Jump to content

Buffett/Berkshire - general news


Recommended Posts

^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:

...

 

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.

Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF.  The yields are better and the risks are better than long duration bonds at this point in the bond market cycle.  Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows.  As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.

Link to comment
Share on other sites

...

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.

Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF.  The yields are better and the risks are better than long duration bonds at this point in the bond market cycle.  Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows.  As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.

This is not all black and white but the big asset allocation shift of the last ten years (see attached) has been the movement of funds from longer term fixed income to cash and equivalents.

This movement raises two questions (the indirect one raised by wabuffo and a direct one).

The indirect (and retrospective) one: Returns would have been better if the longer term fixed income portion would have grown proportionally to float.

The direct one: Does the current (and growing) allocation offer potentially significant optionality value? (my answer is yes)

BRK_percent_allocation.png.c123ffbbb6bd84e0cfcd1dd8a3e7b9b3.png

Link to comment
Share on other sites

...

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.

Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF.  The yields are better and the risks are better than long duration bonds at this point in the bond market cycle.  Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows.  As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.

This is not all black and white but the big asset allocation shift of the last ten years (see attached) has been the movement of funds from longer term fixed income to cash and equivalents.

This movement raises two questions (the indirect one raised by wabuffo and a direct one).

The indirect (and retrospective) one: Returns would have been better if the longer term fixed income portion would have grown proportionally to float.

The direct one: Does the current (and growing) allocation offer potentially significant optionality value? (my answer is yes)

Part of the decision in shifting from bonds to other assets (cash, owned income producing assets) is about expected future returns.  The move seems correct, but the unexpected happened during the recent COVID panic -- government became a lender of first resort where normally Berkshire would have had its pick of distressed assets.

 

A similar crossroads is appearing now for Berkshire.  AAPL is starting to flatline in terms of its EBIT growth and topline sales growth, but it's priced for some large expectations out of the business.  Does Berkshire exit, partially exit or hold due to the expected tax hit?  In 1998, Berkshire was facing a similar question with very sizable paper gains in Coca Cola, Gillette and American Express in particular.  Berkshire had an out where they turned a ~3x BV share price into General Re with a merger where they acquired a substantial amount of float and a bond-heavy portfolio that they turned into cash.  So, giving up a bit of equity to acquire a cashable asset was enough to de-risk an overvalued portfolio without incurring a very sizable capital gains hit from selling KO, G or AXP.  Do they interrupt compounding at lower rates going forward and take the sizable capital gains tax hit?  History says no, but the new answer may be something creative just like the last time.

Link to comment
Share on other sites

...

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.

Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF.  The yields are better and the risks are better than long duration bonds at this point in the bond market cycle.  Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows.  As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.

This is not all black and white but the big asset allocation shift of the last ten years (see attached) has been the movement of funds from longer term fixed income to cash and equivalents.

This movement raises two questions (the indirect one raised by wabuffo and a direct one).

The indirect (and retrospective) one: Returns would have been better if the longer term fixed income portion would have grown proportionally to float.

The direct one: Does the current (and growing) allocation offer potentially significant optionality value? (my answer is yes)

Part of the decision in shifting from bonds to other assets (cash, owned income producing assets) is about expected future returns.  The move seems correct, but the unexpected happened during the recent COVID panic -- government became a lender of first resort where normally Berkshire would have had its pick of distressed assets.

 

A similar crossroads is appearing now for Berkshire.  AAPL is starting to flatline in terms of its EBIT growth and topline sales growth, but it's priced for some large expectations out of the business.  Does Berkshire exit, partially exit or hold due to the expected tax hit?  In 1998, Berkshire was facing a similar question with very sizable paper gains in Coca Cola, Gillette and American Express in particular.  Berkshire had an out where they turned a ~3x BV share price into General Re with a merger where they acquired a substantial amount of float and a bond-heavy portfolio that they turned into cash.  So, giving up a bit of equity to acquire a cashable asset was enough to de-risk an overvalued portfolio without incurring a very sizable capital gains hit from selling KO, G or AXP.  Do they interrupt compounding at lower rates going forward and take the sizable capital gains tax hit?  History says no, but the new answer may be something creative just like the last time.

 

IIRC he has said not selling KO at the peak was a mistake. I think he is an expert at learning from mistakes.

 

Maybe a swap for like the deal they did with Graham holdings somehow?

Link to comment
Share on other sites

Anyone else contemplating how BNSF could stand to benefit from the Keystone XL closing? That 800k barrels a day has to go somewhere right?

Interesting question.

Keeping everything else equal and on a first-level basis, Keystone XL not coming through would increase demand for railway carload petroleum products transport for BNSF.

But:

-Coal transport is much more significant in volume (18% of freight revenues year 2019) and the policy 'intent' behind the Keystone decision would likely spill over into a more rapid decline in coal transport over time. Eventually, the intent would also involve moving away from natural gas, another accentuation of previous trends for the mid to long term.

-Unlike coal, railway petroleum volumes are highly dependent on shale oil price dynamics. Fluctuating and hard-to-forecast demand is not ideal for the railway operator (logistics, equipment, etc).

-Keystone not occurring is more likely to be marginally (and temporarily) beneficial for CDN railway operators like CN as the output related to tar sands will tend to go elsewhere than in the US and railways may play a role to reach export terminals.

At any rate, the long term moat of BNSF relies on the fact that it will retain its comparative advantage to carry any of many potential products, from point A to point B.

 

Link to comment
Share on other sites

...

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.

Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF.  The yields are better and the risks are better than long duration bonds at this point in the bond market cycle.  Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows.  As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.

This is not all black and white but the big asset allocation shift of the last ten years (see attached) has been the movement of funds from longer term fixed income to cash and equivalents.

This movement raises two questions (the indirect one raised by wabuffo and a direct one).

The indirect (and retrospective) one: Returns would have been better if the longer term fixed income portion would have grown proportionally to float.

The direct one: Does the current (and growing) allocation offer potentially significant optionality value? (my answer is yes)

Part of the decision in shifting from bonds to other assets (cash, owned income producing assets) is about expected future returns.  The move seems correct, but the unexpected happened during the recent COVID panic -- government became a lender of first resort where normally Berkshire would have had its pick of distressed assets.

 

A similar crossroads is appearing now for Berkshire.  AAPL is starting to flatline in terms of its EBIT growth and topline sales growth, but it's priced for some large expectations out of the business.  Does Berkshire exit, partially exit or hold due to the expected tax hit?  In 1998, Berkshire was facing a similar question with very sizable paper gains in Coca Cola, Gillette and American Express in particular.  Berkshire had an out where they turned a ~3x BV share price into General Re with a merger where they acquired a substantial amount of float and a bond-heavy portfolio that they turned into cash.  So, giving up a bit of equity to acquire a cashable asset was enough to de-risk an overvalued portfolio without incurring a very sizable capital gains hit from selling KO, G or AXP.  Do they interrupt compounding at lower rates going forward and take the sizable capital gains tax hit?  History says no, but the new answer may be something creative just like the last time.

 

IIRC he has said not selling KO at the peak was a mistake. I think he is an expert at learning from mistakes.

 

Maybe a swap for like the deal they did with Graham holdings somehow?

 

This was brought up when Apple was trading at $120. Apple is good as any investment at this point. If the market crashes and opportunities arise, he's got $100 plus billion to work with to make ample returns.

Link to comment
Share on other sites

...

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.

Another way to look at this -- they converted their long duration bond portfolio into a set of income producing real assets at BHE and BNSF.  The yields are better and the risks are better than long duration bonds at this point in the bond market cycle.  Further, based on Christopher Bloomstran's deep dive, they used the accelerated depreciation credits at BHE and BNSF as a secondary method of reducing tax payments and increasing cashflows.  As well, based on Brooklyn Investor's charts, they have built up a large cash component in their portfolio to backstop insurance losses and to provide optionality for opportunistic acquisitions.

This is not all black and white but the big asset allocation shift of the last ten years (see attached) has been the movement of funds from longer term fixed income to cash and equivalents.

This movement raises two questions (the indirect one raised by wabuffo and a direct one).

The indirect (and retrospective) one: Returns would have been better if the longer term fixed income portion would have grown proportionally to float.

The direct one: Does the current (and growing) allocation offer potentially significant optionality value? (my answer is yes)

Part of the decision in shifting from bonds to other assets (cash, owned income producing assets) is about expected future returns.  The move seems correct, but the unexpected happened during the recent COVID panic -- government became a lender of first resort where normally Berkshire would have had its pick of distressed assets.

 

A similar crossroads is appearing now for Berkshire.  AAPL is starting to flatline in terms of its EBIT growth and topline sales growth, but it's priced for some large expectations out of the business.  Does Berkshire exit, partially exit or hold due to the expected tax hit?  In 1998, Berkshire was facing a similar question with very sizable paper gains in Coca Cola, Gillette and American Express in particular.  Berkshire had an out where they turned a ~3x BV share price into General Re with a merger where they acquired a substantial amount of float and a bond-heavy portfolio that they turned into cash.  So, giving up a bit of equity to acquire a cashable asset was enough to de-risk an overvalued portfolio without incurring a very sizable capital gains hit from selling KO, G or AXP.  Do they interrupt compounding at lower rates going forward and take the sizable capital gains tax hit?  History says no, but the new answer may be something creative just like the last time.

 

IIRC he has said not selling KO at the peak was a mistake. I think he is an expert at learning from mistakes.

 

Maybe a swap for like the deal they did with Graham holdings somehow?

 

This was brought up when Apple was trading at $120. Apple is good as any investment at this point. If the market crashes and opportunities arise, he's got $100 plus billion to work with to make ample returns.

 

He had his opportunity this last year though. This thesis still holds weight, but actions speak louder than ideas at this point no? BRK hit $162 and hardly any buybacks.

Link to comment
Share on other sites

Anyone else contemplating how BNSF could stand to benefit from the Keystone XL closing? That 800k barrels a day has to go somewhere right?

Interesting question.

Keeping everything else equal and on a first-level basis, Keystone XL not coming through would increase demand for railway carload petroleum products transport for BNSF.

But:

-Coal transport is much more significant in volume (18% of freight revenues year 2019) and the policy 'intent' behind the Keystone decision would likely spill over into a more rapid decline in coal transport over time. Eventually, the intent would also involve moving away from natural gas, another accentuation of previous trends for the mid to long term.

-Unlike coal, railway petroleum volumes are highly dependent on shale oil price dynamics. Fluctuating and hard-to-forecast demand is not ideal for the railway operator (logistics, equipment, etc).

-Keystone not occurring is more likely to be marginally (and temporarily) beneficial for CDN railway operators like CN as the output related to tar sands will tend to go elsewhere than in the US and railways may play a role to reach export terminals.

At any rate, the long term moat of BNSF relies on the fact that it will retain its comparative advantage to carry any of many potential products, from point A to point B.

 

Thanks for sharing your thoughts. It’s a dilemma of sorts because the opportunity exists, but as you said many dynamics make it difficult to forecast logistics.

 

Does anyone have info on how these contracts are written? I’m not super familiar with rail transport, but I would imagine it’s not much different than container shipping where you have a range or “quote” of price and the contract acts more as a “we get the business” type of deal.

Link to comment
Share on other sites

...

Does anyone have info on how these contracts are written? I’m not super familiar with rail transport, but I would imagine it’s not much different than container shipping where you have a range or “quote” of price and the contract acts more as a “we get the business” type of deal.

This is on the edge of my limited knowledge and i guess you wonder if railways obtain good margins on those contracts. Because of commercial 'sensitivity', contract clauses are not widely reported. It seems that railways need to invest (buying and leasing) significant funds to meet this specific demand and ask, in return, for a multi-year commitment and a baseline daily (bpd equivalent) take-or-pay scenario. i think the Alberta government was recently on the hook for such contracts negotiated at at time when prices (and demand) were higher.

So, BNSF could be eager to contract for such crude-by-rail agreements and the deals would likely be quite profitable short term but this does not appear to be a long term advantage. There was an article about CN some time ago dealing with this topic, sort of:

https://www.nationalobserver.com/2019/05/01/news/crude-rail-temporary-solution-pipeline-shortage-cn-rail-ceo

Link to comment
Share on other sites

If there are multiple hedge funds going under from "infinite" squeezes here it seems logical that there could be a role for BRK as a bailout provider once again? They need someone with pretty much unlimited capital to come in and save them from complete wipeout by giving them certain staying power. What could be more logical than Berkshire for this purpose? Buying hedge funds for 5 cents on the dollar seems like Buffett's kind of business and it was a somewhat close call with LTCM back in the day, so it's not like it would be unprecedented.

Link to comment
Share on other sites

If there are multiple hedge funds going under from "infinite" squeezes here it seems logical that there could be a role for BRK as a bailout provider once again? They need someone with pretty much unlimited capital to come in and save them from complete wipeout by giving them certain staying power. What could be more logical than Berkshire for this purpose? Buying hedge funds for 5 cents on the dollar seems like Buffett's kind of business and it was a somewhat close call with LTCM back in the day, so it's not like it would be unprecedented.

 

I don't think Berkshire wants optics that comes along with bailing out HFs that were pummeled in this even. Even if it was a decent return. IMO LTCM was a different era and arguably a less controversial strategy (except for the level of leverage).  And he ultimately passed didn't he?

Link to comment
Share on other sites

If there are multiple hedge funds going under from "infinite" squeezes here it seems logical that there could be a role for BRK as a bailout provider once again? They need someone with pretty much unlimited capital to come in and save them from complete wipeout by giving them certain staying power. What could be more logical than Berkshire for this purpose? Buying hedge funds for 5 cents on the dollar seems like Buffett's kind of business and it was a somewhat close call with LTCM back in the day, so it's not like it would be unprecedented.

I don't think Berkshire wants optics that comes along with bailing out HFs that were pummeled in this even. Even if it was a decent return. IMO LTCM was a different era and arguably a less controversial strategy (except for the level of leverage).  And he ultimately passed didn't he?

Not quite, at least the way i understand it.

A short and relevant summary:

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2009/summer/pdf/economic_history.pdf

This was the era when it's nobody's and everybody's fault started to apply with inspiration to come for more and more moral hazard collective rescues.

Link to comment
Share on other sites

If there are multiple hedge funds going under from "infinite" squeezes here it seems logical that there could be a role for BRK as a bailout provider once again? They need someone with pretty much unlimited capital to come in and save them from complete wipeout by giving them certain staying power. What could be more logical than Berkshire for this purpose? Buying hedge funds for 5 cents on the dollar seems like Buffett's kind of business and it was a somewhat close call with LTCM back in the day, so it's not like it would be unprecedented.

I don't think Berkshire wants optics that comes along with bailing out HFs that were pummeled in this even. Even if it was a decent return. IMO LTCM was a different era and arguably a less controversial strategy (except for the level of leverage).  And he ultimately passed didn't he?

Not quite, at least the way i understand it.

A short and relevant summary:

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2009/summer/pdf/economic_history.pdf

This was the era when it's nobody's and everybody's fault started to apply with inspiration to come for more and more moral hazard collective rescues.

 

Thanks for the correction. I read "When Genius Failed" a long time ago and had it in my head WEB ultimately passed. I was wrong. Maybe I was confusing it was AIG. With regards to a different era, I mean the headline/reputation risk for Berkshire is much greater these days if they take a side. Also it could impact potential future acquisition relationships if BRK was bailing out short HFs.

Link to comment
Share on other sites

  • 3 weeks later...
  • 2 weeks later...
  • 2 weeks later...

Saw this Rational Walk post linked on another board and there is a very good spreadsheet showing the entire (recent) history of Berkshire share repurchases all in one place.  Of course we already know there have been additional purchases after this spreadsheet through 2/16. 

 

Thought some here would find it interesting -

 

https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F63ba108e-5fe7-4b69-aaa2-a27919aec005_1658x1076.png

 

 

Link to comment
Share on other sites

Saw this Rational Walk post linked on another board and there is a very good spreadsheet showing the entire (recent) history of Berkshire share repurchases all in one place.  Of course we already know there have been additional purchases after this spreadsheet through 2/16. 

 

Thought some here would find it interesting -

 

https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F63ba108e-5fe7-4b69-aaa2-a27919aec005_1658x1076.png

 

Very nice! Thanks!

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...