shalab
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Posts posted by shalab
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Yes - I think energy is generally tied to book value somewhere in the 1.6 - 1.9 times book. Insurance is another that is typically tied to a multiple of book - Gieco is probably an exception here.
There are several others that aren't tied as much - examples:
Lubrizol
Van Tuyl
Iskar
Marmon(?)
Fruit of the Loom
Brooks shoes
Sees candies
Retail(?)
PCP when it gets done
So I think the assertion of IV deviating to the higher side of book over time is correct.
BNSF was of the best investments that Buffett made in recent years and it was an opportunity that came about from the 2008 bear market. I do not think you can extrapolate such results onto all other investments. Energy is a good example.
Vinod
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Good discussion overall thanks guys for all the different opinions.
I think the IV is deviating from book more than 1% a year.
If we look at BNSF alone, the price on books is 34B. It is worth double that now in five years - even if we say it is worth $30B more, it has contributed to roughly 10% increase in market value at today's market cap. So 1.9% increase in IV just from BNSF. This is excluding the retained earnings that is paid out as dividend to the parent.
This doesnt even include other businesses which have increased in value since.
longinvestor,
If you start with year end 2014 and use book value for measuring performance to say either year end 2019 or 2024, I am on.
Vinod
After 22 pages of discussing the fact that BV is / has become a poor proxy of BRK's IV, why would I do that? Because of the nature of BRK today...they keep adding value to the coffers regularly which in turn contributes to earnings which is increasingly retained and adds to IV but BV never gets revised upwards. The whole reason why BRK is misunderstood today. Why WEB has started measuring stock price in the table for the very first time. It is clearly explained on the very first page of the Annual report.
My bet is self-explanatory. It is based on stock price which over time converges with IV. I want to go back to the year 2010 for a very specific reason. There is a whole new BRK developing since then, the world is late to catch on.
"Berkshire has not gotten that worse". That is my bet, and it is in stock price growth.
I disagree with your interpretation of Buffett's comments in the annual report.
The context for that discussion is Berkshire's failure to meet his 5 year test. That Berkshire as measured by book value would beat S&P 500 total return over a 5 year period as defense for retaining all the earnings.
He was saying book value as in "IV being roughly equal to book value" was a good measure early on but that now IV is much higher than book value.
He never said that IV is unrelated to book value. In fact, he lays out when he thinks Berkshire is attractive and when it is overvalued entirely as a multiple of book value later on in the annual report.
So all he is saying is we need to use a multiple of book value now and not just 1x book value.
I do not disagree that IV and MV would converge over the long term. But Berkshire is undervalued now and over 5 or 10 year period changes in valuation would add or detract to returns just due to end points.
Growth in IV I believe would be much closer to growth in IV. I do believe that IV is growing at a slightly faster rate than BV but that difference is less than 1% annually. So book value growth remains a convienent and reasonable method to estimate growth in IV.
As I said before, I root for you to be right for my portfolio sake.
Vinod
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I read the post by oddball with interest, sent him a PM as well. He has some very good points but I think he has overloaded the term leverage. However, I agree with original mungerville's articulation of scale and asymmetric bets - it is not leverage. There are some other mental models involved here - some are articulated in Poor Charlies Almanack - but it is not just leverage that is at play.
I know of mechanical leverage, financial leverage and operating leverage. However, I don't think the analogy of sizeof AUM or scale to leverage is correct, there are advantages of scale which IMO is different than leverage.
Essentially the concept of leverage ( as I imagine ) is akin to the one noted here which is what Archimedes articulated a while back. It applies to different fields but the basic principle is the same.
http://en.wikipedia.org/wiki/Lever
Operating leverage is vital. To go back to Nate's comments on the lawn mowing business. No matter how good you are there is little scalability. You probably can't charge much of a premium for doing a better job. A barber or beautician is in a similar situation. The person who gains wealth looks for scalable businesses with fat margins. Asset management, software, franchising, royalties, etc. I often hear people say I should start x business and it almost always is a business with little upside beyond a regular job. Most of the time it is much worse - more time consuming, no benefits, and less pay. No matter how hard they work it is marginally profitable.
I agree. You need scalability, otherwise why bother - the upside will be relatively limited. What you really want is not leverage as that usually cuts both ways, instead you want asymmetric pay-offs like call options. Putting effort into a scalable business is asymmetric: your down side is limited to the opportunity cost of your time while your upside is huge. A serial entrepreneur trying to make a bunch of very asymmetric situations successful should eventually get a very large pay-off.
I have a good friend/business partner. He isn't rich, but don't talk to him about something that can make a million or two, he doesn't get out of bed to make a million, his head space is always "Ok, my minimum goal is $100 million by xx date, can this get me there". He is very risk averse yet very focussed on this huge upside goal. He wants big scale with no to limited downside. That's basically all he thinks about.
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Jeff Bezos security detail costs 1.6 million/year though salary is fixed at 81840.
Jeffrey P. Bezos
2013 $81,840 $ — $ 1,600,000 (2) $ 1,681,840
Chief Executive Officer
2012 81,840 — 1,600,000 1,681,840
2011 81,840 — 1,600,000 1,681,840
$300,000 sounds pretty cheap compared to Michael Dell who pays $2.7 million for his security.
Maybe because BRK shareholders are happy while there are plenty of ex-DELL shareholders who got screwed when Dell took DELL private!
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Anyone has opinions on fasting? I have heard fasting has many benefits, the wikipedia article covers it:
http://en.wikipedia.org/wiki/Fasting
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Good way to reason, it would be good to hear from Paleo diet aficionados as I think it does include eating good quantity of fruits.
I guess is too much of anything is bad - including sugar or fats.
Ornish diet suggests low intake of sugars and fats to reverse heart disease. It is also clinically proven to work.
Surprisingly, eating potatos only helped this person reduce cholesterol and blood glucose levels.
http://www.20potatoesaday.com/
After all that you've done for us in the FNMA/FMCC thread, I look forward to all your insight on this topic, Merkhet!
I have little to no insight on this topic other than to say that we should all probably be eating less sugar. In Jacobi-esque fashion, we could ask ourselves the question of "Should we be eating MORE sugar?" and then move backwards.
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From the annual letter as predicted by Sanjeev:
My and my family’s focusing on the long term necessarily requires the next generation’s involvement and familiarity with the management of Fairfax, so this year we have nominated my son Ben (a successful portfolio manager in his own right) as a director. None of my children are officers or employees of Fairfax, but involvement at the Board level will ensure the continuation of Fairfax’s ‘‘fair and friendly’’ culture which is such an important factor in the company’s success over the long term.
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Thanks for sharing
can you share a bit more about your last 10 years and plans for the next 10 or 20?
much appreciated!
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Just started reading it...
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I don't question Prem on dividends, it is there and a bunch people own stock for that reason. The dividend is not increasing.
+1
I disagree. I like the divvie and would actually like to see it raised to 3% but don't think it will happen soon.
I can use that money for whatever purposes I see fit or reinvest in FFH shares if I want to.
Shareholders have different situations, objectives and time horizon.
How do you rationalize the avoidable capital destruction?
If anything, I feel like a stock dividend would make more sense. Then the people that want dividends can sell in a more tax efficient manner while maintaining the same number of shares, and the folks that don't want the cash and related tax inefficiencies forced on them can do nothing. I can see multiple reasons this wouldn't happen though.
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JPM was a big beneficiary in the TARP process - they got WaMu for negative good will by the govt. This was a matter of controversy and was in the courts. If one looked at the court filings, JPM didn't come across as ethical. This again is going at the qualitative, not the quantitative aspect.
I'm kind of shocked by the general sentiment. JPM's grown tangible book value per share from $23 to $45 from 07-14 while paying fairly sizable dividends over that period. I can't see how you would say Jamie hasn't navigated the company through the storm beautifully. And when you judge each of the company's two main segments (it is a retail and investment bank) independently relative to its peers, its performance has been best in class.
You do have a point Nick. I (we) may be getting jaded by recent events that make bad press.
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Good point about funds having hidden gains, but with index funds, generally this is not the case. Also, typically a stock reaches IV in about three years. One can hold the index fund forever and just pay taxes on the dividends..
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Wanted to throw this up for discussion, when one invests in an index etf or mutual fund( say IVV or VFV that mimics SP500), one gets tax benefits that remain till the money is withdrawn. (Even then, it can be mitigated if the income is below say 75K ). Custom stock picking seems problematic from tax efficiency standpoint as most of the stocks have to be sold once they reach their IV which is a taxable event. It looks like custom stocks should outperform the index significantly (atleast 5% or higher) for it to be worthwhile...
cheers!
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Now we need Sanjeev, the burger connoisseur to do a taste test ;D
S1 filed here:
http://www.sec.gov/Archives/edgar/data/1620533/000104746914010114/a2222577zs-1.htm
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Starting the thread on best ideas for 2015:
BH - catalyst, activists replace the board. Alternatively, BIG buys back shares to get more control or both. One or both positive outcomes for the stock.
LUK - cheap and below book
ALLY - still below book
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Hi Gio/Ragu and other BH shareholders,
I got a small position in the last couple of days, how about a share holder proposal to terminate this? I also like Biglari to give up his CEO position and he becomes a CIO.
Abolish this:
On January 11, 2013, Biglari Holdings entered into a trademark license agreement with him, stating it would pay Biglari 2.5 % of the company's gross revenues for five years under these conditions:
If there is a change of control at Biglari Holdings
If Biglari is terminated from the company without cause
If the CEO/chairman resigns from his employment due to an involuntary termination event
cheers!
shalab
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The median stats per household is even worse in the U.S compared to Canada. U.K and Canada are also roughly on par...
http://www.freedomthirtyfiveblog.com/resources/median-and-average-net-worth
Median Net Worth
Per Person in Canada $81,610 2012 middleclasspoliticaleconomist.com/2013/06/us-median-wealth-only-28th-in-world.html
Per Household in Canada $243,800 2012 http://cponline.thecanadianpress.com/graphics/2014/static/cp-median-family-net-worth.jpg
Per Person in the US ($USD) $38,786 2012 http://www.middleclasspoliticaleconomist.com/2013/06/us-median-wealth-only-28th-in-world.html
Per Household in the US ($USD) $77,300 2010 http://www.federalreserve.gov/Pubs/Bulletin/2012/articles/scf/scf.htm
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Al, I haven't tried government work myself - for good or bad ;). It may be mind numbing for high iq folks like yourself but the rewards seem compelling.
I have heard of people reading novels at work (might as well run investment management business from work ) and the benefits given to the city employees are far better compared to what is available in private sector.
Here are some articles
http://time.com/money/3182889/how-to-be-a-millionaire-and-not-even-know-it/
Some of the richest retirees are public pension millionaires:
http://www.mainstreet.com/article/retirement/some-richest-retirees-are-public-pension-millionaires
(2) Following along what Munger said, do boring jobs. Government jobs pay very well if you look at the entire time line including great vacations.
Any job where the unions still have a say is very good - this is becoming rarer in U.S. It should still be available in Canada.
(5) Can work very well - people care where they eat.
2) For the independently minded this option resembles hell. I have some experience with this option.
5) Restaurant, Terrible hours, work load, profit margins, labour problems etc. unless you have vietnamese and chinese family members who are working for nothing.
Shalab, Dont endorse it until you try it. Alot of government work is hell. Some is good but not much. I have worked in government as a professional and it is mind numbing. Most of the people I know can name their retirement date and its years or decades away. There is more to life than being beaten into mediocrity until you collect a pension. :-).
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Some other things worthwhile:
1. Working for someone else - low risk and no capital is needed.
2. In the above, government job is the best with limited hours and pension/health benefits
Also - in many places you can retire at 50 with full benefits and pension
3. Local newspaper delivery
4. Pizza shop
5. Restaurant
6. Handyman if you are mechanically inclined
7. Writing blogs - better yet, moderate one and have others write
There are many others money mustache recommends:
http://www.mrmoneymustache.com/2013/07/25/50-jobs-over-50000-without-a-degree-part-1/
http://www.mrmoneymustache.com/2013/08/05/50-jobs-over-50000-without-a-degree-part-2/
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Who in your opinion is the best young investors around? The person has ( or is going to have soon) a vehicle that is accessible, under 50, financially independent...
A few names that come to mind:
Sanjeev & Alnesh
Sham Gad
Biglari
Gio ( if he opens up Gio holdings )
Packer(?)
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Congrats - impressed by the depth of your knowledge in ALS.TO
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Given the bull market in stocks and bonds, rising house prices and ever increasing wealth - wanted to get a pulse of the board on their spending habits.
May be there is a thing or two for us to learn from the board about spending and saving.
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Gio - checked out your for profit website, looks impressive. (though I had to use google transalte). You should consider listing your firm on over the counter market - like PGNT, SEDN etc. You get to be public and given your age, ethics and returns - I am sure a bunch of people will invest with you.
OTOH, looks like 37% of the people that took the net worth poll are millionaires - pretty impressive.
P.S: The U.S average for millionaires as a percent of the population is 4.2%
just curious, what kind of business did you set up? Or what kind of industry if you dont want to be specific.
Don’t mind at all! Why should I?! Wasn’t Ben Franklin who said “Be just and truthful to anyone, and don’t worry what people know or think about you”?... Anyway, something similar! ;)
I have nothing to hide. And therefore don’t bother to.
Actually, you find the link to both my operating companies (for profit education and civil engineering services) in my Forum Profile. Then I have a third company that gathers the free cash of the first two and invests it (or at least tries not to throw it away!! ;D ;D).
Gio
1.2x P/BV entry point
in Berkshire Hathaway
Posted
Vinod - I am a fan of your posts and analysis. I know you have studied BRK in depth, so keen to know the reasoning behind the gap not being more than 1%. The long term difference and the shorter term difference between the two are very interesting.
For fun, I ran the numbers on book value growth and market value growth. The numbers are interesting:
Case 1:
For the full 50 year period. The market value growth has exceeded book value growth by 1.79% per annum.
Case 2:
First decade of Berkshire:
Book value growth outpaced market value growth by 2.1% per annum.
Case 3:
Second decade at Berkshire. Market value triumphed book value by a whopping 8.4% per annum.
Case 4:
Market value beat book value by 5.8% per annum.
Case 5:
Book value beat market value by 2.6% per annum in fouth decade.
Case 6:
Book value beat market value by a slight 0.2% per annum in the fifth decade.
Case 7:
In the last two decades, book value growth has beat market value growth by 1.36% per year. An anomaly is the last five years where market value has beaten book value by 5.7% per year.
Case 8:
The next decade - looking at the closing prices of Berkshire shares and correlation to book value, the future looks definitely positive for the berkshire investor. If the widening of the gap from book value to market value is recognized by the market, things should get even better.