wabuffo

<b>Hearing good things about the mini-series The Queen's Gambit, but haven't seen it yet.</b> Two episodes in. It’s outstanding so far. wabuffo

Is the business is secular decline? It's hard to say. It makes specialized nanotechnology sensors that have very specific and defined applications in medical and industrial applications. Its main markets are hearing aids, pacemakers, and various industrial uses. While it's trying to innovate, I think its revenue trends follow these three markets. Due to the pandemic, I think its pacemaker business was down quite a bit this summer (but is coming back as surgeries were deferred but not cancelled). I think that unless one of its end customers gets out-innovated (say Abbott in pacemakers and NVEC loses business because Abbott loses business), it's probably a stable, annuity type of business. But I'm not sure about that. wabuffo

NVEC - small cap ($225m mkt cap). Consistent, after-tax net income margins of 45-55% year-after-year. Dividend yield of 8.5% currently. Nice, safe, boring, little Minnesota tech company. wabuffo

I'd very much appreciate anyone with a data set of Berkshire share prices as of the end of each year dating back to 1965. wabuffo is likely the gold standard for this kind of info As CB notes - its easier to find hi-lo quarterly prices, but year-end closing prices are tough to get. You can use this site to get prices for a specific trading day going back to 1984. https://bigcharts.marketwatch.com/historical/default.asp?symb=brka&closeDate=12%2F31%2F84&x=0&y=0 I guess you could try old S&P or Moody's manuals at a library for data going back to the 1960s and 70s. Are you looking for just year-end closing prices or high-low quarterly prices as well? wabuffo

How can the "Changes in Inventory" be positive on the cash flow statement? If the inventory decreases on the Balance Sheet, doesn't that mean that it went through the COGS, thus not needing to go through the CF Statement? Its very likely that I am not understanding your question. But when you say "changes in inventory" is positive on the cash flow statement - do you mean positive as in a source (rather than use) of cash? If so, then this is perfectly consistent with a decrease in inventory on the balance sheet. My answer seems so pat - that I'm guessing that I've totally misunderstood your question. If so, can you please clarify your question? Perhaps you could even refer to the specific set of public company financials to which you are referring? wabuffo

so what is the Treasury trying to achieve here? To help the Fed? I think you already know my perspective. Borrowing by the US Treasury is a reserve balance mop-up operation to absorb bank reserves that accumulate in the banking sector when the US Treasury net spends. There was a ready, fire, aim approach to the crisis by both the Fed and the Treasury - so in this crisis, there was a simultaneous Treasury debt buying operation by the Fed (asset swap that increases bank reserves) + massive deficit spending via the Treasury through the CARES Act (creates new bank deposits in the banking sector but also increases bank reserves). The banking sector was getting the asset side of its balance sheet massively converted to deposits at the Fed earning zero. I'm sure there were alarms raised by the big banks by early April (especially with the big April federal tax season also postponed that would've drained some reserves). But let's back up and look at the numbers. I took a look at the US Treasury Daily Statements from March 11th (the Tom-Hanks-has-the-virus/NBA-cancels-a-game night that unleashed the all-hell-breaks-loose financial panic) to today (I'm using 9/30 - the latest Fed H.4.1 report o/s). Here are the numbers. The US Treasury spent $2t more than it received. But it issued $1.4t more in debt than it needed just to maintain its settlement balance at the Fed at a constant amount (000s). US Treasury total expenditures less total receipts (ex. Public debt issues/redemptions:)($2,083,088) US Treasury public debt issues less public debt receipts: $3,492,430 Net Change in US Treasury general account balance at the Federal Reserve: (A)$1,409,342 We can foot these numbers with the change in its federal reserve account deposit balance as reported by the Fed. US Treasury general account balance at 9/30/20: $1,781,679 US Treasury general account balance at 3/11/20: $372,337 Net Change in US Treasury general account balance at the Federal Reserve: (A)$1,409,342 So why did the US Treasury borrow so much more than it needed? Since the GFC, it typically runs its account balance at around $400b +/-. I believe it was to help the banking system by soaking up $1.4t in settlement balances that would've remained in the banking sector. When the US Treasury issues a $1000 bond, it moves $1000 from the banks' reserve balances at the Fed to its own account. (asset swap). I drew up a week-by-week chart to compare what bank reserves would've looked like if the US Treasury kept its balance at $400b every week vs what they actually came in at. The orange line is the actual weekly reserve levels while the blue line represents where reserves would've been if the US Treasury didn't help the Fed out by building up its general account (even if it didn't need the "money"). IOW, the Treasury's general account would remained at $400b every week - and borrowing would match net spending. Remember the commercial banking sector has ~$20t in total assets - so bank reserves w/o the Treasury's help would've exceeded 20% of all assets (earning basically nothing). I would also point out that this crisis is a little different than WWII or even the GFC. During WWII, the US was still under the gold standard - so the reserve currency was gold (and not the USD). During the GFC there were also aggressive responses by both the US Treasury and the Fed -- but in opposite directions. The Fed was running an interest rate target with no excess reserves. In the financial panic of 2008, fed funds rates were spiking - so the Fed was selling Treasuries (not buying them) - the so-called "Treasuries for trash" program. In fact, here too, the US Treasury issued debt to help out the Fed but in a different way. In a one-off, double-secret probation letter kind of deal, the US Treasury sold ~$560b of short-term bills directly to the Fed (Fed is only supposed to buy in the open market). The reason was that there was a real worry that the Fed was going to run out of "bullets" (ie Treasuries) on its balance sheet because of Treasuries-for-trash. This is also the point in my ramble where I take my obligatory swipe at the bureaucratic stupidity of the Fed's responses to external stimuli. The whole point of the Fed's aggressive buying of Treasury assets was to increase its share vs the private sector's share (so as to reduce "supply"). But because the Fed needed to be bailed out by the US Treasury as noted above, the Fed actually owns a smaller percentage of US Treasury net assets than it did before the crisis started. Doh! wabuffo

Active suppression of interest rates (ie as the last example of this secular trend: the Fed absorbed most of the debt issued so far peri-Covid) has made it easier to issue debt (this point should not be controversial). Is this a good thing or is this the ideal choice? I think its controversial because I believe its wrong. What if the conventional wisdom has the causation totally backwards? What if the reality is that the US Treasury issues debt to help out the Fed, (instead of the Fed buying Treasury debt to help the US Treasury "borrow")? wabuffo

more PDLI (even though I own a lot already). wabuffo

Bought more CASH @ $18.78. At some point, I may do a write-up on it. It's a very interesting and unusual small bank. wabuffo

AIM.TO (teeny-tiny leftover position from last tender) this morning ;D I'm now completely out. wabuffo

By this do you mean that the Federal Reserve is a subsidiary of the US treasury? Munger_Disciple - the first part of your question opens up a very interesting thread. Who owns the Federal Reserve System? Of course, the simple answer is that its conduct is regulated by Congress. The Fed is a product of the 1913 Federal Reserve Act and the US Treasury is the arm of the Executive Branch that manages the public purse as per the laws passed by Congress (taxation, spending, debt limits, etc). But what exactly is the ownership structure of the Fed? In what ways is it independent of the US Treasury? In what ways is it dependent on the US Treasury? Many people mistakenly think that the Federal Reserve System is a private entity because chartered banks must purchase "shares" in their local Regional Federal Reserve Bank in order to become a Federal Reserve "member bank" and have access to the Federal Reserve. Thus, the conclusion must be that the Federal Reserve System is owned by the chartered member banks and is therefore a quasi-private organization. But there was a recent Federal Court Case (U.S. v Wells Fargo) that decided this issue. https://law.justia.com/cases/federal/appellate-courts/ca2/18-1746/18-1746-2019-11-21.html In this case, the Federal Court ruled that the "shares" in the regional F.R. banks owned by chartered banks are really debt contracts of the Regional F.R. Banks and that net profits of the Federal Reserve System all belong to the US Treasury (and not the chartered banks through their "shares"). So there you have it -- the US Treasury owns the equity of the Federal Reserve. In addition, the settlement balances in checking accounts created for the benefit of chartered banks (i.e., bank reserves used for clearing payments in the Federal settlement system) that the Fed creates are also a product of the US Federal government even though they are "unappropriated dollars". IOW - the chartered banks trade a private sector asset for a public sector asset (i.e, a bank reserve - which in turn is "an asset" of the Fed govt via the US Treasury). So much for the idea that bank reserves can be "withdrawn" from the Fed to make loans.... Basically at the inception of the Federal Reserve, the US Treasury "purchased" a payments system infrastructure (a public good) and provided it to the central bank in exchange for an equity claim equal to 100% ownership (and retaining all "profits" the Fed makes). The Fed thus becomes the US Treasury's subsidiary (ie, the US Treasury's bank) performing three important functions: a) running the US Treasury's general account for spending and taxing transfers to/from the private sector banks, b) running the national payment clearing system with the chartered banks that are members of the Federal Reserve System, and c) acting as custodian/transfer agent for the US Treasury's debt issuance by recording all transactions and ownership. In an earlier post, I said the Federal government has three types of liabilities: a) currency in circulation b) bank reserves c) US Treasury debt. One can now see that, in effect, these are all, ultimately, liabilities of the US Treasury (some directly, some via the Fed). Currency is minted (or printed) inside the US Treasury organization and delivered to the Fed when it issues an order to the US Treasury to provide it with currency (that's why the Secretary of the Treasury signs US banknotes and not the Chairman of the Fed). We saw that the Federal Court basically ruled that even bank reserves created by the Fed are unappropriated "property" of the US Treasury/Federal Government. And of course © is obviously an obligation of the US Treasury. After its creation and throughout most of its history, the Fed built up its balance sheet by issuing currency to the private sector in exchange for Treasury bills/bonds. Since the Fed ran a very asset-light balance sheet, the remainder of its balance sheet came from banks freely adding reserves to use the payments system by borrowing them from the Fed in exchange for collateral (more Treasury bills/bonds). In fact, right up to the GFC crisis, this was the typical Federal Reserve balance sheet - dominated by holdings of US Treasury holdings on the asset side and banknotes (ie, currency in circulation) on the liability side, each accounting for 90% of the respective sides of the Fed balance sheet. All in all - a long way of saying that the only way the Fed is independent is in how it sets the interest rate on reserves. In all other ways, operationally as well as equity-wise it is dependent on the US Treasury and the US Federal Government and its accounts really should be looked at in consolidation with the US Treasury. It is no more independent on most of its activities than the Post Office is. wabuffo

I have no idea what might make interest rates rise. I really don't understand how they have been this low. They are low because the rate paid on US Treasuries at issuance is at the discretion of the US Federal government. It can be zero forever, if that's what the Treasury decides. That's because: a) the US Treasury spends first, creating new reserves in the banking system's accounts at the Federal Reserve. (this creates new financial assets for private sector) b) then the US Treasury comes in and removes these excess bank reserves via borrowing (conducts an asset swap with private sector for previously created financial assets). In true monetary and economic terms, its not really borrowing and using that word confuses everyone. US Treasury debt issuance is a hygiene activity for bank reserves - otherwise they would accumulate and drown the banking system. TINA - there is no alternative. In fact, the private sector prefers a Treasury asset over a bank reserve because bank reserves are illiquid and trapped at the Fed. Treasuries are used as collateral because there is a shortage of credit-risk-free collateral around the world. So even in a world of zero rates on bank reserves and zero rates across the entire yield curve, there would still be a preference for US Treasury debt due to its liquidity and safety as collateral. The only real constraint is not borrowing capacity, then, because its not really borrowing. The real constraint from deficit spending is currency debasement. If there is enough currency debasement such that there is obvious inflation, then what will the Fed and US Treasury do? That's the big question. I don't have an answer - but the Fed is hinting that they will tolerate it and keep rates low for a long time to compensate for undershooting inflation in the past. There do not appear to be any Volcker's at the Fed. And I say all this while believing that the Fed is not as powerful as everyone believes (the real 800-lb gorilla of monetary policy is the US Treasury). In addition to there being no Volckers (who I think is overrated frankly), I would add that there are no Greenspans either (who I think was the best Fed Chairman ever). Despite the grief Greenspan gets, he always kept an eye on the gold price (as well as other commodities) and used it to guide Fed policy. There's some quantitative proof for this. Greenspan kept the USD more stable in price vs gold for longer than any other Chairman of the Fed. To this day I'm convinced that Greenspan kept his target at $350/oz (10x the old gold price peg pre-Nixon closing the gold window in 1971). The average price of gold during his long tenure averaged pretty much at this target price (with a +/- $50 band). 1) Here's a table I once made up (and just updated for Powell) to show how Fed Chairman since 1971 have done vs the price of gold. Greenspan shines. (so does Yellen actually - though she wasn't there long enough to really tell). 2) Here's an academic study by George Selgin (I recommend reading his stuff if you are interested at all in central bank operations) that also hypothesizes that Greenspan followed gold in his rate decisions. [not sure if this link works - so I will attach a pdf of this academic paper as well] https://www.semanticscholar.org/paper/The-Price-of-Gold-and-Monetary-Policy-Lastrapes-Selgin/c5d577dd46e898781bfeff704436a483b6ac72db?p2df But I think it is very likely that they go up over the next decade to at least over the inflation rate. Especially if you get a big country that defaults and scares the crap out of the other democracies. Historically financial panics came about when big banks or borrowers went under. Well every reserve currency default is different. But it is interesting to examine how the UK lost its reserve currency status after World War I. In its case, there were two reasons 1) it spent heavily to fund its war effort during World War I and eventually lost its military pre-eminence to a rising United States whose entry into WWI was the difference-maker in winning that war. 2) it borrowed heavily to buy supplies and armaments from the US to fight WWI - but its borrowings were largely in USD rather than GBP. The UK also made a mistake trying to re-peg its currency to its pre-WWI gold price unleashing UK deflation. So perhaps those are the two red flags for to watch for reserve currency loss: a) getting eclipsed as the most powerful military in the world, and b) and being forced to conduct sovereign borrowing in a currency that is not your own. At present, there does not appear to be any clear and present danger to the United States' reserve currency status under either condition a) or b). Finally, I would add another competitive advantage that the United States has. Its geography: https://worldview.stratfor.com/article/geopolitics-united-states-part-1-inevitable-empire wabuffo The_Price_of_Gold_and_Monetary_Policy.pdf

The 1997-2001 period is interesting (this was the time i started to take investing seriously) indeed but it's not clear if it's worth it to discuss what is correlation or causation and the direction of such? "For the federal government to run a surplus, the private sector must run a deficit (ie, borrow to consume or spend)." wabuffo

What is your best guess then to how this plays out in the US and Japan which have a lot of debt but also have their own currency? Seems like could be a big cost at some point. I'm probably going to disappoint you but I see a lot of one-timers here. For one, tax revenues during the pandemic have collapsed. The biggest source of Federal Tax revenues is employment income. It brings in around $3t per year - give or take. Here is a graph of federal employment withholding taxes on a rolling 2-week basis using the Daily US Treasury statements (here - I'm trying to simulate a rolling 2-week national payroll account extrapolated for an annualized number). The US is running about $500B+ below where it should be in annualized federal tax revenues for employment payroll withheld at source. Hopefully that should normalize at some point. In addition, most of the spending programs are one-time in nature and are ending at the Federal level. While there may be continued support - it looks like it will be at lower levels. So the history of these kinds of one-time shocks or national economic crises (like wars) are that the deficit blows out for a few years but then reverts back to its normal run rate after a few years' time. Is it possible that this time is different? Are politicians starting to buy into the MMT prescriptions of running much larger deficits has very little cost? I have no idea. But as I said, I am getting a bit nervous that MMT is being bandied about as an excuse to really blow out Federal spending. That's new - but I don't know if its really gone mainstream yet. wabuffo

From 2000. The theme had to do with surpluses(!). Mid-range scenario expected for public debt to GDP, for 2020, was an actual net negative position (all debt reimbursed and more!). CB - one of the more interesting periods of economic history (for a nerd like me) was the 1997-2001 period of consecutive federal surpluses. The United States was actually paying down its Treasury debt! But be careful what you wish for. It unleashed a period of monetary deflation and (along with China's entry in the WTO in 2001 ramping up the trade deficit) triggered the beginning of the mortgage crisis that blew up years later. There is an interesting macroeconomics book to be written about this period but no one is writing it, unfortunately. Sad. wabuffo

Really not liking all this style-drift from BRK. Just buy your own stock, dude! Cuz it sure feels like we are scraping rock-bottom on capital allocation lately. wabuffo

I tried hard to resist this topic - but its like cat-nip - so here goes. 1) Everything about how we think and talk about US Federal debt is wrong. The framing is wrong and the structure is wrong. Other than that... 8) A sovereign issuer of currency that doesn't peg to gold runs a pay-go system. There is no debt to pay back - its an accounting fiction. "Debt", such as it is, will always get "paid back" by rolling it over at redemption time with new "debt". There can't ever be a default for many reasons. What matters is the real-time deficit spending relative to the size of the US and world economies, in the case of US deficit spending. A sovereign spends first, creating a bank deposit somewhere in the private sector and then withdraws some of it via taxes or fees or legal judgements, etc... In fact, what gives a sovereign currency its initial value is that it is the only thing with which the private sector can extinguish its tax obligations to the sovereign. But that's an initial condition, after which the whole monetary system begins to run on its own as a flywheel. The important thing to key in on is that sovereigns must run a perpetual deficit year-in and year-out. If they try to run a multi-year surplus, they will reduce money and unleash deflation. So what matters is running a deficit that is "reasonable" in size over time. Not all governments are sovereigns - state, provincial, local (even national governments in Euroland) don't control or issue a currency and as such are like you and I. Their debt is real debt and they can and do default - since in these cases they must find a way to balance cash flows over time (or run out of money). Sovereign governments that issue sovereign debt in a foreign currency can also default. A sovereign that pegs to gold (like the old days) and then issues debt is also issuing debt in a de facto “foreign currency” if its currency is redeemable in gold. 2) The sovereign government's deficit spending is what provides "money" to the private sector. The private sector then decides what the composition and mix of that money will be (including how much Treasury debt it wants to hold). In the case of the US government - it comes in three forms (via the US Treasury and its "bank", the Federal Reserve). Here are the real-time balances of each liability type (as at Sep 2, 2020). a) currency in circulation ($ 2.022 trillion USD) b) bank reserves ($ 2.851 trillion USD) c) net Treasury bills/bonds held by the public (less: holdings of Tsy debt by the Fed) ($16.444 trillion USD) Thus at this point in time, the total liabilities of the Federal government are $21.316 trillion (the headline to this thread is wrong). These are by definition private sector assets and represent the cumulative sum total of total net deficit spending by the US federal government in its entire history. When I say the mix of these three liabilities is determined by what the private sector wants in terms of mix - it helps me to think of these three types of liabilities in the context of the Federal Reserve acting as a bank for the US private sector. Like a bank, it offers its bank "customers" three types of accounts (which of course are liabilities of the bank): 1) vault cash (= currency in circulation) 2) demand deposits (= bank reserves) 3) time deposits, locked up for 30-days up to 30-years (= treasury bills/bonds). Historically, the US private sector has preferred the time deposit option because it is more liquid and because it earns interest (1 and 2 don't although 2 has in the past). In fact, interest rates on all these liabilities are not free-market set - instead they are at the discretion of the US Treasury/Fed. 2) is less liquid because it can only be held by banks and thus not very helpful to the private sector. The time deposits are risk-free and super-safe and thus are the world's best collateral for lending. In other posts on WFC and the Fed, I also showed that as the US Treasury deficit spends, bank reserves would accumulate in large and unhelpful amounts, so Treasury debt issuance performs an important reserve maintenance function. 3) Of course, we knows this but part of the deficit spending/US money creation goes overseas because of the trade deficit. The US more so than Japan, China or Euroland has more fiscal space because the rest of the world wants to net save a portion of its rising wealth in USD and USD assets by net exporting to us. So not only does the US Federal govt need to run a deficit big enough for domestic savings needs, it must run an extra larger deficit to also accomodate the foreign sector’s need for the reserve currency. The trade deficit causation is usually talked about in terms of over-consumption by the US when in reality the cause is net exporting by other countries to the US. It is estimated 60% of 1), 30% of 2) and 20% of 3) are held by non-US residents, foreign banks or organizations and thus circulate outside the domestic US economy. Will the US continue to be the world's super-power and reserve currency? The US doesn't just have an advantage due its political system (constitutional republic) but more so than other countries it also has geographic advantages as well that reinforce its political and economic advantages. I certainly wouldn't want to bet against it. 4) So - nothing to worry about? Of course not. But its not paying back the debt that we should worry about. Its the real-time deficit spending. As it spends in real-time, the federal government is competing with the private sector in buying goods and services and therefore it is affecting prices. It is also affecting the real-time supply of money. I like to measure the real-time growth in federal liabilities (money) by looking at the gold price. That's because gold supply rises 1.8% per year. Its not a perfect benchmark - but I feel it is the best one out there. Will that lead to currency debasement because right now federal liabilities are increasing much faster than 1.8% per year? Gold seems to be feeling it. Of course, supply is one factor, but demand for money is another. In late March, worldwide demand for US dollars surged because of a global panic due to the virus. Gold actually fell pretty sharply for a few weeks in March even as supply of dollars was increasing faster than gold's 1.8% typical increase. That global panic has receded now, but supply of USD is still ramping though at a lower rate than April-June. Time to worry? Maybe - I own some GLD and GLD LEAP calls as insurance - so I'm not agnostic about all this stuff. Anyway - this is all my opinion and of course, I could be wrong. But its the model that I use in my head to try to understand the macro monetary flows and has served me well in trying to understand what's going on. wabuffo

LUB at the open - but I may also be selling it today. ??? wabuffo

You are 100% correct that most of the "Investments" are common and preferred stocks and are not comparable to cash and very short term treasuries held by Berkshire today. Your finding actually makes me more optimistic that Berkshire will use its large cash holdings to buy a really attractive business in the future (if they find one). This is fun. Let's dig deeper, ok? Once again - I have to express a debt of gratitude to the curator of the website that provided us with all of the Blue Chip Stamps annual reports -- complete with financials, and 10-Ks which give us even more detail (like the portfolio holdings of BCS). But first - a mea culpa. I made a boo-boo in my earlier table of investment assets vs trading stamp liabilities. Starting around 1975, BCS started breaking out its short-term investments separately on its balance sheet. I didn't pick this up until CB's comments forced me to go into the 10-Ks in order to analyze the portfolio mix. So I've updated the table from my earlier post and added debt/equity columns as well. It's helpful when my error actually boosts investment asset coverage 8). Here's the table and then I will make some comments. [don't forget to click on the images for full-size viewing] 1) Starting in 1975 the investment assets have increased vs the previous table I posted because I've added the short-term cash equivalents (but not cash - I continue to exclude that). 2) Somewhere during 1972, Buffett takes over the investments and together with Munger they buy Sees for BCS. You can see from the table, I've added the debt/equity ratios. When Buffett/Munger purchased Sees, they used the pseudo-equity of the stamp liabilities, to borrow the money to buy Sees. Debt-to-equity jumps from 25% to 94% during 1972 as they add over $30m in debt for the acquisition. 3) I've circled the years 1975 and 1978 because I believe they are key transition points for BCS. After Buffett takes over the investments and they buy Sees, during 1974-75 they take advantage of the overcapitalization of BCS (sitting at 170% investment assets to trading stamp liability) to liquidate some of their portfolio and pay down debt. At this point, we'll go take a look at the portfolio composition and detailed holdings because there is a better match between investment assets and stamp liability. 4) The reason I've also circled 1978 is because it becomes obvious that by this point, the old BCS is no more. Buffett/Munger fully consolidate Sees and Wesco onto the balance sheet. The investment portfolio I'm including is from the BCS 10-K, but the total portfolio is much, much larger. For example, while my table lists $67.5m of investment assets, the consolidated balance sheet holds $134m in investment assets. I feel that at this point, not only does BCS have more assets that it can deploy, but its liabilities are way overstated and Buffett/Munger know it (and are just trying to drag their feet on paying Uncle Sam the deferred taxes they owe). So let's go take a deeper dive on BCS's portfolio mix and portfolio: Buffett takes over sometime in 1972 and what decisions does he make about the portfolio? He clearly liquidates all the fixed income assets right away and over time the preferred stocks. BCS always had a part of the portfolio in common equity, but Buffett increases the mix from 25% to 75% over a few years, while still keeping 20-25% in cash equivalents like time deposits, commercial paper. Buffett knows that inflation is making the fixed income investments losers in real-terms. He's written extensively about his outlook during this period. But I would argue that his equity portfolio isn't what you typically associate with Buffett. In fact, let's take a look at the 1975 common equity portfolio (which upthread we highlighted as one of our two transition years). Yes - he moves into equities, but these are plain vanilla stocks that he views as safe (and a better hedge against inflation than bonds). There's no Washington Post or GEICO in this portfolio like he's buying for Berkshire Hathaway during these years. Now perhaps, we'll have to agree to disagree on this point - but I maintain that the portfolio construction is still 100% for the purposes of meeting possible liabilities. My view is that he treats the portfolio akin to a defined benefit pension plan. So I hold to my conclusions: 1) Buffett holds basically 100% safe assets against a float-like liability. 2) He uses the float as pseudo-equity and employs borrowed money to buy the assets and grow the equity over time (rather than deploying the investment assets). Oh - I forgot, let's look at the BCS common stock portfolio for 1978: The overall portfolio is a little smaller but many of the same utility and financial stocks are still there. The only stocks that I would call "Buffett" stocks (which are new and also appear in BRK's portfolio starting 1980) are Cleveland-Cliffs and Pinkerton's. Now at this point, the remaining "plain vanilla" common stocks are worth $33m (plus another $14m in S-T investments) vs $66m of stamp liability. Does this mean that Buffett is getting more aggressive about deploying the "float"? Does it mean he knows that the stamp liability is way overstated at $66m when annual revenues are down to $16m and falling fast? Or is it simply that the BCS is a bigger collection of businesses with significant assets and equity over and above the stamp business by this time in its evolution? In the end, I believe its all of the above. By the late 1970s, Buffett has made his mind up that he's going to consolidate everything (BCS, Diversified Retailing) into the mother ship (if only because he promised the SEC he was going to clean everything up after his legal near miss). So I don't think 1978 tells us much because of the changes in BCS and BRK. But the period from 1972-1975 tells us a lot. Its all fun stuff and really neat for financial history nerds like myself. However, my thesis stands. I still maintain that this is an a-ha moment that I will use in my approach to valuing Berkshire Hathaway. wabuffo

CB - I love your feedback (and criticism) The tax issue is interesting. Yeah - I think its a big deal. I am in the process of bringing my little model to present day and will use a 12.15x multiple on pre-tax earnings at a 21% federal corporate tax rate (instead of 10x at 35%). That way the implied value on the after-tax earnings are on the same basis. You seem to assume that the fixed income part is non-interest bearing and will always be. Well - who really knows. I think that, whether we like it or not, MMT concepts are beginning to take hold as the non-MMTers running the Federal government learn through trial and error that the fiscal capacity of the US Treasury is much larger than anyone previously thought. Therefore, I think that the Federal government will essentially stop paying any interest at all. In fact, as we discussed on the other macro thread about banks - the Federal government doesn't really have to issue debt at all. It only does so because (a) its General Account at the Fed can't be overdrawn by statute, and (b) bank reserves at the Fed would grow too large - so it will do the next best thing and just pay close to zero rates on Treasuries (while still holding to constraints a) and b)). You seem to rule out the possibility that the "coverage" of liquid investments to float moves away from 1 (below 1). There is a possibility that this ratio could come to 0.8 or even lower going forward, given the right circumstances. You could very well be right and there's some evidence that Buffett takes the ratio down to 80% coverage temporarily in order to accomodate large acquisitions (see PCP). But he quickly restores it to 100% via operating cash flow from what I can see. As I said in the earlier post, I was always aware of brooklyninvestor's 100% float coverage data, but ignored those findings because I attributed them to BRK's immense capital base and a lack of actionable investment possiblities. I assumed that when Buffett was younger and more of a swinger, there's no way he would hold so much cash. Blue Chip Stamps (BCS) would've been a better example of his "float management" principles given that it was the 1970s and Buffett was quoted by Forbes as feeling like he was an oversexed man in a ....well, you know the quote 8). I thought - for sure, Buffett would've deployed all or most of BCS's investment assets into Sees, Wesco and the Buffalo News even as he maintained the liability for the trading stamps because he had "more ideas than capital". Remember this is a period with three savage bear markets - 1973-74, 77-78 and 81-82. But when I looked at the financials after I got them last month, that's not what he did. He borrowed against the pseudo-equity of the stamp liability and maintained the investment assets to cover the potential trading stamp redemption requirements. Sure it occasionally dipped down to 80% as BCS took some hits to its portfolio in 1977 just as Buffett/Munger were buying the Buffalo News - but it quickly rebounded to 100%. This even as by the early 80s, it was clear that the vast majority of the trading stamps liability was never going to be redeemed (you can see this as revenues plummeted while the liability for redemption didn't change at all). Here's the quickie-table I drew up comparing Blue Chip Stamps investment assets vs trading stamp liabilities: I think perhaps we've always underestimated how much of an extreme-safety stance Buffett takes when it comes to float. Like I said earlier, this changes everything. It essentially makes all this $130B in insurance float worthless (especially in this environment of zero rates 4ever). And the idea of bagging a $100B+ "elephant" becomes a total fantasy (unless Buffett wants to get hyper-aggressive with debt). Even if we take 80% (instead of 100%) of investment float as conscripting cash and fixed income securities into being non-working assets, it becomes clear that all the two-column models out there (Tilson's, Semper Augustus, etc) are a mite too optimistic in their intrinsic value read-outs. That's not a terrible outcome. BRK doesn't go from always being undervalued to Tesla-crazy overvaluation. For the most part, its central value drifts a lot closer to Mr. Market's valuation - though still a tad under that daily quotation on most days. The key is to watch what Buffett does (and not what he says). wabuffo

Hi Wabuffo - very interested to see your fair value estimate for BRK under those assumptions. Sure thing - always happy to share. I haven't updated my model in a while so these are annual numbers for 2010-2017. This helps keep everything consistent because I use a pre-tax multiple on operating earnings and this period had a consistent Federal corporate tax rate of 35%. If I update, I will have to think about how to handle the change to a 21% tax rate. Anyhoo - just some quick background. Value of Operating Businesses: To the pre-tax earnings of the operating businesses, I add a long-term expected underwriting profit on insurance float that is in-line with the last 10-15 years performance (ie, 0.5% for BRK Re/Gen Re, 6% for GEICO and 5% for Other Primary). Excluded are all investment gains/losses and derivative gains/losses. I then use a 10x multiple on pre-tax earnings. Value of Investments: After-tax value of all investments (I subtract capital gains taxes). This is where I subtract the non-working part of the insurance investment assets. I typically used 20% of float (based on what Buffett says) - but I also show a second model with 100% (based on what Buffett does). [Click on image for full-screen view.] As I said in the earlier post - this was an a-ha moment for me. (apologies for missing the discussion from that 2015 thread - better late than never) I guess the key insight is that if the assumption that Buffett really does maintain 100% coverage for float via cash/fixed income securities, then BRK goes from perpetually undervalued (67%-88% of the model's central value for BRK-B) to closer to always fairly-valued (82-107%). As always - criticism and feedback always welcome. FWIW, wabuffo

I think someone on this board (gfp?) mentioned before that a business division has to be one party of the exchange to get the tax break. You (and gfp) are correct! The actual relevant part of the tax code is Sections 355(a), 355©, 361(a) and 361©. Basically a new corporate structure has to be created by one of the two swappers who will own 100% of the new wholly-owned subsidiary (let's call it NewSub). The owner of NewSub throws in their assets and then NewSub makes the exchange with the other party to the asset swap. The most important element to qualifying for Sec. 355 is that the IRS must agree that NewSub's acquired assets have a maximum of 67% of total assets being investment assets. In other words, someone has to throw in an operating biz that the IRS will recognize as having 33% or more of the total NewSub asset value. Otherwise, NewSub becomes a disqualified investment corporation and does not qualify for the tax-free exchange. Cash is classified as an investment asset and doesn't help. In the BRK-Washington Post exchange, the Miami TV station was valued at ~33.33% of NewSub's assets. In the BRK-PG tax-free exchange, Duracell tipped it over the 33% line. So we must find an operating business that AAPL can throw into the NewSub (Or AAPL sets up the NewSub and BRK must throw in an operating biz. It's gonna have to be a big'un since we're talking 34% of $125B in total assets being exchanged here ::) ). wabuffo

i don't see why BRK would not become a leveraged play again, given the right circumstances. Is it possible we have gotten the idea of insurance float all wrong? Despite Buffett's denial, brooklyninvestor highlights powerful evidence that BRK typically holds cash and fixed income amounts roughly equal to total insurance float, year-in and year-out. In my BRK valuation models (variation of 2-column method), I've always deducted 20% of total float as non-working capital from total after-tax value of investments per share) to get my fair value estimate. But what if it is really 100%? Then my fair values have been overstated (and so have everyone else's). When I try this adjustment (20% to 100%), my fair value estimates go from BRK being perpetually undervalued to BRK being mostly fair-valued with just a few periods of slight undervaluation (eg. 2015-16). This approach would be consistent with Buffett's methodology going all way back to Blue Chip Stamps. I always assumed that Buffett redeployed BCS's cash and fixed income investments into an investment in See's Candy - but that's not what actually happened when I got my hands on the annual reports. Instead, Buffett used the unredeemed stamp liability as pseudo-equity and levered up the balance sheet to buy Sees. He didn't really touch BCS's investment portfolio - other than tinkering with some of the fixed income investments for a bit of higher yield. It was only many years down the road, when it was clear the redemption liability was wildly overstated (and in fact the IRS began prodding BRK to take profits (and pay income taxes) on the "breakage" that Buffett really began to redeploy/shrink the investment portfolio. It is a bit of an a-ha! moment for me given the blog's reminder and my recent acquisition of the old BCS financials. I'm gonna have to go back and re-tool my BRK valuation models. wabuffo

Sell the AAPL and buyback an equivalent amount of BRK. How about: 1) AAPL uses its large cash hoard to buy ~$125B of BRK common stock, 2) Wait two years, 3) AAPL then swaps its holdings of BRK common stock with BRK for BRK's holdings of AAPL common stock in a tax-free exchange, 4) Both companies then retire their newly-acquired own shares (in effect, equivalent to a major stock buyback). 8) wabuffo

As expected every airline share is gone. plus OXY shares Sold financials: 85.6m shares of WFC 35.5m shares of JPM 8.3m shares of PNC 4.8m shares of BNY 0.8m shares of MTB 0.5m shares of USB all GS shares did not sell any AXP or BAC sold 82.4m shares of Sirius XM wabuffo