Buffett/Berkshire - general news

[sleepydragon]

Last week or so, Russell 2000 outperformed Russell 1000 by 3%+ in one day. This is turns out to be rare event. It only happened like 3 times since 2000.  2 of those times Russell 2000 continued to outperform for another 4 years. Value stocks are back.

[gfp]

There is a paywall but the headline and beginning text cover the gist - Ajit is less aggressive in Florida this season:

https://www.insuranceinsiderus.com/article/2dj4r5bh7hhbs81rl20hs/floridians/berkshire-hathaway-pulls-out-of-citizens-2024-25-risk-transfer-program?zephr_sso_ott=mGFXVh

[CorpRaider]

Could be a good opportunity in BAC if he nukes the price.  It was in WFC.

[coc]

On 7/20/2024 at 12:44 PM, UK said:

So this is from SA from a few month ago. It does not cover everything and omits some important positives (e.g. recent total operating results, because of very strong insurance performance, or together with other omissions them not buying long term bonds in ZIRP period etc). And author seems to be expecting some perfection after all:), despite stating the opposite. But I think some of his critique and analysis is quite interesting and not that bad/stupid?

 

For what it is worth: https://seekingalpha.com/article/4693091-berkshire-15-years-of-disappointing-acquisitions

 

Please do not shoot the messenger:). Still own some BRKB, but this year/recently reduced allocation to a "core minimum", mainly because of the valuation, although I admit, that WB's warning on utilities earlier this year also scared me a little. Also I am a bit worried, that the way the possible management transition on the horizon is expected to occur at BRK is the best way to do this or one I would prefer.

 

Personally, from a current valuation, I still expect BRK will provide a reasonable buy and hold return in the next 10 years of 6-8 per cent or even more, but doubt it could be >10 per cent, without some major luck. And probability is also very high they will finally have to deal with a management transition in this period (and this again could be an opportunity). Now, this 6-8-10 is nothing tragic at all and price/valuation could overshoot even more (probably ~1.8 BV would be a level for me to get out completely), but I think now it is already out of the exciting territory, at least for more active approach. I get and respect this "do not sell a single share" approach, but not so sure if this is a reasonable thing to do in BRK case this time, especially if your expectations are higher, than mentioned above. And with recent AAPL (wonderful, but probably to expensive) and BAC (probably expensive enough for average at best and not anti fragile business) sales, it seems even Buffett himself is showing this is the the way to go:)?

 

I would also appreciate if anyone could share their thinking or push back on this and maybe also discuss what are his expectation for the next 10 year BRK returns.

 

 

That SA article is atrocious and doesn't do any real analysis. The first one alone (BNSF) he failed to notice with his "thousands of hours" that BNSF paid out a bunch of dividends in the early days reducing BRK's cost basis almost immediately. It has also distributed substantial cash and would be worth >$100B at market today. Where is this in his "analysis"? Also, BRK has tax advantages to owning something 100% versus owning the index, which he doesn't mention. 

 

PCP and Kraft were disasters as everyone already knew.

 

I agree that BRK's disclosures suck but WB seems to do that purposely for competitive reasons.

Edited July 23, 2024 by coc

[Malmqky]

6 minutes ago, coc said:

 

That SA article is atrocious and doesn't do any real analysis. The first one alone (BNSF) he failed to notice with his "thousands of hours" that BNSF paid out a bunch of dividends in the early days reducing BRK's cost basis almost immediately. It has also distributed substantial cash and would be worth >$100B at market today. Where is this in his "analysis"? Also, BRK has tax advantages to owning something 100% versus owning the index, which he doesn't mention. 

 

PCP and Kraft were disasters as everyone already knew.

 

I agree that BRK's disclosures suck but WB seems to do that purposely for competitive reasons.

Yep.
 

You also have to look at things as a whole. I know he mentioned Apple and such near the end of the article, but the author needs to actually factor them into his argument as well. You can’t just isolated companies Berkshire has bought 100% of and judge Berkshire based solely off that. That’d be like looking at Lamar Jackson and saying “hmmm… if we ignore his rushing ability and stats he’s actually a below average quarterback because he doesn’t have as many passing yards and tds as other top qbs”.
 

Besides, I’m not sure if anyone thinks Berkshire is going to consistently beat the SP500 now that it’s pushing $1T in valuation anyways. But I’d much rather own Berkshire than a very top heavy SP500.

[sleepydragon]

Remind me an old saying (from Buffett?): people who took subways to work giving advice to people who took rolls Royce to work.

is he has been right , why he’s not rich yet?

Many Berkshire shareholders are.

[Munger_Disciple]

I recall reading a few years back somewhere that Buffett sold some Berkshire stock to buy the beach house for his wife in 1970s. I am unable to find the article which says he called his personal broker to direct him to sell Berkshire stock. Does anyone here have the reference? Thanks

Edited July 24, 2024 by Munger_Disciple

[keegomaster]

3 hours ago, Munger_Disciple said:

I recall reading a few years back somewhere that Buffett sold some Berkshire stock to buy the beach house for his wife in 1970s. I am unable to find the article which says he called his personal broker to direct him to sell Berkshire stock. Does anyone here have the reference? Thanks

I don't think buffett ever sold berkshire shares

[Munger_Disciple]

24 minutes ago, keegomaster said:

I don't think buffett ever sold berkshire shares

 

That's what I thought but apparently he sold some in the seventies. I am sure he bought back those & more later. 

[gfp]

He ran out of personal cash in the 70's at some point.  He had come out of the Buffett Partnership wind-down with $16 million in cash but he used that cash to buy more Berkshire and Blue Chip shares.  The first Laguna house cost $150k.  He probably had a net worth between $25 and 40 million at the time Susie convinced him to buy that $150k house.

 

He was only making $50k a year salary at BRK and he had a little bit of other income - but he was pretty tapped out at one point cash-wise.  I think he bought the first Laguna house before he ran low on cash but I don't know for sure.

 

 

[petec]

On 7/20/2024 at 5:44 PM, UK said:

So this is from SA from a few month ago. It does not cover everything and omits some important positives (e.g. recent total operating results, because of very strong insurance performance, or together with other omissions them not buying long term bonds in ZIRP period etc). And author seems to be expecting some perfection after all:), despite stating the opposite. But I think some of his critique and analysis is quite interesting and not that bad/stupid?

 

For what it is worth: https://seekingalpha.com/article/4693091-berkshire-15-years-of-disappointing-acquisitions

 

Please do not shoot the messenger:). Still own some BRKB, but this year/recently reduced allocation to a "core minimum", mainly because of the valuation, although I admit, that WB's warning on utilities earlier this year also scared me a little. Also I am a bit worried, that the way the possible management transition on the horizon is expected to occur at BRK is the best way to do this or one I would prefer.

 

Personally, from a current valuation, I still expect BRK will provide a reasonable buy and hold return in the next 10 years of 6-8 per cent or even more, but doubt it could be >10 per cent, without some major luck. And probability is also very high they will finally have to deal with a management transition in this period (and this again could be an opportunity). Now, this 6-8-10 is nothing tragic at all and price/valuation could overshoot even more (probably ~1.8 BV would be a level for me to get out completely), but I think now it is already out of the exciting territory, at least for more active approach. I get and respect this "do not sell a single share" approach, but not so sure if this is a reasonable thing to do in BRK case this time, especially if your expectations are higher, than mentioned above. And with recent AAPL (wonderful, but probably to expensive) and BAC (probably expensive enough for average at best and not anti fragile business) sales, it seems even Buffett himself is showing this is the the way to go:)?

 

I would also appreciate if anyone could share their thinking or push back on this and maybe also discuss what are his expectation for the next 10 year BRK returns.

 

 

I own BRK and don't plan to sell (which is not to say I won't, but my intention is to hold long term).

 

I assume 5-9% REAL returns over very long periods of time with a very low probability of a genuinely bad outcome.

 

My PRIMARY reason for holding is culture and management. You could assess this in any number of ways but the simplest is just to reiterate that all board members have to buy stock with their own money and don't get D&O insurance. This is incredibly different from most boards and I expect the behaviours to be different too. I think this massively narrows the expected outcomes. There is no incentive to take the kinds of risks required to compound at 15, 20, 25%; but equally the likelihood of really bad outcomes is very low.

 

[73 Reds]

6 hours ago, gfp said:

He ran out of personal cash in the 70's at some point.  He had come out of the Buffett Partnership wind-down with $16 million in cash but he used that cash to buy more Berkshire and Blue Chip shares.  The first Laguna house cost $150k.  He probably had a net worth between $25 and 40 million at the time Susie convinced him to buy that $150k house.

 

He was only making $50k a year salary at BRK and he had a little bit of other income - but he was pretty tapped out at one point cash-wise.  I think he bought the first Laguna house before he ran low on cash but I don't know for sure.

 

 

Yes, he easily could have financed the house but instead he chose to pay cash. One lesson that made a lasting impression on this shareholder.

[Viking]

9 hours ago, petec said:

 

I own BRK and don't plan to sell (which is not to say I won't, but my intention is to hold long term).

 

I assume 5-9% REAL returns over very long periods of time with a very low probability of a genuinely bad outcome.

 

My PRIMARY reason for holding is culture and management. You could assess this in any number of ways but the simplest is just to reiterate that all board members have to buy stock with their own money and don't get D&O insurance. This is incredibly different from most boards and I expect the behaviours to be different too. I think this massively narrows the expected outcomes. There is no incentive to take the kinds of risks required to compound at 15, 20, 25%; but equally the likelihood of really bad outcomes is very low.

I think the headwinds for Berkshire Hathaway have been growing over the past decade. The problems?

1.) The size of the company.

2.) its capital allocation policies - it looks to me like Buffett has painted himself into a corner. The problem is he likely has also painted his successor into a corner. 
 

An couple of examples:

- buy and hold forever works best when you are growing rapidly - and earning returns of 20% per year. The queens in your portfolio dominate your dogs. But when you become an elephant and your growth slows - and your returns slow - your dogs become a bigger part of the total portfolio. The buy and hold forever mantra no longer works for BRK - but Buffett made promises decades ago to never sell. That bit of marketing is not going to age well.
 

- not doing stock buybacks (starting much earlier and going heavier) has created the size problem for BRK today. But Buffett has couched buybacks in moral terms ‘taking advantage’ of BRK shareholders. Of course this is marketing. Buffett loves buybacks - look at Apple etc. Buffett also put Singleton on a pedestal and he was the king of buybacks. 
 

- is the focus on cash flow resulting in underinvestment at the companies? This appears to have been a big problem at Wells Fargo - they were more profitable than peers for year (and Buffett was constantly praising them) because they were underinvesting - and it blew up. It looks like the same thing has been happening at Geico - Progressive looks much better positioned from a technology perspective moving forward. Does BNSF have the same disease? Are the falling behind peers from a technology perspective?
 

Anyways, i love Warren Buffett and i like BRK as a company. But i think they have some structural issues (some external and some internal) that might make it a challenge for them to outperform the S&P500 moving forward. I do think BRK will likely perform better than a balanced (stock and bond) portfolio. An alternative perspective…

Edited July 24, 2024 by Viking

[73 Reds]

13 minutes ago, Viking said:

I think the headwinds for Berkshire Hathaway have been growing over the past decade. The problems?

1.) The size of the company.

2.) its capital allocation policies - it looks to me like Buffett has painted himself into a corner. The problem is he likely has also painted his successor into a corner. 
 

An couple of examples:

- buy and hold forever works best when you are growing rapidly - and earning returns of 20% per year. The queens in your portfolio dominate your dogs. But when you become an elephant and your growth slows - and your returns slow - your dogs become a bigger part of the total portfolio. The buy and hold forever mantra no longer works for BRK - but Buffett made promises decades ago to never sell. That bit of marketing is not going to age well.
 

- not doing stock buybacks (starting much earlier and going heavier) has created the size problem for BRK today. But Buffett has couched buybacks in moral terms ‘taking advantage’ of BRK shareholders. Of course this is marketing. Buffett loves buybacks - look at Apple etc. Buffett also put Singleton on a pedestal and he was the king of buybacks. 
 

- is the focus on cash flow resulting in underinvestment at the companies? This appears to have been a big problem at Wells Fargo - they were more profitable than peers for year (and Buffett was constantly praising them) because they were underinvesting - and it blew up. It looks like the same thing has been happening at Geico - Progressive looks much better positioned from a technology perspective moving forward. Does BNSF have the same disease? Are the falling behind peers from a technology perspective?
 

Anyways, i love Warren Buffett and i like BRK as a company. But i think they have some structural issues (some external and some internal) that might make it a challenge for them to outperform the S&P500 moving forward. I do think BRK will likely perform better than a balanced (stock and bond) portfolio. An alternative perspective…

Viking, first I'd like to say thanks.  You are the primary inspiration for me having recently joined this board.  Your work on Fairfax has been the most thorough, spot on analysis of any company or investment that I have seen in a lifetime.  

 

That said, a little push-back on Berkshire.  As you know, Berkshire has one huge advantage over the S&P 500 - insurance float.   That alone ensures that with proper underwriting discipline, size is no barrier to success.  To your point about size, it does of course minimize the playing field of needle moving investments, that is until it doesn't.  Financial armageddon  will most certainly recur one day, whether during Buffett's tenure or thereafter.  What company is better situated to avail itself to a time of blood in the streets?  My personal opinion is that shareholders will demand much more of successor management than they do of Warren.  They won't tolerate some of Buffett's nuances that shareholders were always happy to overlook.  This does not require a change in culture; rather the company could focus less on empire-building and more on broadening the so-called "circle of competence" to encompass industries, and even geographical regions of the World that have never really been considered.  Older shareholders like me are happy to own Berkshire in its present form with a bent toward preservation of capital.  But in order to attract new shareholders, successor management may have to loosen up the company's investment objectives beyond those of a 93 year old.  Future management will surely recognize that they are not Warren Buffett, nor should they try to be him.  My guess as a shareholder is that they will utilize their specific strengths and skills to see the company evolve in a way of which Buffett would be proud, as opposed to stagnation and/or a poor S&P 500 proxy. 

[Viking]

1 hour ago, 73 Reds said:

Viking, first I'd like to say thanks.  You are the primary inspiration for me having recently joined this board.  Your work on Fairfax has been the most thorough, spot on analysis of any company or investment that I have seen in a lifetime.  

 

That said, a little push-back on Berkshire.  As you know, Berkshire has one huge advantage over the S&P 500 - insurance float.   That alone ensures that with proper underwriting discipline, size is no barrier to success.  To your point about size, it does of course minimize the playing field of needle moving investments, that is until it doesn't.  Financial armageddon  will most certainly recur one day, whether during Buffett's tenure or thereafter.  What company is better situated to avail itself to a time of blood in the streets?  My personal opinion is that shareholders will demand much more of successor management than they do of Warren.  They won't tolerate some of Buffett's nuances that shareholders were always happy to overlook.  This does not require a change in culture; rather the company could focus less on empire-building and more on broadening the so-called "circle of competence" to encompass industries, and even geographical regions of the World that have never really been considered.  Older shareholders like me are happy to own Berkshire in its present form with a bent toward preservation of capital.  But in order to attract new shareholders, successor management may have to loosen up the company's investment objectives beyond those of a 93 year old.  Future management will surely recognize that they are not Warren Buffett, nor should they try to be him.  My guess as a shareholder is that they will utilize their specific strengths and skills to see the company evolve in a way of which Buffett would be proud, as opposed to stagnation and/or a poor S&P 500 proxy. 

@73 Reds thank you for the comment. 
 

Regarding Berkshire Hathaway, i am a novice when it comes to understanding the company. So my comments are very high level. And they could be way off base. 
 

BRK appears to me to be a conglomerate today. Insurance is now one of many businesses. Float is a benefit, just much less of a benefit than it was 20 or 30 years ago. 
 

My read is for the past 5 years, perhaps longer, Berkshire Hathaway has been primarily run like a trust - with the focus on preserving the wealth of Berkshire Hathaway’s many, many long term and very wealthy shareholders (who have big tax issues if they sell).
 

Berkshire Hathaway is no longer focussed primarily on building long term per share value for shareholders. 
 

Now this might change when Buffett is gone. But it adds a great deal of complexity for the new guy - because if he does something different and it doesn’t work out right away… well his job will just get that much more difficult. 
 

As per usual, i am probably way overthinking things. And i like to go to extremes sometimes when posting on the board - to test drive ideas… (thanks for pushing back

 

Anyways, i don’t own BRK shares today. When i do, i usually hold it as a bond substitute. 

Edited July 24, 2024 by Viking

[73 Reds]

You're welcome, Viking!  The irony is I wouldn't buy Berkshire today but I wouldn't sell it either; decades of deferred capital gains makes that entirely logical.  Going forward, the appeal of Berkshire is that it can, and does invest in literally anything.  Trillion dollar companies evolved from one idea/concept and each operates in a single industry.  When viewed like that, size is really no excuse.

[sleepydragon]

I think compared to other companies , Berkshire is the one that has the most options to do anything. It basically has the most optionality to make the best choice in the uncertain future. Just like human. Some born rich, some well educated, some are smart. But ultimately it’s those handful options we chose that made the difference of our life. Making the right choice and frankly to have the options to make that choice is the most important, and that’s what Berkshire has.

 

 

[Charlie]

2 hours ago, charlieruane said:

All that to say: yeah, Berkshire's not as great as it once was, but it's still an incredible investment in risk-adjusted terms. You used to get ludicrous absolute returns with very low risk. Now, you get adequate absolute returns with very low risk. It would be a mistake for future managers to try to jack up absolute returns by taking on more risk; the next generation should not seek to attract new, growth-hungry shareholders. To do so without risking the company is basically impossible. 

 

In the book "Richer, Wiser, Happier" Munger talks about his investments:

"Berkshire, Costco and a portfolio of Chinese stocks selected by Li Lu. The chances that any of those three bets will fail is "almost zero".

 

I like almost zero. There are not many stocks like this. 

[DooDiligence]

GEICO just seems like plain old incompetence. It's as simple as NOT running off your best customers. I find it hard to believe that they don't have the analytics to figure out who's who.

[73 Reds]

Not to minimize the issues at Geico but it is hardly the only company that shuns its best customers.  In fact most renewal type businesses raise prices on existing customers at renewal time while offering first time customers a better deal -  the telecommunications industry is perhaps the worst culprit.   Call me naive but wouldn't rewarding loyalty (and lack of claims/incidents in the case of insurance) increase customer stickiness and thereby decrease marketing and turnover costs?    

[MCR]

I've had the sense of late that more times than not over the past month or so Berkshire's daily price moves appear more out of sync with the broader market than what I've seen in the past few years. Out of curiosity, I went to Portfolio Visualizer to look at the correlations for daily returns between BRK.B and SPY. I set the rolling correlations to 20 days and the date range for January 1 through July 24. I did this for each year from 2000 through 2024. Yes, the time period is arbitrary and as we all know the start and end dates of any analysis can skew the results. So, with these caveats (and more unmentioned) in mind, here's what I found:

 

Asset correlations for time period 01/01/2024 - 07/24/2024 based on daily returns (Year and Correlation):

 

2000 0.26; 2001 0.29; 2002 0.31; 2003 0.22; 2004 0.24; 2005 0.25; 2006 0.17; 2007 0.31; 2008 0.18; 2009 0.70; 2010 0.62; 2011 0.81; 2012 0.76; 2013 0.84; 2014 0.73; 2015 0.84; 2016 0.82; 2017 0.72; 2018 0.85; 2019 0.73; 2020 0.93; 2021 0.64; 2022 0.73; 2023 0.73; 2024 0.36

 

Net-net: through the first 206 days of the year (one additional day for leap years), this is the lowest correlation between Berkshire and the S&P 500 in 15 years. There were high correlations over this time period every year since 2009. So far this year, Berkshire appears to be providing more diversification than it has in a long time... 

 

 

[crs223]

On 7/25/2024 at 6:38 AM, 73 Reds said:

Not to minimize the issues at Geico but it is hardly the only company that shuns its best customers.  In fact most renewal type businesses raise prices on existing customers at renewal time while offering first time customers a better deal -  the telecommunications industry is perhaps the worst culprit.   Call me naive but wouldn't rewarding loyalty (and lack of claims/incidents in the case of insurance) increase customer stickiness and thereby decrease marketing and turnover costs?    

 

If I understand you correctly, you are suggesting that Geico:

 

1. Sell insurance below cost to existing customers with low claims

2. Gain customer loyalty/stickiness

3. Sell insurance above cost to existing customers with low claims

 

Assuming Geico adopted your plan, how do you know they are not on Step 3 right now?

 

Or perhaps you are saying geico should:

 

1. Sell insurance below cost to existing customers with low claims

2. Gain customer loyalty/stickiness

3. Go to 1

 

 

 

[Maverick47]

1 hour ago, crs223 said:

 

If I understand you correctly, you are suggesting that Geico:

 

1. Sell insurance below cost to existing customers with low claims

2. Gain customer loyalty/stickiness

3. Sell insurance above cost to existing customers with low claims

 

Assuming Geico adopted your plan, how do you know they are not on Step 3 right now?

 

Or perhaps you are saying geico should:

 

1. Sell insurance below cost to existing customers with low claims

2. Gain customer loyalty/stickiness

3. Go to 1

 

 

@73 Reds was on the right track with regard to current industry practice in pricing auto insurance customers.  In order to get customers to switch to a new insurance company, almost all companies now offer prices or discounts to them which are not warranted as they are not based on their actual expected loss costs.  Once they are in the door however, those discounts drop off over the next few years so that somewhere around years 2-4 or so, the company breaks even on them.  Prices continue to rise at each subsequent renewal, while loss costs on longtime customers tend to improve.  Most of the underwriting profit is generated by customers who’ve been with the company for over 4 years.  In that sense, the longtime customers are indeed paying more than they should be and could likely get better prices if treated  as a new customer with another company.

 

Most of the underwriting loss is generated by the newer customers.  If a company priced every customer to make a target underwriting profit, prices for new customers would be too high relative to other companies and so they wouldn’t sell any new policies.  Their prices on existing customers would be better, so they’d be more likely to retain them, but eventually all their existing customers will die and they won’t have been able to replace them with new customers in the meantime.

 

It really is sort of a catch-22 situation.  For long term customers with good driving records, an optimal approach is likely to entail shopping for replacement coverage on a regular basis.  The industry relies on actual customer behavior being much less rational.  They rely on customers such as myself being too lazy or simply uninterested in shopping regularly for replacement coverage.

Edited July 29, 2024 by Maverick47
Correction.

[Hektor]

6 hours ago, Maverick47 said:

They rely on customers such as myself being too lazy or simply uninterested in shopping regularly for replacement coverage.

Inertia

[73 Reds]

10 hours ago, crs223 said:

 

If I understand you correctly, you are suggesting that Geico:

 

1. Sell insurance below cost to existing customers with low claims

2. Gain customer loyalty/stickiness

3. Sell insurance above cost to existing customers with low claims

 

Assuming Geico adopted your plan, how do you know they are not on Step 3 right now?

 

Or perhaps you are saying geico should:

 

1. Sell insurance below cost to existing customers with low claims

2. Gain customer loyalty/stickiness

3. Go to 1

 

 

 

@crs223 I am not suggesting that Geico sell insurance "under cost" to anyone.  But it seems that properly measuring "cost" may be an issue at Geico.  Where I live Geico has never been a viable option for auto insurance.  This encompasses a more than 40-year time span, multiple family members - young and old and in-between, who oh-by-the-way have never had a ticket, accident or claim.  The only reasonable conclusion is that Geico should not be in business here at all or their standards of assessing risk need adjustment.