Buffett/Berkshire - general news

[ValueArb]

40 minutes ago, charlieruane said:

It's also clear that Combs and Weschler are doing way more than public-market stockpicking. Combs is spending the vast majority of his time fixing up Geico, which is a huge value-add for Berkshire. Ted also does meaningful work on private deals, the results of which are not reflected in his portion of the public equity portfolio. 

 

 

 

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.

[Hektor]

From a Davita 8k today

 

"Entry into a Material Definitive Agreement.

 

On April 30, 2024, DaVita Inc. (the “Company”) entered into a letter agreement (the “Share Repurchase Agreement”) with Berkshire Hathaway Inc., on behalf of itself and its Affiliates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) (collectively, “Investor”), the largest stockholder of the Company. Pursuant to the Share Repurchase Agreement, at any time Investor beneficially owns at least 45.0% of the issued and outstanding common stock of the Company (the “Common Stock”) in the aggregate, the Company shall repurchase from Investor, and Investor shall sell to the Company, on a quarterly basis, a number of shares of Common Stock sufficient to return Investor’s aggregate beneficial ownership to 45.0% of the issued and outstanding Common Stock. The per share price the Company will pay Investor in connection with any such repurchase will be the volume-weighted average per share price paid by the Company for any shares of Common Stock repurchased by the Company from public stockholders pursuant to the Company’s share repurchase plan during the applicable repurchase period.

 

Repurchases of shares of Common Stock by the Company from Investor under the Share Repurchase Agreement will occur on the date that is two business days prior to the date of the Company’s regular quarterly or annual (as applicable) investor call to report earnings (as publicly announced by the Company); however, if at any time the Company determines that Investor owns or will own (whether of record or beneficially) shares of Common Stock representing more than 49.5% of the issued and outstanding Common Stock in the aggregate, such determination will trigger immediate share repurchases by the Company under the Share Repurchase Agreement.

 

In addition, pursuant to the Share Repurchase Agreement, Investor also agreed that it would cause any share of Common Stock that it beneficially owns in excess of 40% of the aggregate issued and outstanding shares of Common Stock to be voted or consented on any matter in accordance with the recommendation of the Company’s Board of Directors. The Share Repurchase Agreement does not amend, supersede or otherwise modify the Company’s existing restated standstill letter agreement, dated as of February 9, 2022, with Investor, which remains in full force and effect in accordance with its terms."

 

[Charlie]

Morningstar´s latest regarding Berkshire:

 

https://www.morningstar.com/stocks/is-berkshire-hathaway-buy-before-annual-meeting

 

 

[Spooky]

15 hours ago, ValueArb said:

I wasn't referring to Buffett, I was referring to what happens after he's gone. Clearly it's unlikely he'll ever issue any dividends because it's antithetical to his life long goal of making his "painting" as large as possible. He didn't even start buybacks until his 6th decade as CEO, but at least in that case it directly increases per share value.

 

What happens from here is really the huge question. The company is so big now, Buffett even wrote in the last letter that their era of eye popping returns is over. Breaking up the company after Buffett is gone would impair some of the advantages it has using insurance float to buy safe businesses. Paying a dividend would be counter to the desires of most of the shareholder base that Buffett has built up. No easy answers. However, there is still a possibility that in a period of financial turmoil Berkshire will be in a position to deploy a significant amount of capital. Given what is happening in the world today I wouldn't count out that possibility.

 

This WSJ article was pretty good: https://www.wsj.com/finance/stocks/warren-buffett-berkshire-hathaway-returns-investors-2e0acca9?st=y8ssqh77y6a8wpt&reflink=desktopwebshare_permalink

[gfp]

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?

 

[Viking]

44 minutes 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?

For Berkshire (and Fairfax) i think the cash drag was more a problem when short term interest rates were effectively zero. Now that short term rates are much higher (3 month treasury is 5.4%) holding cash is no longer a drag on returns.

Edited May 2 by Viking

[John Hjorth]

42 minutes 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?

 

 

It's a good one, @gfp,

 

Or,

 

1. - like in posts above,  where a dividend from Bershire is desparately needed for the shareholders, because Berskhire is underperforming, and the large positions in the portfolio desparately needs to be sold [AAPL, BAC, AXP, KO], while some seem to forget those positions are indeed financed by insurance float and also partly by basically massive, free and deferred taxes on giant unrealized capital gains. Talk of dividends of perhaps USD 250B or USD 100 B, while the insurance group as a whole at YE2023 has a max. dividend capacity of USD 31 B, and holding company cash and T-Bills at YE2023 is USD 22 B. Typically suggested by people who trade around quite a lot, and never tell anything about their own track record.

2. - 'Breaking' the whole thing 'up' by splitting it to atoms, to 'get the real values to surface', [likely by the use a particle accelerator at CERN to put the company in or something like that?]. Typically suggested by people who aren't aware of the central role of NICO in the group structure and all the implications of that and no understanding of the inner workings of insurance float.

[Munger_Disciple]

3 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?

 

 

[cubsfan]

^^^ Yup, in regards to understanding the excess cash and the insurance funding of stockholdings - GFP always has great commentary. We're lucky to have him.

[SafetyinNumbers]

4 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.

 

[Viking]

What were the key drivers of Berkshire Hathaway’s success when the company was in its prime?

 

I have ranked the key drivers by importance. 

• Did i get the list right? What is missing? 
• Did i get the order right? If not, what is the new order?

1.) Buffett

• the man is a genius. 
• As an investor. He has also been a very good manager.

2.) Control - Buffett has voting control.

• Gave Buffett free rein to run the company as he saw fit
• Without this, Berkshire Hathaway never would have evolved as it did

3.) Capital allocation skills of management.

• Primarily Buffett, but also includes Charlie Munger, Ajit Jain, Greg Abel etc.
• Value investing framework: shifted over the years (as Berkshire Hathaway grew in size) from deep value to quality at a reasonable price

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.

5.) Long term focus

• Fits hand and glove with the ‘buy and hold’ value investing framework. 
• Investments: able to take advantage of market volatility. 
• Also fits hand in glove with the P/C insurance cycle - which can run in 15 year cycles (hard to soft and back to hard).

6.) Invest a significant portion of the investment portfolio in equities.

• Embrace volatility
• Earn a much higher return, compared to a bond only portfolio.

7.) Culture

• Insurance and investments - operations decentralized
• Capital allocation - managed by Buffett / small corporate office

8.) Businesses generated enormous cash flow.

• Both insurance and investments: was reinvested well, creating new income streams. Virtuous circle.

9.) The company was small.

• capital allocation decisions made had a relatively quick and material impact on the performance of the company

10.) Power of compounding

• Attributes 1 to 9 - all happening at the same time - is a very powerful elixir, especially if it can be maintained for decades.
• time is the friend of the wonderful business

11.) Favourable external environment

• There was lots of volatility in financial markets. This provided continuous supply of opportunities to deploy large amounts of capital at very attractive rates of return.

Edited May 2 by Viking

[Jaygo]

Great post Viking. Most of those things are still present. I just feel like magic was the system and aside from being huge is still very much in place. 
 

will the worlds greatest investor be at the helm, it’s unlikely but that could change and they could also shrink the equity to limit the strain on the next guy. 
 

I also think that the amount of potential efficiencies in the operating businesses must be massive and ripe for a bit of screw turning or outright divestment. 
 

The complaint about the cash is nuts. I think their interest income alone puts them in the fortune 50 ( this may be totally wrong but I read that )

 

i’m in the camp of good returns with brk for the foreseeable future. 

[Spooky]

6 hours ago, John Hjorth said:

 

It's a good one, @gfp,

 

Or,

 

1. - like in posts above,  where a dividend from Bershire is desparately needed for the shareholders, because Berskhire is underperforming, and the large positions in the portfolio desparately needs to be sold [AAPL, BAC, AXP, KO], while some seem to forget those positions are indeed financed by insurance float and also partly by basically massive, free and deferred taxes on giant unrealized capital gains. Talk of dividends of perhaps USD 250B or USD 100 B, while the insurance group as a whole at YE2023 has a max. dividend capacity of USD 31 B, and holding company cash and T-Bills at YE2023 is USD 22 B. Typically suggested by people who trade around quite a lot, and never tell anything about their own track record.

2. - 'Breaking' the whole thing 'up' by splitting it to atoms, to 'get the real values to surface', [likely by the use a particle accelerator at CERN to put the company in or something like that?]. Typically suggested by people who aren't aware of the central role of NICO in the group structure and all the implications of that and no understanding of the inner workings of insurance float.

 

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

[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 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!