el_chieh
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From this year's shareholder letter re non-insurance businesses:
"Viewed as a group, these businesses earned pre-tax income in 2018 of $20.8 billion, a 24% increase over
2017."
I've not been able to corroborate Buffett's 24% growth figure above. Is this a typo?!?!
I get $21.6BN pre-tax income earned in 2018, up from $19.8BN last year, up 10%. The passages below match my 10% pre-tax growth above.
When discussing pre-tax income in greater granularity, Buffett's # add up to 10% pre-tax income growth instead of 24%
Anyone?
"Our two towering redwoods in this grove are BNSF and Berkshire Hathaway Energy (90.9% owned). Combined, they earned $9.3 billion before tax last year, up 6% from 2017."
"Our next five non-insurance subsidiaries, as ranked by earnings (but presented here alphabetically), Clayton
Homes, International Metalworking, Lubrizol, Marmon and Precision Castparts, had aggregate pre-tax income in 2018
of $6.4 billion, up from the $5.5 billion these companies earned in 2017.
The next five, similarly ranked and listed (Forest River, Johns Manville, MiTek, Shaw and TTI) earned $2.4
billion pre-tax last year, up from $2.1 billion in 2017.
The remaining non-insurance businesses that Berkshire owns – and there are many – had pre-tax income of
$3.6 billion in 2018 vs. $3.3 billion in 2017."
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Instead of a mutual fund or an index ETF, perhaps you should consider a few BRK Bs...this board does take inspiration from Buffett after all.
Unlike mutual funds (even ones that are good value), BRK doesn't charge any sort of fees (and brokerage fees for a few BRKs will be much less than anything a mutual fund would charge).
Unlike mutual funds, BRK will likely be more tax efficient (will matter in the long-term).
Like most mutual funds, BRK is relatively well diversified.
Unlike S&P500 which is put together by a committee, BRK has been put together by someone who has beat the S&P 500 and most mutual funds over the very long-term.
Yes, you're new to investing and you don't know what you're doing...but you'll be just as ignorant buying a mutual fund as buying BRK. Buy BRK.
The only leap of faith you need is that BRK is priced relatively cheaply (I think it is)...but that is no different from the leap of faith that whatever mutual fund or ETF you buy has bought names that are well priced.
And, once you've sunk your $5K in BRK...start reading BRK letter to shareholders and learn w/ real buy-in.
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Thanks! Much appreciate the comments/clarification.
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Thanks, helpful.
So to confirm:
~$2BN has been paid out to counterparties (our P&L losses)...this cash has left FFH, unlike our investments which contain the collateral.
~$1BN on our books is deposited as collateral in favor of counterparties, to support our swaps.
~$94MM (out of $132MM which includes other derivatives) still owed to counterparties (in between resets).
~$156MM in short swap value (as quoted by broker-dealers).
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I'm having a hell of a (very bad!) time understanding how FFHs short equity index and short equity swaps are reflected on its financials.
Please help me connect dots in the financials:
From 2009 to 2Q13 FFH generated net investment losses from equity hedges of $2,220.8BN (mostly "unrealized") and "paid net cash in connection with the reset provisions of its short equity and equity index total return swaps" of $2,269.7BN.
As of 2Q13 FFH had $1,022.7BN in "assets pledged for short sale and derivative obligations" as part of its investment portfolio (including holdco cash).
As of 2Q13, FFH has $94.4MM in "short sale and derivative obligations" related to its short swaps out of a total of $132.1MM.
As of 2Q13, the short swaps are carried on the books at $61.4MM (Assets: $155.8MM, Liabilities: $94.4MM).
I really can't tie all the above together:
+ If FFH closes the short swaps, what happens to the $1,022.7MM collateral?
+ Has FFH already paid out >$2BN to counterparties? Does FFH investment portfolio (including holdco cash) still hold the $2BN?
+ Is $1,022.7MM in collateral in addition to the >$2BN paid out above? Or, do we still owe counterparties ~$1BN after the collateral?
+ What is "short sale and derivative obligation" of $132.1MM (of which $94.4MM is related to short swaps)?
Thanks!
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Anyone that still has copy of the original Wilens note; care to post it?
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Thanks V!
Good work; lucid and concise.
I personally like to use 2 column method since it's quick and easy. I do think that it does have strong basis on "theory"; assumptions: 1) that $1 float = at least $1 of intrinsic value, 2) that income tax liability has $0 NPV).
I also like to add value of u/w earnings to the 2 column method. A more speculative valuation layer, if you will.
As an aside, anyone care to comment on Buffett's evolving BRK's valuation methodologies vs. BRK's own evolution? I find it highly interesting how he's gone from look-through earnings, to 2-column method and now back to a renewed emphasis on changes in book value.
Also, I find it highly amusing to value Fairfax using Buffett's 2-column valuation methodology (adjusting for debt and different quality of float, etc).
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Mpauls, thanks for clarifying.
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It'd be interesting if you provided additional details for some of your calculations.
Eg, how do you arrive at float being worth $78BN?
Or, why is MSR worth ~$16BN when its book value is ~$30BN?
Or, if WEB paid a ~$34BN valuation for BNI why do you think it's worth $47.9BN?
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Here's very nice link w/ Teledyne articles:
http://valueinvestingresource.blogspot.com/2008/04/reflecting-on-leon-coopermans-case.html
In addition, I enjoyed, "Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It" which can be found on Amazon relatively cheaply.
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>>"Your analysis seems to imply that it is." Please elaborate.
I just re-read your analysis, and it is not implied in it that the cash from the equity put premium is in "financial products". I wrote my question a bit too quickly. Sorry.
But my question remains, do you know where the cash from the equity put premium is? Is it indeed in "financial products"?
Thanks.
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Thanks for the BRK analysis.
Off on a bit of a tangent, can you confirm that the equity put premium cash resides w/in "Financial Products"? Your analysis seems to imply that it is.
I know the equity put liabilities are in "Financial Products" but where is the asset side?
I was just wondering whether Buffett's 2-column valuation ignores the equity put premium received (in my mind, it does ignore it if the cash for equity put premium is in "Financial Products").
I didn't think the equity put premium cash is in "Financial Products" due to the relative change from year to year of assets.
Thanks!
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Buffett has made it pretty clear that loss reserves have npv of zero ($1 of float is worth at least $1).
if you're capitalizing earnings (which includes interest expense), you don't have to take into account debt, since you'd be double counting.
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At this point, using Buffett's 2-column methodology, BRK is trading as it's whole equity portfolio is zero (assuming 12x p/e q3'08 depressed annualized operating earnings).
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The usual spread is ~1%.
At various points the spread has been ~3%.
Spread has never been this wide (~6%).
The 10 year return basically reflects the discount.
BRK As are v cheap.
BRK Bs 6% cheaper.
The gap should eventually return to ~1%.
I've sold all my As and bought Bs.
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Yes, buy Bs and not As.
If you have As and can do it tax efficiently, sell As to buy Bs.
In 1999 AR Buffett said he'd go for Bs whenever discount >2%.
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"What could kill a company"
It's a very important question.
History is littered with companies that got killed.
Forget Commodore, Wang, Atari, Acclaim, Polaroid, hundreds of airlines, hundreds of car makers, etc. How many companies in the DJIA today existed 100 years ago? or even 30 years ago?
In 1950s, GM made expensive pension promises based on continued 50%+ market dominance. If one had put some serious thought into it (like Drucker did) it was clear that not holding on to that 50% market dominance might kill GM.
Going forward:
AMAZON: 2/3 of its revenue is media (books, dvd and cd's); a shift away from physical books might kill AMZN if it is unable to follow that transition and put to use its physical infrastructure for other retail categories.
MSFT: An alternative that replaces Windows and breaks MSFT's hold on to the PC would kill MSFT / if the personal computer is eventually replaced by the internet and cheap access devices that don't use MSFT software would kill MSFT
INTC: chip manufacturing technology that did not depend on massive size to get past low yields would kill INTC (e.g., INTC's flash biz)
"The key to investing is...determining the competitive advantage of any given company and, above all, the durability of that advantage" -Buffett
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Wondering if there are any board members currently living in Taipei / Taiwan?
I'll be spending 2 months in Taipei starting March and I thought it might be fun and interesting to meet with local investors / exchange ideas, etc.
I speak fluent Mandarin.
I can be reached at:
"info@chiehcapital.com"
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Without having dipped into its fixed maturity investments, BRK has dipped below Buffett's self imposed $10BN. BRK had $40bn in cash in mid 2007.
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I know the company only generally / conceptually and haven't done a deep dive but to me it's long-term positives are simple and clear:
+ reasonable price for a good company (~11x p/e, trailing)
+ can't duplicate company's assets / stronghold on west-east and powder basin traffic
+ strong cashflow hidden by capex > depreciation / BUT someday capex will moderate as there's a limit to amount of triple tracking + adjusting tunnels and bridges for higher loads + jamming more trains and running them closer to each + buying lighter cars...at some point, capacity growth will reach a limit
+ demand curve will slowly shift up over time and supply curve is steep...prices will rise and profits accrue to shareholders / lot's of examples of pricing power of these companies (e.g., passing on fuel costs, price increases that offset volume declines)
+ in inflationary environment, prices will rise but productive assets already paid for
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I'm wondering how the equity puts affects Buffett's 2-column valuation.
+ Does cash and investments from "Insurance and Other" include cash premium received from the equity put?
+ The derivative contract liabilites are held in "Finance and "Financial Products" but the asset side of that reporting segment does not seem to reflect any increase similar to the cash premium (I know you can see the equity put premium in the cash flow statement)
I'm wondering whether by using cash and investments + a multiple of operating companies properly captures the value of the equity put (which I think is ~$4.8bn the cash premium received), esp if the premium cash is held in "finance and financial products".
btw, I buy that the tax liability + float liability + derivative contract liability has an NPV of close to zero (and thus not netted in the 2 column valuation).
Thanks!
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Thanks for putting in the work Sanjeev!
BRK non-insurance group pre-tax earnings growth in 2018; 24% a TYPO?
in Berkshire Hathaway
Posted
Thanks!!! Tied (mostly) to Buffett's number.