redskin

The Fed approved JPM's plan to buy back $15 billion worth of stock last year. BAC is a lot stronger than JPM was last year. I would be very disappointed if BAC were to only buy back $3 billion of stock next year. Moynihan has said that all excess capital sitting on the balance sheet is there waiting to be distributed to shareholders. I would hope he would take advantage of the low stock price with large amounts of buybacks. He's also said that it is a priority to at least get back the shares that were issued during the crisis. This is what BAC issued during the crisis.... 10/7/08 455 million @ $22 5/19/09 1.25 billion @ 10.77 12/3/09 1.29 billion @ 15 They should make it a priority to retire these 3 billion shares as Moynihan has said.

I am unimpressed with Andrew Barry's coverage of Berkshire. He seems to be Barron's authority on Berkshire but I don't feel he has a very good understanding of the business. Barry seems to rely entirely on Price/Book in determining the value of Berkshire. Also, using a P/E analysis based on reported earnings only tells 1/2 the Berkshire story. Wishing Barron's could find a journalist that could dissect the true intrinsic value. I remember reading in the past that Buffett had these same frustrations. This was the reason he began communicating with Alice Schroeder. He wanted the intrinsic value of Berkshire to be understood by the public so the stock would trade close to that value.

This article was referenced in the Bloomberg story.... http://www.c-ville.com/Weschlers_imprint_on_local_news_grows_with_Berkshire_Hathaways_purchase_of_Media_General_papers_with_audio/

I was looking through the results of the Fed's CCAR for BAC. The Fed's stress scenario projected a 5.9% Tier 1 common ratio under severe adverse economic conditions. The minimum required by the Fed was 5%. These were based upon the banks 3rd quarter results of 2011. At the time, BAC's Tier 1 common capital was $118 billion and risk weighted assets were $1,360 billion. Through Q2 of 2012 BAC has Tier 1 Common of $134 billion and risk weighted assets of $1,193. How much will the Fed allow them to return this go around? If BAC had asked last year, I calculate they would've been allowed to return approximately $12 billion. (5.9%-5= .9% X 1,360). BAC has increased their Tier 1 Common by $16 billion since Q3 2011. They have also reduced risk weighted assets by $167 billion. Conservatively, if you use 5% for the reduced assets, they will need $8.35 billion less capital. Adding all of these together gets you approximately $36 billion the Fed would allow them to return and still maintain the 5% Tier 1 Common ratio if a similar stress test is used. This is about 40% of their current market cap and they will be replenishing it every year as the legacy assets come off. Of course BAC will be extremely conservative with what they ask for, but I would imagine they would request at least half of that amount. They also have an additional quarter to build more capital. Hopefully they will request most of it in share buybacks.

http://www.forbes.com/sites/randalllane/2012/08/27/inside-warren-buffetts-private-poker-game/

Kintsler is my guess for the next CEO of Berkshire. He started at the Berkshire homestate insurers. Buffett then sent him to Fecheimer and finally on to Buffett's beloved See's Candy. Kintsler has been embedded in the Berkshire culture for a long time.

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit. In the 2011 annual report WEB has stated that the insur ance float will most likely remain flat or decline slightly. 2011 Annual Report.... "It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add, it would almost certainly be very gradual and therefore impose no unusual demand for funds on us." This is how I look at the float. What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10). Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more. redskin, in my valuation appraisal I was trying to separate out the insurance business valuation, the operating units and the value one puts on WB growing earnings. In valuing the insurance business, I just looked at two aspects, the cash/investments and the profitability of the insurance operations. These two aspects come to at least $106bn. This valuation does not include anything for WBs ability to generate earnings from retained profits. I tried to give an idea of what this might be worth by showing how the operating units might grow in the future and how much that would be worth. Maybe that was not clear from what I had written. You are right that the float has some value which is why I applied a 5% investment income to the annual premiums in arriving at a combined value of the insurance assets. However, the 5% is a normalised figure and is probably high currently as Berkshire's float is about $70bn with $33bn in cash and $31bn is fixed interest securities. I think that WB has been very cautious investing float which has resulted in the float being invested mainly in cash and fixed interest securities. If one looks back at 2001, float was about $45bn with cash and fixed interest investments at $42bn. On the other hand, Berkshire has invested retained earnings from its insurance business and non insurance businesses extremely well over the years. Estimating how much this is worth is very subjective but it is definitely worth quite a lot. I tried to give a feel for how much this might be worth by stating that a 10% growth rate with a 2% terminal growth could add about $100bn to the valuation. redskin, we probably arrive at a similar valuation but I may be attributing the value slightly differently. I think I would value the insurance business higher than your estimates. There could be a case made for adding back 100% of the float liability if Berkshire is able to maintain the current level of float over time and has breakeven underwriting. Here is a quote from Buffett's 1997 annual letter..... "Since 1967, when we entered the insurance business, our float has grown at an annual compounded rate of 21.7%. Better yet, it has cost us nothing, and in fact has made us money. Therein lies an accounting irony: Though our float is shown on our balance sheet as a liability, it has had a value to Berkshire greater than an equal amount of net worth would have had."

http://www.nypost.com/p/news/business/boxed_in_by_lowe_A1SoEHWbrW4US1TDlk3S7J

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit. In the 2011 annual report WEB has stated that the insur ance float will most likely remain flat or decline slightly. 2011 Annual Report.... "It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add, it would almost certainly be very gradual and therefore impose no unusual demand for funds on us." This is how I look at the float. What would you pay to have $70 billion interest free and the ability to have Buffett, Combs and Weschler invest the money for you? If Berkshire can make a 8% return on that interest free loan and you use a discount rate of 10% it would be worth $56 billion ($5.6B/.10). Obviously, if you discount the return with current interest rates or are more optimistic about the returns that can be achieved it would be worth a lot more.

If one values Berkshire as two businesses, the insurance business and the operating units, in order not to double count, I believe that one has to deduct the float i.e. liabilities from the insurance valuation. Therefore, as it 31/12/2011, Berkshire had about $159bn of cash and investments in the insurance business with float of about $73bn giving a net value of about $86bn or $52,000/share. The insurance business also generates underwriting profit so this would need to be added to the valuation. Using a 2% underwriting profit and 5% investment income on the $30bn of premiums could give rise to a valuation of about $20bn, making the insurance business in total worth about $106bn or $64,000/share. (One should note that when Berkshire purchased GEICO, it payed a premium of 1x premiums over book value) Assuming the non insurance business generates about $12bn of pre tax earnings per year, an investor that assumes no growth in earnings and demands a 6% discount rate, would value that earnings stream at about $144bn or $87,000 per share. A no growth valuation of Berkshire equates to about $151,000 per share. The question is how much can Berkshire grow earnings in the future for both the insurance and non insurance businesses. If one assumes a 10% per annum growth rate for the non insurance business for 5 years and then a 2% terminal growth rate, it would add another $100bn plus to the valuation or about $60,000 per share. One should note that over the last 10 years Berkshire has increased its operating earnings for the non insurance units from $3.3bn in 2002 to over $12bn in 2011 implying a growth rate of 13.8% per annum. At 120,000 per share, Berkshire looks cheap with a comfortable margin of safety! I think you are undervaluing the insurance subsiaries with your $85 billion estimate. First, the insurance subsidiaries have a statuary surplus of $95 billion. Second, I don't agree with deducting the float entirely. By this logic, if float were to double to $140 billion it would add no value. The float is a perpetual loan at 0% as long as they can maintain the current level of float while breaking even on underwriting. If you were to discount the float, I don't think it would be by any more than what you would add to the valuation to account for the probability of an underwriting profit.

What is Berkshire Hathaway worth in 5 years? The pre tax earnings of the non insurance businesses was $7,000/share in 2011. Cash and investments was approximately $100,000/share. Berkshire is generating $12 billion ($7,200/share) of free cash annually. A few simple assumptions.... Cash and investments increase at a rate of 6% annually over next 5 years. I would expect the investment portfolio to perform better but he is also holding a lot of cash at very low rates. PV= 100,000 Rate= 6% Periods= 5 FV= $134,000 Buffett is able to deploy the $12 billion of free cash in to wholely owned businesses with a hurdle rate of 10%. This would add approximately $720 annually to the pre tax earnings of non insurance businesses. The non insurance businesses increase their pre tax earnings by 5% annually. PV= 7,000 Payment= 720 Rate= 5% Periods= 5 FV= 13,000 If you put a 10X multiple on the non insurance businesses you would get $130,000/share. Add cash and investments and you get $264,000/share. This would be an annual return of over 16% from the current price. These numbers don't include the possibility of underwriting gains from the insurance businesses. I also think the assumptions are very conservative. While Buffett would prefer purchasing businesses entirely, it is likely he will use some of the incoming cash to increase his publicly traded securities, which I believe with current conditions he should be able to achieve the 10% hurdle rate. I think the investment provides a very nice margin of safety. Even if these conservative numbers turn out to be optimistic, the investment should still provide an adequate return. I believe the returns will end up being significantly higher.

http://www.msnbc.msn.com/id/3036789/ns/msnbc_tv-morning_joe/#47779271

Makes sense to me.

Shorting a double long or short fund is a no brainer. Unfortunately, impossible to borrow. I have looked into this but apparently my broker (Interactive) has had trouble in the past obtaining shares of UBT to short, and it can be expensive.

I think it was definitely a jab at Buffett. Einhorn could be categorized as a 'gold bug'. He has a sizable portion of his fund's assets in gold bars locked up in a vault. I thought the section regarding cash in his letter seemed awkward and out of place with the obvious reference to Buffett. As others have said, Buffett would put gold and cash in the same bucket.

I enjoyed reading Seller's Harvard presentation, but didn't he ignore the most important trait when he liquidated his partners stocks and returned the money in late 2008? "And finally the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss."

Bloomberg. Huge moat with pricing power.

I don't think its worth spending much time on it since I trust Buffett and the board will make the right decision. However, I believe it will be Brad Kinstler. He currently manages Buffett and Munger's beloved See's candy. He previously managed one of the insurance subsidiaries and was then sent to Fechheimer to solve some problems. He has experience in a diverse group of the Berkshire businesses and has 'grown up' in the Berkshire culture. Ajit Jain is mentioned often, but I think of him as more of an actuary than a CEO/manager. I don't think he would be interested in the high profile position. He seems more comfortable behind the scenes while living in New York.

I'm hoping for another strong 15 years out of Buffett. However, on the date of Warren's death, there may be a fantastic opportunity for the Berkshire board to utilize the buyback. This will pay dividends to shareholders for years in to the future.

I very well may be low. Definitely going to be a nice increase in BV for the quarter. Hopefully we can get a break in the stock in order for him to get some shares back. I'm not sure I am following your calculation if BV increases by $13 billion. There are 1,650,000 Class A equivalent shares outstanding. $13 billion would increase the BV by $7,878. 99,860+7,878= 107,738 This would put the buyback price at 118,500. Either way, we are close to the buyback price now and BV will continue to increase over time.

I was figuring the increase in book value (not earnings) would be somewhere between 10-12 billion. The equity portfolio looks like it gained around $7 billion. This doesn't include the Goldman, GE, and BAC warrants. If it is $12 billion, I think the new book value would be approximately $107,000/share and the buyback price would be around 117,000/share

Hardincap, there is your answer. Bac has 12 per share of TBV and over 20 BV, once goodwill can be assumed ok. Rather than waiting for BAC to buy back shares, you can buy as many as you want at a price cheaper than BAC will ever get. you're missing my point. I WANT bac to buy back shares at these valuations alongside me. We are not "missing" your point at all as many of us were through the Fairfax journey. We just don't agree with you that it is the priority right now. I am 100% in agreement with hardnicap. BAC's capital and liquidity ratios are higher than they have been at any point in their history. If BAC were to buy back $5 billion of stock this year or 5% of the outstanding shares, it would be the gift that would keep giving for decades in the future. Even with a buy back of this amount they would still continue to generate capital throughout the year. Someone mentioned that the stock would fall if they announced a buyback because of fears of capital. I think that would be great! If the stock was cut in half and they were repurchasing $5 billion, they would retire nearly 10% of the shares outstanding. they can't buy stock because they are forbidden. Why? Because the fed does not believe they have enough capital to do And survive a depression like economic scenario. Yes wouldn't it be great, in a perfect world, that bac could buy stock back. But they can't. It's impossible right now. BAC needs to build confidence. There will be plenty of time for bac to buy back stock. It's not going to suddenly become ZYNGA overnight. They didn't request a buyback this year. They could've requested to buy back shares and would have remained above the stress test minimum. JPM will go below BAC's levels after their dividend and buyback. I am all for having a Fortress balance sheet and keeping a margin of safety. I just think they are already at that point and should take advantage of the current share price to buy a few shares in.

Hardincap, there is your answer. Bac has 12 per share of TBV and over 20 BV, once goodwill can be assumed ok. Rather than waiting for BAC to buy back shares, you can buy as many as you want at a price cheaper than BAC will ever get. you're missing my point. I WANT bac to buy back shares at these valuations alongside me. We are not "missing" your point at all as many of us were through the Fairfax journey. We just don't agree with you that it is the priority right now. I am 100% in agreement with hardnicap. BAC's capital and liquidity ratios are higher than they have been at any point in their history. If BAC were to buy back $5 billion of stock this year or 5% of the outstanding shares, it would be the gift that would keep giving for decades in the future. Even with a buy back of this amount they would still continue to generate capital throughout the year. Someone mentioned that the stock would fall if they announced a buyback because of fears of capital. I think that would be great! If the stock was cut in half and they were repurchasing $5 billion, they would retire nearly 10% of the shares outstanding. 90 days ago they were SELLING shares. Think about it. Yes. Conversion of debt to equity. Very expensive to shareholders selling those shares to retire debt.

Hardincap, there is your answer. Bac has 12 per share of TBV and over 20 BV, once goodwill can be assumed ok. Rather than waiting for BAC to buy back shares, you can buy as many as you want at a price cheaper than BAC will ever get. you're missing my point. I WANT bac to buy back shares at these valuations alongside me. We are not "missing" your point at all as many of us were through the Fairfax journey. We just don't agree with you that it is the priority right now. I am 100% in agreement with hardnicap. BAC's capital and liquidity ratios are higher than they have been at any point in their history. If BAC were to buy back $5 billion of stock this year or 5% of the outstanding shares, it would be the gift that would keep giving for decades in the future. Even with a buy back of this amount they would still continue to generate capital throughout the year. Someone mentioned that the stock would fall if they announced a buyback because of fears of capital. I think that would be great! If the stock was cut in half and they were repurchasing $5 billion, they would retire nearly 10% of the shares outstanding.

'Meanwhile, many of Buffett’s major stock picks for the past five years, like Johnson & Johnson, Kraft Foods Inc., ConocoPhillips, and Wal-Mart Stores Inc. have been lackluster. ' Total Returns from 2/28/07-2/29/12 SP500 +8.15% Conoco Phillips +38.7 Kraft +43.69 Walmart +36.02 J&J +21