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Berkshire Hathaway - The Mysterious Death Star


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New article in Newsweek about BH and WB.WOW!

 

http://www.newsweek.com/2015/03/06/berkshire-hathaways-transparency-problem-309127.html

 

Basically investment banking analysts bitching that BH doesn't have an Investor Relations department and that it doesn't hold quarterly conference calls to give them neatly packaged figures to plug into their excel models.

 

A couple of other tidbits from the article:

-BH website is ugly

-Buffett is an imperial CEO and an empire builder last seen during the Gilded Age

-BH disclosure is in the league of Chinese and Russian banks and below all other companies.

 

I thought Newsweek was supposed to have something at least resembling journalistic standards :S

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“You cannot see into the actual economics of the core businesses,” says Jim Shanahan, who covers the company for investment bank Edward Jones. “They fall well short of the disclosure we’ve come to expect of other financial services companies, particularly in the insurance space.”

 

Calling Ed Jones an investment bank? Hahaha, good one.

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Let's invert: assume you know nothing about Warren and Charlie and you start to analyze BRK as a black box company with no previous knowledge about its management. Would you not raise serious questions about the BRK corporate governance?

 

For example, nepotism in the board: we let Warren slide with it, but it would be a red flag at other companies.

 

(Aside: auditor trouble at DJCO would have legitimately crashed stock of other companies. DJCO shareholders let it slide because it's run by Munger).

 

Edit: I wrote about corporate governance, while the article talks more about transparency. Still the issue remains: if you were to deeply analyze BRK, would you not need the info about its (re)insurance businesses that is not provided? Would you buy the stock if it wasn't "Warren knows what he's doing, so let's pay 1.3 P/B"?

 

Edit2: I thought the article was a bit sensionalistic, but it IMHO raised some valid points. And to answer the question above: if BRK was a black-box-no-name company, I would not invest in it. I think it is very hard to analyze and very hard to predict future returns.

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“You cannot see into the actual economics of the core businesses,” says Jim Shanahan, who covers the company for investment bank Edward Jones. “They fall well short of the disclosure we’ve come to expect of other financial services companies, particularly in the insurance space.”

 

Calling Ed Jones an investment bank? Hahaha, good one.

Haha, no kidding. May I suggest to the good Mr Shanahan that maybe the reason he cannot see into the economics of BH is the same reason why he works at Ed Jones and unfortunately for him it has nothing to do with BRK disclosures.

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Let's invert: assume you know nothing about Warren and Charlie and you start to analyze BRK as a black box company with no previous knowledge about its management. Would you not raise serious questions about the BRK corporate governance?

 

For example, nepotism in the board: we let Warren slide with it, but it would be a red flag at other companies.

 

(Aside: auditor trouble at DJCO would have legitimately crashed stock of other companies. DJCO shareholders let it slide because it's run by Munger).

 

Edit: I wrote about corporate governance, while the article talks more about transparency. Still the issue remains: if you were to deeply analyze BRK, would you not need the info about its (re)insurance businesses that is not provided? Would you buy the stock if it wasn't "Warren knows what he's doing, so let's pay 1.3 P/B"?

 

Edit2: I thought the article was a bit sensionalistic, but it IMHO raised some valid points. And to answer the question above: if BRK was a black-box-no-name company, I would not invest in it. I think it is very hard to analyze and very hard to predict future returns.

Well I think that if would start to analyze BH I would find out about Warren and Charlie... and Ajit.

 

Re corporate governance I just assume there's nepotism on every board. Just because the names don't match doesn't mean that the results are different and management doesn't own the board. I have yet to see an instance when the board voted down a CEO's pay package. I think the fact that BH doesn't provide insurance to its directors makes for much better governance than any chairman/CEO role split ever would. If anyone does pls let me know. I am curious.

 

The reinsurance business is such that no amount of information short of seeing the actual contracts would help you. It really is one of those cases where you definitely bet more on the jockey than the horse. You look at the track record over very long periods and you look at management and then if you're comfortable you kinda take a leap of faith. I think that Buffett is probably the best insurance analyst on the planet and even he gets it wrong often enough (Gen Re anyone?).

 

I do agree that BH could provide more information. I would personally like more detail on the smaller operating subs. But then would I arrive at a significantly different estimate of BH's IV? Probably not, it would just make my work a bit easier. However, I am sure that the competitors of those subs would also be highly interested in those details as well and I don't know if that would be so beneficial for BH's IV.

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Let's invert: assume you know nothing about Warren and Charlie and you start to analyze BRK as a black box company with no previous knowledge about its management. Would you not raise serious questions about the BRK corporate governance?

 

For example, nepotism in the board: we let Warren slide with it, but it would be a red flag at other companies.

 

(Aside: auditor trouble at DJCO would have legitimately crashed stock of other companies. DJCO shareholders let it slide because it's run by Munger).

 

Edit: I wrote about corporate governance, while the article talks more about transparency. Still the issue remains: if you were to deeply analyze BRK, would you not need the info about its (re)insurance businesses that is not provided? Would you buy the stock if it wasn't "Warren knows what he's doing, so let's pay 1.3 P/B"?

 

Edit2: I thought the article was a bit sensionalistic, but it IMHO raised some valid points. And to answer the question above: if BRK was a black-box-no-name company, I would not invest in it. I think it is very hard to analyze and very hard to predict future returns.

 

I'm with Jurgis on this one.  There seems to be blinders on when it comes to all things WB and BH.  Look at it without those glasses on and I'm sure your opinion on its disclosures and governance methods would change.  If there is any take away from Munger its that you should question things and ALWAYS INVERT.

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if it can maybe bring down the stock by say, 10-15% ? I can buy a load :)

 

Let me ask provocative question: if Warren died tomorrow and stock dropped 15%, would you buy a load? How about if it dropped 10%? At which level you would still buy a load?

 

Personally, if it dropped up to 15%, I would sell everything. Somewhere between 15% and 20%, I'd hold. I would possibly buy a load if it dropped over 20% (highly unlikely, since BRK probably has an auto-authorization to buyback massively if this happens).

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if it can maybe bring down the stock by say, 10-15% ? I can buy a load :)

 

Let me ask provocative question: if Warren died tomorrow and stock dropped 15%, would you buy a load? How about if it dropped 10%? At which level you would still buy a load?

 

Personally, if it dropped up to 15%, I would sell everything. Somewhere between 15% and 20%, I'd hold. I would possibly buy a load if it dropped over 20% (highly unlikely, since BRK probably has an auto-authorization to buyback massively if this happens).

Why would you sell everything if it dropped 15% after WB passes? Do you think anyone would ship less on BNSF or anyone would cut their power consumption from mid-American or not buy insurance from Geico or NICO, or buy less furniture from NFM.... or or or? If you are going to make an argument about how value evaporates it should be accompanied by an explanation about how the subs are going to be less profitable.

 

But a 20 % drop is ok because they get close to the buyback threshold? I have news the buyback threshold is there a soft threshold for when it becomes a screaming buy because it would add tons of value because it's so cheap. I don't see how at 15% drop it is dogshit but at 20% drop it is gold. And I have news for you, WB is 84 years old. He will die any day now. If you're worried about him not being in the picture you should probably sell now and not wait.

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If you're worried about him not being in the picture you should probably sell now and not wait.

 

Thank you very much, but I am not asking for your advice when to sell.  8)

 

And, yes, I will do as I said in my previous message. I believe that Buffett is about 20% value of BRK. I am not going to try to persuade anyone else to agree or whatever. I asked the question just to see how much value sleepydragon puts on Buffett. There is some correlation between that and how much value is BRK transparency worth.

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Let's invert: assume you know nothing about Warren and Charlie and you start to analyze BRK as a black box company with no previous knowledge about its management. Would you not raise serious questions about the BRK corporate governance?

 

For example, nepotism in the board: we let Warren slide with it, but it would be a red flag at other companies.

 

(Aside: auditor trouble at DJCO would have legitimately crashed stock of other companies. DJCO shareholders let it slide because it's run by Munger).

 

Edit: I wrote about corporate governance, while the article talks more about transparency. Still the issue remains: if you were to deeply analyze BRK, would you not need the info about its (re)insurance businesses that is not provided? Would you buy the stock if it wasn't "Warren knows what he's doing, so let's pay 1.3 P/B"?

 

Edit2: I thought the article was a bit sensionalistic, but it IMHO raised some valid points. And to answer the question above: if BRK was a black-box-no-name company, I would not invest in it. I think it is very hard to analyze and very hard to predict future returns.

Well I think that if would start to analyze BH I would find out about Warren and Charlie... and Ajit.

 

Re corporate governance I just assume there's nepotism on every board. Just because the names don't match doesn't mean that the results are different and management doesn't own the board. I have yet to see an instance when the board voted down a CEO's pay package. I think the fact that BH doesn't provide insurance to its directors makes for much better governance than any chairman/CEO role split ever would. If anyone does pls let me know. I am curious.

 

The reinsurance business is such that no amount of information short of seeing the actual contracts would help you. It really is one of those cases where you definitely bet more on the jockey than the horse. You look at the track record over very long periods and you look at management and then if you're comfortable you kinda take a leap of faith. I think that Buffett is probably the best insurance analyst on the planet and even he gets it wrong often enough (Gen Re anyone?).

 

I do agree that BH could provide more information. I would personally like more detail on the smaller operating subs. But then would I arrive at a significantly different estimate of BH's IV? Probably not, it would just make my work a bit easier. However, I am sure that the competitors of those subs would also be highly interested in those details as well and I don't know if that would be so beneficial for BH's IV.

 

These are both excellent posts.

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Why would you sell everything if it dropped 15% after WB passes? Do you think anyone would ship less on BNSF or anyone would cut their power consumption from mid-American or not buy insurance from Geico or NICO, or buy less furniture from NFM.... or or or?

 

 

Actually, over time, quite possibly yes.  When looking at BH I think it is worth remembering that virtuous circles can become vicious circles.  At the moment Buffet's reputation attracts people who want to sell their business but stay on and run it.  His reputation also allows him to leave them alone to run their business without interference (no other market CEO could get away with the statement that their management style is "lethargy bordering on sloth").  If he goes, over time, market pressure will eventually lead to tighter internal controls.  BRK will very slowly ossify into a more bureauocratic, and actually less well run company.  Some existing CEO's will leave.  Subsidiary profitability could very possibly decline. 

 

On top of that: 1) fewer good buying opportunities will come up, because BRK will become a less attractive company to sell your business to; 2) few people can allocate capital like Buffet, and 3) BRK won't get any more Goldman/GE prefs deals just because companies want a stamp of approval from Buffet in a crisis.

 

So it's perfectly reasonably to suppose that BRK's IV with buffet is higher than its IV without.  (Not that that says anything about where the stock price is relative to that IV.)

 

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Well I think that if would start to analyze BH I would find out about Warren and Charlie... and Ajit.

 

Re corporate governance I just assume there's nepotism on every board. Just because the names don't match doesn't mean that the results are different and management doesn't own the board. I have yet to see an instance when the board voted down a CEO's pay package. I think the fact that BH doesn't provide insurance to its directors makes for much better governance than any chairman/CEO role split ever would. If anyone does pls let me know. I am curious.

 

The reinsurance business is such that no amount of information short of seeing the actual contracts would help you. It really is one of those cases where you definitely bet more on the jockey than the horse. You look at the track record over very long periods and you look at management and then if you're comfortable you kinda take a leap of faith. I think that Buffett is probably the best insurance analyst on the planet and even he gets it wrong often enough (Gen Re anyone?).

 

I do agree that BH could provide more information. I would personally like more detail on the smaller operating subs. But then would I arrive at a significantly different estimate of BH's IV? Probably not, it would just make my work a bit easier. However, I am sure that the competitors of those subs would also be highly interested in those details as well and I don't know if that would be so beneficial for BH's IV.

 

This gets at the heart of the issue, for me.  The calls for greater disclosure are premised on the idea that more information is better information.  I would like more information on operating subs because it is interesting to me.  But the important details are 1) the economics - how much cash is made, how much cash is invested, and where that cash is invested; and 2) what the risks are to the business.  The first point is addressed in abundant detail.  The second point is far more difficult, but I don't see that the information being complained about not being disclosed will help answer that point.  Perhaps unfairly, I read the complaints as being that earnings are impossible to estimate.  Which is of course the heart of what Berkshire stands for.

 

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