ERICOPOLY

If it is is "business" then why did he not buy these shares on the open market? The next time he buys a subsidiary using BRK shares as currency, he can reassure the seller that his/her heirs will be able to unload them upon death. Classy way to treat the people -- just like agreeing to never trade away the company purchased. This cultivates better transactions in the future by showing the world that any business owners willing to sell their company to Berkshire will be treated well till death do us part. Yes, I can see that perspective, as long as it was someone who sold their business to Berkshire. Do we know if that was the case here? Was it Al Uletschi's estate? Cheers! True, I did make an assumption based on the rumors that this was his estate.

Ericopoly, Doesn't the estate still need to pay estate tax to the govt? Yes. However, I don't know how much. The guy should have put the shares into a GRAT.

If it is is "business" then why did he not buy these shares on the open market? The next time he buys a subsidiary using BRK shares as currency, he can reassure the seller that his/her heirs will be able to unload them upon death. Classy way to treat the people -- just like agreeing to never trade away the company purchased. This cultivates better transactions in the future by showing the world that any business owners willing to sell their company to Berkshire will be treated well till death do us part.

Yup. Even if the tax rate is 70% on income/dividends you just need a plan, like Warren did... you know, back when he started Berkshire when the tax was 70%. No, you can't do a Personal Holding Company to hold your passive investments -- you'd be hit with the undistributed profits tax. A few things your holding company needs (to avoid the Personal Holding Company label): 1) you need to hold your passive investments in financial subsidiaries (insurance companies will do). 2) you need other shareholders -- BRK passes this test Not sure if there were other criteria, but there you have it. Take away the insurance subs and have Warren & Charlie as the sole shareholders and BRK would either have to pay a dividend or get slapped with the undistributed profits tax. Nice job Warren! Oh yeah, and you guys thought Warren managed the money of his partners "for free" 8) Without you guys, he'd be paying those taxes. That's his management fee.

Complete disconnect in what you are saying. Not only did he pay more by not buying in the open market, the purchase provides a huge tax windfall for someone who obviously does not need one. It wasn't business...it was charity for a long-time shareholder! The GE, GS and BAC deals were business...I have no problem with that. Cheers! The tax windfall was that at the time of death the US government resets the cost basis to present market value. Thus, all the BRK shares can be sold without any taxes at all. Warren really had no hand in helping anyone out here -- except that if he had instead paid a cash dividend then some shareholders would owe tax on the dividend. So he managed to return cash to all shareholders in a tax-efficient manner. The higher dividend tax never matters when you instead just buy back shares, eh Warren?

Loopy says he likes it up on top Yes he knows if he ever lets go The pretty machine will swallow him whole

I was thinking about the Marquis Jet Card -- it's priced based on 25 hours to be used over 18 months. It doesn't have to be a jet though -- in fact, there are many smaller airports (short runways) that I want to fly into that a jet just can't do. My father had a Mooney that he kept at Palo Alto and we went camping all the time -- Hoopa, Lake Pillsbury, Eagle Lake, Truckee, Half Moon Bay. I'm just not confident that I would make a responsible pilot -- but maybe if I can find a retired Navy pilot living on a pension, and offer him some kind of deal where I pay him more than he could make in the Navy reserves, promise of no armed conflict, and he just needs to be on call (within respectful limits). Then we can just rent a plane from the local flying club when we want to go.

My father married an assertive strong-willed woman and I did the same. They are both Amazon women. I will never be free. I have money but I have no real decision making power.

One of the shows I always hated was Lifestyles of the Rich and Famous. Champagne days and caviar dreams. Yuck! That was a very tacky show. At first I was mentioning NetJets metaphorically, but since moving to Santa Barbara I'm finding it to be practical (albeit very, very expensive). The airport here is awesome but it just doesn't fly directly to many places -- everything is a connecting flight. And I'm terrible at planning -- if it snows in Tahoe, I want to be able to make a Thursday night decision to take the kids skiing for the weekend. That means picking them up at school at noon, driving 10 minutes across town right to the plane, getting on, and being in Truckee 1 hour later. Driving to Truckee from Santa Barbara is a non-starter. Flying commercial means getting a connecting flight in Los Angeles and then on to Reno, then we're still at least another hour from Truckee if we're lucky to get our bags right away. So it's like a 4 or 5 hour trip probably counting the connections. Maybe 6 hours including early checkin with security and all. Compare that to just 1 hour on NetJets. Move to SF, you can drive to Tahoe in 3 hours, a few friends do this every other week during the winter. Oh to have been a fly on the wall listening to me venting and fuming with frustration when I told my wife that I wanted to move back to Los Altos Hills where I grew up, and her digging in her heels with refusal to live anywhere within close driving range of my parents. So I lost that one and now we're isolated from all of the NorCal locations that I grew up loving. But we live in a nice spot -- really nice. It's just too long of a drive from anywhere else.

My advice is to figure out who knows what they are talking about, listen to what they say, and use your reasoning and logic to determine if and when it is time to buy. All the time gurus discuss their holdings and ideas. The information is generally there but you have to buy what makes sense to you after looking at the logic. Buffett talks about fat pitches but I think that's because he is a major league player. I'm not, so I look for the "coach pitch/t-ball" plays.

do you have a pointer to the original speech/video? No. But I'm certain that it was Benmoche and that he said it. It was in an interview that I saw a clip of. It was never discussed on this board before.

One of the shows I always hated was Lifestyles of the Rich and Famous. Champagne days and caviar dreams. Yuck! That was a very tacky show. At first I was mentioning NetJets metaphorically, but since moving to Santa Barbara I'm finding it to be practical (albeit very, very expensive). The airport here is awesome but it just doesn't fly directly to many places -- everything is a connecting flight. And I'm terrible at planning -- if it snows in Tahoe, I want to be able to make a Thursday night decision to take the kids skiing for the weekend. That means picking them up at school at noon, driving 10 minutes across town right to the plane, getting on, and being in Truckee 1 hour later. Driving to Truckee from Santa Barbara is a non-starter. Flying commercial means getting a connecting flight in Los Angeles and then on to Reno, then we're still at least another hour from Truckee if we're lucky to get our bags right away. So it's like a 4 or 5 hour trip probably counting the connections. Maybe 6 hours including early checkin with security and all. Compare that to just 1 hour on NetJets.

On moving to AIG warrants as a way of limiting exposure to financials... There was a point in summer of 2011 when Benmoche said that a 50% drop in the equity markets would put pressure on their capital levels. I never understood his comment as I didn't think they were all that exposed to the equity markets in the first place. Does anyone else remember him saying that and the context?

Which is why, Eric, that when you say you are headed to the sidelines (clipping dividends from high quality, low risk stocks) after the next wave of wealth, I don't believe you! :) To some degree you are right but I have to play a game with myself to try to keep this manageable from a psychological standpoint. One of the funny things is that I want to move my RothIRA assets from Fidelity to Wells Fargo (where I have my checking account) but so far the only thing keeping me at Fidelity is that performance feature. I'm so vain! My advice to anyone running a brokerage business is to get one of those systems implemented right away -- it increases the stickiness of customers (although, maybe if you were doing poorly it would be an incentive to switch brokers).

Actually, on the topic for why already rich people reach for yet more yield... Buffett already stated: 1) nuclear terrorism would have taken Berkshire down had he not realized it at one point and had the policies changed. But for a period of time Berkshire was completely exposed 2) Buffett clearly stated that Berkshire would have gone under in 2008/2009 had the government not bailed it out by proxy (he might be exaggerating to bolster a political point) Prem Watsa: Keeps on leveraging his wealth with insurance underwriting. Why dude, you are totally rich already? Your unleveraged equity investing returns have been 17% long term... when is enough enough? It's not as good as 20% so you need to write insurance to lever it up? I'm just pointing out that it's not strictly about needs that keeps people reaching for the little bit extra through these forms of added risk -- it's about the fun, the personal relationships, and the adventure as well. They are certainly both adding risk through insurance but neither one of the men needs to do so in order to generate market beating returns.

Well, maybe it's still to early to say whether he prematurely worried about increases to the carried interest taxation: http://www.thedailybeast.com/articles/2012/04/27/romney-holds-big-money-fundraiser-at-n-y-billionaire-s-townhouse.html

That does work with any meaningful impact? You'd still compare that 7500% to that 15000% and it would seem lower, right? What if, as now you only have one basic holding you'd make a portfolio chart showing potential future conservative portfolio value, i.e. 45000% in whatever year (it has to be a real estimate, of course). So when it goes down the potential for increase actually goes higher and the clear target remains. You're kinda anchored to the higher value. Yes, the 50% drop is still really painful and annoying. It works enough to remind me that it's part of the price to pay for the strategy. Otherwise it's easy to get wrapped up in the loss itself and fixate too much on it. Plus seeing the performance charted out with the ups and downs keeps the good times in perspective because every time I log into the Fidelity account I can pull up the graph and see the deep peaks and valleys.

My Roth IRA now has a "performance" feature where it will show me the asset levels at the end of every month/quarter/year going back for 10 years. When down, I visit that page and try to focus on the fact that if I wasn't so aggressive in the first place from day one the amount I have left would be yet a fraction of that still. The account at the end of October was up 15,000% over the past 10 years. It can be down 50% and while most people wouldn't be able to take that lightly, they would be giddy to be able to say that they'd made 7,500% in 10 years. This is actually the primary game I play on my mind to keep myself from having more discipline. Right now I can take a breather because for the first 3 years the account actually declined quite a bit. So improving the trailing 10 yr performance will get relatively easier for 2013,2014, and 2015. By the time I get to June 2016, I'm just going to have to concede to myself that my 10 year compounding number will never improve from there forward.

At least youre retired, if you lose sleep over those paper losse you can recuperate during the day :) Seriously tough why are you still doing an all or nothing approach? I'm sure you have enough to live for the rest of your life. To paraphrase Munger: "I remember when we did not have money and it was worse then not earning a proper return" BeerBaron BeerBaron The all or nothing approach wasn't planned, it just sort of crept up on me. I think Patton said something to the effect that the carefully prepared battle plans are just tossed aside once the shooting starts. I admire the self discipline of those of you who only put 5% into your biggest idea. It began when the AIG warrants had rallied to a peak for the year and BAC's were doing poorly on a relative basis. Impulsively I decided that relationship would change after I read the Q3 CC transcript for BAC. Since then the AIG warrants have declined modestly (7%) and the BAC warrants up in the mid-to-high-teens. This gives me a bit of reason to think about flipping some back actually. Once I had flipped the AIG warrants to BAC warrants I decided that I understood the long term future of BAC better than the long term future of MBI and DELL, so I flipped them too. That's why I got so interested in MBI once it dropped -- but with the way the management was so angry at MBI I took it as a sign that they were worried so I didn't go back in. DELL dropped and has since recovered. So I don't know. Maybe a little of AIG back again. I really want to wait and see first with respect to the capital return plans for BAC.

This is why I'm almost through with this game. My results are so lumpy it's driving me sick with emotional extremes. Really, at this point I want it to be the last big score so I can think less about the markets. In 2008 I was down 23% YTD at one point, but then finished the year up 20%. In 2009 I was down 50% YTD at one point, but then finished the year up 84%. In 2010 I finished up 20% on the year. In 2011 I was down 35% YTD at one point (but it was down 50% from the April high so felt much worse). I finished down about 25% on the year. In 2012 I suffered a 35% decline in July from the March/April high

Understood (at least, I hope! :) ). You are saying that there are not many funds, which are selling for more than their NAV. Even among the best performing funds. Am I right? I agree and I can understand why: both the mutual and the hedge fund business models have weaknesses that the FFH business model doesn’t have (among them no permanent capital and a much higher cost of money). I consider them to be fundamentally riskier than FFH and I have never invested in a fund. That’s probably one of the reasons why no fund command a significant premium to NAV. giofranchi You could look at how closed-end funds are priced if you want to see the premium (or more likely discount) to how captive capital is trading. One of the great things about a mutual fund is when you ask for your pro-rate share of book value back, you are guaranteed to get it right away. A closed-end fund this is not the case -- you can get back only what Mr. Market is willing to pay you, and often that can be less than what the book value is. Now if you paid a big premium to book value and you sell it below book value -- double ouch! So, I'm just saying that it's not all a dreamboat ride when you get into captive capital.

There is also the "cart before the horse" analogy if that helps to see things clearer: A large portion of the future 15% return will come from the future recognition of IV from the underlying portfolio investments when the market actually prices them at IV. Your discounting method is asking the market to realize that appreciation right now -- before it is willing to do so! Thus, you are putting that cart before the horse when you use discounting method that ignores the mechanics of how that 15% is achieved.

As to whether it's worth more than 1.5BV if a 'Kaboom' moment is coming, Mr. Gundlach's fund can be invested in without any premium to book value whatsoever. The market is having trouble valuing FFH at a high premium to book value because the market itself is the one setting the value of the underlying portfolio investments -- it would be truly bizarre for it to say that JNJ is worth more in FFH's portfolio than outside of it. Thus it's down to the operating income and growth assumptions of the insurance operations for the market to use as it's input for setting a PB multiple on the stock. ERICOPOLY, I think the market is extremely allergic to those “lumpy results” Mr. Watsa is used to referring to. FFH has not meaningfully increased BV per share for some time now. That’s why, in my humble opinion, the market is completely mispricing FFH today. Because lumpy results in a secular bear for stocks are the only sustainable results possible. My best guess is the market sooner or later will recognize that Mr. Watsa & Company are right, and that will be the moment when BV per share starts to rise again very quickly. Until then the market might not have patience, but FFH shareholders must have it. giofranchi Yes, BV will no doubt rise quickly when their investments rise quickly. But that isn't in itself in any way warranting a high book value multiple. It merely results in very high rates of compounding over time, which is just dandy anyhow. There are no investment funds compounding at a high rate that command a high multiple to their underlying portfolio investments. FFH by definition should always trade below intrinsic value, otherwise it would be overvalued. That's the nature of gaining much of your intrinsic value by making shrewed equity investments. The place where they do command some kind of BV multiple would come from evaluating their insurance operations and their wholly owned non-insurance subs. Figure out some sort of value of what the float+floatgrowth+underwriting results brings to the table, and then add that to the BV to get some sort of BV multiple. But the lumpy capital gains... I don't see them worth anything more than portfolio mark-to-market value. ERICOPOLY, I am well aware of the fact that almost nobody wants to hear about discounted valuations on this board… And I agree that they are not very useful. But let’s just make a simple exercise, and calculate the discounted value of equity (VOE) of FFH 20 years from now. To do it, I will use Professor Penman’s formula from his book “Accounting for Value”, page 68, Columbia Business School Publishing: Present value of equity = B0 + [(ROE1 – r) * B0] / (1 + r) + [(ROE2 – r) * B1] / (1 + r)2 +[(ROE3 – r) * B2] / (1 + r)3 + … + [(ROE20 – r) * B19] / (1 + r)20. Assumptions: B0 = book value today = $360, ROE1 = return on equity in year 1 ROE2 = return on equity in year 2 … ROE20 = return on equity in year 20 r = interest rate Let’s say our required minimum return is 9%, so r = 9%. Let’s assume that ROE in year 1 and 2 will be equal to their stated goal of 15%, and then, from year 3 to year 20, it falls to 10% (just above the minimum required return). Under these assumptions we get to a present value of equity: VOE = $570.24, or 1.584 x B0. If we assume that a ROE = 15% will be sustained for the next 20 years, we get to a present value of equity: VOE = $1,112.39, or 3.09 x B0. If, instead of using our required minimum return, we choose to use FFH’s cost of capital as interest rate, so that r = 2,8% (until year end 2011 the weighted average cost of float for FFH since inception has been 2,8%), future ROEs just have to average 6,5% for the next 20 years, to get to a present value of equity that is 2 x B0. My intention here is not to put a precise number on VOE, but simply to argue that the market always has a very hard time valuing properly a machine that can compound capital at high rates of return for a very long time. That’s why I think that, even if FFH might not look “statistically” very cheap, right now it is, like Sir John Templeton was used to saying, a “true bargain”. Something that’s trading below book value is worth more dead than alive… Now, please read how Mr. Watsa answered to Mr. Shezad, when he asked if FFH shareholders had to expect other 7 lean years (Q3 2012 results conference call): “Yes, that was -- Shezad, that's a good question. And so the first thing, just to say you is we've always focused on the long-term and when we went through our 7 lean years, Shezad, we were turning around our company. We were turning around Crum & Forster and the -- take reinsurance and all of that, and that took sometime to turn it around. Today, our companies are in excellent position, they're underwriting-focused, they are well reserved, they've cut back in the soft markets and they are well- positioned to expand significantly at the right time. And then as we are expanding today, you're seeing that in Zenith, and you're seeing it in Crum & Forster, you're seeing it on Odyssey. And the Canadian market's always lag -- have lagged in the past and you'll see it in time in Canada. So underwriting operations are very well-positioned, and our investment philosophy and position -- they're always long term. So when we had credit default swaps in the past, it took a few years for it to work out and as you know, we made a lot of money. And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses but we don't like taking permanent losses. So I don't think we'll be at a position where our results will be poor for a long period of time but you're right for the last year and a half, it hasn't been good. But our results for year ending 2011, for the 5 years, is among the best in the business and of course, for the 26 years ending 2011, it's better than anyone else in our industry. So we're focused on the long-term and we continue, we've always been focused on the long-term, and continue to be focused on doing well for our shareholders always.” It really doesn’t sound to me as something worth more dead than alive! :) giofranchi It feels like you are talking past my point. I was separating out the operating components and you are still fully valuing the investment returns as operations. I haven't read their annual report for a couple of years, but I remember a few years ago they were putting up numbers of around 17% annualized compounding returns on their equity investments. Let's say they shut everything down and put all of their capital into equities. And further let's project that they make 15% compounding returns going forward. You now have a 100% equities fund that has no operations. Are you still going to discount it the way you are doing? My answer right now is that the 100% equities fund is worth book value... even if we all project that it will keep compounding at 15%. You could rightly argue that "it's worth just as much dead as alive". True, but that's the nature of most funds I know of. Ironically, if they were 100% an equities investment fund making 15% returns their results would be MORE LUMPY than they are. They have a lot of leverage with lower yielding bonds and that helps them to achieve a smoother 15%.

That's exactly right. In 2002 I had an Audi S4 parked in my driveway at my home in West Seattle. I got up in the morning to go to work, and once I looked at my car it took me a second to figure out what didn't look quite right. All four wheels were stolen and the car was on blocks. That's cost over $2,000 to "fix". I called the police and reported the crime. They just made a report and that was all. They never even sent anyone out to the home to investigate! Now, if I instead had reported a $10 million worth of artwork stolen they might have shown more interest -- perhaps even sending an officer to the house to investigate.

As to whether it's worth more than 1.5BV if a 'Kaboom' moment is coming, Mr. Gundlach's fund can be invested in without any premium to book value whatsoever. The market is having trouble valuing FFH at a high premium to book value because the market itself is the one setting the value of the underlying portfolio investments -- it would be truly bizarre for it to say that JNJ is worth more in FFH's portfolio than outside of it. Thus it's down to the operating income and growth assumptions of the insurance operations for the market to use as it's input for setting a PB multiple on the stock. ERICOPOLY, I think the market is extremely allergic to those “lumpy results” Mr. Watsa is used to referring to. FFH has not meaningfully increased BV per share for some time now. That’s why, in my humble opinion, the market is completely mispricing FFH today. Because lumpy results in a secular bear for stocks are the only sustainable results possible. My best guess is the market sooner or later will recognize that Mr. Watsa & Company are right, and that will be the moment when BV per share starts to rise again very quickly. Until then the market might not have patience, but FFH shareholders must have it. giofranchi Yes, BV will no doubt rise quickly when their investments rise quickly. But that isn't in itself in any way warranting a high book value multiple. It merely results in very high rates of compounding over time, which is just dandy anyhow. There are no investment funds compounding at a high rate that command a high multiple to their underlying portfolio investments. FFH by definition should always trade below intrinsic value, otherwise it would be overvalued. That's the nature of gaining much of your intrinsic value by making shrewed equity investments. The place where they do command some kind of BV multiple would come from evaluating their insurance operations and their wholly owned non-insurance subs. Figure out some sort of value of what the float+floatgrowth+underwriting results brings to the table, and then add that to the BV to get some sort of BV multiple. But the lumpy capital gains... I don't see them worth anything more than portfolio mark-to-market value.