Kiltacular

Posted by: boilermaker75 Boilermaker, What browser on the iPad do you use for viewing these? Thanks, Kiltacular

www.advent.com These guys are a bit pricier but their range of products is huge. See "solutions" dropdown. They work with almost every broker / custodian, afaik.

Yes, thanks...just set the recording.

+2 Great stuff

T-bone1, Great article / write-up. Thanks for posting. The board previously discussed "Fortune's Formula" -- that's the book where I first heard of Thorpe -- hadn't seen this.

The softer side of Kraven (nod to old Sears advertising). Really, though, your original comment can be called funny (at least by me) because it wasn't directed at anyone personally. The apology - whether or not he's the guy - is cool. I have to say, Kraven, you won a lot of points in my book for your posts some weeks (months) ago about how one of those banking / consulting conferences play out. It was genius. The early workings of a Dilbert. You know, if I have a son, I'm beginning to look at this board for pithy life lessons for the as yet unborn tyke. Wanna go corporate, see Kraven posts. Wanna get into insurance, see twacowcfa. Wanna pull yourself up and do it on your own, read the story of Parsad. Wanna flout the conventional wisdom you'd otherwise be taught at business school (or at least die tyrin'), see my friend Ericopoly. Want some excellent returns and good insights into macro, here's Pakcer. Want to become a lawyer like your grandfather -- fine -- but do what txlaw does. Want to pursue your Italian heritage, how about a summer internship with gio franchi. Feeling a tinge of anarchy -- I've got just the rkbabang for you. Want to see dad put in his place, call ragu. You like Canada -- what's that aboot? O.K. but at least find a girl from Vancouver (if she isn't already an actress in L.A.) and don't tell mom.

Exactly...this won't be in the news. You'll have subscribe to something like Stratfor or be really into knowing how these things sometimes end up fitting together. Plus, the best part of this stuff is ruined if Brian Williams is talking about -- then our "conspiracy" theories didn't go deep enough :) Seriously, what you're saying just "fits" the situation. Out of nowhere (I know, not literally out of nowhere), the Cyprus situation is everywhere. Virtually contemporaneously, we hear that Assad has / is using chemicals on his people. The second point puts pressure on Russia. The first part creates their opportunity. A deal can be struck since all the big money in Cyprus is Russian. Obviously, including the depositors with less than $100,000 was done to make it front page news and get the excuse for the larger involvement of Russia. Cause, based on what I saw about the banking system, most of the total dollar amount of money would be in excess of $100,000. Why include below $100,000 if it both hurts all the little guys and doesn't really help the problem...headlines All can relax, tin-foil hat now back in its box. Still, here's wishing I had Cardboard as my poli sci teacher. I'd probably had at least a bit part in zero dark thirty. :)

I don't believe this........anyone with photos? :P

Thanks twa...I hadn't thought of this particular similarity. Interesting.

You are a smart fellow, Cardboard. I wish I had had you in my school for "Model United Nations". You make so many good points here about what is likely happening that I don't know where to start. I'll only add that Russia's support for Syria -- for the reason you cite -- was becoming a real problem for the West as the Assad regime / chemical weapons issue rise to the fore. A real cynic might opine that the whole "game" in Cyprus revolves around giving the excuse for the Russians to come into the game to get their port so that they will cave on Assad / Syria.

EDIT: I erased my response because after thinking about it for a few minutes, what Ragu is saying is much more correct that what I was saying. I was double counting. My example: Using GEICO's book value excludes all of GEICO's float. If we include all of GEICO's float, then there is not too much "economic goodwill" not included on Berkshire's balance sheet. Ragu...thanks for your patience.

Hi Ragu, I see how you're looking at it -- well explained. But, what you say is true if Berkshire simply always writes a combined ratio of 100. No underwriting losses but also, no underwriting profits. But, I would add, again, that in the case of GEICO, the discrepancy you describe is not just attributable to GEICO's float. So, while I would agree with you that if we're just talking about valuing Berkshire's float, you are correct, I was adding the idea in my original comment that, even if you subtract the goodwill on the books associated with the insurance companies, it isn't insane to think that this is conservative (and I'll amend that with) if you consider that the value of GEICO [if not the other insurance operations] is not just its existing float and its future float but also its ability to create massive underwriting profits. So, if you assume that GEICO will produce large and growing underwriting profits for a long time and that the rest of Berkshire's insurance operations will write at breakeven, I would still argue that you are not double-counting if you write up Berkshire's books for the unrecorded value of GEICO's goodwill even if you subtract the rest of the goodwill associated with the insurance operations that are recorded on Berkshire's books (as Buffett suggests should be done in this year's letter). Does this make any sense? I may still be double counting it but I don't think I am if the conditions I describe are met.

I'm not an old-timer yet (a bit under 40) but I asked my father, many years ago, what this was like in the 1970's in the U.S. He said that people would leave their jobs (as administrators, secretaries, etc.) every 6 months because they could get a higher paying job. However, is this how it plays out this time? As Packer has pointed out (last year), there is little pressure on wages (at least right now). This is one of the reasons why corporate profit margins have stayed high. Others here might recall that Buffett has done a bunch of long discourses on inflation -- if you read all that I comment on below, I think you'll agree Warren has given this subject an enormous amount of thought -- and he was the son of a gold-bug. A great primer on what you want to own, if you believe Buffett, is in the appendix to the Berkshire letter of 1983. This is a must read if you're interested in this subject. There is also this must read article by Buffett from 1977. "How inflation swindles the equity investor" : http://features.blogs.fortune.cnn.com/2011/06/12/warren-buffett-how-inflation-swindles-the-equity-investor-fortune-1977/ I feel that his title is a bit confusing, though, because if you think an inflation protected business -- like the kind he describes in the 1983 Appendix -- is hurt by high inflation you haven't thought through what happens to "cash" (especially if after-tax interest rates are less than the inflation rate). The body of the 1979, 1980, 1981 and 1984 letters contain 'inflation' commentary as well (as well as a few more letters after that). These are very useful and unusual in some respects. (Though, by 1984, Buffett himself was worried about the possibility of "runaway" inflation. The predictions are difficult but the business insights in these letters are still awesome in my opinion and what I found particularly useful is the idea that a great business is also good even when there is not high inflation so you don't have to guess.) By 1985, Buffett said this (in case you don't believe me about the appendix to the 1983 letter): The dramatic growth in earning power of these three businesses, accompanied by their need for only minor amounts of capital, illustrates very well the power of economic goodwill during an inflationary period (a phenomenon explained in detail in the 1983 annual report). And, in 1986, Buffett said this: Our aversion to long-term bonds relates to our fear that we will see much higher rates of inflation within the next decade. Over time, the behavior of our currency will be determined by the behavior of our legislators. This relationship poses a continuing threat to currency stability - and a corresponding threat to the owners of long-term bonds.

This is a great topic and I remember when I read this story originally. Perhaps it is obvious to others, but do other posters see why / how this is relevant to business and investing? I have my opinion. I haven't previously seen the transitive dice discussion subsequently connected to why this might be interesting to the history's greatest investor. I think it is fascinating and learned something about how to think about investing when I first read the story. It is particularly interesting w/r/t investing in the case of Buffett but, in my opinion, it is also interesting in the case of Gates and Microsoft. Anyone with comments?

Hi Ragu, Sometimes these types of conversations are difficult online. With that said, I DO NOT think it is inconsistent with Buffett's commentary / explanation to subtract goodwill for the insurance businesses. I was pointing out that it is VERY conservative if you believe Buffett when he explains that there is a lot of "economic goodwill" for the insurance companies -- at least w/r/t GEICO -- that IS NOT on Berkshire's consolidated balance sheet. The goodwill that is on Berkshire's balance sheet related to the insurance companies is -- from memory -- mostly related to the purchase of General Re. The goodwill represents the portion of the purchase price in excess of what can be allocated to the purchased assets once those assets that are indentifiable are written up to fair value. What Buffett explained about GEICO in the letter I referenced was that there is a huge amount of "goodwill" that is not on Berkshire's balance sheet but would be if Berkshire "rebought" GEICO now (well, in 2010). Subtracting the goodwill related to the insurance companies that is on Berkshire's balance sheet is very, very conservative if you believe Buffett about GEICO. And, GEICO's "economic goodwill" (what would be balance sheet goodwill if Berkshire rebought GEICO today on the same basis that it bought it when it did) is likely more related to GEICO's ability to produce enormous underwriting profits on premium volume than it is related to GEICO's ability to produce float. Though, that is likely not true for the Gen Re purchase -- which was for the float (very long-tailed) -- and less for the underwriting profits. Again, this is wordy and likely worthless. The point is simply that subtracting the goodwill that is on the balance is very, very conservative IF you believe Buffett about GEICO. My 2 cents.

You can find the growth / change in deferred taxes for BNSF using their filings. I've found that many people quickly grasp how Berkshire's deferred taxes on its stock holdings represent an interest free loan from the gov't. They see that the present value of this deferral is unknowable because we don't know when the underlying stock holdings will be sold. Still, they see that this deferral has significant value at Berkshire because many of the stock holdings which represent the bulk of the unrealized gains have been held for a very long time -- especially Coke and AXP and to a lesser extent Wells Fargo. However, when it comes to discussing the deferred taxes for BNSF, they don't seem to see the value. These deferred taxes -- as I read it -- are even MORE valuable than those generated by the stock holdings because they are likely to be permanent. I mean, Buffett has made it clear that they plan to hold BNSF "for 100 years", etc. Second, it is clear to me that because of inflation, the total amount invested in PP&E at BNSF is likely to grow and, as well, Buffett has made it clear that BNSF is spending well above depreciation in any case. So, therefore, as long as the total invested in PP&E doesn't shrink AND the rules regarding BNSF's benefit from accelerated depreciation don't change, this deferral is effectively permanent and the cash it currently provides BNSF in excess of reported earnings is a substantial number. Because of the regulated return on capital nature of BNSF, I don't think Buffett will go to pain to highlight this situation if it is correct. The filings for BNSF can be confusing. They keep two current with the SEC: "BNSF Railway Co" and "Burlington Northern Santa Fe, LLC" I believe the second one, the "LLC", is the one you want to use. It shows, for example, the distributions to Berkshire while the former one doesn't. Using the second filing, we can see that in 2012, deferred income taxes went from $15,637 to $16,319 for an increase of $682 million in 2012 alone. The cash represented by this increase is not reported in earnings but, I'm arguing, it is real cash flow for BNSF (as long as the requirements I described above are met -- I think they are and they will be indefinitely, and that's key). If you talk to an accountant, he will tell you simply that deferred taxes represent differences between GAAP taxes and those calculated to determine tax payments to the IRS. He'll tell you that "they eventually converge". The issue here is that, in some cases, "eventually" can be a really, really, really long time. I think these kinds of insights are a big reason Buffett is so rich. I mean, if every year you tell yourself that you owe taxes to your government of $50,000 and therefore your gross income of $200,000 is reduced by $50,000 and so your net is $150,000 (your "reported" earnings). But, in fact, you only pay your government $40,000 but you make an entry on a ledger that notes you "eventually" will owe the other $10,000. And, crucially, that "eventually" is at least 100 years away, then, effectively, you've made more than $150,000. You've made something much closer to $160,000 because the present value of the deferral is a much smaller number than what you've recorded on your ledger. This is a very similar concept as to what Buffett highlighted again this year regarding Berkshire's "liability" on its balance sheet for "float". (With float, though, you have a different set of circumstances that make it true. I feel confident that Buffett understands all these things -- he's the one that taught me the concepts :) )

Oh, I see. Yeah, the ROE's aren't that bad. Plus, they're somewhat muddled for BNSF because there's now a lot of goodwill and there are enormous deferred taxes each year. (I feel strongly that these deferred taxes will be indefinitely deferred and therefore act as real cash. Unless Berkshire shrinks the PPE&E or there's a tax law change, it amounts to a lot of money.) *_*_ I mentioned previously that MidAmerican files. You can find info. on the MidAmerican holding company online: "MidAmerican Energy Holdings Co / New" They filed their 10k March 1. Equity at the holding company (excluding $9MM of non-controling interests) was $15.742 billion on 12/31/12. MidAmerican doesn't have, as I read it, the same kind of tax deferrals indefinitely as BNSF but they have currently been getting all kinds of tax benefits from wind (and soon solar) that don't appear if one just takes reported earnings and divides by equity to get the ROE. My 2 cents on these subjects.

fareast, I think that is the reason. MidAmerican also still files and they too issue bonds not guaranteed by Berkshire. It makes sense that this would be the law / requirement.

BNSF pays out a bunch to Berkshire proper as well which reduces equity at the subs.

Whether or not the hedges work out at this point, I think Packer makes a lot of very interesting comments both w/r/t Fairfax proper as well as some of the larger macro issues / goals of the Fed, etc. About a year ago, when latest "rage" was that profit margins were too high, Packer made some insightful comments about why they might not be. Interesting stuff.

Boardwalk empire is a terrific show (done by the same guy who did Sopranos) -- just a great show. The guy who plays Rothstein is a superb actor as is the rest of the cast. There was a quote from Rothstein in the show that I wrote down (you can also find it online). Since EC has added it as his picture, I thought I'd post the quote as it is apropos (sorry if it is a repeat -- someone else probably caught it already): "I've made my living, Mr. Thompson, in large part as a gambler. Some days I make twenty bets, some days I make none. There are weeks, sometimes months, in fact, when I don't make any bet at all because there is simply no play. So I wait, plan, marshal my resources, and when I finally see an opportunity and there is a bet to make... I bet it all."

Hey guys, CNBC usually posts a transcript of his long appearances on their program. Does anyone see one for his Monday appearance? I can't find it if it's there. Thanks in advance. kiltacular

And, posting on cornerofberkshireandfairfax...

Very well said. Just look at a lot of the lottery winners -- some of whom have won 10's and 100's of millions -- that are dead broke within 10 or 20 years (or less). Importantly, if these assertions are correct (and I believe they obviously are), they lead to some important conclusions about public policy. It can only be taken so far -- unfortunately -- before it destroys its host. America -- given its incredible heterogeneity in race, religion, country of origin, and even language (at certain points) -- has so far done a damn good job of handling this. It's pretty impressive. It's also a good reminder of why someone like Munger says that you should never get too extreme in your political views. It's better to gently nudge the pendelum back in the other direction when things move too far. Still, consider that charitable giving in the U.S. last year exceeded $300 billion. Even though some of this money might have been ill-gotten, its interesting that over time (going back to J.P. Morgan, Rockefeller, Carnegie, Stanford, etc., etc.), the American tradition is to give back enormous amounts of personal wealth. I'm still proud of the U.S. (I like Canada too ;) )

philassor, Good points. And, the funny part is that, for example, he tells you to subtract the goodwill for the insurance business -- as you have. But then, you can find something -- like the 2010 report -- where he says that GEICO is on the books for only $1.4 billion of "goodwill" but really you could easily say that it should be on the books for more than $14 billion over carrying value...if you marked it up to what he thinks it's worth. (And, that was two years ago.) Or, this year, he says Marmon is worth more than $4 billion more than it's on the books for. God knows what he thinks BNSF's value is over Berkshire's carrying value. Whatever it currently is, the spread widens by the day if Buffett is to be believed. Anyway, good comments.