Compounder Growth Propspects

[Palantir]

Divide ROE by P/B = starting expected return. I want this number to be above 8-9%, and as time goes on, investor returns approach ROE....

[constructive]

Which company is BNL?

 

I'm also confused.

 

Context suggests maybe Brookfield?

[Packer16]

BNL is Braodstone Net Lease and private NNN firm I described under the interesting income alternatives thread.

 

Packer

[frommi]

Divide ROE by P/B = starting expected return. I want this number to be above 8-9%, and as time goes on, investor returns approach ROE....

 

Thats a bit misleading, after a good year like 2013 ROE will always be high if the book is invested in equities. Perhaps you can take the average ROE of the last 10 years, but that should equal the book value growth over the last 10 years. Thats only the growth component of the return you can achieve when the manager gets the same returns like the last 10 years. It tells you nothing about the fair book value multiple.

[Palantir]

Yes, you should come up with a normalized estimate of ROE, or even Growth in BVPS as a proxy.

[frommi]

That book value multiples are lower these days can also be a factor of the current non-inflation environment. In higher inflation the float should be more valuable, because you pay no interest on it. When interest rates are 0%, the float is worth nothing, because you can lever with borrowed money for zero. But when interest rates are 10%, a 0% float gets you easy money.

[yadayada]

what about LMCA? Or any of malone's company's.

[KCLarkin]

MKL probably goes on the too hard pile. Operating earnings are highly volatile, so trying to normalize ROE is hazardous.

 

Compare MKL to BRK, which has relatively stable earnings and is also growing BVPS in low double digits. I KNOW BRK's BVPS is greatly understated. Partly because Buffett and Munger tell me so, but also because I know GEICO and BNSF are worth multiples of what they paid for them.

 

You could use Munger's valuation method. Is MKL a more compelling buy than your best idea? Is MKL at 1.25x better than BRK at 1.3x?

 

Disclaimer: MKL is on my too hard pile so the above is purely theoretical. I haven't done any in-depth research. Based on historical valuation, MKL looks compelling at less than 1.1x BV.

[CorpRaider]

http://brooklyninvestor.blogspot.com/2014/03/markel-2013-annual-report.html

[jay21]

The Berkshire performance collapse is my concern.  Over the past 10-years it has approached the performance of the S&P 500 as its P/BV has declined and BV growth has slowed.  You have the best capital allocator in the world whose performance is approaching the S&P 500.  I like the Markel team and approach my only concern is if size has reduced the best capital allocator in the worlds returns, why would it not do more so for others?

 

Packer

 

MKL won't have to worry about the size issue for quite some time.  Look at where they invest their money.  It's pretty easy to see where they are going to be investing for the next 5 years and none of those investment opportunities are illiquid or small.

 

BRK is more diversified and bigger.  It's much tougher to think about them and where they will be reinvesting 5 to 10 years from now.  Only thing I can think of is utilities will be a greater proportion of net worth.

[Packer16]

I think size has already effected them.  The 5-year rolling growth rate has fallen to the low double digit growth rates from mid/high double digit growth rates 10 years ago this is also comparable to other investment options today some Infrastructure MLPs and real estate cos.  The question in my mind is will the growth rate decline to the high single digit range where some of the comparable firms will become more favorable.

 

Packer

[HJ]

I think size has already effected them.  The 5-year rolling growth rate has fallen to the low double digit growth rates from mid/high double digit growth rates 10 years ago this is also comparable to other investment options today some Infrastructure MLPs and real estate cos.  The question in my mind is will the growth rate decline to the high single digit range where some of the comparable firms will become more favorable.

 

Packer

 

The fall off in performance probably has more to do with the soft insurance market, especially in E&S.  It's generally acknowledged that the market peaked in 2005 post Katrina.  And has been in a soft market ever since, briefly interrupted by the "Great Recession".  But then again, the P/B ratio reflects that, falling off from 2x down to 1.2x.

 

It's a tough environment, and there's something to be said for Markel Venture as a strategy, which diversifies the space where they can get ROE from.  That book of business, though is of manifestly lower quality than the ones owned by Berkshire.  But evaluated as a pure insurance company, I'd say it's "fair value", in line with the other good underwriters, WRB, CB, etc.

[crastogi]

That book value multiples are lower these days can also be a factor of the current non-inflation environment. In higher inflation the float should be more valuable, because you pay no interest on it. When interest rates are 0%, the float is worth nothing, because you can lever with borrowed money for zero. But when interest rates are 10%, a 0% float gets you easy money.

 

+1.  That's true, and that is also why BRK is selling at historically low p/B

[skanjete]

I think size has already effected them.  The 5-year rolling growth rate has fallen to the low double digit growth rates from mid/high double digit growth rates 10 years ago this is also comparable to other investment options today some Infrastructure MLPs and real estate cos.  The question in my mind is will the growth rate decline to the high single digit range where some of the comparable firms will become more favorable.

 

Packer

 

In my opinion it's not their size that has effected them, but rather the changed interest rate environment.

The lower interest rates lower the value of their float. 

 

If and when interest rates start to climb again in the future, they will take a (controlled) hit to their fixed income investments, but the value of their float will go higher, as well as the income potential they can generate from that float.

 

I'm pretty sure their growth prospects would look completely different in a higher interest environment, as well as their P/B rate.