Buffett's Berkshire is yesterday's story

[CanadianMunger]

http://www.theglobeandmail.com/globe-investor/investment-ideas/for-berkshire-investors-book-value-growth-is-key/article17503460/

 

By Mr. NormR ;)

 

"Problem is, it is extraordinarily difficult for giant companies to grow at above average rates for a long time."

 

I would generally agree.   

 

But wouldn't meaningful buybacks with moderate increases in earnings power from the subidiaries continue to grow operating earnings in the double digits for a considerable stretch of time?  (I'm thinking of the IBM model here)

 

-CM

[NormR]

Please keep in mind that I didn't get to pick the title of the story.

[PJM]

I think an interesting second part of the article would be "The Berkshire's of tomorrow"

[NormR]

I think an interesting second part of the article would be "The Berkshire's of tomorrow"

 

Do you have any nominations?  :)

[NormR]

But wouldn't meaningful buybacks with moderate increases in earnings power from the subidiaries continue to grow operating earnings in the double digits for a considerable stretch of time?  (I'm thinking of the IBM model here)

 

The meaningful buybacks assume a lower than current multiple. 

 

Why do you think BRK will be able to grow operating earnings at a double digit rate?

[JBird]

Why do you think BRK will be able to grow operating earnings at a double digit rate?

 

Because it's earning double digit returns on incremental capital in its five largest operating businesses (which account for 68% of operating earnings).

 

But long-term returns will rest mainly on the company’s ability to increase its book value. That’s not great news because, as Mr. Buffett has warned, it’s starting to slow down.

 

Long-term returns will rest entirely on the company's ability to increase intrinsic value, not book value. If stock prices dwindle and share repurchases start, per-share book value will fall and per-share intrinsic value will rise. The price will follow the movements of the latter.

 

 

[Liberty]

I think an interesting second part of the article would be "The Berkshire's of tomorrow"

 

Do you have any nominations?  :)

 

If you want something close to Berkshire in structure and philosophy but without the size, I'd probably say Markel.

 

I don't think they're quite at the level of brilliance of Buffett (who is?), so I don't think they'll have a similarly spectacular long-term book value growth record when all is said and done, but they should do very well nonetheless.

[valueinvesting101]

"My biggest worry is related to the firm’s size. Berkshire Hathaway is the fifth-largest stock in the U.S. by market capitalization and the fourth-largest by revenue, according to S&P Capital IQ. Problem is, it is extraordinarily difficult for giant companies to grow at above average rates for a long time."

 

Okay so large companies cannot grow as fast as small companies but 10 smaller companies combined will be able to grow faster than one large company. Isn't that what Berkshire is? Collection of independent companies running with minimal interference from each other. I think top 20 companies in SPX have weight of around 42% and most of these companies work in single industry. They perform poorly when they try to go into different business area. So either ROI decreases and hence slow growth aka value creation or significant cash built up or spitting cash out of business hence lacking compounding. Berkshire seems to have advantages in terms of float from insurance business, excellent capital allocation to go into completely different areas and still able to generate returns.

 

For giant Berkshire to grow faster than even larger SPX index(combined market cap of $20tn) it needs to have selected companies from SPX with above average potential. Running company privately does give management greater flexibility and less pressure to create greater longer term value.

 

"But long-term returns will rest mainly on the company’s ability to increase its book value. That’s not great news because, as Mr. Buffett has warned, it’s starting to slow down."

 

Isn't this missing growth in earning capacity of acquired companies such as Gieco but no growth in its book value. Does book value captures growth in earning capacity?     

[jay21]

I think an interesting second part of the article would be "The Berkshire's of tomorrow"

 

Do you have any nominations?  :)

 

If you want something close to Berkshire in structure and philosophy but without the size, I'd probably say Markel.

 

I don't think they're quite at the level of brilliance of Buffett (who is?), so I don't think they'll have a similarly spectacular long-term book value growth record when all is said and done, but they should do very well nonetheless.

 

+1 - Markel is the closest thing I have found to a BRK copy. Float growth can give them very high returns. 

 

But wouldn't meaningful buybacks with moderate increases in earnings power from the subidiaries continue to grow operating earnings in the double digits for a considerable stretch of time?  (I'm thinking of the IBM model here)

 

The meaningful buybacks assume a lower than current multiple. 

 

Why do you think BRK will be able to grow operating earnings at a double digit rate?

 

They can take their earnings and just keep building utilities where the ROE is in the low double digits.  IMO, 10% ROE is their floor.  Bolt-ons, other companies ROEs, purchasing marketable securities all probably have higher returns than 10%. 

[Guest longinvestor]

I think an interesting second part of the article would be "The Berkshire's of tomorrow"

 

Do you have any nominations?  :)

 

If you want something close to Berkshire in structure and philosophy but without the size, I'd probably say Markel.

 

I don't think they're quite at the level of brilliance of Buffett (who is?), so I don't think they'll have a similarly spectacular long-term book value growth record when all is said and done, but they should do very well nonetheless.

 

+1 - Markel is the closest thing I have found to a BRK copy. Float growth can give them very high returns. 

 

But wouldn't meaningful buybacks with moderate increases in earnings power from the subidiaries continue to grow operating earnings in the double digits for a considerable stretch of time?  (I'm thinking of the IBM model here)

 

The meaningful buybacks assume a lower than current multiple. 

 

Why do you think BRK will be able to grow operating earnings at a double digit rate?

 

They can take their earnings and just keep building utilities where the ROE is in the low double digits.  IMO, 10% ROE is their floor.  Bolt-ons, other companies ROEs, purchasing marketable securities all probably have higher returns than 10%.

 

+1

 

This article (and several others) quickly point to BRK's return over the past 10 years. The past 10 years included the do-nothing period(WEB fearful, everyone else greedy) leading up to the disruption of 08-09. And then WEB got really greedy and the frenetic pace of value creation(putting birds in the bush), many of those investments have barely started bearing fruit. Early indications are that it is a bumper crop.

 

A 10 year look back to 2009-19 is very likely far different relative to 2004-14. Time will tell.

[Guest longinvestor]

"My biggest worry is related to the firm’s size. Berkshire Hathaway is the fifth-largest stock in the U.S. by market capitalization and the fourth-largest by revenue, according to S&P Capital IQ. Problem is, it is extraordinarily difficult for giant companies to grow at above average rates for a long time."

 

Okay so large companies cannot grow as fast as small companies but 10 smaller companies combined will be able to grow faster than one large company. Isn't that what Berkshire is? Collection of independent companies running with minimal interference from each other. I think top 20 companies in SPX have weight of around 42% and most of these companies work in single industry. They perform poorly when they try to go into different business area. So either ROI decreases and hence slow growth aka value creation or significant cash built up or spitting cash out of business hence lacking compounding. Berkshire seems to have advantages in terms of float from insurance business, excellent capital allocation to go into completely different areas and still able to generate returns.

 

For giant Berkshire to grow faster than even larger SPX index(combined market cap of $20tn) it needs to have selected companies from SPX with above average potential. Running company privately does give management greater flexibility and less pressure to create greater longer term value.

 

"But long-term returns will rest mainly on the company’s ability to increase its book value. That’s not great news because, as Mr. Buffett has warned, it’s starting to slow down."

 

Isn't this missing growth in earning capacity of acquired companies such as Gieco but no growth in its book value. Does book value captures growth in earning capacity?   

 

+1. I've been using the term "urban myth" for the broad brush stroke with which BRK of today is being painted with. Time will tell and the market will catch up but what you write is exactly how WEB has structured BRK for long past his reign.