Semper Augustus

[John Hjorth]

Welling on Wall St. - Volume 5, Issue 6 [April 1^st 2016] : Listeningin [<- [ : - ) ]] Berkshire Believer - Stock's slide, Change in Buffett Valuation Guide Don't Temper Ardor [<- [ : - ) ]]. Interview with Chris Bloomstran, Semper Augustus Investments Group LLC.

 

[H/T @Vexboy_Value on Twitter.]

 

Much water has run through the river since then, but to me still worth your time, if you are a Berkshire investor.

 

- - - o 0 o - - -

 

Still no 2018 Client Letter as of yet! - 2017 Client Letter - also about Berkshire - was released on February 11^th 2018.

[gfp]

Thanks for the post John.  Always interesting to read Mr. Bloomstran's thoughts, even if dated.

 

Takes me back to the beginning of 2016!  A lovely time to be a buyer indeed.  I think quite a few of us BRK-nerds were happily buying low-premium in-the-money LEAPs at the time.  I guess some of you wild folks were even more aggressive..

 

It is odd that, even back in 2016, Bloomstran through the railroad wasn't paying out dividends to BRK, and relied on STB filings when BNSF has always filed individually with the SEC. 

[John Hjorth]

Thank you for the kind words, gfp,

 

Yes, the piece is actually a fascinating story about how client pressure on a money manager without permanent capital created a wonderful, high quality client letter. -Twitter is Twitter ... - there are gems on there from time to time though!

 

- - - o 0 o - - -

 

With regard to the situation back then in early 2016, for my part : Triggered by your post, gfp, I think what I did not do back then is now - and as of now -  my biggest error of omission [thumbsucking], based on partially ignorance, not doing my homework correctly & sufficiently, and in general not being in total control of my own sh*te - sh*te I've setup & created myself ... *SIGH* [ : - / ]. I'll elaborate on that in the "SIL/MIL investing" topic tomorrow. [Now I wrote it here, so I WILL do it morrow ...] later. [<- [ ; - ) ]]

 

 

 

 

[John Hjorth]

At least partly related to this topic: Semper Augustus Investments Group LLC portfolio composition according to 2018Q3 13-F filing, processed and sorted in Excel, attached.

 

Berkshire position at 38.6 percent.

 

I see other "good stuff" there, too, -several of the names covered actively here on CoBF by fellow board members. Mr. Bloomstran & Mr. Christensen appear to me to have a sweet tooth for O&G and materials also.

 

Please note the usual qualification: We don't know about positions and capital allocated to companies not listed in the US. There are three European headquartered companies in the portfolio via sponsored ADRs.

Semper_Augustus_Investments_Group_LLC_-_Portfolio_end_2018Q3_according_to_Form_13-F_-_20190203.xlsx

[Gamecock-YT]

2018 letter is out:

 

https://static.fmgsuite.com/media/documents/a7b56d26-b22e-4d16-8b65-7fe23f0ea19d.pdf

[Guest longinvestor]

2018 letter is out:

 

https://static.fmgsuite.com/media/documents/a7b56d26-b22e-4d16-8b65-7fe23f0ea19d.pdf

 

Thanks for posting!

[Charlie]

Good warm-up read for the annual letter and great Berkshire analysis.  :)

 

 

[DooDiligence]

Outstanding analysis (the parts I'm able to comprehend) & the writing style is off the charts.

 

I think we may also be in tune with regards to musical tastes.

 

Here's to hoping Berkshires equity price falls off a cliff on Monday!

[Guest longinvestor]

http://investorfieldguide.com/bloomstran/

 

Podcast not the written report. 37 minute marker if you want to cut to the chase.

[cubsfan]

http://investorfieldguide.com/bloomstran/

 

Podcast not the written report. 37 minute marker if you want to cut to the chase.

 

thanks for posting - really enjoyed this

[Guest longinvestor]

Interesting commentary on earnings accounting inflation @ most S&P companies. He assigns a negative 15% impact to reported earnings by “don’t count that “ accounting. It’ll show up eventually. Usually does as big bath accounting. Take GE as an example! Berkshire’s propensity to keep accounting clean is by itself worth some delta over the S&P. It’ll show up over time.

[CorpRaider]

I feel like CAPE without all these Seigel adjustments picks a lot of that up too (for macro purposes).  Like, Jeremy...they don't need any help inflating earnings bro...incentives matter.  "Yeah everyone dumped in huge losses in 2008, so let's exclude that...no, let's not do that mmmmkay?"

 

Going to look at the longer stuff to see what he says/thinks about float.  i.e. if the longer-term recent run rate BRK ROE is 10% what about the float/holdco leverage (that's kind of what I've been thinking).

[CorpRaider]

Also, fascinating discussion of the GIS proxy/perverse incentives.  I've avoided that one just because I thought management seemed too slick/smarmy via conference calls (even before the acquisition of blue buffalo...I actually kind of liked the Annie's acquisition but some of the decisions make more sense now with his discussion of the incentives); nice to have something more concrete to look at...will be helpful to me in the future.  I also don't invest in any company where they use the term "learnings."

[StevieV]

Also, fascinating discussion of the GIS proxy/perverse incentives.  I've avoided that one just because I thought management seemed too slick/smarmy via conference calls (even before the acquisition of blue buffalo...I actually kind of liked the Annie's acquisition but some of the decisions make more sense now with his discussion of the incentives); nice to have something more concrete to look at...will be helpful to me in the future.  I also don't invest in any company where they use the term "learnings."

 

I also thought that was interesting.  As Charlie Munger preaches, always look at the incentives.  Per the podcast, organic growth is incentivized and cost of acquisitions isn't counted.  So, what do you get, an acquisition that costs a lot but can contribute to organic growth going forward.  Only the good (organic growth) is counted.  The bad (high acquisition cost) isn't.

[Viking]

I am re-reading prior letters... BRK has grown nicely in value during 2019. Shares under $200 look cheap :-)

[gfp]

Looks like Bloomstran / Semper Augustus has made it on to the dataroma 13f site, for those that are interested -

https://dataroma.com/m/holdings.php?m=SA

[Dynamic]

Interesting that 37% of the portfolio was in Berkshire (Class A plus Class B) and the rest has considerably smaller position sizes. Nice quality of names in there, and good for further research.

Having said that, Berkshire itself is internally diverse and Bloomstran understands it extremely well. It might have hurt Semper's market value gain on a Year-to-Date price performance basis as BRK.A/B finished 2018 strongly and has been flattish while the market has risen strongly, but it may well be that the coming year will be a great time to have an excess of Berkshire Hathaway if the intrinsic value and book value growth force the market price to break free of its previous highs eventually. I expect his 2020 letter will again have a lot of Berkshire content because again it's looking seriously mispriced despite greatly increasing its value in ways and extent that don't seem to be widely appreciated yet, and somehow I don't see that being likely to change by January or February when he writes his letter. His investors deserve to feel very positive about the future prospects, downside protection and buying opportunities afforded by the discount to IV and the growth in IV even if their portfolio may have lagged the price performance of the soaring index in 2019.

[John Hjorth]

I wonder if we will get a Semper Augustus Letter this year?

[OracleofCarolina]

Yes, look at valueinvestingworld.com

[John Hjorth]

Yes, look at valueinvestingworld.com

 

Thank you so much OracleofCarolina,

 

Is it possible for you to be a bit more specific with regards to link? -Thank you in advance.

[OracleofCarolina]

the letter will be posted there later today, if you look at that site, there is a note that it will be there.

 

Cheers!

[Guest longinvestor]

Its up there now. Thanks for the link!

[ValueMaven]

It posted .... alll 128 pages - of which Berk is about HALF the letter.  Best analysis out there on Berkshire ... his valuation targets are extremely interesting

[Swedish_Compounder]

There are lots of valuation and details indeed, but does he anywhere evaluate the company the way Buffett stresses more than once in this years letter that he evaluates companies attractiveness - by analyzing the returns on the net tangible assets required for its operations?

 

Buffett writes that it is over 20% for the stock holdings, on a weighted basis. So one simplification could be to assign 20% to the stock holdings and also analyze the operating entities and in the process not forget to deduct excess cash not required to run the operations.

 

 

[Cigarbutt]

To add insult to the injury related to the Don’t Fear the Repo section on share repurchases.

 

The author does a good job at showing how the massive amount of cash allocated to buy back activity has not materially reduced the share count over time overall and in many cases.

An interesting but mostly undiscussed topic is the ultimate value transferred through compensation packages that contain options, RSUs etc. One can infer the “true” value better when looking into the GAAP accounting and the tax accounting basis, something possible when comparing reported earnings and NIPA profits. When the stock award is issued, the value of the grant is estimated using models and expensed during the vesting period. When times are good, the ‘value’ realized from the stock compensation ends up being larger (often substantially larger). One could argue that interests are aligned and people should get what they deserve but often the incentives are short-term in nature and there are problems. Problem#1: The idea of stock-based compensation is for management to accept lower current-period wages and salaries with the expectation that the growth in the market value of the company stock will offset the reduction to their wages. With defining factors often largely more significant than specific company performance (where the wind is blowing), in good times, the value of the stock-based compensation may end up much higher that initially thought or anticipated through GAAP accounting. NIPA reports company profits using a different methodology, using tax accounting reflecting the value of the option or grant upon exercise, which reflects more directly the eventual value of the allocated stock-based compensation. There are periods (leading to the early 2000s and now) when a significant part of the divergence between the reported operating earnings and the NIPA profits diverge significantly, indicating that compensation expense ends up much higher than initially recognized and never shows up in reported company numbers. If compensation expense is not an expense, then what is it? Problem #2: When things go downhill, options, performance RSUs and others get cancelled and a batch of new ones are issued which is effectively a way to legally reprice the instruments and which is a way to make sure that higher than planned expenses in the previous period are not matched by an opposite scenario in the following.

 

If interested in the technicality:

https://apps.bea.gov/scb/pdf/2008/02%20February/0208_stockoption.pdf

 

Disclosure: I often discard companies that manifest poor capital allocation decisions (such as share repurchases) even if underlying operations are fine and have recently come to the conclusion that the parent of a relatively illiquid security has a compensation policy that is becoming excessive, in part given the above value consideration.