkshire IV was still way above BV even in 2008. A few years later the buyback 1.2x level went into effect. Why would he do this? I can think of 3 reasons: One - setting up an automated buyback threshold that would transcend his retirement which he feels is getting closer Two - after the 2008 crisis, he feels that 1.2x BV is extremely cheap relative to his ability to earn a market beating return and in this environment and for years to come, this is a price level that should not naturally occur, so he will buy back aggressively. Three - at this level it is a normal form of diversification where Berkshire stock would have equal footing with any other deal, but are not mutually exclusive. 2 and 3 are opposing reasons but given his attitudes to buyback I'd be more inclined to go with 2 as the default preference until he retires is to make deals.

Why a stock price column and not an ROE or free cash flow growth % column? BV is based on internal criteria, stock price perhaps a delayed proxy in the best of times.

I thought I heard Buffett on a video not too long ago say BNSF was the top dog railroad. Best operating metrics in all areas. Not sure if this is true or not but if it is, would it command a higher premium than the other railroads?

Has anyone noticed that over a 10 year period, Berkshire has outperformed virtually every single one of their major public stock investees? Would this influence your decision to invest in Berkshire vs shadowing his holdings for your long-term portfolio?

I found this site and thought it was pretty good. Similar to valueinvestorsclub .... https://sumzero.com/headlines The headlines are free but many are quite in depth. And there are some other free services that require just registration. Apologies if this has already been mentioned here!

Regarding Warren's retirement, I suspect it would be more of a notice that within 2 or 5 years he will step back his involvement so it won't be a sudden shock event, more a graceful and well-timed exit - kind of like the Fed rate hike! Some are underestimating the value of quality assets with relatively predictable futures. If Warren decided it was really smart to own poor companies at a cheap price or high tech companies whose future was even less certain, the value of Berkshire wouldn't budge above 1x book, maybe lower. But this is not the case. 1.2x book really does seem a good deal especially as time passes and he keeps making deals while he can.

I thought the deal was for $32 billion plus/minus(?) the already 3% stake. The extra $9-10 billion represents a FCF of $2 billion. If I can buy a business that earns $2 billion free cash flow for $10 billion that seems extremely cheap. But as you mentioned, the growth would factor into that.

It'll be interesting to see who wins the race: the tortoise or the hare :) I think PSX in their presentation has stated they have some goals to increase profits in the next few years too. I was just struck how similar the valuations are yet the FCF is not the same at all.

I'm trying to understand something. PCP had 1.7 billion or so of free cash flow after capex. Phillips 66 has double or about 3.6 billion of free cash flow after sustaining capex. The purchase price for both companies is roughly the same. Say 38 billion vs around 41 billion. How can Berkshire justify paying the same amount of cash for two companies one of which has double the free cash flow as the other? Perhaps there's a lesson here but I can't see it exactly yet!

#1: What is my investment plan and goals? #2: What is my money management plan? #3: Investment checklist :)

The 1.2bv buyback seems to me a hybrid compromise between an opportunistic buyback and the stability of a dividend. It's quite interesting. As was mentioned, BV can bob up and down and it may not be worth it to the company to buy back at 1.2 as a fixed target... yet the stated policy is sort of a compromise to those who are screaming for a dividend and those who see a dividend as something to come later after all opportunities for deploying capital are exhausted. Kind of like this strategy, haven't seen it in many companies!

I'm actually thinking the figures are quite accurate except unknown what the cost of float is taken at. Berkshire does have a return on invested capital to a new investor at current prices of no more than 15%. It also has some debt, minus the almost "Free float", plus a premium to the assumed rate of the long bond for desired equity risk premium. The differential is positive if you assume this and that the quality of the earnings demand a discounting not much more than 4 or 5%. Still, I'm not entirely sure what this means. Looking at the big picture, it does seem we shouldn't expect a shareholder to earn more than 8-15% per year at current prices. That's a broad range, let's call it pessimistic to optimistic scenarios.

Conglomerates and financials seem to have some problems with these filters I guess. It does better on DCF and projected DCF with a value range of $114 to $155/share. Kind of in the 1.2x P/BV ballpark where an investor would get close to the 8-10% annual return that has been calculated by several different methods, assuming no multiple expansion.

Here's a little humour(?) from Gurufocus: "As of today, Berkshire Hathaway Inc's weighted average cost Of capital is 8.68%. Berkshire Hathaway Inc's return on invested capital is 7.11%. Berkshire Hathaway Inc earns returns that do not match up to its cost of capital. It will destroy value as it grows." http://www.gurufocus.com/term/ROIC/NYSE:BRK.B/Return%2Bon%2BInvested%2BCapital/Berkshire%2BHathaway%2BInc

quality intangibles are more valuable than gold, literally.

Perhaps he sees refining as a good business in a sustained low oil price environment. For example, what I heard from the business in Canada, oil prices are 1/2 but gas prices at the pump not that much because the refineries can keep their profit margins - also it's a more value added product than just oil. Seems Berkshire's philosophy with lots of industrial acquisitions is the thought that value-added products/services in the supply chain can command better margins and are overall a superior business than pure commodity plays.

I am looking for public stocks that meet these two criteria (Berkshire excluded)! 1. A genius - an extremely talented capital allocator with unusual skills. Not just talking the talk but literally being able to execute above the rest. 2. A great asset or collection of assets with great returns. A quality jewel that you can feel very comfortable owning without worrying about it going away or decreasing in value and in fact commanding or likely to command a premium for that quality. To be honest, I can't really think of anything outside of Berkshire. Yes #2 alone could be nice but combine it with #1 and you have a dynamite investment at the right entry price. Maybe Bruce Flatt at Brookfield but I'm not so keen on the profit potential of the assets owned and their outstanding quality.