wabuffo
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Posts posted by wabuffo
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I think Walmart's biggest advantage is grocery. They dominate grocery (at least in physical store sales) as it makes up 55% of total US Walmart revenues (~$180B in annual net sales). Amazon is a non-player in grocery (though they made a splash with the acquisition of Whole Foods). To put it in perspective, Walmart's grocery sales are bigger than Amazon's TOTAL NORTH AMERICA net sales.
I still believe grocery is a poor fit for on-line sales (witness the numerous disasters - Webvan, Peapod, even Amazon Fresh). There are numerous reasons why most grocery will not work with on-line delivery (except for maybe some packaged dry foods).
Amazon has advantages vs Walmart in other areas - but Walmart is the 800-lb gorilla in US grocery and its a very important segment that entails frequent store visits.
wabuffo
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The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs
LEAPs can be expensive. LEAP calls are essentially margin with an embedded put option.
You can often achieve the same result (more cheaply) by buying the underlying stock on margin and writing LEAP puts to protect the downside of the margin. Plus - if the underlying pays a dividend, you get to keep the dividend (which you don't with a call option). Margin interest rates can be low if you use a broker like IB. Its not out of the question that a margin+put can cost 500bp less than the exact same position via a LEAP call.
wabuffo
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Appaloosa, absolutely, like 1000% certainly, does use leverage, as do most major funds. Especially those who run credit funds and get involved in distressed asset investing(which is Appaloosa's bread and butter)
Even the simple structure funds like Perhsing Square deal in swaps/OTC derivatives, which is another form of leverage.
I wouldn't condone or recommend it - but every great investing track record employs leverage, in some form. Buffett has used leverage at every stage of his investing career (Munger was even more aggressive). For example, Buffett talks about the great returns he made in the years before the Buffett Partnership (1951-56) ("I killed the Dow"). But he was aggressive in the use of leverage even then (this is before insurance float or Blue Chip stamp float).
There's a page in one of Andy Kilpatrick's books that shows Buffett's personal portfolio for 1951. His opening capital is $9,800, but he basically buys GEICO ("the stock I like the best"), his biggest position during the year, on borrowed money ($5K) and makes a 76% return on the year.
Leverage is best left to the pros (and they do use it).
wabuffo
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Berkshire May have a lot of cash, but it has had several 50% drops during its trading history, so a 2:1 margin could definitely wipe you out, regardless of the fact that Berkshire ultimately was fine.
Spek - that is a great watch-out.
The only nit is that the two times in the last twenty-five years that BRK dropped by 50%, it did so from a starting point of trading at 2X book value per share:
1) Q4, 98 to Q4, 99 - BRK-B fell from $ 54.26 to $27.02 (BV was ~$25 per B-Share)
2) Q3, 07 to Q4, 08 - BRK-B fell from $101.18 to $44.82 (BV was ~$51 per B-Share)
Both of these occurred in the absence of any announced BRK buyback policy (though the first instance caused Buffett to write an open offer to buy shares in his March, 2000 Chairman's letter). The second instance caused Charlie Munger to "sell" a ton of BRK shares to his heirs on margin (via a note - so, like 95% margin) in a shrewd-tax planning move in Nov. 2008. One could say a bell was wrung in both cases near the top and bottom. Since then, BRK has communicated various forms of buyback policies starting in 2011.
Short-hand rule used to be - buy at book, sell at 2x book, rinse and repeat.
wabuffo
(who sometimes uses a bit of margin against his BRK position to buy market-neutral positions like liquidations ;)).
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In addition, the FED repo action since Fall 2019 provides them with more liquidity (hedge funds are one beneficiary of the Fed providing liquidity via Repos).
Bingo - that's it. The Fed expanded its balance sheet and stocks went up. But, wait ... before the Sept repo madness, the Fed was removing liquidity, right? To the tune of $300B!
So of course, stocks went....DOWN UP...22% during that time.
Fed removes liquidity, stocks go up, Fed adds liquidity, stocks go up. Maybe, just maybe one has nothing to do with the other and our mental models when it come to how the Fed works are ... wrong.
wabuffo
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If generating prosperity were as easy as keeping rates low so that extremely high P/Es could be justified ("rates are 1%, a P/E of 50 is low"), Europe and Japan should have been booming
I'm trying hard to avoid pulling back the curtain on my weird devil's-den of macroeconomic theory,... but I'll just say this.
1) Perhaps we are very wrong about what a central bank does, and how limited its power truly is.
2) Perhaps we are also very wrong about deficits and how they work for a fiat currency issuer that is also a global reserve currency.
This is why its so tough to make predictions about macroeconomic theory.
wabuffo
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Buffett never predicted whether inflation would go up or down in "how inflation swindles the equity investor." He explained how it affects return on capital and business investment decisions, didn't predict the future.
Sure - he never made an outright prediction - but he was pretty gloomy about inflation being a perpetual issue in the US. Here's the "money" quote that ends the article:
"On balance, however, it seems likely that we will hear a great deal more as the years unfold about underinvestment, stagflation, and the failures of the private sector to fulfill needs"...this is how the long-term stagflation environment looked like after the publication of his article. I'm not knocking Buffett here - you are correct that his purpose was mostly educational. But if we give him credit for "Buy Stocks, I am" in 2008, then he gets dinged for the pessimism in this article, IMHO.
wabuffo
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in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..were not reasonable
Buffett is not a great macro-forecaster (and he admits as such). Remember his "how inflation swindles the equity-investor"? Well the publication of that article pretty much marked the top for inflation in the US. As I continue to point out - there are two major valuation inputs that have changed since Buffett's iconic 1999 Fortune article.
1) At the time of the article, the 30-year Treasury was yielding over 6.5%. Today it is 2.3%. Buffett admitted in that article, that this was a factor that could change his forecast (though he didn't predict it). This input is a two-fer for valuation purposes. Corporate America is paying less for its debt - plus discount factors for equity valuations have to be pegged lower. This was also a reason Buffett was bearish at the time - in 1999, 30-year Treasuries were yielding a higher rate than the earnings "yield" on Corporate America. That is not the case today.
2) The Federal tax rate on corporate pre-tax income was 35%, today it is 21%. Uncle Sam has decided to transfer 14% of his ownership stake in Corporate America to us, the private sector owners, at no cost. I think that's a big deal.
It seems to me, one would have to adjust a time series of market cap ratios for these two important input factors. Whether these input factors continue to stay at their current values, I have no idea (though I am not betting against it).
wabuffo
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Corporate debt to after-tax corporate profits currently at 5.42X (average for the last 65 years = 5.43X) Max was in 1990 = 9.08X, Min was in 1966 = 3.32X
In a recession, profit dips, so the ratio will increase, but it doesn't look like businesses would be starting from an overleveraged position (relative to history).
FWIW,
wabuffo
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Not a big deal, but minor correction: S&P 500 TR for 2019 was 31.49%.
Yes - you are correct. Sorry about that, I had an error in my spreadsheet. Thanks for pointing it out!
wabuffo
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Interesting to see that ... the mean/average of this years returns seems to be significantly below the index with the most people having a 20-25% outcome, not one, but two steps below the option that includes the index return.
Hielko - not terribly surprising. I think there are two reasons:
1) The average stock underperformed the big market-cap weighted indices (the FAANG influence). I would guess the COB&F stock pickers are value pickers and generally are underinvested in FAANG.
One way I measure the annual return of the average stock is to take a squint at the Wilshire Equal-Weight Indices. The Wilshire Equal-Weight 5000 Index had a 28.9% return in 2019 (vs 31.05% for the S&P 500 Total Return). So basically a bunch of monkeys throwing darts at the WSJ stock pages underperformed the S&P but still edged out the average COB&F value investors in 2019 by the looks of the self-reported survey.
2) The other factor that I think comes into play is BRK's underperformance. Just like the COB&F value investors are underinvested in FAANG, they are probably overinvested in BRK and BRK underperformed the indices by a lot this year (e.g., BRK-B had a 10.9% annual return vs 31.05% for the S&P 500 TR).
wabuffo
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Negative rates didn't change anything, why?
Maybe because negative/low rates hurt savers (in terms of lost interest income) than they "help" debtors. It's a tax basically and destroys the banking sector (which probably also hurts debtors - so no gain). I remember an analysis that Einhorn did a while back during Bernanke's drive for zero short term rates that used US Household data from the Fed to quantify the negative net impact (savers vs borrowers). The US was heading in the same direction, but then cut federal taxes which helped to offset the impact to savers by increasing after-tax incomes.
wabuffo
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Another important factor is the size of your grubstake. If its small and you are relatively young, there's an argument to be made that you should be fully invested at all times.
wabuffo
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Buffett piled up $128 billion because the market is not in a bubble
or maybe the cash and short-term bills is nothing unusual when placed in proper context.
One needs to equate the cash as a percent of shareholders' equity in order to judge its size. In fact, there are times when BRK has had a greater percentage of its net worth in cash and s-t-bills. The cash is nominally bigger because the balance sheet is bigger. The actual amount tells you nothing about any positioning or market stance because it is not unusual at all.
wabuffo
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the market will observe these prospects and vomit. on the day after the election of warren.
The market is fairly good at handicapping political outcomes. It will mark-to-market the odds of either party winning on a daily basis throughout the political campaign season - and thus, won't wait until election. Unless its a complete surprise ("Dewey Wins!")
Also - what if these ultra-low long-term Treasury rates are here to stay for the next 10-20 years? Stocks might actually be undervalued at a 3% risk-free long-term rate. I think the comparisons to historical valuations are really comparisons at much higher discount rates (and higher domestic corporate tax rates).
What is $1 pre-tax earnings worth at a 35% tax rate and 7% 30-year Treasury ($0.65/.07 = 9.3x pre-tax earnings) vs
a 21% tax rate and a 3% 30-year Treasury ($0.79/.03 = 26.3x pre-tax earnings). Of course, if that 3% 30-year Treasury rate is here to stay................
wabuffo
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Buffett doesn't like buying assets out of a bankruptcy proceeding. In the past, courts/judges have imposed deal termination fees are that are sometimes too low for him.
wabuffo
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But he doesn't know that WEB doesn't do auctions.
WEB is also not crazy about buying assets inside a bankruptcy process.
He's had some disagreements with Bankruptcy judges about the miniscule size of the deal break-up fees imposed by Courts. Buffett views it like he is being forced to offer a put option and isn't being adequately compensated for it.
wabuffo
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We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year
BTW - back to the original post for a quick sec. Anyone else noticed that this bolded statement is plainly untrue.
Here is Wedgewood's holdings of BRK.B shares over the last few years according to the 13Fs. He actually started selling in late 2015 (when BRK got cheap and very near Buffett's 1.2x book value buyback level). There was more selling there than this year. How does one reconcile his statement and his many media appearances as a BRK bull with his actual record? Perhaps I'm missing something.
wabuffo
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The old chucks angles board was so active during that time.
oh hey - gfp = globalfinancepartners! The penny just dropped. I didn't realize the connection!
Yeah the old Chuck's Yahoo BRK board was amazing - Prez, BabyB and too many others to mention. Those were fun times. I learned a great deal from many posters there and on the Motley Fool. Became a better investor because of them.
wabuffo
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Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time.
https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml
Who says they don't ring a bell at the bottom. Sometimes they do!
wabuffo
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If you look at peak to trough Berkshire was down more than 50% during this period.
Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)
Trough: 3/5/09 closing price 72,400 (intra-day low was lower)
Drawdown: -51.3%
Munger_Disciple - this is an interesting example. Before Buffett came out with his 1.1x and 1.2x book value buyback "floor" prices, I liked to use price-to-book value as a short-hand way to buy and sell BRK. Basically if the price approached 2x book value - you sold (or didn't buy) and if you got anywhere near book value - you bought.
The drawdown you note neatly encapsulates this "rule". The peak in Q4 2007 represented a price-to-book value of 1.96x book value. The trough in Q1, 2009 represented a price-to-book of 0.95x book value. Many people were buying BRK hand-over-fist in late 2008 and early 2009. Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. He was actually selling his shares to his heirs near their lows on margin (95% margin IIRC). It was actually a ringing of the bell to buy BRK because Munger was executing a deft tax-planning move.
There was another 50% draw-down with BRK that happened early in my investing career. During Q4 1998 and Q1, 1999 (in the middle of the Gen Re acquisition), BRK sold briefly at 2.1x book value. Then in March 2000, it sold as low as 1.06x book value. I believe the fall in price from peak to trough was 49.8%.
My larger point is that 50% drawdowns do happen to BRK. But they start from a point of very high valuation and the trough (when it happens) often represents an outstanding bargain investment. BRK's valuation today makes it unlikely you would see a 50% drawdown from today's prices. And if you did, then you might want to buy it in size.
wabuffo
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I follow every post from benhacker and writser as well. Very thoughtful investors (and humble too - despite their very evident value investing chops). I also like cigarbutt's careful reflections and ideas. He's very polite and tolerates my snarky posts about Aimia. I don't think I would have his patience and grace if someone was ripping one of my investment theses. :)
Overall - as long as one stays away from the "Politics" mosh pit, one of the few websites with so many high class posters!
wabuffo
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I don't want to pile-on Wedgewood. But I don't agree that Berkshire Hathaway has underperformed the S&P 500 in recent years. He/they arbitrarily chose the start of the current bull market in March 2009 to do their comparison - but I think that misses an important point. Buffett is starting to acknowledge that his capital base and cash position are making it harder to achieve BRK's past results and he has signalled that he will take action to prevent underperformance.
That is why starting in Sept. 2011, he formalized a buyback policy which has helped to put a floor under the stock and moderate its price declines. He started at 1.1x Book Value, then raised it to 1.2x Book Value in Dec. 2012 and then finally went to a more unconstrained approach last year. I would argue that this new capital policy means that one should look at BRK's record since 2011 vs the S&P 500. From what I can see, how can one say that BRK has under-performed vs the S&P 500 through this period (until this year)? It hasn't!
It's too early to panic because of a few Q's of underperformance in 2019. Especially since Buffett will act if BRK's price/value becomes attractive. We all may wish he was more aggressive with his buybacks so far - but I do believe that the presence of a significant repurchase program is a new factor that helps the stock from languishing the way Wedgewood fears it will.
Of course, this performance reflects buy-and-hold since the end of 2011. There's nothing that prevents someone from buying or adding to a BRK position during periods where it gets statistically cheap (like late 2008/early 2009, Aug-Sep 2011, or Q4 2015). In those cases, the investing record in BRK improves vs the simple buy-and-hold record. I don't see how Wedgewood's investment in BRK has anything to do with their underperformance vs the S&P 500.
FWIW,
wabuffo
Stocks for a 15-20 Year Hold Time
in General Discussion
Posted
Madison Square Garden(if post spin, the sports teams) owns one of a kind, trophy assets.
Not to hijack this thread, but Forbes just came out with its yearly NBA sports franchise values and the Knicks are no. 1 at $4.6B. Historically, Forbes' valuations have been under the level at which transactions occur. FWIW.
https://www.forbes.com/sites/kurtbadenhausen/2020/02/11/nba-team-values-2020-lakers-and-warriors-join-knicks-in-rarefied-4-billion-club/#6f4c918e2032
wabuffo