xo 1

It really does seem like Warren's been really clear in pointing out that cash dividends do not make sense with Berkshire trading above book value. A dollar of after-tax earnings is worth less than a dollar if sent out in a cash dividend, or more than a dollar if retained. Despite there bing a ceiling price on their repurchase plan, I do think repurchases are the way he will go. And, of course, cash hasn't piled up the way many would have expected. We're still here at $100 Billion. One of these days he's going to buy a decent sized company. He has done two really significant acquisitions in the last 10 years (BNSF and PCP), whereas he would need one of those on average *every year* to motivate retaining all earnings in the future. Repurchases are an alternative possibility but the price (and size) he has done them at thus far doesn't give any indication that they will come even close to solving the "problem". It's very easy math and the numbers are just too big at this point. By my estimation, something has got to give decently soon, whether that's the buyback price level or dividends. A dollar retained is not worth a dollar if you retain it just because the alternative of paying it out means making it 70 cents through taxes. How many cents on the dollar would you pay to get a return of ~2% before inflation and taxes and not having any control over when you can have disposal of it? Whatever your answer to that question is right now is what the marginal dollar at BRK is worth, because all the evidence available points towards it being impossible to deploy internally except in bonds. I understand and respect the perspective. The counter position, in my mind, is illustrated by the Great Financial Crisis. Alice Schroeder has stated several times that, as well as Berkshire did with its investments in the GFC, it was not able to really back up the truck because of its bets on the equity indexes. This has been explored already here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/interview-with-alice-schroeder/ I can't help but believe that Buffett hesitates to return capital because he remembers well what it felt like to be light on cash in a time of great opportunity. From my portfolio's perspective, that is the greatest value of BRK - it is anti-fragile to the extent it has gobs of cash available in the next crisis. If it starts to accept that the cash will never be investable, then it needs to undertake promptly a return of cash to shareholders. BRK may still have a position among my investments in that event, but the thesis will be different. But I reject that the time to make that determination is nearly a decade into a bull market. I'm not suggesting that a crash is imminent - only that the absence of satisfactory large opportunities is not likely to be permanent.

Great stuff. Thank you.

Here is a link to a Department of Justice news release: https://www.justice.gov/usao-edtn/pr/pilot-flying-j-enters-criminal-enforcement-agreement Here is a link to a local Tennessee paper with an update: http://www.knoxnews.com/story/news/crime/2017/07/25/whos-still-headed-trial-pilot-flying-j-case/506800001/ I live in Cleveland (where Mr. Haslam owns the NFL Cleveland Browns), so it was a very large story locally. With respect to BRK investing in other ethically questionable companies, perhaps, although I believe Pilot is different than buying a publicly traded stock in that this will be a wholly owned subsidiary eventually and the case is still playing out. As best I can tell, the initial thoughts that criminal charges would reach the CEO and ownership are not going to play out. Perhaps WEB knows enough to say for sure. But that was the biggest surprise from my perspective - this could end up with BRK buying into a private business where it needs promptly to replace management and that I didn't see that discussed by analysts. And it could be that the risk is priced into the deal, but until we know pricing for the deal, I don't know what to make of that.

The economics are still to be determined, but I was surprised that BRK would touch Pilot after the criminal trouble the company ran into cheating customers of rebates. Haslam has not yet been charged, so likely won't, but the pleas ran to nearly the top of the corporate chain and with the summer plea bargains in exchange for cooperation, I had thought there may be more charges forthcoming. Maybe BRK has reason to believe the matter is concluded. In fact, maybe that's part of the timing of the deal.

Thanks for the color, Uccmal. You do a nice describing the strengths. The one that I would add, which may be implied in your list, is access to capital. BAM and the subs have been hitting it out of the park over the past decade building relationships across the globe. Having a long-established relationship goes a long way to making capital sticky, which should prove a huge advantage over later entrants into the space. That makes their capital access more akin to the insurer companies and pension funds than other private equity.

I was surprised when I re-read Lowenstein's biography, after having read Snowball, how much of Snowball was already there. I loved them both, but when I think back to how groundbreaking Lowenstein's work was, I have to give it a nod.

I suspect the deal doesn't get done for less than the price that was negotiated. Management at PCP is very focused on price and wasn't going to sell on the cheap without extrinsic pressure, which i don't see having happened because the market dipped.

I think it is an untimely investment, as I see headwinds in the aircraft business for a couple of years. This is similar to buying ISCAR shortly before the Great Recession. I do think that the multiple will turn out to be a bit rich, given he near term performance. However, I think in the longer run, this is a good business, with the opportunity to bolt on more via acquisitions. On the plus side, the timing makes consummation even more likely and industry weakness will permit better pricing on bolt-on acquisitions from the outset. Headwinds are the friend of a strong business.

This sounds exactly right. As you use different models, they may wear a groove in your thought process so you have to be less deliberate but it isn't inconsistent with a checklist of mental models. As I apply the mental model approach, the process amplifies two related BRK concepts: 1) WEB's punch card of 20 lifetime investments, so think as deeply as possible about an opportunity before buying; and 2) Munger's "invert, always invert "(not just in the strict mathematical sense but more broadly as thinking a problem through from as many perspectives (mental models) as possible).

Magic Formula Investing / The Little Book that Still Beats the Market I just lent my copy to a 13-year-old last month and he couldn't put it down and was able to discuss the concepts afterwards with intelligence. Great introduction to investing.

Transdigm Group Incorporated - TDG. They keep hitting it out of the park, year after year. Great business model well executed. Brookfield Asset Management - BAM. Flatt and his entire team are hard working and super smart.

And not just a regular IPO. An LBO IPO exit. A Twitter finance community member just made the point that Carlyle has more than tripled their money with this IPO. And that speaks poorly for Dupont management. I wonder if this company is a potential acquisition candidate for Berkshire? Seems like it would be very beneficial to vertically integrate with all of the planes, trains, and automobile activity going on with Berkshire. Valspar apparently generates 15% EBIT margins on its coatings business, with what looks like a pretty high return on assets. If you folded Axalta into Lubrizol, could you get a best of breed transportation coatings companies that generates very high returns on investment? (Just back of the envelope musings, right now.) That's the only way I can make sense of the deal. Whatever the reason, there seems little reason to do a negotiated purchase at a premium to market. (I saw early reports that it was a 10% premium, but the stock price history doesn't support that as far as I can tell, unless we go back several months, which doesn't make sense.) Also, it's a pretty small buy for WEB to make personally.

I can't dismiss the risk. However, I note that Buffett and Munger have undoubtedly been attempting to design an entity that can be run profitably by a ham sandwich. In that time frame, the significant decisions of the successor CEO would be capital allocation. I can foresee that a poorly chosen successor who disregards the counsel of Tedd and Todd could blunder into one or more large below-market-return acquisitions. That wouldn't change the terrific DNA of the organization but would be a drag. It does emphasize the point that Professor Cunningham has made about the value of Munger. It is imperative that the succession plan include a top-notch "No" man. From what we know of them, either Tedd or Todd strike me as intellectually and emotionally well suited for the role. Professor Cunningham's idea that Howie Buffett is part of the No role doesn't resonate with me. I don't know if having a strong number 2 will be politically palatable in the BRK boardroom. I suppose that will be the first test of the new CEO - does he have the humility to accept a number two with effective veto power. I suspect there will be periods of drift under ineffective CEOs in the BRK future, but I am optimistic that it will take significantly longer than 10 years. Any of Jain, Abel or Rose will be fine CEOs, I believe. It's the next generation of leadership, at both BRK (CEO and CIO) and the important subs, that concern me.

With respect, I urge you to read again Buffett's rationale for why he chose to urge management privately to reconsider the compensation package and reflect on Buffett's management style (praise publicly, criticize privately), before deciding what the "right thing" is. I sold my shares in Winters' fund over this debacle, as I concluded his doubling down, when the errors in his math were pointed out to him, suggested to me that he was letting his ego get in the way of rational action. I don't doubt that Winters was trying to do the right thing - but trying isn't enough. His tactics never had a chance and his ham-fisted attempt to drag Buffett into the fracas to get his way was ill conceived. To your final point, notwithstanding your insinuation that Coke management wouldn't change their behavior, in fact the plan was changed. We can't prove what caused the change, but based on the public evidence, I'm inclined to believe quiet diplomacy was more influential than demogoguery. With the rise of activism, we are at an instructive time in board-shareholder relations. It is satisfying to believe the board should send strong messages to management, but reviewing the structure of BRK suggests that trying to influence corporate behaivor through up-down board votes is simplistic. If your CEO proposes motions that the board opposes, the board needs to change the CEO. Voting "No" isn't productive.

Well I think that if would start to analyze BH I would find out about Warren and Charlie... and Ajit. Re corporate governance I just assume there's nepotism on every board. Just because the names don't match doesn't mean that the results are different and management doesn't own the board. I have yet to see an instance when the board voted down a CEO's pay package. I think the fact that BH doesn't provide insurance to its directors makes for much better governance than any chairman/CEO role split ever would. If anyone does pls let me know. I am curious. The reinsurance business is such that no amount of information short of seeing the actual contracts would help you. It really is one of those cases where you definitely bet more on the jockey than the horse. You look at the track record over very long periods and you look at management and then if you're comfortable you kinda take a leap of faith. I think that Buffett is probably the best insurance analyst on the planet and even he gets it wrong often enough (Gen Re anyone?). I do agree that BH could provide more information. I would personally like more detail on the smaller operating subs. But then would I arrive at a significantly different estimate of BH's IV? Probably not, it would just make my work a bit easier. However, I am sure that the competitors of those subs would also be highly interested in those details as well and I don't know if that would be so beneficial for BH's IV. This gets at the heart of the issue, for me. The calls for greater disclosure are premised on the idea that more information is better information. I would like more information on operating subs because it is interesting to me. But the important details are 1) the economics - how much cash is made, how much cash is invested, and where that cash is invested; and 2) what the risks are to the business. The first point is addressed in abundant detail. The second point is far more difficult, but I don't see that the information being complained about not being disclosed will help answer that point. Perhaps unfairly, I read the complaints as being that earnings are impossible to estimate. Which is of course the heart of what Berkshire stands for.

Good stuff. Thanks for the information. Does anyone have a good solution for international calling plans for trips from the US? AT&T had a fairly good add-on plan two or three years ago, but when we traveled to Canada for the recent Thansgiving holiday, I was underwhelmed with pricing and the performance. When we've traveled to Europe for longer trips, we've used cell-service-only rentals, which is ok but not cheap and doesn't cover our smart phones. As Wi-Fi becomes more freely available, it is getting to be less of an issue, but I kept thinking that there must be a better way.

I read this book avidly. Terrific histories on several of the more important and lesser known BRK subsidiaries, such as the Marmon Group. It was well researched and written. I'm not persuaded necessarily by the professor's thesis regarding the principles that underlie BRK acquisitions, but it is thought provoking. All in all, for a fan of BRK, I recommend the book.

I like the turn of phrase "Hiding behind brands." Did you mean that the brands had their own management layers, where management across brands would permit a decrease in managers? Thanks. 18 months later, I am still fascinated by this deal.

Thanks for the link. It will be interesting to see if BH Energy is willing to participate in an auction or if they will try to use the certainty to close in lieu of a bidding war. I'd love to see Oncor added but it seems likely that one of the other bidders will have more aggressive pricing.

Very well put, Redskin. It's a question I've been hoping to hear answered.

Thanks. I agree those would have been interesting questions to have answered, had they been asked.

As someone who did not able to attend this year, could you list some of the unanswered questions you have in mind. From the media live blog and summary reports, I haven't come across the unanswered questions. (It has appeared that the media and analyst questions might have been less compelling this year than last year, but the shareholder questions perhaps betters.)

Interesting interview with the author of Dream Big in The New York Times. http://dealbook.nytimes.com/2014/05/05/a-q-a-with-the-author-of-a-buffett-praised-book-on-3g-capital/?_php=true&_type=blogs&emc=edit_dlbkpm_20140505&nl=business&nlid=64662544&_r=0 It hadn't struck me until reading the interview that one of the more important aspects of the BRK relationship with 3G might be to expand the geographic footprint of the BRK's deal. As Warren remarked at the annual meeting, the phone isn't ringing from outside the United States. With their brewery work, they strike me as having a much broader world view and, more important, a substantial set of contacts.

Thanks. Interesting nuance. As much as WEB has written about the regulated utilities, there are angles such as this one that I am missing.

Any one have any insight on the valuation? The Globe and Mail report on the transaction included SNC CEO Robert Card's characterization of the bidding process as "highly competitive" with interest from a "large quantity of very well-heeled people." That may be puffery but it doesn't sound like a typical BRK transaction. As an aside, I am also surprised that Brookfield Infrastructure didn't scoop up AltaLink. Perhaps the US$3 billion purchase price was too large for its appetite. Here is a link to a short article that has some additional color on AltaLink: http://www.bidnessetc.com/21718-berkshire-hathaway-inc-nyse-brk-a-nyse-brk-b-news-analysis-acquires-snc-lavalin-group-incs-altalink-for-2-9-billion/