Buffett/Berkshire - general news

[ValueMaven]

Thanks for the heads-up!  Very interesting

 

[adesigar]

Lubrizol was a bad purchase for BRK.

 

[John Hjorth]

14 hours ago, adesigar said:

Lubrizol was a bad purchase for BRK.

 

adesigar,

 

How can we even be sure this is the situation, based on the "black box" reporting - now for years - for the big wholly owned manufactoring companies in Berkshire's belly?

[gfp]

Buffett has talked about it a bit back in 2015-2016.  Lubrizol had/has a fine core business but a few years after Berkshire bought them they made a bad bolt-on acquisition.  I don't remember which one it was, but it wasn't the Phillips 66 spin-out, which is called Liquidpower specialty and might be technically under Lubrizol's management.

 

Whatever the bad acquisition was, Buffett/Lubrizol sold it within a few years and took a $365 million loss.  

 

Then, of course, this year we had a contractor on a scissor lift bust a mineral oil pipe in the ceiling of the Chemtool plant in Rockton Illinois and it created a huge mess when it ignited.  (Chemtool is a grease subsidiary of Lubrizol).  I don't know what lead to Abel making a change at the top, but it could be the way the Chemtool disaster was handled or it could just be general underperformance form Lubrizol over a long period of time.  Abel has a lot of the Sokol school in him - continuous improvement, "pleased but not satisfied..." 

 

You could say Lubrizol, Precision Castparts and Kraft were all mistakes he overpaid for and yet Berkshire as a whole has continued to do very well despite these very material screw-ups.  

[adesigar]

2 hours ago, John Hjorth said:

adesigar,

 

How can we even be sure this is the situation, based on the "black box" reporting - now for years - for the big wholly owned manufactoring companies in Berkshire's belly?

It started with the David Sokol issue. Then a bolt on acquisition in 2014 which cause a write down a few years later and the CEO was replaced then. His replacement has been replaced again within 5 years. 
 

If I recall correctly sales and net income are flat after 10 years even though there were bolt on acquisitions. I’m my opinion it was a bad purchase for Berkshire Hathaway.

[adesigar]

1 hour ago, gfp said:

Buffett has talked about it a bit back in 2015-2016.  Lubrizol had/has a fine core business but a few years after Berkshire bought them they made a bad bolt-on acquisition.  I don't remember which one it was, but it wasn't the Phillips 66 spin-out, which is called Liquidpower specialty and might be technically under Lubrizol's management.

 

Whatever the bad acquisition was, Buffett/Lubrizol sold it within a few years and took a $365 million loss.  

 

Then, of course, this year we had a contractor on a scissor lift bust a mineral oil pipe in the ceiling of the Chemtool plant in Rockton Illinois and it created a huge mess when it ignited.  (Chemtool is a grease subsidiary of Lubrizol).  I don't know what lead to Abel making a change at the top, but it could be the way the Chemtool disaster was handled or it could just be general underperformance form Lubrizol over a long period of time.  Abel has a lot of the Sokol school in him - continuous improvement, "pleased but not satisfied..." 

 

You could say Lubrizol, Precision Castparts and Kraft were all mistakes he overpaid for and yet Berkshire as a whole has continued to do very well despite these very material screw-ups.  

It was the purchase from Weatherford. 
 

Accidents happen. 2 years ago there was the fire at the location in France and another Berkshire Hathaway insurance company was the insurer for  Lubrizol.

[John Hjorth]

Thank you to @gfp & @adesigar for replying in a constructive way here.

 

The conclusion for me is, that I need to work harder on this. Again, thank you to the both of you.

[gfp]

Another good (and rare) interview with Ted Weschler.  This one by the Washington Post:

 

https://www.washingtonpost.com/business/2021/08/27/retirement-fund-millionaire/

[ValueMaven]

Behind a pay-wall ?!

[gfp]

try this one:

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=&cad=rja&uact=8&ved=2ahUKEwi2tc2KvNHyAhUpm2oFHYdoCFsQxfQBMAN6BAgIEAM&url=https%3A%2F%2Fwww.washingtonpost.com%2Fbusiness%2F2021%2F08%2F27%2Fretirement-fund-millionaire%2F&usg=AOvVaw3iPs4f1c2-o9dGyq-InrlG

[ValueMaven]

Doesnt work

[gfp]

The simple tricks that turned an ordinary investor’s $70,000 retirement account into a $264 million fortune

Ted Weschler says that starting early and taking full advantage of his employer’s match were key to his success.

By 

Allan Sloan

Columnist

Today at 9:26 a.m. EDT

 

Ted Weschler pose for a photo on July 30 in Charlottesville. Weschler is a former hedge fund manager and current investment manager at Berkshire Hathaway. (Eze Amos/For The Washington Post)

You can sometimes find fascinating information in footnotes — and that’s where I discovered the amazing investment returns of Ted Weschler, 60, a relatively low-profile money manager based in Charlottesville whose retirement account has outperformed the S&P 500 by hundreds to 1.

 

Weschler, who operates out of a two-person shop located above a bookstore, has been one of Warren Buffett’s deputies at Berkshire Hathaway since 2012, where he manages billions of Berkshire bucks.

Even so, Weschler managed to keep a pretty low profile until his name turned up in a ProPublica story that showed how zillionaire Peter Thiel, one of PayPal’s founders, had amassed a $5 billion account in a tax-sheltered Roth individual retirement account, a program intended to help people of modest needs.

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ProPublica revealed that Thiel’s Roth had profited immensely by buying PayPal founders’ stock in 1999 at 0.1 cent a share — which by my math was less than 1/20,000th of what eBay paid for PayPal three years later. Thiel’s special deal was not available to the general public.

I stumbled across Weschler’s investment acumen by reading the email that he sent ProPublica in response to questions about his Roth account, which was worth $264.4 million at year-end 2018, according to IRS information that ProPublica obtained.

By reading the ProPublica story, parsing Weschler’s email and doing about 15 minutes of research, I realized that unless my calculator was having a meltdown, his IRA had outperformed Berkshire stock by about 120 to 1 from 1989 through 2012, and by almost 90 to 1 from 1989 through 2018.

 

His IRA outperformed Vanguard’s low-cost S&P 500 index fund, a standard investment benchmark, by even wider margins.

 

I wanted to know how on earth Weschler had done what he did. So, I sent him a brief email telling him that I wanted to understand how he’d made all that money.

Much to my surprise, Weschler responded quickly and positively.

It quickly became clear that Weschler wanted to show that even though his initial IRA stake grew more than 300,000 percent from 1989 to 2018, unlike Peter Thiel he hadn’t played any insider games by having his IRA pay mega-cheap prices for securities that regular people couldn’t buy.

Weschler said he had put up his numbers by investing in only publicly available securities.

 

I also realized that Weschler wanted to encourage young people to do what he did to accumulate his nine-digit net worth: save and invest, early and often, and take advantage of any retirement account benefits offered by their employer.

“In a perfect world, nobody would know about this account,” he said. “But now that the number is out there, I’m hopeful that some good can come of it by serving as a motivation for new workforce entrants to start saving and investing early.”

Normally, you never see investors’ private numbers, such as the size of Weschler’s account when he converted his regular IRA to a Roth IRA in 2012 or the size of his Roth at year-end 2018, the last date for which ProPublica had data.(Weschler declined to update his IRA numbers or to discuss how the money he’s managed for Berkshire has performed).

 

Weschler has put up his amazing numbers despite suffering a 52 percent loss in his IRA in 1990, which makes his record even more impressive.

What happened? To give you the short version, he had a trading profit early in 1990 but then watched his fund’s holdings — Continental Health Affiliates stock and Intelogic Trace bonds — end the year down 67 and 55 percent, respectively, from what he paid for them.

Weschler said that he kept swinging for the fences despite that whopping loss because, “One of my personal investment mantras is that there’s no such thing as a loss, it’s just an unmonetized lesson.”

Weschler converted what had become a nine-digit IRA into a Roth in 2012, even though that required him to pay $29 million of federal income tax (which he did by reaching into other accounts to come up with the necessary cash).

 

Here’s why he did the conversion. With a regular IRA, the money going in is tax-deductible, but withdrawals are taxable. And you have to start taking annual withdrawals when you turn 72. With a Roth, the money going in isn’t deductible, but the withdrawals aren’t taxable.

So, if you think — as Wechsler did — that you can save enough on future taxes to justify paying taxes today, it makes sense to convert a regular IRA to a Roth. Provided, of course, that you’ve got enough money to cover the tax bill.

Such transactions weren’t available to high-income people like Weschler until 2010 when legislation (intended in part to pay for prolonging some of President George W. Bush’s tax cuts) waived the income limits on IRA- to- Roth conversions.

 

Converting to a Roth from a regular IRA cost Weschler serious money on his 2012 taxes — but he won’t have to pay the IRS anything when he takes money out of his Roth. This means that down the road, he’ll save lots more tax than he paid nine years ago. And in his email to ProPublica he acknowledges the policy challenges that presents.

“Although I have been an enormous beneficiary of the IRA mechanism, I personally do not feel the tax shield afforded me by my IRA is necessarily good tax policy,” he wrote. “To this end, I am openly supportive of modifying the benefit afforded to retirement accounts once they exceed a certain threshold.”

How does someone like Weschler, the youngest of five children in a family of modest means in Erie, Pa. get to have the kind of money that he’s got?

 

And how does he get to have a job that lets him sit at Buffett’s right hand?

Let’s begin at the beginning.

Weschler started as a junior employee at W.R. Grace, a New York City-based conglomerate, in 1983 after he graduated from the University of Pennsylvania.

He began maxing out his contributions to the Grace 401(k) plan a year after he joined, when he was first allowed to participate. By the time he left in late 1989, his account was up to $70,384. (Of this, $34,353 was his contribution, $12,328 was Grace matching money, the rest was from investment gains).

By year-end 2018, that $70,384 had grown to $221.6 million. The other $42.8 million in his Roth came from accounts he set up after leaving Grace.

 

In 1990, Weschler left New York and relocated to Charlottesville to start a leveraged buyout fund with Grace vice chairman Terry Daniels, who was also leaving the company.

Weschler and Daniels picked Charlottesville because Daniels went to the University of Virginia and owned a house there. Weschler says that he and Daniels left New York both to avoid “groupthink” and to be able to afford nice homes for their families while he and Daniels spent four or five days a week on the road.

After about 10 years with Daniels, Weschler went off on his own to start what turned out to be a very successful hedge fund. He said that it produced more than 22 percent of after-fee compounded annual returns for investors during its run, from Jan. 14, 2000 through Dec. 9, 2011. A terrific record.

In 2010, Weschler, a long time Buffett admirer, entered and won the annual auction run by the Glide Memorial Church of San Francisco to have a lunch with Buffett by making a $2,626,311 donation. He also won the 2011 auction by bidding $100 more.

 

Ted Weschler's incredible IRA return. 

Rather than join Buffett for high-profile lunches in New York City, Weschler flew to Buffett’s hometown of Omaha to dine at a since-closed steakhouse called Picolo’s.

These two lunches, which Weschler says lasted about four hours each, resulted in Buffett offering Weschler a job.

Because Weschler’s family wanted to stay in Charlottesville, he bought a condo near Berkshire’s headquarters and regularly flies to Omaha (on flights by NetJets, a Berkshire subsidiary) at his own expense (and with no employee discount) to spend time with Buffett and colleagues.

For Berkshire, he looks for investments that can absorb a minimum of $500 million without giving Berkshire a stake of 10 percent or more.

For his personal investments, he’s got the rest of the universe.

Weschler says that he used to buy beaten-down bonds of companies that were in less dire straits than they seemed to be, and stocks of little-known companies that he determined were in much better shape than the market thought they were.

Although Weschler’s overall IRA returns since 1989 are astronomical, his percentage gains from 2013 through 2018 — since joining Berkshire — are below both Berkshire stock and the Vanguard S&P 500 fund.

 

 “I think it is safe to say that my retirement account got a lot less attention after I joined Berkshire,” Weschler said. “For the prior 22 years, there was a direct overlap between things I was looking at for my day job and potential investment opportunities for my retirement account. Once I joined Berkshire, that simply wasn’t the case.”

Weschler spends a lot of his time reading and thinking, and studying companies and industries to find things that the financial markets don’t seem to be seeing.

“For people who can’t do that, index funds are the answer,” he says.

Even though index funds can’t begin to match Weschler’s long-term performance, they can make you a lot of money if you stick around.

Weschler, extrapolating from numbers that I sent him, said that if you’d put the $70,535 that he had in his IRA at year-end 1989 into Vanguard’s S&P index fund, you’d have had more than $1.6 million as of June 30.

(The exact number, Vanguard confirmed, was $1,636,238.)

“That $1.6 million,” he says, “drives some very simple advice: start early, maximize the (employer) match, invest 100 percent in equities, and ignore all the other noise.”

To which I would add: make sure to pay attention to small details like Weschler’s email to ProPublica. You never know what you can learn by studying a footnote and reaching out to the person who wrote it.

 

[ValueMaven]

awesome.  thank you!!

[Dynamic]

Thanks, @gfp, the Google link worked a treat and was fascinating to read.

[gfp]

The part about him flying to Omaha regularly for work on his own dime on NetJets was pretty impressive.  Berkshire is very lucky to have 4 independently wealthy principled people who are extremely talented, devoted to Berkshire and like to keep a low profile.  

[Dynamic]

I quite agree. We have successors in important roles who are made of the right stuff and the selection criteria for the instrument managers was based on far more than great records of returns. Perhaps Sokol-gate may have contributed to ensuring high standards of probity asking all the future top personnel which will be of benefit to all partners in the business. I would not be surprised if future leaders of Berkshire will have a majority of their wealth in Berkshire stock and eat the cooking like the rest of us they partner with.

[Munger_Disciple]

2 hours ago, gfp said:

The part about him flying to Omaha regularly for work on his own dime on NetJets was pretty impressive.  Berkshire is very lucky to have 4 independently wealthy principled people who are extremely talented, devoted to Berkshire and like to keep a low profile.  

+1 and thanks gfp for sharing the link. We are lucky to have such outstanding & ethical successors to Warren & Charlie in Ajit, Greg, Ted & Todd. The more I read about Ted, more impressed I am with him.  

[bizaro86]

Although the comp for Ted and Todd (iirc 0.1% + 10% of performance above S&P500) is quite significantly more than WEB has been paid. It would be interesting to know what BRK returns would have been like with that compensation scheme instead of the flat low salary he actually took.

[ValueMaven]

[omagh]

Greggory Warren with his updated SOTP valuation...

 

Morningstar article with updated BRK valuation

We’ve increased our fair value estimate for the wide-moat company to $480,000 per Class A share from $440,000 and to $320 per Class B share from $293 after updating our near- to medium-term forecasts for the conglomerate’s various operations. We use a 9.0% cost of equity in our valuation, which assumes an increase in the U.S. federal statutory tax rate to 26% from the current 21%.

 

Our fair value estimate is equivalent to 1.42, 1.31, and 1.35 times our estimated book value per share for Berkshire at the end of 2021, 2022, and 2023, respectively. For some perspective, during the past five and 10 years, the shares have traded at an average of 1.43 and 1.41 times trailing calendar year-end book value. We expect book value to grow at a 15%-20% rate this year (it expanded 26.6% year over year during the first half) and increase at a mid- to high-single-digit rate in 2022.

[ValueMaven]

Great recap: simple, direct, and to the point.  Some of his assumptions are conservative in my view.  Even still Greg is one of the better analysts on Berkshire.  

[IceCreamMan]

"we believe the company has finally hit a nexus where it is far more focused on reducing its cash hoard through stock and bond investments and share repurchases."

 

"we expect the bulk of Berkshire Hathaway’s excess capital to be focused on stocks and bonds for the insurance investment portfolio--with an eye toward boosting the yield on the portfolio"

 

I wonder what gives him the idea that Buffett is more focused on making bond investments now.

 

Also, this is sort of interesting-- questioning whether Buffett is breaking his written promise to shareholders:

 

This raises the following questions in our mind:

• Is Berkshire buying back shares more recently at prices at or above chair and CEO Warren Buffett’s and vice chair Charlie Munger’s calculation of intrinsic value?

[ValueMaven]

He is speculating ... that is all 

[longterminvestor]

Why buy bonds?  Berkshire does not buy bonds for cash flow, they buy for store of value.  and interest rates can only go up which means the price of the bond goes down.  Agree, doesnt make any sense.  

[John Hjorth]

2 hours ago, longterminvestor said:

Why buy bonds?  Berkshire does not buy bonds for cash flow, they buy for store of value.  and interest rates can only go up which means the price of the bond goes down.  Agree, doesnt make any sense.  

Agreed, longterminvestor,

 

Over the last years, we've seen [almost relentlessly] posting from @Cigarbutt , indicating the "real bond portfolio" [understood as "non cash or cash equivilatents" is about USD 20 B - over time.

Edited August 30, 2021 by John Hjorth