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Buffett/Berkshire - general news


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Yes, Ron Olson periodically buys Berkshire shares and added ~$900k to his $55+ million in Berkshire shares.  What I found odd was that he purchased the 4000 b-shares on December 18th and filed his form 4 on January 6th.  That's a big no-no and surprising from the head of Munger, Tolles & Olson.

 

https://www.sec.gov/Archives/edgar/data/0001067983/000120919121002201/0001209191-21-002201-index.htm

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Someone should tell Cathy she needs to let the journalists and cameraman have "unprecedented access". One day there will be never before seen footage, and behind the scenes stories to be told via a remarkable, never before seen documentary. This is....The Last Dance.

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Great find.  Thank you.  This group is fast growing with strong combined ratios.  Frankly, the insurance bench below Ajit is extremely strong.

Yes it is scary how strong it is. I started to transfer a lot of my "growth" stock money into Berkshire, most of them reached valuations far beyond my targets and I think that most  people currently underestimate the strenght of berkshires insurance and railway business

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The key catalyst for Berkshire stock is what Buffett does with the cash hoard of $145 billion over the next year. If he is able to put a significant amount to work this will drive the stock price (improving both earnings and sentiment in shares).

 

Immediately after the pandemic broke out he got extremely risk averse. Not only did he not buy anything he sold out of some positions like airlines. His commentary during the AGM was pretty dour. And preservation of capital for long term shareholders was clearly his core objective.

 

As 2020 progressed it appears Buffett got more comfortable with the pandemic. More optimistic. And you could see this with his purchases as the year progressed:

- Japanese stocks

- big pharma

- meaningful buybacks of BRK stock

 

The new news (November) is we now have vaccine’s approved and actually in arm. It makes sense that this should help make Buffett even more comfortable/optimistic and further shift from capital preservation to more of a risk on approach. So i think there is a good chance we may start to see the cash hoard decrease in size each quarter moving forward:

- BRK stock buybacks?

- pipelines? - lots of cheap opportunities here; in BRK circle of competence

- energy?

- other international?

- other domestic US?

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One other big catalyst in terms of re-rating has been in my opinion, Berkshire shedding itself of financial services (not all i.e. BAC). How could the "Apple trade" really shine through the mud (that is BRK) when the whole conglomerate was perceived of being "big on financials". This has been partially rectified in my opinion by getting rid of financial names.

 

Another way for the "Apple trade" to shine through the mud is to be simply more relaxed about Berkshire's buyback program and be willing to do buyback at higher and higher level dollar level, while trimming Apple here and there to fund those higher and higher purchase levels. Seems like a fair exchange:  trim Apple/buyback BRK with the same dollar amount.

 

There has also been a structural change on how we should perceive BRK cash pile as well:

 

(1)  in a world of money supply expansion, the risk of sitting on cash (more than it actually needs) can be determinantal.

(2)  in a world embedded with a Fed put, the universe of quality targets has also shrunk.

 

Both of these interrelated items were not a concern in 2018 or in 2019, but now look to be a long term term concern. 

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There has also been a structural change on how we should perceive BRK cash pile as well:

 

I would like to point out that Buffett's avoidance of long-term US Treasury bonds starting in 2010 or so in favor of extremely short-term T-Bills has cost BRK a lot of money. 

 

As an example, her is the bond table from the 2019 BRK annual report:

BRK-bonds.jpg

 

Look at the fair value gains on the tiny amount of bonds in the five-to-ten year duration bucket (+84%).  Imagine what the fair value gains in the ten-to-thirty year bucket would've been.

 

It's been taken as gospel that Buffett has been shrewd in avoiding the long-end of the yield curve and staying in cash and cash equivalents for the better part of a decade.  But in fact, its been a huge error that has cost BRK shareholders plenty. 

 

Is ten years long enough to call out Buffett's mistake or is that still heresy here at COB&F?

 

wabuffo

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Yes, i would love to see continued stock buybacks in Q4 (hopefully they took out another 2% of shares).

 

Brk, Apple and BAC all flush with cash and buying back meaningful amounts of stock all at the same time. Has to benefit shareholders of BRK at some point in time :-)

 

PS: yes, i hope BRK continues to sell Apple shares, given current valuation and position size. The issue is what to do with the proceeds - we keep circling back to this core ‘high class’ problem of BRK holding (apparently indefinitely) too much cash!

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Buffett has made plenty of mistakes, but so have we all, if counting things we missed is in there. The difference with most, is simply omission vs commission. Its largely why I dislike Fairfax but at various points like to load the boat on Berkshire. Buffett when he acts, typically gets it right or misses small. He'll drive everyone nuts doing nothing. But this is preferable to Watsa who is always doing something and screws up, big, quite frequently. Much easier to forecast the former than the latter. All Buffett needs to do at these prices is marginally buyback stock and let the businesses operate. If he gets anything else right, watch out.

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yes, i hope BRK continues to sell Apple shares, given current valuation and position size. The issue is what to do with the proceeds - we keep circling back to this core ‘high class’ problem of BRK holding (apparently indefinitely) too much cash!

 

I am seeing not as high class problem but as an opportunity for BRK to capture some low hanging fruits by arbitraging away by trimming Apple and buying at higher prices its own shares without feeling squeamish about it.

 

The whole BRK sum-of-the-parts thing being more than market value thing, but using Apple position market value as a yardstick as what is the rest of Berkshire is really worth.

 

 

 

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It's been taken as gospel that Buffett has been shrewd in avoiding the long-end of the yield curve and staying in cash and cash equivalents for the better part of a decade.  But in fact, its been a huge error that has cost BRK shareholders plenty. 

 

Is ten years long enough to call out Buffett's mistake or is that still heresy here at COB&F?

 

wabuffo

 

I think both Watsa and Buffet have been waiting for the long term bear market in the bond, that doesn't seem to want to come. Watsa switched in the fall of 2016 to short term, i think as well. The so-called first innings of that long term bear market in the bond are literally taking a decade to unfold.

 

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I haven't been shy in the past about calling out mistakes at the namesake firms here. But I think the risk reward from switching to short term bonds makes it hard to call it a mistake. BRK doesn't have a big loss from interest rate derivatives, although they did miss a chance for profits in bonds from falling rates. But they also avoided a potentially large loss (if rates had risen).

 

Buffett has consistently said his priority (rule 1) is to not lose money, and long bonds are a great way to do that if sharply rising rates are on the table. Because he is consistent with his stated plan and the overall results have been acceptable, I think its hard to call that a mistake. YMMV.

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I've got to agree with you, bizarro. 80+% potential gain over a decade isn't that much considering the risk, especially having started with much less cash and having most of it offset by float liability.

 

The counterfactual situation of rising rates remained a big possibility, and if it happened, large acquisition opportunities might have arisen at the exact moment the funds were depleted by too heavy a weighting on long dated T billls. That could have been a major error of commission potentially costing many decades of compound growth from the acquisition missed.

 

Only with perfect hindsight can we know that rates fell further and prices of potential acquisition targets remained high, though it sounds like we came close to something big in 2017.

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All Buffett needs to do at these prices is marginally buyback stock and let the businesses operate. If he gets anything else right, watch out.

This is my sentiment exactly.  Keep the current cash pile where it's at and nothing higher.  Use all cash coming in to buy back stock and strike when an opportunity arises.  If he does nothing but invest excess cash in BRK buybacks for the next year, we'll all be happy shareholders!

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A potential catalyst might  be Snowflake. It is the subject that I’m eager to read about in the annual report. If it is a success like Apple is the market sentiment that Berkshire is just about old economy might change Just like when the market realised that Apple wasn’t just a hardware company. There is also Stone and Byd. At some point you have to realize that Berkshire is changing under the influence of Ted and Todd

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^So could BRK have done better by ‘managing’ duration in its fixed income component of float? This is a relevant question going forward, whoever is in charge of capital (asset) allocation as the present posture can be seen as a drag or as an optionality feature.

Thanks to Brooklyn Investor:

 

brk_cash.PNG

 

The asset allocation in BRK’s fixed income ‘portfolio’ has been very unusual. Longer duration exposure has remained minimal up to the last quarterly report. It’s interesting to remember that BRK, when it acquired General Re in 1998, acquired a portfolio of longer duration fixed income securities (mostly non-taxable munis) valued at about 24.6B (if my numbers are correct). So, what about BRK’s fixed income duration strategy?

 

Here’s a (borrowed) table showing the return on the fixed income side for insurers at large over the last 10 years:

 

NEAMgroup_earned_investment_income.jpg?width=1103&name=NEAMgroup_earned_investment_income.jpg

2019 2.4  2018 2.2  2017 2.3  2016 2.0  2015 1.7  2014 1.8  2013 3.1  2012 2.6  2011 2.4  2010 3.3

 

Added below the table are the results (%) for RNR (which happen to be on my working desk now).

 

When assessing the fixed income side of (re)einsurers’ portfolios over the last 10 to 20 years, several tentative conclusions can be reached:

-yields are coming down, absolutely and relatively to the 10-yr yield

-managers have not used duration to increase yields

-managers have moved up the risk ladder (yield searching)

-it’s no fun to manage the fixed income side of float

-Mr. Buffett has achieved, at this point of the underwriting/investing cycle, a lower return than the industry ‘benchmark’ (especially since 2014 with the growing cash pile earning basically 0%)

 

So, could BRK have done better with duration? Maybe. But:

-Mr. Buffett was always clear that he viewed longer term fixed income as poor allocation.

-FFH which has played the duration game with positive results has reported, at best, a mixed picture with ‘macro’ calls in the last 10 years.

-The whole industry at large has not exploited longer duration fixed income opportunities. For example RNR, despite a progressively longer insurance reserves duration with acquisitions started with an effective duration of 3.2 years in 2010 and reported a duration of 2.9 at 2019 year-end.

 

It’s also instructive to look at a previous kind of cycle (leading to the housing b****e). As an example of the insurance industry’s investment income pattern, here is what RNR reported (net investment income over total investments, %) for the 2003 to 2009 period: 2003 3.1  2004 3.4  2005 4.1  2006 5.0  2007 6.1  2008 0.4  2009 5.2.

An argument could be made that BRK ‘lagged’ leading up to the 2007-9 episode (it’s hard to derive the exact yield on the fixed income part because of the way BRK reports) but the opportunistic use of cash during the last part of the phase to buy fixed income-like instruments at very advantageous terms largely made up the difference and more.

 

I think it was possible, in the last 10 years, to produce investing profits by playing the long duration game (even with ‘risk-free’ instruments) and there may be an ultimate puff left but humility suggests to wait for a full cycle (whatever that means as the new to-be Treasury person who used to promote Fed put instruments has suggested that true financial crises are a thing of the past, at least for this generation) before reaching the conclusion that there is little comparative optionality value in BRK’s fixed income portfolio and that Mr. Buffett has become passé.

 

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