BRK 2016Q3 reporting

[Dynamic]

I've long had a high exposure to BRK.B (13 years, I think) and at times such as between about Feb and May 2016 I've been about 90% to 95% BRK.B in my discretionary portfolio and slept well. (I also have index trackers in defined contributions pension schemes and could even consider my home equity to further reduce that percentage exposure to nearer 45-50% of my net worth and we are still saving hard).

 

Currently after buying a big chunk of AAPL in May my discretionary port is about 61% exposed to BRK.B (or around 40% exposed to the operating part of BRK.B on a look-through basis) and I think it's so well diversified in terms of wholly owned earnings streams and dividends and has so much cash and a liquid stock portfolio that I feel it's very secure. If it had any net debt that the holding company was on the hook for, I wouldn't be so confident, but the utilities and railroad both have debts secured only against their own assets.

 

I don't think there's another company I'm so confident of preserving value. In my current phase of investing with at least a 10-20 year horizon I'm quite willing to accept the risk of a temporary loss of market price in the event of Warren Buffett's death or retirement and would see that a steep decline in price would provide the opportunity for substantial buybacks to ultimately enhance Intrinsic Value per share. I think the culture will survive for quite some time in terms of value oriented capital allocation. Also, I don't expect Warren's exit to come soon, probalisticly, so there's a probably a good deal of compounding before that happens that I'd miss if I waited on the sidelines for that possible buying opportunity.

 

I recognize that I'm more willing to take on volatility and concentration than most, so most people wouldn't be happy to take on so much BRK.B exposure.

[no_free_lunch]

Thanks for that rb.  I didn't think to look at the B class for options even though that is the stock I actually own.  :)

 

That is really good to know regarding the reinsurance, I remember back a decade ago him saying that he was reducing coverage after he discovered there were certain events that could bankrupt the company.  I didn't understand how far along they were in reducing that exposure.

 

I am not sure that I would actually go 50%, I am more just playing with different allocation scenarios to try to deal with a brutal market.  It seems we are destined for 1-2% real returns for the next while and it seems Berkshire can exceed that.

 

Dynamic,

 

I tend to agree, it feels more like you are buying an ETF, more of a concentrated one but still.  I have a similar time horizon and am not too worried about the death of the legend.  I actually think that is why it is priced where it is and also that is why Buffet is establishing the 1.2x floor.  I don't see why the stock wouldn't match or exceed the general market even without Buffet.

[Guest longinvestor]

Market appears to prevent a stock buyback from happening. Wondering if there is a glass floor of 1.3x BV in anticipation of a bump up from the 1.2. Will watch over the next year to see if this is indeed true.

[John Hjorth]

Market appears to prevent a stock buyback from happening. Wondering if there is a glass floor of 1.3x BV in anticipation of a bump up from the 1.2. Will watch over the next year to see if this is indeed true.

It reads very reasonable, longinvestor. The book value becomes gradually less relevant - gradually more [and too] conservative - going forward for BRK as measure of intrinic value, thus an increase in the buyback treshold market price must be expected.

 

- - - o 0 o - - -

 

I just made a couple of back on the envelope calculations related to the 13/F we will see in a few days.

 

Purchase of equity securities first mine months of 2016: USD 5.185 B

-Purchase of euity securities first six months of 2016: USD 4.129 B

=Purchase of equity securities 2016Q3: USD 1.056 B

 

Sales and redemptions of equity securities first nine months of 2016: USD 19.989 B [including KHC preferred redemption in June 2016 USD ~8.320 B]

-Sales and redemptions of equity securities first six months of 2016: USD 12.444 B [again, including KHC preferred redemption in June 2016 USD ~8.320 B]

=Sales and redemptions of equity secuties 2016Q3 USD 7.545 B,

 

Meaning net sales of equity securities in 2016Q3 of USD 6.489 B,

 

signalling a bearish view at BRK on the market in general or on certain investments in 2016Q3.

 

As always it will be interesting to see the changes in the portfolio, despite they for 2016Q3 are expected to be - relatively - small.

[Guest longinvestor]

Market appears to prevent a stock buyback from happening. Wondering if there is a glass floor of 1.3x BV in anticipation of a bump up from the 1.2. Will watch over the next year to see if this is indeed true.

It reads very reasonable, longinvestor. The book value becomes gradually less relevant - gradually more [and too] conservative - going forward for BRK as measure of intrinic value, thus an increase in the buyback treshold market price must be expected.

 

- - - o 0 o - - -

 

I just made a couple of back on the envelope calculations related to the 13/F we will see in a few days.

 

Purchase of equity securities first mine months of 2016: USD 5.185 B

-Purchase of euity securities first six months of 2016: USD 4.129 B

=Purchase of equity securities 2016Q3: USD 1.056 B

 

Sales and redemptions of equity securities first nine months of 2016: USD 19.989 B [including KHC preferred redemption in June 2016 USD ~8.320 B]

-Sales and redemptions of equity securities first six months of 2016: USD 12.444 B [again, including KHC preferred redemption in June 2016 USD ~8.320 B]

=Sales and redemptions of equity secuties 2016Q3 USD 7.545 B,

 

Meaning net sales of equity securities in 2016Q3 of USD 6.489 B,

 

signalling a bearish view at BRK on the market in general or on certain investments in 2016Q3.

 

As always it will be interesting to see the changes in the portfolio, despite they for 2016Q3 are expected to be - relatively - small.

Agree that BV multiple is less significant over time. As I've posted before would rather that they don't trickle up the multiple but take bigger steps up. 1.2 to 1.5 or even 2.0. That would likely require significant patience on the part of shareholders. While the Omaha boys have their feet up on the couch waiting for the phone to ring with elephants on the other side.

[rb]

I don't think they can just sit around waiting for the phone to ring anymore. They'll have to start tracking prey like a real hunter. Cash is coming in just too damn fast.

[ourkid8]

Yup, I am just waiting for Berkshire to announce they are acquiring KO.

 

I don't think they can just sit around waiting for the phone to ring anymore. They'll have to start tracking prey like a real hunter. Cash is coming in just too damn fast.

[rb]

The funny thing is that they could actually take KO right now. It's ridiculous how much fire power BRK has.

[Guest longinvestor]

I don't think they can just sit around waiting for the phone to ring anymore. They'll have to start tracking prey like a real hunter. Cash is coming in just too damn fast.

 

At 86 & 92, they ain't changing:-) Also, they kinda knew about the cash balloon coming; It will be there for the next guy to prick it.

[scorpioncapital]

How does acquiring KO increase the value of Berkshire, exclusivity? as in take out all the current owners who must become Berkshire owners if they so choose? I see a very specific criteria for public stocks to be acquired in whole by Berkshire, namely that they can bring something to the table or help a public company do better operating privately, otherwise I see more private acqusitions, joint ventures, or large % public stakes but not full stakes.

 

 

[captkerosene]

How does acquiring KO increase the value of Berkshire, exclusivity? as in take out all the current owners who must become Berkshire owners if they so choose? I see a very specific criteria for public stocks to be acquired in whole by Berkshire, namely that they can bring something to the table or help a public company do better operating privately, otherwise I see more private acqusitions, joint ventures, or large % public stakes but not full stakes.

 

It would be as a partner with 3G.

[rb]

How does acquiring KO increase the value of Berkshire, exclusivity? as in take out all the current owners who must become Berkshire owners if they so choose? I see a very specific criteria for public stocks to be acquired in whole by Berkshire, namely that they can bring something to the table or help a public company do better operating privately, otherwise I see more private acqusitions, joint ventures, or large % public stakes but not full stakes.

What happened to good old fashioned value? Or is Berkshire not a value shop anymore? Also owning the whole company provides tax benefits as opposed to owning large public stakes.

 

KO is no go cause of the price. Even if it's reasonably priced now, to take it out BRK would have to pay a hefty premium. I also think that BRK would probably prefer a company that likes to gobble up capital as opposed to a prodigious cash generator like KO.

 

We need to get serious here though. At the rate that BRK generates cash there's a limited set of opportunities. There are simply not that many private companies out there. 10 years ago buying Iscar was a big deal. Today they can have Iscar as an appetizer and still be eagerly awaiting the main course.

 

There's gonna be an evolution in acquisition strategy or it's dividend/buyback time.

[Guest longinvestor]

Buffett is really wary of doing stupid things because of the cash build. He addressed that as the full bladder syndrome during the last meeting. I read this as saying that even the best allocators have this urge. With the five capital allocation priorities laid out there are many people who've been deploying Berkshires cash, not just Buffett. Caution should serve well here. The fat pitches will come. If not enough of those do, it won't be a calamity to return capital. Also how much of this angst over cash has to do with it crossing $100B. $40 or $60B is also a shitload. They've been there for 10+ years already.

[Dynamic]

Well said, longinvestor. Patience in waiting for the fat pitch is key to value-oriented capital allocation.

[DooDiligence]

How does acquiring KO increase the value of Berkshire, exclusivity? as in take out all the current owners who must become Berkshire owners if they so choose? I see a very specific criteria for public stocks to be acquired in whole by Berkshire, namely that they can bring something to the table or help a public company do better operating privately, otherwise I see more private acqusitions, joint ventures, or large % public stakes but not full stakes.

What happened to good old fashioned value? Or is Berkshire not a value shop anymore? Also owning the whole company provides tax benefits as opposed to owning large public stakes.

 

KO is no go cause of the price. Even if it's reasonably priced now, to take it out BRK would have to pay a hefty premium. I also think that BRK would probably prefer a company that likes to gobble up capital as opposed to a prodigious cash generator like KO.

 

We need to get serious here though. At the rate that BRK generates cash there's a limited set of opportunities. There are simply not that many private companies out there. 10 years ago buying Iscar was a big deal. Today they can have Iscar as an appetizer and still be eagerly awaiting the main course.

 

There's gonna be an evolution in acquisition strategy or it's dividend/buyback time.

 

Agreed...

 

Please be gentle with me here (what are your thoughts on shrinking the company by spinning out divisions & setting the wayback machine to 1970 for a restart?)

 

Consider this a thought experiment (or a thoughtless one, whichever you prefer...)

[Jurgis]

I wonder if Buffett would buy AXP if he could.

[Guest Schwab711]

How does acquiring KO increase the value of Berkshire, exclusivity? as in take out all the current owners who must become Berkshire owners if they so choose? I see a very specific criteria for public stocks to be acquired in whole by Berkshire, namely that they can bring something to the table or help a public company do better operating privately, otherwise I see more private acqusitions, joint ventures, or large % public stakes but not full stakes.

What happened to good old fashioned value? Or is Berkshire not a value shop anymore? Also owning the whole company provides tax benefits as opposed to owning large public stakes.

 

KO is no go cause of the price. Even if it's reasonably priced now, to take it out BRK would have to pay a hefty premium. I also think that BRK would probably prefer a company that likes to gobble up capital as opposed to a prodigious cash generator like KO.

 

We need to get serious here though. At the rate that BRK generates cash there's a limited set of opportunities. There are simply not that many private companies out there. 10 years ago buying Iscar was a big deal. Today they can have Iscar as an appetizer and still be eagerly awaiting the main course.

 

There's gonna be an evolution in acquisition strategy or it's dividend/buyback time.

 

Agreed...

 

Please be gentle with me here (what are your thoughts on shrinking the company by spinning out divisions & setting the wayback machine to 1970 for a restart?)

 

Consider this a thought experiment (or a thoughtless one, whichever you prefer...)

 

I don't think anyone could, even if they wanted to, due to where the assets sit. I think it would trigger large tax bills. It's part of the reason 1.2x P/B is more reflective of conservative value, not 1.0x. They need dividends/buybacks to realize the underlying ROE.

[ourkid8]

Is it a bank holding company?

 

I wonder if Buffett would buy AXP if he could.

[Jurgis]

Is it a bank holding company?

 

I wonder if Buffett would buy AXP if he could.

 

http://dealbook.nytimes.com/2008/11/10/american-express-to-become-bank-holding-company/comment-page-9/?_r=0

[DooDiligence]

 

There's gonna be an evolution in acquisition strategy or it's dividend/buyback time.

 

Agreed...

 

Please be gentle with me here (what are your thoughts on shrinking the company by spinning out divisions & setting the wayback machine to 1970 for a restart?)

 

Consider this a thought experiment (or a thoughtless one, whichever you prefer...)

 

I don't think anyone could, even if they wanted to, due to where the assets sit. I think it would trigger large tax bills. It's part of the reason 1.2x P/B is more reflective of conservative value, not 1.0x. They need dividends/buybacks to realize the underlying ROE.

 

So he evolved from the partnership's strategy to the BRK strategy & maybe now he'll start returning capital to shareholders?

 

It must be awesome to build something so intelligent & to remain strong throughout all the cycles & then to see it mature (and then to pass on before your child...)

[rb]

Agreed...

 

Please be gentle with me here (what are your thoughts on shrinking the company by spinning out divisions & setting the wayback machine to 1970 for a restart?)

 

Consider this a thought experiment (or a thoughtless one, whichever you prefer...)

Well...

 

Firstly, I don't think spinouts are a good idea because a lot of the subs are more valuable inside of BRK as opposed to outside. So doing spinouts would destroy value.

 

Secondly, it's nearly impossible to do spinouts because the insurance cos own a lot of the subs. So really it's a moot point.

 

Secondly

[DooDiligence]

Agreed...

 

Please be gentle with me here (what are your thoughts on shrinking the company by spinning out divisions & setting the wayback machine to 1970 for a restart?)

 

Consider this a thought experiment (or a thoughtless one, whichever you prefer...)

Well...

 

Firstly, I don't think spinouts are a good idea because a lot of the subs are more valuable inside of BRK as opposed to outside. So doing spinouts would destroy value.

 

Secondly, it's nearly impossible to do spinouts because the insurance cos own a lot of the subs. So really it's a moot point.

 

I guess I was just thinking about the whole "working with less capital" thing & kind of doing a "start over" in the partnership mold (just pondering & learning...)

[Jurgis]

BRK may be broken up some time after Buffett and Munger die. Not before.