Kiltacular
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Posts posted by Kiltacular
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Buffett wrote in his 1994 letter that he wrote a report on IDS Corporation. Snowball also mentions that Buffett wrote a report on it in the Commercial & Financial Chronicle in the early 1950's - has anyone ever seen this report and/or know where to get it?
(EDIT -- I see, reading more carefully, that you're probably not looking for this FCIC interview...I'll leave it up in case someone else finds it of use. Apologies)
http://fcic.law.stanford.edu/interviews/view/19
Is this what you're looking for?
There also is (or at least used to be) a transcript that I got from Santangelsreview.com
I might have found the that transcript on this site, so you might try searching this board if you can't find with a search engine.
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How a 36-year-old Wall Street prodigy saved Burger King
http://www.businessinsider.com/how-wall-street-prodigy-daniel-schwartz-saved-burger-king-2017-6
Good article -- thanks
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longinvestor,
https://www.youtube.com/watch?v=hrulcIBe3Z0 , at about the 04:12:00 mark and then some minutes going forward, about the buyback scheme at place right now.
The first part of this
Greg Warren claims Buffett did confirm to us during the company's last annual meeting that he would aggressively buy back stock if it dipped below 1.2 times book value, even if the firm had not yet reported its end-of-quarter book value per share to shareholders.is right, including the last part of the sentence in the article is not right [in the meaning "not said"/"misleading"/"lack of precision in written reporting by a journalist"], though Mr. Buffet states that he follows this relationship between market price of the stock and book value closely.
There are a lot of shades in the statement from Mr. Buffett made on this question at the AGM that are worth noting.
To me the built in qualifications in the statements af the AGM is about that what potential investment opportunities Mr. Buffett has on his desk at that particular moment when the market price is about 1.2 X BV, as an alternative investment opportunity to share buybacks, and that we will never know.
Personally, after listening carefully to the above mentioned slip of the video, I - sucjectively - consider the BRK buy back scheme - at least a bit - more "firm" than "soft" without here trying to quantify it in one way or another.
And I like that, going forward with this investment.
longinvestor, thank you for bringing my personal attention to this BRK issue/topic.
My take on the Berkshire buyback scheme:
(1) He doesn't want to buy back any shares (He will...but he doesn't want to...no matter how cheap he thinks they are).
(2) He implemented the buyback as a way to guarantee meeting his "beating the S&P metric" -- a dollar retained is worth more in "market value" than in book value...at least 1.2x. Why? Because, he doesn't want to pay a dividend and he doesn't want to buy back any shares...the threshold works for these purposes. But, he's committed to doing some combination of those things if Berkshire's market price doesn't keep up with its growth in BVPS.
(3) He doesn't want this obvious set-up to be gamed so he is warning the smart money that, say, in a market crash, your put options might be put to you because he might let the price drop to .9x book (or whatever) for a relatively short period of time, i.e. long enough for most options to expire worthless and/or destroy the people trying to game him.
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What a great story and legacy -- thank you for posting.
It's still true: "Only in America!"
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I agree w Picasso. I think if you want to get the most out of your question you need to ask something with a 15-20 year time horizon (something really long term to get his wheels spinning) but also make it detailed (so he doesn't give you a canned, generic answer).
I like the idea of asking something with a long time horizon. It made me think. I'd probably not make the question too detailed. Like a politician, a public figure on stage like Buffett will often only answer the easiest part. Or, if it is too complex, answer something different.
Based on the long horizon insight, here's a question I'd like to see Buffett asked:
"You've said in recent years that America's best days are ahead -- do you think that's true even if GDP per capita shrinks over time?"
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http://news.morningstar.com/articlenet/article.aspx?id=749007&SR=Yahoo
Montross retirement and speculation over Jain's evolving role at Berkshire.
IMO, given his mastery over "risk" across all kinds of businesses, Jain would be the only candidate to replace Munger. I can see all big deals made by others coming to Jain for the last word. Given how well it has worked for the last 50 years, having two people look at each deal makes a lot of sense. One for circle of competence and the other for assessing risk and more importantly making the decision if the price is right for risks that may happen down the road. In some ways, spreading the capital allocation across people with deep domain knowledge could be better than trying to find another prodigy who's mastered the method of learning across a swath of life. Now, there's not two of that kind.
+1
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The irony in this wordy thread is that reasonable estimates of BRK today has it selling at 30-50% discount to IV. While we are rueing missed opportunities in 1965.
Can you explain how Berkshire would be valued at $480-$680 billon? Thanks.
Using two of the three pillars of IV
Portfolio=$160k;
+Earnings=$12k x 10 = $280K per A share (30% above today)
+Earnings=$12k x 12 = $304k per A share (50% above today)
Actually the multiple deserves to be much higher for a business that has grown earnings at a 23.4% clip for 50 years and this decade looks on pace for 15%+. In my mind, for the earnings multiple, comparables are premier conglomerates, DHR, ITW; They are selling at 18x. Berkshire is better in important ways than these two. (I am intimately familiar with DHR, worked there for a meaningful length of time) .
Some more IV to chew on (few want to go there); a factor of >1.0 for the third/qualitative pillar of IV needs to be included based on the historically disproportionate retention of earnings over the past 7 years, but we will let time tell if that was deserved or not. 1 dollar is being turned into 1+ dollars as we speak. So as to not double count, I think a higher multiple of earnings will cover that. (higher than what I used above). I suspect that it will all show through the continuing earnings growth. Willing to wait for that.
Thanks for your explanation. A few follow-ups.
(1) I would be careful not to equate "Berkshire is trading at a 30-50% discount to intrinsic value" with "intrinsic value is 30-50% higher than today's price" -- they are not the same. The first statement implies, as I said, that Berkshire is worth $480-$680 billion. The second statement implies (and I think is what you meant) that Berkshire is worth $440 billion - $510 billion, a far more reasonable range. (In my opinion.) Your second statement implies a 22-33% discount to intrinsic value.
(2) I have seen this "two column" analysis before but one part of it does not make sense to me: Why is that $260 billion investment portfolio considered all belonging to shareholders? It is encumbered in two important ways: Deferred taxes on gains in the equity portfolio ($25 billion) and, more importantly, $88 billion belongs to policyholders in the form of float.
You would correctly argue that both of these will be paid at some indeterminate future time, and thus shouldn't be counted 100% against the investments - and I would agree. That means the $113 billion of liabilities are worth somewhere between $0 and $113 billion. I'm not sure what the final figure should be, but I know it should be something. If you disagree, I would ask you: Would you rather own $260 billion of cash and securities with no liabilities against them or with $113 billion of liabilities against them? Yet I never see this deducted in the two-column analysis. Deducting $40-60 billion would lower your intrinsic value by $25K-35K per share.
(3) Berkshire's operating earnings figure is pre-tax, I think the multiples you're citing for DHR and ITW are after-tax. They both also have much lower tax rates than Berkshire, which hurts the apples-to-applies comparison. (Pre-tax earnings at ITW and DHR are more valuable in that sense.)
Berkshire has some great businesses in there for sure, but remember that to generate that 15% per annum growth, he's had to invest a tremendous amount of capital -- it's not happening organically. To double that earnings stream again will require a massive investment. So I would find it hard to swallow an argument that values those businesses at much more than 12x pre-tax earnings, which is roughly 19x after-tax earnings. Most of them are earn good returns, but aren't growing a whole lot anymore.
(4) Regarding use of retained earnings, that could add a plus factor for sure, but I would argue that's partially captured already if you value Berkshire's businesses at a 12x multiple, moreso if you go higher. Looking at the metrics of the PCP deal for example, where Buffett had to pay 25x earnings or something in that neighborhood, tells me that BRK's operating earnings growth must slow pretty dramatically from 15%.
Thanks for the discussion, really helpful.
This is a good discussion.
On (1) -- Buffett has laid out the numbers as clearly as ever in this year's report. It's probably worthwhile to spend some time considering how he tells us to evaluate Berkshire if for no other reason than someday he will be gone. Straight from the annual: Pre-tax earnings per share $12,304. Put a 10x multiple on those for $123,040 of value per A share. Investments per share: $159,794. Fair value: $282,834. If you buy Berkshire at that price for an A Share, what would you expect to get as a CAGR in the following 10 years -- I'd guess Buffett would say about 7%.
On (2) -- If it doesn't make sense, you're arguing with the best investor ever explaining his "masterpiece" to you. Buffett's method (prior to this year, where he finally tells the investor its okay to apply a multiple to the underwriting profits) gives only a relatively small value to the insurance operations and their "intrinsic" ability to add new float and to give ongoing underwriting profits. Using Buffett's method if actually very conservative unless you think float is going to run off quickly. In this year's letter he calls the insurance operations the best in the world -- why would he lie? If you think he's right, his method of the two columns probably vastly understates the value of the insurance operations. It isn't that complicated and probably undervalues Berkshire (based on what I would guess are Buffett's assumptions about the "3rd column". As Munger would say, "your smart and Buffett's right -- figure it out." Buffett has explained this for a long time...way back when Berkshire's deferred tax and float liabilities were much smaller...they've only grown...never been paid off -- was he right back then? When can we say "yes"?
On (3) Berkshire's GAAP tax (and therefore the reported tax rate) don't come close to matching up with actual cash paid for taxes. Make some adjustments and you'll see. See the top of page 57 of the annual for cash paid for taxes versus "income tax" near bottom of page 38. Cash paid for taxes hasn't exceeded 60% of GAAP reported tax expense in last 3 years. How long does the deferral have to last before it has a high present value?...It isn't "on / off" and it isn't 100% of the deferral. But, is it 80% or 5% -- because we can't know, it doesn't make sense to me just throw up our hands...what if we had this discussion 20 years ago...what was the present value of the deferred tax then? This is like Buffett's example of float being a revolving fund.
On (4) I feel that investors vastly overstate the value of a company's ability to create "organic" growth. Berkshire's method proves how irrelevant that approach actually is. The better question is why, if so many other companies have such terrific organic growth -- growth that comes without additional capital investment -- where is all the extra money going? What aren't the financial statements capturing? The excellent tech companies -- MSFT, GOOG, AAPL -- are counter examples...they throw off excess cash and it just builds on the balance sheet -- they are true organic growers. But, they're also held back by the fact that they don't know what to do with the excess cash. Berkshire has two solutions -- buy new businesses and invest in others via the stock market.
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I mean if you keep buying up dollars for 30-50 cents, does it really matter what happens with deleveraging and macro? I don't like BAC or GM but if you buy up enough of half of book and 7x earnings type stocks it's hard to lose even though macro is a factor. You just don't want to go balls to the wall long at 2x book or 10x peak earnings, etc. Macro matters a hell of a lot when you're paying a full price.
Respect the macro and market but it's too easy to lose track of why value investing works when all these slick tongued macro guys come out. Dalio spends an insane amount of time only thinking about these macro issues.... Can any of us say that spending a similar amount of time will get us better investing results? Just some simple due diligence and respect for the macro will keep you out of a lot of blow ups and hopefully buying up enough cheap assets will show in the result over time. And you can't rely on Dalio's thoughts either. He's only recently become a more public speaker on these various issues. I wouldn't expect him to tell us when the macro suddenly looks great.
+1
Find cheap stocks -- cheap blue chips right now: aapl, bac, wfc, axp, ibm, xom, brkb
If interest stay low, these will be homeruns (on a blue-chip return scale) 10 years from now. If interest rates tend back to 4 or 5%, they will only do very well -- 10% to 12% annually averaged for the decade.
The macro won't matter in either case.
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Thanks for highlighting this link...I read the story about the Cascadia fault when it appeared in the magazine. It is excellent.
http://www.newyorker.com/magazine/2015/07/20/the-really-big-one
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muscleman,
With regard to Buffett, what you're looking for might be at the end (appendix) to this letter (?):
Purchase-Price Accounting Adjustments and the "Cash Flow" Fallacy
http://www.berkshirehathaway.com/letters/1986.html
Not sure, though, because it is from so long ago...rules might differ today.
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Thanks Dazel!
Dazel and LongHaul...you might like "The Big Rich". Focuses on the big 4 Texas wildcatters that became crazy wealthy (for a while)...includes the branch that led to the Bass Brothers and Rainwater.
Good read. http://www.amazon.com/The-Big-Rich-Greatest-Fortunes/dp/0143116827
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FIDO has an app -- for the iphone, at least -- which acts as a token. It's from Symantec and is on the phone. You might need to press them to offer it to you. This solves the issue raised above and also seems generally more secure, as a hacker could break into your computer remotely and load the token that is on your machine, right?
Not sure if I'm missing something.
The security token is a small device that is separate from your computer. You push a button on the security token, it shows a passcode that you then type as part of the log in process. You cannot access it through your computer.
Thanks Boiler. I've got one of those separate tokens for Schwab. This thing I'm talking about for Fidelity is like have the token but on your phone -- it generates a new 6 digit code every 30 seconds. It's great (assuming I'm not missing something about the security) because as long as you have your phone with you, you have the code rather than having to be sure you're carrying around your separate tokens (Schwab) or cards (IB).
I don't recall, but I'm pretty sure I didn't just download an app from the app store but I made it sound that way. It was activated somehow from Fidelity but it appears just like any other app on the phone itself.
But, it might not be as secure as the entirely separate Schwab token you're talking about and am open to being told otherwise.
Perhaps you were telling me that in your reply!
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Fidelity - I couldn't find info on their website, but when I inquired about it by phone, a representative set me up with one, where Fidelity uses a virtual token from Verisign they place on your computer desktop. When I log on with my username and password, I get prompted for the 6-digit code which I can see by minimizing the Fidelity page and clicking the Verisign icon.
How does Fido software work if you have multiple computers? Do you have to install it on every computer you access Fido from?
I'd guess you would have to install a separate one on each device you use. For the correct answer, you'd have to call someone in the know at Fidelity. I do not think they have a physical token like E-trade.
My wife and I are paranoid enough that we have a dedicated laptop on which we do only financial stuff (banking, credit card, brokerage, etc.) on it, no web-surfing or anything else on it, and no financial stuff on all our other devices.
FIDO has an app -- for the iphone, at least -- which acts as a token. It's from Symantec and is on the phone. You might need to press them to offer it to you. This solves the issue raised above and also seems generally more secure, as a hacker could break into your computer remotely and load the token that is on your machine, right?
Not sure if I'm missing something.
In any case, thought I'd throw it out there. I've only had this for a few months so perhaps it is new.
If you need to make a trade and don't have your phone, I've found Fidelity was wiling to work with me. The two times this has happened to me and I called to make a trade, Fidelity has given me the online commission price.
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It sure seems like it worked out very well for an arranged marriage.
From what I've read, arranged marriages do have lower rates of divorce.
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Somewhere in the annual letters to shareholders Buffett refers to all of his companies collectively as "the streams of income that form the mighty Amazon" (I'm paraphrasing). I think it's quite a bit of his strategy is to prefer an acquisition over his own shares -- his own shares would have to be awfully tempting to be a better idea. Or something like that.
It seems like Buffett has built Berkshire to withstand the downside to a greater degree than other entities are typically structured. For an active / enterprising investor, this seems to have little value -- it isn't something engaged market participants are willing to pay for. They / we will just sell a company in which we've lost confidence.
Berkshire is more like the result you might get from an arranged marriage which neither party can ever leave.
You might as well accept your fate and work together in a true partnership to better your conjoined futures. Any alternative choice is irrational.
But, if either party can divorce (sell) at any time, the nature of the investment is entirely different.
Berkshire probably has a better chance of being around 100 years from now than virtually any other business. But, in a world where there is no fault divorce, I'm not sure that fact will ever be worth a premium and maybe it shouldn't be except for Buffett's image in posterity. And, well, it's not unreasonable to argue that has little or no value to anyone but Buffett.
I own it because I think it will be around for my future and grow its value at a decent clip. The deferral of taxes has a large value to me. Divorce (selling) is very costly in a taxable account in the States.
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Eating at Osteria Francescana is an awesome experience. Usually you need to reserve a couple of months in advance. Francesco Bottura restaurant based on some expert review is the second best place to eat in the whole world.
There's a Netflix Original Series called "Chef's Table". Episode 1 is about Massimo Bottura and his restaurant -- excellent episode.
There's also a television show on Netflix called "Anthony Bourdain: Parts Unknown". Season 2, episode 4 is "Copenhagen" and is all about Rene Redzepi and "his brainchild, Noma".
You might want to watch the Copenhagen one sooner rather than later as I've noticed that some series -- like Top Gear -- are ultimately removed from Netflix.
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Here's a 2 hour audio clip of the Q & A. It includes everything except the very first question (which Charlie said happened to be the most intelligent question ever asked at the meeting, haha)
This is outstanding. Thank you.
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I did not see any mention of Matt Rose, and he semi skewered the performance of BNSF in this letter. Which for his usual standards of lavishing praise was pretty harsh.
Great point. I thought this was really interesting too. Like you said he semi-skewered him and then specifically did not mention anything about the management of BNSF, which by implication is somewhat of an indictment since he singled out the heads of the all the other "Powerhouse 5" I believe for praise. And since in the past it has seemed that Buffett not praising management of one of the very large subsidiaries is almost like criticism.
At face value, it does seem like BNSF dropped the ball. But, my paranoid thought is that Buffett is justifying to regulators and captives shippers why he is going to spend $6 billion this year on a cost plus business.
It is unlike him to single out a business like this when it has been such a great performer unless they have years of trouble. Plus, Buffett is saying that BNSF needs to spend a much higher portion of revenue than other rails, including its primary competitor. The first thing regulators are going to ask is: "Why?..." The answer to regulators has to be that it is because BNSF is losing competitive ground rather than BNSF wants to gain competitive ground and Berkshire loves spending as much as possible on this cost plus business.
Plus, note that Matt Rose is no longer CEO (and hasn't been) and Carl Ice is.
But, that is the paranoid response. The simple explanation is that Union Pac. ate BNSF's lunch.
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I was under the impression that the ECB couldn't do QE....so how exactly are they doing this today?
each country has to take 80% of their risks. So ECB isn't carrying the risk if bonds arent worth what they bought them for. So if for example greece fails, they will take 80% of the pain. And richer countries will take 20% of the pain.
I dont know how likely this is though, the general people of the EU are beginning to see the Euro and the EU for what it really is, a failed experiment that is enforcing hardship on millions of people to protect the wealthier countries in the Euro. Sooner or later than are going to give the EU the finger and go it alone, things cant get much worse for some.
Even in the UK, which has come out relatively unscathed considering, the general public despise the EU and everything it is doing - trying to enforce actions onto sovereign countries - it's completely undemocratic and we are seeing an uprising in extremely right wing parties coated in socialist rhetoric against draconian spending cuts forced on them by the EU. The whole thing is unfolding in a much too similar way to the rise of the Nazi party, people are worried.
http://www.scribd.com/doc/134732321/Margaret-Thatcher-Forbes-1992
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"Frontline" @ www.pbs.org ...recently aired a decently interesting episode on Ebola.
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While I don't know the politics here, given the disaster that was Energy Future holdings, the regulators might be favorably disposed to the stability that Berkshire offers.
Buffett has stated that this stability, combined with Berkshire's clear willingness to invest, should give it an advantage in bidding for these types of utility investments. It is an enticing offering for regulators and politicians. In addition, in this particular case, Berkshire's BNSF is headquarted (for now 8)) in Dallas / Ft. Worth. Berkshire's Nebraska Furniture Mart is also building a huge store in the area right now. That is a lot of jobs and tax revenues that might tilt things in Berkshire's favor.
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I've been reading Buffet's letter and I noticed that although Berkshire experience a few cycles when the insurance market is tough and he stated the willingness to stop underwriting unprofitable policies, Berkshire's float kept growing since 1967. Do you know why? I would assume that the float would shrink heavily when they reduce underwriting volumes. ::)
Geico is growing .... and growing .... and growing ...
:)
Beginning after Gen Re, most of the float is from the retroactive reinsurance deals.
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I recently read the (dense) "Good Calories Bad Calories". For those interested in the paleo diet or just diet and nutrition in general, I can't recommend it enough.
Like good value investors, some of you ferreted out this idea ahead of others. Together with a recommendation to read this book, it was commentary here that got me to pay attention. Now, even the NY Times is catching on.
This subject has huge implications for both children and adults. I was dismissive of these ideas. I think I was dead wrong.
This NY Times article is fully supported by the extremely in depth arguments of Gary Taubes in "Good Calories Bad Calories".
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Europe / Euro needs this devaluation. Aside from price risk on natural gas (does Russia price it in dollars?), what other downsides would there be? I'm sure I'm missing a bunch.
Li Lu's foreword to Poor Charlie's Almanack (translated to English)
in Berkshire Hathaway
Posted