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POLL: When Buffett is gone, whither BRK's intrinsic value?


cobafdek
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How will you adjust BRK's intrinsic value the day Buffett dies or retires?  

184 members have voted

  1. 1. How will you adjust BRK's intrinsic value the day Buffett dies or retires?

    • No adjustment (or only marginal impairment)
    • Minor-to-moderate downward adjustment (medium impairment)
    • Major downward adjustment (major impairment)


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I'm going to assume that folks here will not see Buffett's leaving as a positive, hence no voting option for "Increase in intrinsic value."

 

For about the past 10 years, Buffett has assisted us shareholders in calculating a rough estimate of BRK's intrinsic value.  Since the 2010 letter and in annual reports since, he speaks of the Three Pillars.  Pillar #1 is float/investments.  Pillar #2 is non-insurance operating results, where you can apply some appropriate multiple to aggregate pre-tax earnings.  Adding these two pillars gives you a quantitative estimate.

 

Finally, there is Pillar #3, which is qualitative, subjective, and forward-looking:  how well will future retained earnings be deployed.  This factor is the management intangible.  Some of you might use Pillar #3 as a buttress to your confidence in your quantitative calculation using Pillars #1 and #2.  Others might consider Pillar #3 as a Buffett Premium, and actually add some "X" dollar amount to the quantitative IV estimate.  Regardless, Pillar #3 is Buffett.

 

What happens to Pillar #3 (and, by extension, BRK's intrinsic value), when Buffett is gone?

 

1. Option 1 implies that Buffett is unique by having solved the succession problem.  I really liked his discussion this year of how BRK's conglomerate form will actually enhance corporate performance compared to run-of-the-mill conglomerates.  The culture will remain intact.  Buffett has engineered a kind of DNA that will be self-replicating and self-sustaining without him.  BRK's genetic structure is resilient (or, if you prefer, antifragile), and Berkshire's "practice evolution" (Munger's words) will continue for the next 50 years.

 

OR, do you believe:

 

3. Option 3 implies that Buffett is unique because Buffett is Berkshire, and Berkshire is Buffett.  If Buffett is gone, you are gone.  When the jockey is gone, the horse is just another horse.

 

Or something in between?

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I think Munger captured it well and I certainly agree.

 

"Berkshire would almost surely remain a better-than-normal company for a very long time even if

(1) Buffett left tomorrow, (2) his successors were persons of only moderate ability, and (3) Berkshire never again

purchased a large business." - Munger

 

I am young and new to investing. When I first bought Berkshire shares about 2 years ago, I bought them because of what Buffett has built not because of Buffett. In the current state, Berkshire intrinsic value gains year to year are from growth of the permanent subsidiaries and stocks. Decades ago, those didn't exist, the IV growth was from capital allocation and making those wise decisions that make Berkshire what it is today.

 

I think anyone that is buying for Buffett should think twice about doing so.

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I'm going to assume that folks here will not see Buffett's leaving as a positive, hence no voting option for "Increase in intrinsic value."

 

...what used to be called the Buffett premium is turning into a Buffett discount as Warren gets older and people are fearful of the future.

 

http://www.gurufocus.com/news/130239/alice-schroeder-on-the-buffett-discount-in-berkshires-stock-price

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Key- man risk is much lower in Berkshire than in a lot of corporations.

Apple stock has done well after Jobs died. I am not worried about Berkshire after Buffett.

 

I don't think Berkshire and Apple are comparable in this regard. Apple is a very focused company, despite now being so large, both in terms of how much business it does and how many employees it has. It only really has one mission, which is to bring to market computing devices including the ecosystem supporting them. Berkshire is a conglomerate with each business unit having different aims. You could say that this makes the key man risk less with Berkshire, which may be true. But it also could be true that this actually makes Buffett's role even more important and thus idiosyncratic, which would cause a much larger disruption to Berkshire than Apple upon losing the key man. I really don't know one way or the other, and I think it is unknowable until the rubber actually hits the road. Everyone always look prepared before the bad event actually happens.

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AAPL is actually not a bad comparison. I expected it to perform much worse than it has done so far. So, yeah, kudos to Tim Cook.

 

And yet the story is far from over. There is still high risk that Jobs' shoes are tough to fill. Neither Apple nor Berkshire are going to collapse immediately after the key person dies. But there is a high risk of slow rot: lower performance, losing the cachet, fewer innovations, etc. And I still consider this risk to be present in Apple, even with all respect to Tim Cook. (Of course, I'm probably going to be crucified by Apple fans for saying this, so be it.)

 

In case of Berkshire, the risks are:

- Will sub heads be happy to work for someone else than Buffett?

- Will sub heads be happy to give extra cash flows out of the sub to someone else than Buffett?

- Will the new leader solve the internal issues (NetJets, BNSF, GenRe, etc.) as well as Buffett did?

Plus the external issues:

- Will companies still regard BRK as white knight for selling to it, financing, etc?

- With Buffett and Gates foundation selling BRK shares, are the new shareholders be happy/patient/understanding with new CEO?

 

I'm sure I miss some other stuff. There have been other people on this forum that discussed this quite well.

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Regardless of whether or not Buffett stays, Berkshire is getting close to (what appears to be) a size where it can no longer retain all of its earnings. I mean, if you just think mathematically, if BRK grew at 10% a year, it would be something like a $1.5 trillion market value company in 15 years. That certainly isn't impossible, after all Apple is a single business and could reach $1T in market cap, but my guess is that it isn't long before a dividend or share buyback are instituted regularly. If so, it seems to me that the role of capital allocation at Berkshire will become *slightly* less important in its overall performance, with most of the performance differential vs. the market relying on how Berkshire's wholly-owned businesses perform versus the market. And thus, I'd expect that the incremental advantage in capital allocation that Buffett's talents provide may be reduced going forward, reducing the impact that his leaving has on future performance. The wild card is whether or not selling a whole business to Berkshire is still attractive after Buffett leaves; my guess is that as long as the acquisition philosophy remains the same, Berkshire will remain a good place to sell for certain owners versus alternatives (private equity, public markets, etc).

 

Basically, my point is, if we were investing in a $50M stock fund, I'd pay a sizeable premium for Buffett to manage it over almost anyone else. But Berkshire is so far removed from that that I'm not sure how much Buffett is really worth these days over another capable person who believes in the same basic capital allocation principles. Could be totally off base but my two cents.

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I am more comfortable on the investment side than the operating business / large acquisition side. Ted and Todd have exhibited very good decision making so far, and that is reflected in their performance being stronger than Buffett's since they joined. One of their advantages is that they don't have the $200B CEO mentality. So far they are targeting much smaller midcap companies than Buffett. I think in his 80s he has constrained himself to ultra large companies a little more than necessary.

 

Not knowing who will be the CEO, what their investment background is, and what the decision making split will be on large wholly owned acquisitions in terms of the CEO vs the CIOs, that is where I see more risk.

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I am more comfortable on the investment side than the operating business / large acquisition side. Ted and Todd have exhibited very good decision making so far, and that is reflected in their performance being stronger than Buffett's since they joined. One of their advantages is that they don't have the $200B CEO mentality. So far they are targeting much smaller midcap companies than Buffett. I think in his 80s he has constrained himself to ultra large companies a little more than necessary.

 

Not knowing who will be the CEO, what their investment background is, and what the decision making split will be on large wholly owned acquisitions in terms of the CEO vs the CIOs, that is where I see more risk.

 

Can't dispute that the two have done an incredible job. But in the bigger picture, their performance on a few billion of capital means little to the overall performance of Berkshire. And my guess is, if they were required to make investments of the size that would really move the needle at Berkshire, they would no longer be outperforming to the degree they have.

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Guest wellmont

the price is already discounting a berkshire without buffett. unless you think he lives till "doomsday".

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I think it's interesting that there is so much talk about BRK and it's valuation / Buffett-discount when in 2011 it was trading at less than half today's price. It was a lot quieter back then. Whatever the discount, it's small compared to what you could get a few years ago! And guess what? In a few years the same will happen again. Same with BAC at 75-80% of IV and FFH since the run-up.

 

Idk, maybe it's just because the board has gotten much bigger but it's certainly interesting to see how acceptance of risk among many has changed in just a few short years. Correct me if I'm wrong btw...

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tombgrt,

 

You are right, but only partially. I would love to buy BRK/FFH/BAC at 2009-2011 prices. I can't though. So should I hold cash? Maybe, but likely not. You say "In a few years the same will happen again". If we knew that it will, we could hold cash. But we don't know. Maybe it will, maybe it won't. With that in mind, there are few opportunities in current market and BRK/FFH/BAC might still be the best places for money even though they are not as cheap as they recently were.

 

BTW, I don't think that BRK is currently trading with Buffett-discount. I think price with Buffett discount is about 1x to 1.2xBook. Current price is not "quite-overvalued 2xBook", but not with discount either.

 

 

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There is a significant risk that after Buffett dies, BRK will be a run-of-the-mill bumbling directionless conglomerate in 10 years or so.

 

I can't dismiss the risk. However, I note that Buffett and Munger have undoubtedly been attempting to design an entity that can be run profitably by a ham sandwich.  In that time frame, the significant decisions of the successor CEO would be capital allocation.  I can foresee that a poorly chosen successor who disregards the counsel of Tedd and Todd could blunder into one or more large below-market-return acquisitions.  That wouldn't change the terrific DNA of the organization but would be a drag.  It does emphasize the point that Professor Cunningham has made about the value of Munger.  It is imperative that the succession plan include a top-notch "No" man.  From what we know of them, either Tedd or Todd strike me as intellectually and emotionally well suited for the role.  Professor Cunningham's idea that Howie Buffett is part of the No role doesn't resonate with me.

 

I don't know if having a strong number 2 will be politically palatable in the BRK boardroom.  I suppose that will be the first test of the new CEO - does he have the humility to accept a number two with effective veto power.

 

I suspect there will be periods of drift under ineffective CEOs in the BRK future, but I am optimistic that it will take significantly longer than 10 years.  Any of Jain, Abel or Rose will be fine CEOs, I believe.  It's the next generation of leadership, at both BRK (CEO and CIO) and the important subs, that concern me. 

 

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Regardless of whether or not Buffett stays, Berkshire is getting close to (what appears to be) a size where it can no longer retain all of its earnings. I mean, if you just think mathematically, if BRK grew at 10% a year, it would be something like a $1.5 trillion market value company in 15 years. That certainly isn't impossible, after all Apple is a single business and could reach $1T in market cap, but my guess is that it isn't long before a dividend or share buyback are instituted regularly. If so, it seems to me that the role of capital allocation at Berkshire will become *slightly* less important in its overall performance, with most of the performance differential vs. the market relying on how Berkshire's wholly-owned businesses perform versus the market. And thus, I'd expect that the incremental advantage in capital allocation that Buffett's talents provide may be reduced going forward, reducing the impact that his leaving has on future performance. The wild card is whether or not selling a whole business to Berkshire is still attractive after Buffett leaves; my guess is that as long as the acquisition philosophy remains the same, Berkshire will remain a good place to sell for certain owners versus alternatives (private equity, public markets, etc).

 

Basically, my point is, if we were investing in a $50M stock fund, I'd pay a sizeable premium for Buffett to manage it over almost anyone else. But Berkshire is so far removed from that that I'm not sure how much Buffett is really worth these days over another capable person who believes in the same basic capital allocation principles. Could be totally off base but my two cents.

 

I do believe that WEB has stated that in ten to twenty years BRK will be paying a dividend. Not sure if that was on CNBC or in the letter this year......

 

cheers

Zorro

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I think it's interesting that there is so much talk about BRK and it's valuation / Buffett-discount when in 2011 it was trading at less than half today's price. It was a lot quieter back then. Whatever the discount, it's small compared to what you could get a few years ago! And guess what? In a few years the same will happen again. Same with BAC at 75-80% of IV and FFH since the run-up.

 

Idk, maybe it's just because the board has gotten much bigger but it's certainly interesting to see how acceptance of risk among many has changed in just a few short years. Correct me if I'm wrong btw...

 

I wasn't on this board until a few months ago, but from looking back do agree somewhat that I am surprised that the level of optimism in certain names today appears not much lower than it was several years ago at much lower valuations. Looking back at the AAPL thread, for example, it seems there was not nearly as much enthusiasm as I would have expected a great business trading at ~15-20% FCF yield in mid-2013 to generate.

 

That said, IMO this part of the cycle more than any is when talk of valuation is important, and when checking your assumptions carefully with others is likely to be useful. It was much easier a few years ago to throw darts and find something that was reasonably priced or underpriced.

 

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tombgrt,

 

You are right, but only partially. I would love to buy BRK/FFH/BAC at 2009-2011 prices. I can't though. So should I hold cash? Maybe, but likely not. You say "In a few years the same will happen again". If we knew that it will, we could hold cash. But we don't know. Maybe it will, maybe it won't. With that in mind, there are few opportunities in current market and BRK/FFH/BAC might still be the best places for money even though they are not as cheap as they recently were.

 

BTW, I don't think that BRK is currently trading with Buffett-discount. I think price with Buffett discount is about 1x to 1.2xBook. Current price is not "quite-overvalued 2xBook", but not with discount either.

 

 

What I meant with the line you quoted is that at some point you will have a whole sector or even the broad market offer (much) bigger bargains (in large caps) again than currently available. I don't know whether BRK or BAC will be one of those bargains, but it is certainly possible. I guess you generally have to take what you can get. You don't get to choose what is going to sell off and just have to decide whether you can get comfortable with what the market is offering you.

 

I don't believe that names like BRK, FFH and BAC are some of the best investments you can find now. Maybe when looking at US large caps. Not that they are expensive but if you can't find better bargains you should probably hold some cash yes.

 

I think it's interesting that there is so much talk about BRK and it's valuation / Buffett-discount when in 2011 it was trading at less than half today's price. It was a lot quieter back then. Whatever the discount, it's small compared to what you could get a few years ago! And guess what? In a few years the same will happen again. Same with BAC at 75-80% of IV and FFH since the run-up.

 

Idk, maybe it's just because the board has gotten much bigger but it's certainly interesting to see how acceptance of risk among many has changed in just a few short years. Correct me if I'm wrong btw...

 

I wasn't on this board until a few months ago, but from looking back do agree somewhat that I am surprised that the level of optimism in certain names today appears not much lower than it was several years ago at much lower valuations. Looking back at the AAPL thread, for example, it seems there was not nearly as much enthusiasm as I would have expected a great business trading at ~15-20% FCF yield in mid-2013 to generate.

 

That said, IMO this part of the cycle more than any is when talk of valuation is important, and when checking your assumptions carefully with others is likely to be useful. It was much easier a few years ago to throw darts and find something that was reasonably priced or underpriced.

 

 

+++

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Regardless of whether or not Buffett stays, Berkshire is getting close to (what appears to be) a size where it can no longer retain all of its earnings. I mean, if you just think mathematically, if BRK grew at 10% a year, it would be something like a $1.5 trillion market value company in 15 years. That certainly isn't impossible, after all Apple is a single business and could reach $1T in market cap, but my guess is that it isn't long before a dividend or share buyback are instituted regularly. If so, it seems to me that the role of capital allocation at Berkshire will become *slightly* less important in its overall performance, with most of the performance differential vs. the market relying on how Berkshire's wholly-owned businesses perform versus the market. And thus, I'd expect that the incremental advantage in capital allocation that Buffett's talents provide may be reduced going forward, reducing the impact that his leaving has on future performance. The wild card is whether or not selling a whole business to Berkshire is still attractive after Buffett leaves; my guess is that as long as the acquisition philosophy remains the same, Berkshire will remain a good place to sell for certain owners versus alternatives (private equity, public markets, etc).

 

Basically, my point is, if we were investing in a $50M stock fund, I'd pay a sizeable premium for Buffett to manage it over almost anyone else. But Berkshire is so far removed from that that I'm not sure how much Buffett is really worth these days over another capable person who believes in the same basic capital allocation principles. Could be totally off base but my two cents.

 

I think you are correct. Actually, years after Buffett's gone BRK may/should be a right place to invest for those thinking about indexing their investments since it has several companies in a wide array of industries and if Buffett did his job right (I think he certainly did), then those companies are going to outperform its rivals!

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