2016 Letter

[Guest longinvestor]

https://www.wsj.com/articles/only-a-market-crash-can-stop-warren-buffett-from-winning-this-1-million-bet-1487851203

 

If anyone finds another link where all can read, please post. Found one, a video

 

http://finance.yahoo.com/video/buffetts-1-million-bet-index-174705632.html

 

Here we go again! This happens like a ritual every year.  I've been watching every year for the past 3 years, the financial media (WSJ in particular) gets out ahead of the annual letter about this hedge fund versus Index bet. The rearguard nature of these articles is palpable! Wall Street seems hell bent on softening the impact of Buffett's letter on one of their key constituents - the fee collectors! What's amazing is that the underlying hedge funds have remained anonymous for 10 years. How about that! They will surely be happy when 2019 comes around. Cause, the bet ends in Dec 2017, which means it will be reported on around this time in 2018 as well! Unless, of course, if Buffett re ups and there is another fool taker again!

 

The punch line in this article is this from Seides, who took the opposite side of the bet.

 

“I wholeheartedly agree with your contention that the aggregate returns to investors in hedge funds will get eaten alive by the high fees earned by managers,” Mr. Seides said in a letter to Mr. Buffett proposing the bet. A copy of the letter was included in a 2016 book Mr. Seides authored.

 

But “I am sufficiently comfortable that unusually well managed hedge fund portfolios are superior to market indexes over time.”

 

Let's see if he will graciously accept that he was wrong, now that we've had ten years of reality to stare at.

[CorpRaider]

Caught an interview with Seides on a podcast a few weeks back.  I think it was on Patrick Oshaghnessy's podcast.

[John Hjorth]

https://www.wsj.com/articles/only-a-market-crash-can-stop-warren-buffett-from-winning-this-1-million-bet-1487851203

 

If anyone finds another link where all can read, please post. Found one, a video

 

http://finance.yahoo.com/video/buffetts-1-million-bet-index-174705632.html

 

Here we go again! This happens like a ritual every year.  I've been watching every year for the past 3 years, the financial media (WSJ in particular) gets out ahead of the annual letter about this hedge fund versus Index bet. The rearguard nature of these articles is palpable! Wall Street seems hell bent on softening the impact of Buffett's letter on one of their key constituents - the fee collectors! What's amazing is that the underlying hedge funds have remained anonymous for 10 years. How about that! They will surely be happy when 2019 comes around. Cause, the bet ends in Dec 2017, which means it will be reported on around this time in 2018 as well! Unless, of course, if Buffett re ups and there is another fool taker again!

 

The punch line in this article is this from Seides, who took the opposite side of the bet.

 

“I wholeheartedly agree with your contention that the aggregate returns to investors in hedge funds will get eaten alive by the high fees earned by managers,” Mr. Seides said in a letter to Mr. Buffett proposing the bet. A copy of the letter was included in a 2016 book Mr. Seides authored.

 

But “I am sufficiently comfortable that unusually well managed hedge fund portfolios are superior to market indexes over time.”

 

Let's see if he will graciously accept that he was wrong, now that we've had ten years of reality to stare at.

 

longinvestor,

 

Please do not get carried away too much - just hold on to your BRK position [which I know is large!].

[Guest longinvestor]

https://www.wsj.com/articles/only-a-market-crash-can-stop-warren-buffett-from-winning-this-1-million-bet-1487851203

 

If anyone finds another link where all can read, please post. Found one, a video

 

http://finance.yahoo.com/video/buffetts-1-million-bet-index-174705632.html

 

Here we go again! This happens like a ritual every year.  I've been watching every year for the past 3 years, the financial media (WSJ in particular) gets out ahead of the annual letter about this hedge fund versus Index bet. The rearguard nature of these articles is palpable! Wall Street seems hell bent on softening the impact of Buffett's letter on one of their key constituents - the fee collectors! What's amazing is that the underlying hedge funds have remained anonymous for 10 years. How about that! They will surely be happy when 2019 comes around. Cause, the bet ends in Dec 2017, which means it will be reported on around this time in 2018 as well! Unless, of course, if Buffett re ups and there is another fool taker again!

 

The punch line in this article is this from Seides, who took the opposite side of the bet.

 

“I wholeheartedly agree with your contention that the aggregate returns to investors in hedge funds will get eaten alive by the high fees earned by managers,” Mr. Seides said in a letter to Mr. Buffett proposing the bet. A copy of the letter was included in a 2016 book Mr. Seides authored.

 

But “I am sufficiently comfortable that unusually well managed hedge fund portfolios are superior to market indexes over time.”

 

Let's see if he will graciously accept that he was wrong, now that we've had ten years of reality to stare at.

 

longinvestor,

 

Please do not get carried away too much - just hold on to your BRK position [which I know is large!].

 

??

 

My investing track of 30 years is split 20:10.

 

20 years of blissfully ignorant stupidity; 10 years of non-stupidity. The non-stupidity is being mindful of fees/taxes. Buffett / Munger taught me that. Now as they are in their twilight years, they feel the need to educate the world about this. They are doing this with gusto and repetition. I'm with them. In my own private life, I've helped two in my circle of friends kick out high fees from their portfolios. I look forward to the day when Munger's prediction of 0.2% fee becomes the norm. Until then, plenty education is needed. WSJ is not about to do that. Neither are many of the CoBF members who work with OPM.

 

Not carried away at all. You don't need to be concerned!

 

 

 

 

[John Hjorth]

... You don't need to be concerned!

 

I'm not. - I'm at your side of the fence.

 

What I meant was actually: What does that bet has to do with your - or for that sake - my - return?

 

I really hope we can leave it at here.

[Guest longinvestor]

... You don't need to be concerned!

 

I'm not. - I'm at your side of the fence.

 

What I meant was actually: What does that bet has to do with your - or for that sake - my - return?

 

I really hope we can leave it at here.

peace, bro!

[John Hjorth]

longinvestor,

 

If my prior post in some way offended you, I hereby apologize for that. It was certainly not my intention. I love being invested in BRK [almost] as much as you do! :-)

[Guest longinvestor]

longinvestor,

 

If my prior post in some way offended you, I hereby apologize for that. It was certainly not my intention. I love being invested in BRK [almost] as much as you do! :-)

No worries at all. Having been on this forum for almost 10 years, I have a system to not let posts get under my skin. There is an ignore poster feature which I use for certain repeat behaviors (political hacks, know-it-alls- personal insults etc.).

 

I look forward to posts from you. Now let's wait for the letter and we'll have plenty to talk about ;)

[John Hjorth]

longinvestor,

 

If my prior post in some way offended you, I hereby apologize for that. It was certainly not my intention. I love being invested in BRK [almost] as much as you do! :-)

No worries at all. Having been on this forum for almost 10 years, I have a system to not let posts get under my skin. There is an ignore poster feature which I use for certain repeat behaviors (political hacks, know-it-alls- personal insults etc.).

 

I look forward to posts from you. Now let's wait for the letter and we'll have plenty to talk about ;)

 

Yes, and I'm actually home alone Saturday - It will be a day of reading and communication! :-)

[rb]

[The non-stupidity is being mindful of fees/taxes. Buffett / Munger taught me that. Now as they are in their twilight years, they feel the need to educate the world about this. They are doing this with gusto and repetition. I'm with them. In my own private life, I've helped two in my circle of friends kick out high fees from their portfolios. I look forward to the day when Munger's prediction of 0.2% fee becomes the norm. Until then, plenty education is needed. WSJ is not about to do that. Neither are many of the CoBF members who work with OPM.

I'd say that the issue of fees is complicated. On one hand if the fees are high enough underlying performance doesn't matter. The client will loose. On the other hand if the fees get really low such as the dream 0.2% fee the returns will be mediocre guaranteed. In that scenario to make any kind of money you would need huge amounts of AUM. For example for $100,000 in revenue a firm would need $50 million in AUM. Smaller investment managers would not be able to exist only giant firms whose only goal is to pile on as much AUM as they can and not much concern about performance.

 

On top of everything a lot of the fees don't end up with the investment manager. They go to the distribution channels - advisors and what not. You would think that it would be an issue only on the retail side. But no. It's also an issue on the institutional side as well. Fees on top of fees on top of fees.

 

Now don't get me wrong. The industry is full of charlatans and cranks, a good chunk of them wrapped in the cloak of respectability. But how do you fix that? I don't know. I hate to blame the victim, but inside I think that the solution starts with the clients. They need to stop being so cavalier and need to invest more time learning how to make better decisions in selecting investment managers. The industry is not going to clean itself.

 

All that being said while I think that Buffet and Munger are contributing to the average investor's understanding of the industry (how average is reader of BRK AR?) what are they saying? Everyone sucks except for them and the fees they charged were ok because they were so awesome that actually nobody should even try to do what they did?

[Jurgis]

I think that the solution starts with the clients. They need to stop being so cavalier and need to invest more time learning how to make better decisions in selecting investment managers.

 

We should probably move further discussion to General and start new thread.

 

So, please teach me how to make better decisions in selecting investment managers.

 

My goal is to beat SP500 after fees (preferably by x%+). I am willing to pay fees for that. What's next?

[carlo]

A light, alternative regulatory framework could be introduced for those asset managers that can show that most of their own wealth is invested alongside the fund they manage. Such managers would profit mainly from incentive fees, risk-seeking behaviour being prevented by their own large interest in the fund.

 

This might make small funds viable even if the rest of the industry focuses on collecting large amounts of AUM for 20 bps. A large number of unrelated small funds with the right long-term incentives should allocate capital more efficiently on average than a smaller number of institutional funds with bloated cost structures.

[John Hjorth]

Berkshire announced yesterday, that the Annual Letter and the 2016 Annual Report will be avaiable on the website tomorrow at about 8:00 AM Eastern Time [,as usual].

[Guest longinvestor]

[The non-stupidity is being mindful of fees/taxes. Buffett / Munger taught me that. Now as they are in their twilight years, they feel the need to educate the world about this. They are doing this with gusto and repetition. I'm with them. In my own private life, I've helped two in my circle of friends kick out high fees from their portfolios. I look forward to the day when Munger's prediction of 0.2% fee becomes the norm. Until then, plenty education is needed. WSJ is not about to do that. Neither are many of the CoBF members who work with OPM.

I'd say that the issue of fees is complicated. On one hand if the fees are high enough underlying performance doesn't matter. The client will loose. On the other hand if the fees get really low such as the dream 0.2% fee the returns will be mediocre guaranteed. In that scenario to make any kind of money you would need huge amounts of AUM. For example for $100,000 in revenue a firm would need $50 million in AUM. Smaller investment managers would not be able to exist only giant firms whose only goal is to pile on as much AUM as they can and not much concern about performance.

 

On top of everything a lot of the fees don't end up with the investment manager. They go to the distribution channels - advisors and what not. You would think that it would be an issue only on the retail side. But no. It's also an issue on the institutional side as well. Fees on top of fees on top of fees.

 

Now don't get me wrong. The industry is full of charlatans and cranks, a good chunk of them wrapped in the cloak of respectability. But how do you fix that? I don't know. I hate to blame the victim, but inside I think that the solution starts with the clients. They need to stop being so cavalier and need to invest more time learning how to make better decisions in selecting investment managers. The industry is not going to clean itself.

 

All that being said while I think that Buffet and Munger are contributing to the average investor's understanding of the industry (how average is reader of BRK AR?) what are they saying? Everyone sucks except for them and the fees they charged were ok because they were so awesome that actually nobody should even try to do what they did?

 

 

 

I'd say that the issue of fees is complicated. On one hand if the fees are high enough underlying performance doesn't matter. The client will loose. On the other hand if the fees get really low such as the dream 0.2% fee the returns will be mediocre guaranteed. In that scenario to make any kind of money you would need huge amounts of AUM. For example for $100,000 in revenue a firm would need $50 million in AUM. Smaller investment managers would not be able to exist only giant firms whose only goal is to pile on as much AUM as they can and not much concern about performance.

 

Making any kind of money is not a guarantee in any business, one has to earn it. Why does the money manager have to have this? Even after the client made nothing more(most of the time less) than what she would have by investing in a low cost index fund? Money management as is largely practiced today is not a business, it is an unending rip off!

 

On top of everything a lot of the fees don't end up with the investment manager. They go to the distribution channels - advisors and what not. You would think that it would be an issue only on the retail side. But no. It's also an issue on the institutional side as well. Fees on top of fees on top of fees.

This is what Buffett / Munger are educating the world about. Why Seides lost his bet with Buffett.

 

 

Now don't get me wrong. The industry is full of charlatans and cranks, a good chunk of them wrapped in the cloak of respectability. But how do you fix that? I don't know. I hate to blame the victim, but inside I think that the solution starts with the clients. They need to stop being so cavalier and need to invest more time learning how to make better decisions in selecting investment managers. The industry is not going to clean itself.

This is my point also. Why Buffett / Munger are using their bully pulpit in educating the world. Of course WSJ is going to do it's part to discredit the messenger; It's the oldest trick in the defense book.

 

All that being said while I think that Buffet and Munger are contributing to the average investor's understanding of the industry (how average is reader of BRK AR?) what are they saying? Everyone sucks except for them and the fees they charged were ok because they were so awesome that actually nobody should even try to do what they did?

 

So why not? It has been 47 years since Buffett closed down his fee-based partnership; that fee structure with a 6% performance huddle did not skim fees off the top from clients and it performed well. Like really well. Everyone assigns their own reason why Buffett shut it down. I think he started to stare at the mathematical difficulty of charging fees, size and most importantly fiduciary standards getting compromised. It was no longer fun and would have lead to misery with his unique fiduciary mindset.

 

Since then, how many have tried a)that kind of fee structure and b) performed well, like in, earn the fee? It is  ridiculously hard, so investment managers just go into denial and engage in marketing tactics instead. And the current regulations investment managers are complaining about is there to protect the fee regime, if you think hard about it. It obfuscates the lack of performance and perpetuates it.

 

Of all things Munger has stated, one that I really like is that for the past 30 or so years, this fee-upon-fee scheme we are living through has naturally attracted the brightest young talent to the industry. The loss of talent to solving society's biggest problems is the real tragedy here.

 

Let's see what Buffett has to say in the letter.

 

[Guest longinvestor]

The letter

 

http://berkshirehathaway.com/2016ar/2016ar.pdf

 

And here's the much awaited commentary on fees / Wall Street:

 

“The Bet” (or how your money finds its way to Wall Street)

In this section, you will encounter, early on, the story of an investment bet I made nine years ago and,

next, some strong opinions I have about investing. As a starter, though, I want to briefly describe Long Bets, a

unique establishment that played a role in the bet.

Long Bets was seeded by Amazon’s Jeff Bezos and operates as a non-profit organization that

administers just what you’d guess: long-term bets. To participate, “proposers” post a proposition at Longbets.org

that will be proved right or wrong at a distant date. They then wait for a contrary-minded party to take the other

side of the bet. When a “doubter” steps forward, each side names a charity that will be the beneficiary if its side

wins; parks its wager with Long Bets; and posts a short essay defending its position on the Long Bets website.

When the bet is concluded, Long Bets pays off the winning charity.

Here are examples of what you will find on Long Bets’ very interesting site:

In 2002, entrepreneur Mitch Kapor asserted that “By 2029 no computer – or ‘machine intelligence’ – will

have passed the Turing Test,” which deals with whether a computer can successfully impersonate a human being.

Inventor Ray Kurzweil took the opposing view. Each backed up his opinion with $10,000. I don’t know who will

win this bet, but I will confidently wager that no computer will ever replicate Charlie.

That same year, Craig Mundie of Microsoft asserted that pilotless planes would routinely fly passengers

by 2030, while Eric Schmidt of Google argued otherwise. The stakes were $1,000 each. To ease any heartburn

Eric might be experiencing from his outsized exposure, I recently offered to take a piece of his action. He

promptly laid off $500 with me. (I like his assumption that I’ll be around in 2030 to contribute my payment,

should we lose.)

Now, to my bet and its history. In Berkshire’s 2005 annual report, I argued that active investment

management by professionals – in aggregate – would over a period of years underperform the returns achieved by

rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave

their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index

fund. (See pages 114 - 115 for a reprint of the argument as I originally stated it in the 2005 report.)

21

Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least

five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match

the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and

named a low-cost Vanguard S&P fund as my contender. I then sat back and waited expectantly for a parade of

fund managers – who could include their own fund as one of the five – to come forth and defend their

occupation. After all, these managers urged others to bet billions on their abilities. Why should they fear putting

a little of their own money on the line?

What followed was the sound of silence. Though there are thousands of professional investment managers

who have amassed staggering fortunes by touting their stock-selecting prowess, only one man – Ted Seides –

stepped up to my challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money

from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.

I hadn’t known Ted before our wager, but I like him and admire his willingness to put his money where

his mouth was. He has been both straight-forward with me and meticulous in supplying all the data that both he

and I have needed to monitor the bet.

For Protégé Partners’ side of our ten-year bet, Ted picked five funds-of-funds whose results were to be

averaged and compared against my Vanguard S&P index fund. The five he selected had invested their money in

more than 100 hedge funds, which meant that the overall performance of the funds-of-funds would not be

distorted by the good or poor results of a single manager.

Each fund-of-funds, of course, operated with a layer of fees that sat above the fees charged by the hedge

funds in which it had invested. In this doubling-up arrangement, the larger fees were levied by the underlying

hedge funds; each of the fund-of-funds imposed an additional fee for its presumed skills in selecting hedge-fund

managers.

Here are the results for the first nine years of the bet – figures leaving no doubt that Girls Inc. of Omaha,

the charitable beneficiary I designated to get any bet winnings I earned, will be the organization eagerly opening

the mail next January.

Year

Fund of

Funds A

Fund of

Funds B

Fund of

Funds C

Fund of

Funds D

Fund of

Funds E

S&P

Index Fund

2008 -16.5% -22.3% -21.3% -29.3% -30.1% -37.0%

2009 11.3% 14.5% 21.4% 16.5% 16.8% 26.6%

2010 5.9% 6.8% 13.3% 4.9% 11.9% 15.1%

2011 -6.3% -1.3% 5.9% -6.3% -2.8% 2.1%

2012 3.4% 9.6% 5.7% 6.2% 9.1% 16.0%

2013 10.5% 15.2% 8.8% 14.2% 14.4% 32.3%

2014 4.7% 4.0% 18.9% 0.7% -2.1% 13.6%

2015 1.6% 2.5% 5.4% 1.4% -5.0% 1.4%

2016 -2.9% 1.7% -1.4% 2.5% 4.4% 11.9%

Gain to

Date 8.7% 28.3% 62.8% 2.9% 7.5% 85.4%

Footnote: Under my agreement with Protégé Partners, the names of these funds-of-funds have never

been publicly disclosed. I, however, see their annual audits.

The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily

prove typical for the stock market over time. That’s an important fact: A particularly weak nine years for the

market over the lifetime of this bet would have probably helped the relative performance of the hedge funds,

because many hold large “short” positions. Conversely, nine years of exceptionally high returns from stocks

would have provided a tailwind for index funds.

Instead we operated in what I would call a “neutral” environment. In it, the five funds-of-funds

delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in

those funds would have gained $220,000. The index fund would meanwhile have gained $854,000.

22

Bear in mind that every one of the 100-plus managers of the underlying hedge funds had a huge

financial incentive to do his or her best. Moreover, the five funds-of-funds managers that Ted selected were

similarly incentivized to select the best hedge-fund managers possible because the five were entitled to

performance fees based on the results of the underlying funds.

I’m certain that in almost all cases the managers at both levels were honest and intelligent people. But

the results for their investors were dismal – really dismal. And, alas, the huge fixed fees charged by all of the

funds and funds-of-funds involved – fees that were totally unwarranted by performance – were such that their

managers were showered with compensation over the nine years that have passed. As Gordon Gekko might have

put it: “Fees never sleep.”

The underlying hedge-fund managers in our bet received payments from their limited partners that

likely averaged a bit under the prevailing hedge-fund standard of “2 and 20,” meaning a 2% annual fixed fee,

payable even when losses are huge, and 20% of profits with no clawback (if good years were followed by bad

ones). Under this lopsided arrangement, a hedge fund operator’s ability to simply pile up assets under

management has made many of these managers extraordinarily rich, even as their investments have performed

poorly.

Still, we’re not through with fees. Remember, there were the fund-of-funds managers to be fed as well.

These managers received an additional fixed amount that was usually set at 1% of assets. Then, despite the

terrible overall record of the five funds-of-funds, some experienced a few good years and collected

“performance” fees. Consequently, I estimate that over the nine-year period roughly 60% – gulp! – of all gains

achieved by the five funds-of-funds were diverted to the two levels of managers. That was their misbegotten

reward for accomplishing something far short of what their many hundreds of limited partners could have

effortlessly – and with virtually no cost – achieved on their own.

In my opinion, the disappointing results for hedge-fund investors that this bet exposed are almost certain

to recur in the future. I laid out my reasons for that belief in a statement that was posted on the Long Bets website

when the bet commenced (and that is still posted there). Here is what I asserted:

Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017,

the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is

measured on a basis net of fees, costs and expenses.

A lot of very smart people set out to do better than average in securities markets. Call them

active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their

positions will more or less approximate those of an index fund. Therefore, the balance of

the universe—the active investors—must do about average as well. However, these

investors will incur far greater costs. So, on balance, their aggregate results after these costs

will be worse than those of the passive investors.

Costs skyrocket when large annual fees, large performance fees, and active trading costs are

all added to the active investor’s equation. Funds of hedge funds accentuate this cost

problem because their fees are superimposed on the large fees charged by the hedge funds

in which the funds of funds are invested.

A number of smart people are involved in running hedge funds. But to a great extent their

efforts are self-neutralizing, and their IQ will not overcome the costs they impose on

investors. Investors, on average and over time, will do better with a low-cost index fund

than with a group of funds of funds.

23

So that was my argument – and now let me put it into a simple equation. If Group A (active investors)

and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average

results before costs, so, too, must A. Whichever group has the lower costs will win. (The academic in me requires

me to mention that there is a very minor point – not worth detailing – that slightly modifies this formulation.)

And if Group A has exorbitant costs, its shortfall will be substantial.

There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long

stretches. In my lifetime, though, I’ve identified – early on – only ten or so professionals that I expected would

accomplish this feat.

There are no doubt many hundreds of people – perhaps thousands – whom I have never met and whose

abilities would equal those of the people I’ve identified. The job, after all, is not impossible. The problem simply

is that the great majority of managers who attempt to over-perform will fail. The probability is also very high that

the person soliciting your funds will not be the exception who does well. Bill Ruane – a truly wonderful human

being and a man whom I identified 60 years ago as almost certain to deliver superior investment returns over the

long haul – said it well: “In investment management, the progression is from the innovators to the imitators to the

swarming incompetents.”

Further complicating the search for the rare high-fee manager who is worth his or her pay is the fact that

some investment professionals, just as some amateurs, will be lucky over short periods. If 1,000 managers make

a market prediction at the beginning of a year, it’s very likely that the calls of at least one will be correct for nine

consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet.

But there would remain a difference: The lucky monkey would not find people standing in line to invest with

him.

Finally, there are three connected realities that cause investing success to breed failure. First, a good

record quickly attracts a torrent of money. Second, huge sums invariably act as an anchor on investment

performance: What is easy with millions, struggles with billions (sob!). Third, most managers will nevertheless

seek new money because of their personal equation – namely, the more funds they have under management, the

more their fees.

These three points are hardly new ground for me: In January 1966, when I was managing $44 million, I

wrote my limited partners: “I feel substantially greater size is more likely to harm future results than to help

them. This might not be true for my own personal results, but it is likely to be true for your results. Therefore, . . .

I intend to admit no additional partners to BPL. I have notified Susie that if we have any more children, it is up to

her to find some other partnership for them.”

The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will

usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick

with low-cost index funds.

*******

[gfp]

He has finally moved his cash to Treasury bills.  There is finally some yield there -

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=IRX&insttype=&freq=2&show=&time=12

[ValueMaven]

No mention of 1) Trump 2) Wells Fargo 3) Airlines (outside of saying BRK just bought some 4) APPL....

 

Brilliant letter in typical Buffett format...

 

Would also be interested to think what others feel BRK's Book Value is currently....

 

Sincerely,

ValueMaven

[rb]

Yea, I'm seriously disappointed by the lack of commentary on airlines. I thought given his stance and past commentary on airlines (or anything that flies really) he should tell the shareholders why he's sinking billions of dollars in airlines now.

 

I think BRK's BV is 282,894 but I'm guessing you're really asking about IV/BV. I think that's around the 1.5-1.6 mark.

[gfp]

He mentioned in a recent interview that he did not want to expound on what had changed in his mind to make him bullish on Airlines.  The implication in his tone was that he was still buying shares and had no interest in adding to a 'Buffett Premium' halo-effect around airline stock prices.  As Charlie has confirmed, it is a lot like the Freight Rail business - over time, through consolidation, a "rationalization" occurs when you get an oligopoly.  A bad business can turn OK when it consolidates into a rational oligopoly.  Warren may still be buying airline equity - and it may ultimately turn out like the Freight Rail basket, with Berkshire owning 100% of one the the major US airlines and selling the rest of the basket to satisfy merger conditions / help pay for the acquisition.  Less likely than the BNSF deal, but not all that crazy.

[sleepydragon]

" (Today, I would rather prep for a colonoscopy than issue Berkshire shares.)"

-- ha ha ha  ;D

[rolling]

Fairly uneventfull letter. My few takeways:

a) Sucession: big endorsement of Ajit ("If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!") and not a single mention to BH Energy CEO (sorry, cannot remember the name)

b) I believe it is the first time he straightforwardly calls Gen Re a mistake due to stock issuance, right next to Dexter shoes

c) He has put numbers into Clayton, stating how much the company loses with foreclosures and the total number of foreclosures (18.6 thousand per foreclosure)

d) The intrinsic business value section disappeared. I guess we must search for the numbers ourselves

 

 

 

Underwriting income: 2131 million=1296$/share

Operating pre tax earnings: 5693+2973+8462+1854=18982 million= 11546$/share

TOTAL 12842$/sh (+4.4%)

versus $12,304$/sh

 

Kraft Heinz at market=28400=17275$/sh

Fixed maturity Investments= 23465=14273$/sh

Equities= 122032=74229$/sh

Other investments= 17256=10496$/sh

Cash and eq=70919+3939+11512= 86370=52536$/sh

TOTAL=168809$/sh (+5.6%)

versus $159,794$/sh

 

Seems his intrinsic value numbers growth slowed down A LOT (which might explain their disappearance from the letter).

 

 

Also to point out:

"The investment portfolios of almost all P/C companies – though not those of Berkshire – are heavily

concentrated in bonds."

Cash+fixed maturity= 109835 million

Float= 91577 million

 

from here it seems the equity portfolio is not financed by float but by equity, so not entirely correct to exclude Berkshire from the comparison, or am I missing something?

 

[rb]

The IV calc is part of the AR not the letter.

[rolling]

The IV calc is part of the AR not the letter.

More precisely page 112, but the updated numbers are not there either (that's why I searched for the numbers myself...which obviously means I may have gotten something wrong). In previous years these numbers were on the letter (pages 7 in 2014 and 9 in 2015)

[gfp]

One thing I noticed is that all of the Dow Chemical common stock had been sold as of 12/31/2016.  Seems like he actually had shorted against that conversion or at least arranged one hell of a large, quick block trade.  BRK got 72.6 million DOW shares in December and held zero at the end of the month

[rolling]

One thing I noticed is that all of the Dow Chemical common stock had been sold as of 12/31/2016.  Seems like he actually had shorted against that conversion or at least arranged one hell of a large, quick block trade.  BRK got 72.6 million DOW shares in December and held zero at the end of the month

If he could do the shorting it would have been a huge deal... There were a few times were it approached 53 and then went down to high or even low forties. Could have made some additional hundred millions... Most likely someone did the shorting for him. He hardly could sell all those shares in less than half a month: the sum of all trade volumes on the second half of December was less than those 72,6 M (used google finance data)