mpauls

FOR THOSE INTERESTED I GOT THE AUDIO TO WORK. I'LL BE STARTING IT FROM THE START IN 10 MINUTES. I'LL REPLAY ANOTHER DAY AS WELL. Munger Harvard-Westlake School 2010 http://mattpauls.com/info/?page_id=163

That was my intention, but I've been unsuccessful. There was too much of an echo. I'll see about doing it hopefully tomorrow.

I'm having some issues with the server. I still plan to do it tonight. I'll update soon.

I'm going to be providing a live stream shortly that may be of interest to some of you. Stay tuned for a link.

Hmm, sounds very familiar: http://seekingalpha.com/article/203314

I'm convinced that Li Lu is first in line to replace Buffett & Munger's role as investment officer. Sokol the likely CEO at this point. More details to come once I compile notes.

Ok, I see, I didn't actually read through the entire report. I now see you weren't advocating this method. I didn't have a chance to read it completely, so please which method were you advocating?

That would be interesting if he explicitly told you how to value float by use of a formula. I've never heard or seen him do such a thing, but I don't subscribe to OID and maybe he does describe it there, but it would surprise me a great deal. The flaw: Within your report, notice that your rate of growth is always less than your discount rate. Though convenient, in reality this is not always the case, which invalidates the calculation because the value would then become infinite.

Quite good, but I'd rethink how you value float.

As with a well developed crossword puzzle, you can propose any word as the solution, but there is only one word that solves the puzzle in all its forms. Given two or more numbers, you can arrive at several different ways of calculating one from the other. I'm not saying there is only one way to value float and as with all business valuations there may be several ways to arrive at the same conclusion. However, having considered the problem in great detail, I have only found one method of appraisal that I consider acceptable. It's both unique and convincing, but also confusing. But to the point, I just don't have any interest in sharing the details of my approach. I don't think I'm alone, and if you look at all the people you admire, except maybe Benjamin Graham, you'll have a hard time getting the underlying logic behind a purchase. You'll have plenty of hints, but I know no one that spoon feeds the details of their approach. I'm sorry if this sort of response is irritating, but everyone on this board has enough intelligence to arrive at the same conclusions that I have, you just need to take the time and think it through, but don't think you'll sleepwalk your way into it.

He that would live in peace and at ease must not speak all he knows or all he sees.

I should have labeled the chart. Indeed this is past 10, 15, & 20 yrs.

$47b. On page 21 is not for BNSF alone. Notice Utilities = 13.9. (BNSF earmarked cash & 22.5% equity $14.6b) = 28.5 & (BNSF 100% consolidated) = 47.9, both include the 13.9b utilities figure. 13.9 + 14.6 = 28.5 13.9 + 34.0 = 47.9 BTW, from page 9, "In 2011, Burlington Northern will be placed under “Utilities” for financial reporting purposes. To adjust the 2010 annual report for this, I transfer Berkshire's 22.5% Burlington Northern holding to the utilities operating unit also adding thereto the $8 billion in cash earmarked by Berkshire Hathaway Inc. That is, a total of about $14.6 billion."

Also to the question, Manuf. Service, Retail at $16b and not $30b? $30b includes intangibles. Read the wording carefully, "Although, currently suffering from the global economic downturn, I am still of the opinion that Berkshire Hathaway’s non-insurance operating businesses command a liberal premium over basic net worth." Notice I said premium above net worth. The $16b isn't what I think their worth, its a conservative bottom value. Moreover, I also mention early on, "This is not intended to be a complete explanation of Berkshire Hathaway’s intrinsic value, rather, it is meant to provide a clearer understanding of complicating factors and how to adjust them sensibly." I don't think Manuf. Service, Retail is a very complicated calculation. But the fact remains, Manuf, Service, Retail are currently not performing very well compared with the past, but also compared with what can be reasonably expected in the future. That said, there is still plenty of uncertainty and were these businesses sold today he wouldn't get what he would under normal economic conditions.

In response to the float calculation, that's something I simply don't openly discuss, though I assure you it was not pulled out of the air. With respect to BNSF, I don't recall stating $47b. I did however mention that I thought disputing Buffett's purchase price would be ridiculous. That is, I took BNSF at cost. If you provide specifics I'll see about clearing up that number for you, and it's not impossible that I made a typo, but I'd be surprised.

This will be published around the web over the next few days.

Yikes Scratch that, though they arrive at a reasonable number, they botched the valuation.

I skimmed through it. It looks pretty good and it appears as though they came to pretty much the same conclusions I did, which will appear in a report I'll be sharing in a few days. cheers

You ask about small investors: If you have a broker, call and ask about a bond issue of interest to you. What you'll likely find is that you can't afford to participate. If you can, it's almost certainly on very unfavorable terms given the nature fixed income trades and the small investor's lack of good pricing data. Best of luck to you.

This prospectus, the fifth in a series created by Grant’s Interest Rate Observer Attached below if you're registered.

In part: To our Shareholders: The consolidated normal operating income (i.e., after unusual operating income and all net gains from sales of securities) for the calendar year 1985 decreased to $8,347,000 ($1.17 per share) from $10,060,000 ($1.42 per share) in the previous year. Consolidated net income (i.e., after unusual operating income and all net gains from sales of securities) increased to $51,541,000 ($7.42 per share) from $23,656,000 ($3.32 per share) in the previous year. A highly unusual capital gain of a non-likely to recur type, from disposition of General Foods stock, caused most of the net income in 1985. The table below gives the particulars. Wesco has three major subsidiaries, Mutual Savings, in Pasadena, Precision Steel, headquartered in Chicago and engaged in this steel warehousing and specialty metal products business, and Wesco financial insurance company, headquartered in Omaha and currently engaged in the insurance business. Consolidated net income for the two years just ended breakdown as follows (in thousands of dollars except for per share data): (Table omitted) This supplementary breakdown of earnings differs somewhat from that used in audited financial statements which follows standard accounting convention supplementary breakdown is furnished because it is considered useful to shareholders. Mutual savings Mutual savings "normal" net operating income of $4,342,000 1985 represented a decrease of 4% from the $3,476,000 figure the previous year. Separate balance sheets of mutual savings that year in 1984 1985 are set forth at the end of this annual report. They show (1) total savings accounts rising to $269 million from $228 million the year before, (2) a very high ration of shareholders equity savings account liabilities (probably the highest for any mature US savings and loan association,) (3) a substantial portion of savings account liabilities offset by cash equivalents and marketable securities, (4) a loan portfolio (mostly real estate mortgages) of about $83 million at the end of 1985, down 12% from the $95 million at the end of 1984, and (5) favorable effects of securities gains and other unusual gains and fluctuations, which caused network to decline only $4 million in 1985 despite payment of a dividend of $14 million to the parent corporation The loan portfolio at the end of 1985, although containing almost no risk of loss from the faults, or a fixed average interest rate of only 7.6%, probably the lowest for any US savings and loan association and far below the average interest rate which now must be paid to hold savings accounts. However, as the loan payoff pace intensified and interest rates declined sharply in 1985, the unrealized appreciation in the loan portfolio became approximately offset by unrealized appreciate in mutual savings interest-bearing securities and preferred stocks. As pointed out in footnote 13 to the accompanying financial statements, the book value of Wesco's equity Mutual Savings ($57.6 million at December 31, 1985) overstates the amount realizable, after taxes, from sale or liquidation at book value. If all mutual savings assets, net of liabilities, were to be sold, even pursuant to a plan of complete liquidation, for the $57.6 million in book value reported under applicable accounting convention, the parent corporation would receive much less than the $57.6 million after substantial income taxation imposed because about $47 million above what is designated shareholders equity for town purposes is considered bad debt reserves for most tax purposes. There is, however, a hidden plus value in mutual savings. The foreclosed property on hand (mostly 22 largely oceanfront acres in Santa Barbara) has become worth over a long holding-period much more than its $1.5 million balance sheet carrying cost. Reasonable, community sensitive development of this property has been delayed over 10 years in the course of administration of land-use laws. But we are optimistic that an end to the delay is near and that the Santa Barbara and Montecito communities will be very pleased with the development now likely to go forward. This development will contain 32 houses interspersed with large open areas. Mutual savings plans to make the development first rate in every respect, and unique in the quality of its landscaping. Balancing all merits and demerits, Mutual Savings, as it has been managed under present conditions by the writer and others, is no jewel of the business from the shareholders point of view, mutual savings and points are: (1) high asset quality and sound balance sheet; (2) immaturity matched of interest-bearing assets and liabilities, which makes risk of insolvency near zero, whatever happens to interest rates; and (3) a deserved reputation for high quality service to account holders, achieved at below average cost to the institution in an efficient one-large office operation, as distinguished from many small branch offices operations. Mutual savings bad points are: (1) all recent growth and savings accounts, considered on incremental affects basis, has been lost business because interest and other costs incurred exceeded income obtained by employing the proceeds in short-term interest-bearing assets; (2) a burdensome position under the FFLIC account insurance system causes payments of ever higher amounts into the system to help bail out more venturesome Savings and Loan associations which become insolvent, with the payments being required despite the fact that mutual savings and poses almost no risk on FSLIC; (3) "normal" net operating income is below an acceptable rate of return on present book value of shareholders equity, was such returned reaching an acceptable level over reason years only with help from securities gains and other unusual items; (4) it would not be easy to leave the savings and loan business, should this course of action ever be desired, without a large income tax burden of a type not apply to corporations other than savings-and-loan associations; (5) new regulatory structure of the savings and loan business creates a competitive situation in which it is hard to make respectable profits through careful operations; and (6) management has not yet found an acceptable remedy for any of the previously listed bad points, despite years of trying. Moreover, comparisons of post-1984 financial results for mutual savings with results for many other and more typical savings-and-loan associations in California league mutual savings looking inferior, to put it mildly. As interest rates went down these other associations, which have greater financial leverage and operated less fearfully than mutual savings during former high interest periods, came to have a loan and investment portfolios which (1) now are worth more on average than book value and (2) now produce a high return on book value of shareholders equity, after deduction of operating expenses and interest to account holders at present rates. Any Wesco shareholder who thinks mutual savings has any expertise in predicting and profiting from interest rate change ought to look at the 1985 record and despair. Despite the fact that some other savings and loan associations did much better after 1984 than mutual savings, and are now much better poised to report good figures for 1986, we plan to continue operating only in ways acceptable in our own judgment, and is abating as a consequence widely fluctuation and sometimes inadequate returns. In the future, however, mutual savings will make and purchase more loans. Now that mutual savings old mortgage loans have been declined in amount an increase in market value (the market value increase being caused by both the decline in generally prevailing interest rate and by shortening of remaining loan life,) new loves will be added as seems wise, with a target that 60% of assets be in housing related loans. The first new direct loan in some time, and adjustable rate mortgage with no cap on future interest rate changes but with an extremely low spread" for the lender will shortly be closed. We are not at all excited by our prospects as we now make housing loans of this type, lot we went to get some renewal of direct mortgage lending underway. With assets not employed in direct real estate lending, mutual savings continues not only to make payments to as FSLIC. far in excess of fair charges for risks imposed on FSLIC but also to employ large part of total assets in short-term loans to the Federal home loan Bank. These practices are prosocial but will continue to reduce profits. Mutual savings also continues to support the Federal home loan Bank Board in its efforts to change the present rules of the savings and loan business to augment average soundness of FSLIC ensured associations. We retain our opinion that the present rules, despite some improvement in 1985 through wise efforts of the Federal home loan Bank Board, are unsound, of the country's point of view. Too much latitude has allowed financial "swingers" to grow as they gamble, through use of account guarantees from FSLIC, an agency of the US government, while they offer whatever it takes in interest rates to attract more accounts. With money being the ultimate fungible commodity, it seems to us that the rules create a super competitive, commodity type business, in which (1) economic law probably destined most careful associations, like other fungible commodity dealers, to realize very modest returns on shareholders equity over extended time periods, yet (2) good financial results can nonetheless usually be reported in each near-term period by managers in charge through aggressive deposit expanding lending and investing measures which increased risk, while (3) the importance and rewards of managers, who usually have little downside risk as owners, are tied mostly to institutionalize size and recently report numbers. With managers mostly being non-owners, a sort of Greham's law of competitive yet the positive shirt banking, "bad loans dried out good," tends to work with extra forces. Managers fear being left out of whatever activity allows competing managers to report higher profits while bidding high for deposits. We see now reason for assuming that ethical, intelligent managers in the savings and loan industry are immune from effects similar to those which cause similar managers of all major US banks to place significant portions of assets in now regretted loans, rather than stand apart from the crowd. If our diagnosis is correct, a lot of serious trouble lies ahead, perhaps far ahead, for US savings and loan associations. While present rules and practices have a positive side in causing satisfaction of almost 100% of demand for those housing loans which are sound at the prevailing interest rate, this accomplishment is accompanied by much unsound lending and by much unsound investment in junk bonds and other assets unsuitable for highly leveraged, federally insured, deposit taking institutions. The system design in place would probably be a flunking design in an engineering course, where the emphasis would be on preserving the integrity of an essential system by a margin of safety, by being content with rules which (1) cause satisfaction of say, only 95% of requests for sound credit extension and (2) forced more conservative conduct on banks and savings and loan associations. The present design, we think, would probably also be a flunking design in a surgery course, where the wise practices to remove some healthy cells along with cancerous cells, based on margin of safety principles. We hope we are wrong about the present design of the savings and loan system, but we fear increased, widespread adversity, ultimately reaching housing borrowers and would-be-housing-borrowers, whose interest we consider important. Any such adversity would probably be followed by changes in the rules. No doubt, our judgment as to the probable temporary nature of present savings and loan industry structure practices has helped deter us from direct lending of a conventional sort which otherwise would have occurred. Our attitude, right or wrong, during recent tumultuous changes in the savings and loan industry, has been roughly that of the French grandfather who applied when asking he did in the great Revolution: "I got through." We also think something good could eventually happen to mutual savings because future trouble in the savings and loan business may create opportunities worth seeking. Precision steel Wesco's Precision Steel subsidiary; located in the outskirts of Chicago at Franklin Park, Illinois, was acquired for approximately $15 million on February 28, 1979. The price was roughly book value for a company which carried its inventories on a conservative LIFO accounting bases and which contain significant cash balances. More important, the company had breached its position from a modest beginning through maintenance of sound, customer oriented business values inculcated over a long time by a gifted founder and his successors. Precision steel owns a well-established deal service business and a subsidiary engaged in the manufacture and distribution of tool room and other specialty metal products. Precision Steel's businesses contributed $2,101,000 to "normal" net operating income in 1985, down 1% compared with $2,034,000 in 1984. Such a modest decrease in 1985 profit was achieved in spite of decrease sales (down 7% to 51 nine 124,000). Under the skilled leadership of David Hellstrom, Precision Steel's businesses are now quite satisfactory, taking into account the financial leverage put into Wesco's consolidated picture incident to their acquisition. Shortly after Wesco's purchase of Precision Steel a substantial physical expansion of steel warehousing facilities was authorized, involving a new building in Charlotte, North Carolina. The new building and the whole North Carolina operation are now very successful, contributed $9,140,000 in 1985 sales and profit margin higher than after veiled in a long-established auto headquarters facility. Precision Steel's businesses, despite their mundane nomenclature, are steps advanced on the quality scale from mere commodity type businesses. Many customers of Precision Steel needing dependable supply on short notice of specialized grades of high quality, cold rolled strip steel, reasonable prices, technical excellence in cutting to order, and ?remembers? when supplies are short, rightly believed they had no fully comparable alternative Precision Steel's market share. Indeed, many customer applications removed from Chicago and Charlotte (for instance, Los Angeles) seek out Precision Steel service. Wesco remains interested in a logical expansion of precision steals businesses using available liquid assets. Wesco Financial Insurance Company A new business was added to the Wesco group in 1985, In co-venture with West Coast 80% owner and ultimate parent corporation, Berkshire Hathaway Inc. With the enthusiastic approval of all Wesco's directors, including substantial Wesco shareholders and Peter's in Casper's family, without whose approval such action would not have been taken, Wesco invested $45 million in cash equivalents in a newly organized, wholly-owned, Nebraska chartered insurance company, Wesco financial insurance company ("Wes FIC) The new subsidiary West FIC then reassured through another Berkshire Hathaway insurance Co. subsidiary as intermediary without profit 20% of the entire book of insurance business of the long established Fireman's Fund Corp. listed on the NYSE. Wes FIC thereby assumed the benefits and burdens of Fireman's funds prices, costs and losses under the contract covering all insurance premiums earned by Fireman's fund during a four year period commencing September 1, 1985. The arrangement puts Wes FIC in almost exactly the position it would have been if it, instead of Fireman's Fund, had directly written 2% of the business. Difference in results should occur only from the investment side of insurance, as Wes FIC, instead of Fireman's Fund, invest funds generated from float. Wes FIC's share of premiums earned in 1986 is expected to be over $60 million.

I'd just say read the annual letters of the really good insurers, you'll get plenty of worth while hints there. Then just think about it on your own. onyx1 mentioned a good resource in http://www.iii.org

I've been dragging my feet, but will be finalizing this years valuation by the end of the week. If there's anything you guys want specifically addressed, now's the time to mention it. To the extent that any of you would like to publish or otherwise offer it, provide desired format. Cheers, mpauls

I suppose several members of this board will enjoy the material on this site: http://www.khanacademy.org/ Just scroll down the page slightly. The several hundred, possibly a thousand topics are links to very concise very high quality videos. Enjoy

The best article I've read on the subject of health care: http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande?currentPage=all