Buffett/Berkshire - general news

[ValueMaven]

https://www.wsj.com/finance/stocks/apple-is-buffetts-best-investment-its-also-now-one-of-his-riskiest-fb11f9a2?mod=hp_lead_pos3

 

This time, Buffett asked Combs to identify a stock in the S&P 500 that met three criteria. The first: a reasonably cheap price/earnings multiple of no more than 15, based on the next 12 months’ projected earnings. The stock also had to be one the managers were at least 90% sure would enjoy higher earnings over the next five years. And they had to be at least 50% confident that the company’s earnings would grow by at least 7% annually for five years or longer.

Combs’s research pointed to Apple, the same stock Weschler had already purchased.

[dartmonkey]

 

Posted 18 hours ago

  23 hours ago, gfp said:

It's funny, with Fairfax, nobody points to the bond portfolio and panics over the idle cash.  They get busy calculating the spread between 95% combined ratio cost of capital and +4.5% investment yield.  At Berkshire it sits in 3 month and 6 month bills and it's some huge problem.  If Warren moved $150 billion to 3 and 5 year treasury notes would everybody stop worrying about the "cash problem" and call him a genius like Brian Bradstreet?  Can we just call most of Berkshire's cash the "bond portfolio" and be done with the 'big cash problem' talk?

 

No one except for Bloomstran who thinks BRK’s surplus capital gives it a return advantage over FFH since it can invest more of its capital in equities which by definition have a higher return potential than fixed income. Of course, he ignores the leverage and one would think a quickly increasing surplus capital might be highly correlated to the multiple, but I digress.
 

My question is, how much surplus capital do you think FFH could deploy into quality equities if there was a giant dislocation that created a big opportunity.

 

 

Both Fairfax and Berkshire are constrained by regulators and by common sense in what they can do with their float, equity obviously being preferable if you have enough surplus capital to do it. Undoubtedly, Fairfax is considerably more constrained, but it isn't just a question of surplus capital,, it's also a question of how much float they have, in relation to their equity. And Fairfax has way, way more. Quoting my post here 2 days ago:

 

With Fairfax, you have float of $33b* with $22b of equity (2023 year end numbers), whereas for Berkshire, you have float of $169b with equity of $561b. So $1 of equity is increased to $2.50* of investable assets with Fairfax, whereas with Berkshire, $1 of equity is increased to  $1.23 of investable assets. Fairfax is twice as leveraged by investment float. So if you think the key to success of Berkshire was the float leverage, Fairfax is a much better setup.

 

Thinking about this further, the above way of framing the float actually understates the difference. Perhaps a better way of looking at it is that,, for each dollar of equity invested, Berkshire invests another $0.23 of float. For each dollar of equity invested by Fairfax, you get another $1.62* of float invested. It is unsurprising that Berkshire can invest a lot more of its 23c of float in equities, compared to Fairfax. Berkshire has $568b in book value plus $169b in float, and invests $383b in equity securities and equity method investments. Fairfax has $21.615b in book value plus $35.1b* in float, and invests $15.5b in equities (mark to market, equity accounted and consolidated).

 

So one way of looking at it that Fairfax has 15.5/21.615 = 72% of its book in equities and Berkshire has 383/568 = 67%. Yes, Fairfax has a way bigger bond portfolio, in proportion to its float, but this is just because its float is so much bigger. Fairfax actually has MORE of its book invested in equities than Berkshire, with the rest of its enormous float in fixed income because of regulatory requirements. So I am making the case that Fairfax is even more exposed to equities than Berkshire, and also gets the additional leveraged value of the much bigger fixed income portfolio. And as an investor paying 1.1x equity for Fairfax rather than 1.4x for Berkshire, this difference is further magnified.

 

Does this make sense? Thoughts? What would Bloomstram think of this argument?

 

 

*My number in the Wednesday quote was wrong, for some reason I said Fairfax had $33b in float, meaning $1.50 in float for every $1 in equity; the actual number is $35.1b in float, or $1.62 in float for every $1 in equity.

Edited May 3, 2024 by dartmonkey

[Xerxes]

Buffett has some big competition tomorrow. It is also Star Wars Day. 

May the Fourth Be With You. 

[longterminvestor]

On 4/26/2024 at 4:16 PM, scorpioncapital said:

I wasn't aware that someone suing a division of Berkshire can't access the parent. Is this in the sense that it can be allowed to go bankrupt and protect the cash of the parent? If so it seems another bonus of BRK's structure.

This might be the reason why the rail road was disjoined from the insurance company parent.  Mr. Buffett installing the proper bulkheads in the new litigious world.  Previously thought to be smart to lodge the operating co's inside the insurance companies to boast regulatory surplus and make it more difficult for a break-up post Buffett.  

 

Reminds me of the Honeywell ear plug class action law suits as well.  Good case study for this type of structure and ensuing litigation. 

[scorpioncapital]

11 minutes ago, longterminvestor said:

This might be the reason why the rail road was disjoined from the insurance company parent.  Mr. Buffett installing the proper bulkheads in the new litigious world.  Previously thought to be smart to lodge the operating co's inside the insurance companies to boast regulatory surplus and make it more difficult for a break-up post Buffett.  

 

Reminds me of the Honeywell ear plug class action law suits as well.  Good case study for this type of structure and ensuing litigation. 

 

How about the energy division? That was called out as also a potential big liability risk. Is that outside the insurance cos also?

[bookie71]

Viking,

You missed one very important attribute. He treats the investors as partners and doesn't take advantage of them. For example when he liquidated the partnerships he let his partners select cash or stock and he took what was left.

Thus he has very little turnover in shareholders.

[longterminvestor]

20 hours ago, Viking said:

4.) Insurance Float

• Provides a low cost, stable and growing source of funds/capital that Buffett used to make many outstanding investments.
• When combined with 3.) magnified returns.
• Float loses its value when interest rates are very low, like they were from 2010-2020. Float increases greatly in value when interest rates are high like they are today.

2 corollaries on concept of float value in higher interest rate environment to note:

- increased competition for float ie lower premiums because of competition

- reduced underwriting margins due to lower premiums

 

Great summary, thanks Viking!

[John Hjorth]

21 hours ago, Spooky said:

 

Excellent post John - is there anywhere that I can look that has more information on Berkshire's corporate structure and where NICO sits?

 

 

Right now, @Spooky,

 

I really can't come up with a central and gathering place as a goog place to read and study where and what NICO is in the total Berkshire over time and today. It's almost as a shadow and very private holding company that is likely the most important subsidiary of the public and listed holding company Berkshire Hathaway. 

 

In my early years I did spend enormous amounts of time studying all kinds of Berskhire-related stuff, all while also building the position, and NICO did pop up basically all over the place.

[james22]

On 5/2/2024 at 7:58 AM, Spooky said:

No easy answers.

 

 

[KPO]

6 hours ago, longterminvestor said:

This might be the reason why the rail road was disjoined from the insurance company parent.  Mr. Buffett installing the proper bulkheads in the new litigious world.  Previously thought to be smart to lodge the operating co's inside the insurance companies to boast regulatory surplus and make it more difficult for a break-up post Buffett.  

 

Reminds me of the Honeywell ear plug class action law suits as well.  Good case study for this type of structure and ensuing litigation. 

One catalyst for a quasi-breakup may be centered around limiting liabilities.  Some of the subsidiaries, like BHE, aren’t wholly owned, so it would be unusual to go after a shareholder in a case like this. I’m not saying it can’t happen, because anything is possible, but modesty reducing ownership in subsidiaries like BNSF could be good financial and risk management in the future. 

[Xerxes]

https://podcasts.apple.com/ca/podcast/value-investing-with-legends/id1459993408?i=1000654410861
 

[Charlie]

https://www.berkshirehathaway.com/qtrly/1stqtr24.pdf

 

 

Cheers!

[charlieruane]

On 5/1/2024 at 4:37 PM, ValueArb said:

 

These are very good points. Buffett sees exactly what they do and by all his public statements he's been very pleased with their contributions for a long time.

 

Further edified by WB's comments today re: sending Ted up to do a deal in Canada recently. Todd and Ted are keeping busy beyond their public equity duties. 

[gfp]

2 minutes ago, charlieruane said:

 

Further edified by WB's comments today re: sending Ted up to do a deal in Canada recently. Todd and Ted are keeping busy beyond their public equity duties. 

 

That deal he sent Ted to Canada for was quite a few years ago - Home Capital, 2017.

https://www.reuters.com/article/us-home-capital-berkshire-hatha-idUSKBN19D08X/

 

I believe the recent deal he is considering was mentioned as something he and Greg are looking at.  

[charlieruane]

3 minutes ago, gfp said:

 

That deal he sent Ted to Canada for was quite a few years ago - Home Capital, 2017.

https://www.reuters.com/article/us-home-capital-berkshire-hatha-idUSKBN19D08X/

 

I believe the recent deal he is considering was mentioned as something he and Greg are looking at.  

 

Ah, thanks!

[Jaygo]

Tourmaline would be great asset for them. Nat gas to run all those power plants. Mike would be a great fit in the culture imo 

 

could also be something like td, or a pipeline too. Maybe they buy tmx from the gov. 

[yesman182]

1 hour ago, Jaygo said:

Tourmaline would be great asset for them. Nat gas to run all those power plants. Mike would be a great fit in the culture imo 

 

could also be something like td, or a pipeline too. Maybe they buy tmx from the gov. 

I have been readying about Tourmaline all week. It’s a new name to me, but I agree Mike Rose would fit right in. I plan to start an investment idea on them next week. If buffet doesn’t want to buy OXY, I don’t know why they would want TOU. 

[DooDiligence]

On 5/3/2024 at 6:25 PM, KPO said:

One catalyst for a quasi-breakup may be centered around limiting liabilities.  Some of the subsidiaries, like BHE, aren’t wholly owned, so it would be unusual to go after a shareholder in a case like this. I’m not saying it can’t happen, because anything is possible, but modesty reducing ownership in subsidiaries like BNSF could be good financial and risk management in the future. 

 

Tracker(s)? or would that not be WEB's style. Do trackers separate liability from the parent?

[Spekulatius]

On 5/2/2024 at 9:09 AM, gfp said:

It's funny, with Fairfax, nobody points to the bond portfolio and panics over the idle cash.  They get busy calculating the spread between 95% combined ratio cost of capital and +4.5% investment yield.  At Berkshire it sits in 3 month and 6 month bills and it's some huge problem.  If Warren moved $150 billion to 3 and 5 year treasury notes would everybody stop worrying about the "cash problem" and call him a genius like Brian Bradstreet?  Can we just call most of Berkshire's cash the "bond portfolio" and be done with the 'big cash problem' talk?

 

It is a bigger problem at 2x book versus 1x book.

[KPO]

On 5/4/2024 at 11:27 PM, DooDiligence said:

 

Tracker(s)? or would that not be WEB's style. Do trackers separate liability from the parent?

Divesting minority positions with full voting rights and economic interest, similar to how they’ve acquired around 80% of a number of businesses in the past, but keep it around 80%. 

[changegonnacome]

So Berkshire is headed to $200bn cash........I know bears love to get Warren on their side......but for those that follow Berkshire's idle cash reserves over time relative to what Warren ordinarily likes to keep around for black swan insurance events.......is this cash position totally totally out of whack on a historical basis?

 

Obviously one should expect Berkshire to over time hold more cash as its investable universe shrinks and the opportunities to deploy cash at scale get smaller....so for sure there is an element here of the numbers getting bigger.

 

But for those who read the BRK tea leaves more than me....is cash on hand now relative to say total assets or book..or insurance liabilities.......really in some kind of 1999 outlier position?

 

TIKR hasn't got Q1 2024 in there yet....but here's the cash to BV chart back to 2003....I mean as the business gets bigger he holds more cash but on a relative basis its relatively inline with book value growth and certainly in line with the shrinking opportunity set that comes with the level of cash they need to deploy.

 

Edited May 6, 2024 by changegonnacome

[backtothebeach]

17 minutes ago, changegonnacome said:

But for those who read the BRK tea leaves more than me....is cash on hand now relative to say total assets or book..or insurance liabilities.......really in some kind of 1999 outlier position?

 

Not particularly large historically as a % of market cap.

 

Personally I think Warren wants to be ready for an elephant, maybe even has one in sight. The answer to the question why he sold some AAPL was obviously BS, rambling on for 5 minutes before coming up with a half-way coherent reason (tax rates possibly going higher).

[gfp]

1 hour ago, changegonnacome said:

.is cash on hand now relative to say total assets or book..or insurance liabilities.......really in some kind of 1999 outlier position?

 

No, cash equivalents + fixed income as a percent of all types of measures is totally in line with the post-General-Re era at Berkshire.  The company is just much much bigger and the fixed income portfolio is almost entirely less than 1 year in duration.  As many have pointed out, it won't be out of line or excessive at $200 Billion either.

[changegonnacome]

17 minutes ago, gfp said:

cash equivalents + fixed income as a percent of all types of measures is totally in line with the post-General-Re era at Berkshire.  The company is just much much bigger and the fixed income portfolio is almost entirely less than 1 year in duration.  As many have pointed out, it won't be out of line or excessive at $200 Billion either.

 

Yep thats what i taught thanks - absolute numbers are at a record, relative numbers not so much....

[gfp]

Just imagine the flak they are going to give poor Greg when he holds $400 Billion in t-bills some day.