berkshire - cheap?

[John Hjorth]

"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

 

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

 

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

 

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

 

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.

 

In general I agree with your post, StevieV,

 

What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me.

[StevieV]

"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

 

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

 

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

 

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

 

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.

 

In general I agree with your post, StevieV,

 

What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me.

 

Makes sense.  I tend to think BRK shouldn't be part of a great individual investor's portfolio.  It is not the type of company Mr. Buffett himself would buy at low capital levels.  It is not something I would expect Packer to buy, or that I would probably want him to buy if I was investing with him.

 

Owning stocks like BRK over a longer term and without leverage is a drag on the 25%+ CAGR returns that someone like Packer is achieving (or Pabrai aspires to).

 

Given my current allocation and strategy, it would be very tough to have those type lalapalooza type returns.  I have not proven that I am a great investor and, for various reasons, want some more conservative companies.  I am generally fine with that.  I do however, sometimes wonder whether I should follow a strategy where sustained higher returns of the lalapalooza type are at least possible.

[Guest longinvestor]

"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally.

 

Surprised that you would say that.  BRK doesn't seem like a particularly hard hold to me.  It does not face any clear existential threats.  The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well.

 

If you hold a retailer in today's environment, you may have real concerns about the business model.  Restaurants are hard to hold - something like KONA mentioned here.  A high flyer like Tesla.  As I understand it, Tesla loses money on every car.  Will that turn around at some point?  Will government incentives be reduced and hit adoption?  Will Tesla be the winner?

 

If you are looking for 20% CAGR returns over the longer term, you don't hold BRK.  There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years.  Some stocks will double over the next 2 years.  I hold some that I think have that potential.  BRK stock will not double.

 

On the other hand, BRK is reasonably predictable.  It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions).  Very likely to trade materially higher than today in 5 and 10 years.

 

In general I agree with your post, StevieV,

 

What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me.

 

Makes sense. I tend to think BRK shouldn't be part of a great individual investor's portfolio.  It is not the type of company Mr. Buffett himself would buy at low capital levels.  It is not something I would expect Packer to buy, or that I would probably want him to buy if I was investing with him.

 

Owning stocks like BRK over a longer term and without leverage is a drag on the 25%+ CAGR returns that someone like Packer is achieving (or Pabrai aspires to).

 

Given my current allocation and strategy, it would be very tough to have those type lalapalooza type returns.  I have not proven that I am a great investor and, for various reasons, want some more conservative companies.  I am generally fine with that.  I do however, sometimes wonder whether I should follow a strategy where sustained higher returns of the lalapalooza type are at least possible.

 

Well then, I will be like ordinary investor Joe the plumber living in Omaha who put $10,000 in Buffett's hands in 1957. Ordinariness from here on would (edit:could )be 10% CAGR( edit: or 9, 8, 7, 6 or whatever the index does) for the next 50 years. Edit: the likelihood of it becoming a zero is as low as I can fathom.

 

Leave the greatness for the greats, I suppose.

 

[Jurgis]

Some people think they can predict BRK return in next 30 or 50 years...  :o

 

Good luck.

[bizaro86]

Some people think they can predict BRK return in next 30 or 50 years...  :o

 

Good luck.

I think predicting BRK won't do 25% per year for the next 30 years is a pretty safe bet. At their current size, I'm quite confident that isn't possible.

[AJDelphi]

Did Buffett mention during last AGM that he will buy stock at higher multiple of 1.25 or 1.24 if large block of share were available? I feel like I heard that but could not find it in the transcript.

 

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share with purchase threshold?

 

WARREN: When the time comes—and it could come reasonably soon—even while I’m around, but we really don’t think we can get the money out in a reasonable period of time into things we like. We have to re-examine, then what we do with those funds that we don’t think can be deployed well. And at that time, it would make a decision and it might include both. But it could be repurchases, it could be dividends.

 

There are different inferences that people draw from a dividend policy than from a repurchase policy in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in. But if we felt that we had cash that was unlikely to be used—excess cash—in a reasonable period of time and we thought repurchases, at a price that was still attractive to continuing shareholders was feasible in a substantial sum—that could make a lot of sense.

 

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But, at a point the burden of proof is definitely on us. I mean, the last thing we like to do is own something that a hundred times earnings where the earnings can’t grow. As you point out, we got almost $100 billion. It’s $90 billion plus invested in a business—we’ll call it a business—where we’re paying almost a hundred times earnings and it’s kind of a lousy business.

 

CHARLIE: It’s more after every tax earnings.

 

WARREN: Yeah, so we don’t like that and we shouldn’t use your money that way for a long period of time. And then, the question is, are we going to be able to deploy it? And I would say that history is on our side, but it would be more fun if the phone would ring instead of just relying on history books. I am sure that sometime in the next 10 years—and it could be next week or it could be nine years from now—there will be markets in which we can do intelligent things on a big scale.

 

But it would be no fun if that happens to be nine years off—and I don’t think it will be—but just based on how humans behave and how governments behave and how the world behaves. But like I say at a point, the burden of proof really shifts to us big time and there’s no way I can come back here three years from now and tell you that we hold $150 billion or so in cash or more snd we think we’re doing something brilliant by doing it. Charlie?

 

CHARLIE: Well, I agree with you and the answer is maybe.

 

WARREN: He does have a tendency to elaborate

 

;D ;D The last exchange between them.

 

In another exchange, they were goading each other as to the size of the next elephant deal. Buffett said "something like $150B" and Munger chimed "Now you're talking". They are surely not thinking buybacks at all. If the market does give it to them, they'll do it but but they are still-a-hunting. It would be kind of silly if they retire shares and soon after this $150-200 B deal comes up and they have to issue shares. They would be in a position of Buffett's disavowed "being under the mercy of the kindness of strangers" in a sense because the price at the time may be value destroying to shareholders.

 

Something tells me that the 1.2x buyback is there to make it easier for the next guy. That poor bastard will have one hell of a time stepping into the shoes; besides will have something like $400 B to allocate in his first decade. Buffett is perhaps setting up a return-of-capital-scenario to make him somewhat of a hero to the shareholder community.

 

I totally agree on your comment about making it easier for the next guy. Buffett has barely used repurchases with Berkshire and if the next guy does it at cheap prices you could still get good per share returns after Buffett is gone. The benchmark just makes it easier for the next person to see what cheap is.

[Guest longinvestor]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

[John Hjorth]

Thanks for the update, longinvestor.

 

Yes, somehow as boring as sitting at a put & take, where all the prior visitors have caught all the fish - perhaps leaving one huge potential catch to get, which species we have yet to find out!

[racemize]

So disclosure here: I own BRK and GOOG (and more of BRK), but...

 

The earnings/book of the 'A' (Amazon) really isn't useful and shouldn't be used for comparison against Berkshire.  Bezos is hiding billions of dollars in earnings through reinvestment, and the margins and growth of AWS is insane.  While I wouldn't say Amazon's current price is cheap, I have created models where it can still do very well, it just requires assumptions that I'm not willing to make.  (I've also made models where it drops in half, but I doubt that will happen, it just shows that I really don't know)

 

On the other hand, if you want to look at something like Tesla and perhaps Netflix, then by all means.

[scorpioncapital]

http://www.stern.nyu.edu/~adamodar/pdfiles/country/UserValuation2018New.pdf

[Liberty]

So disclosure here: I own BRK and GOOG (and more of BRK), but...

 

The earnings/book of the 'A' (Amazon) really isn't useful and shouldn't be used for comparison against Berkshire.  Bezos is hiding billions of dollars in earnings through reinvestment, and the margins and growth of AWS is insane.  While I wouldn't say Amazon's current price is cheap, I have created models where it can still do very well, it just requires assumptions that I'm not willing to make.  (I've also made models where it drops in half, but I doubt that will happen, it just shows that I really don't know)

 

On the other hand, if you want to look at something like Tesla and perhaps Netflix, then by all means.

 

That's not the only problem with this approach... Book? Who cares about the book value of these companies? It's not like they're financials (I know they have lots of cash on the balance sheet, but still)... Would you value Microsoft or Adobe on book value too? And not looking at growth and growth runway and ROIC ex-excess cash and things like that...

 

BRK's great, but it has a pretty different profile from, say, Facebook.

 

I think focusing on easily quantifiable metrics without analyzing the actual businesses is exactly the kind of myopia that Buffett warns against.

[KinAlberta]

I wonder if there shouldn’t be a cute phrase about the increasing discomfort with cash piling (up while investors increasingly view positive market returns as inevitable) to serve as s precursor to Buffett’s quip about being greedy when others are fearful.

 

 

 

 

Warren Buffett's Cash "Problem" Just Got $2.4 Billion Worse -- The Motley Fool

https://www.fool.com/investing/2018/06/08/warren-buffetts-cash-problem-just-got-24-billion-w.aspx

 

 

[CorpRaider]

Being lazy so ignoring me is probably doing me a favor, but what kind of un-levered returns has been the recent historical experience in BRK Energy?  ~5-7%? 

[rolling]

Being lazy so ignoring me is probably doing me a favor, but what kind of un-levered returns has been the recent historical experience in BRK Energy?  ~5-7%?

As you asked, I'm not answering your question  ;D

 

What do you mean by unlevered?

- ROA?

- after subsiary leverage (ROE)?

- after parent leverage (BRK energy leverage)?

 

From what I understand they are granted a defined ROE for each subsidiary. Last time I checked around 10% (someone?). In addition, at parent level (BRK energy) they usually carry some leverage over that leverage (not sure how much... that would be interesting to know... someone?). In addition, BRK itself used to carry some leverage over that (I believe it no longer does: float is on cash, brk finance leverage is mostly to cover manufactured home credits and there is minor leverage at subsidiaries).

 

edit:

https://www.berkshirehathawayenergyco.com/assets/pdf/2018-fiic-presentation.pdf

 

edit2: page 18 in the presentation. ROE by subsidiary

 

edit3: page 29, debt by subsidiary and parent debt (6,452M+100M). Total: 35 251M.

equity (page 14) 28.2M. 

So Parent leverages subsidiaries in 23.2%. Interest and some other costs maybe should be eliminated to adjust parent leverage over subsidiaries. Subsidiary ROE a little over 10%

 

 

[CorpRaider]

Thanks. That presentation is literally the only thing I've looked at.  Weird.  I think it says they earn 10-12% regulatory ROEs across the operating units and they are running @ like 60% leverage on a BH Energy basis.

 

I am mostly interested as a potential clue to how WEB views his opportunity set. 

[rolling]

Thanks. That presentation is literally the only thing I've looked at.  Weird.  I think it says they earn 10-12% regulatory ROEs across the operating units and they are running @ like 60% leverage on a BH Energy basis.

 

I am mostly interested as a potential clue to how WEB views his opportunity set.

How did you get at 60% leverage? My numbers got to 23%... which explains the 2017 adjusted ROE of 10.7% (parent adds leverage but for sure assumes some general costs).

[gfp]

WSJ is running a good article on NextEra Energy, in case people have missed it the last couple days -

https://www.wsj.com/articles/how-a-florida-utility-became-the-global-king-of-green-power-1529331001

[CorpRaider]

Thanks. That presentation is literally the only thing I've looked at.  Weird.  I think it says they earn 10-12% regulatory ROEs across the operating units and they are running @ like 60% leverage on a BH Energy basis.

 

I am mostly interested as a potential clue to how WEB views his opportunity set.

How did you get at 60% leverage? My numbers got to 23%... which explains the 2017 adjusted ROE of 10.7% (parent adds leverage but for sure assumes some general costs).

 

Just took it from slide 19 of the deck you linked ("Credit Ratios Support our Credit Ratings") Debt/Total Capitalization column for Berkshire Hathaway Energy for 2015 - 2017. It is right at 60% for each year.

[Libs]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

[thepupil]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

 

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

 

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

 

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

 

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

[sleepydragon]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

 

Brk has 180b of stock portfolio, I think? Maybe the earning of these companies as % of brk ownership?

[SlowAppreciation]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

 

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

 

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

 

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

 

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

 

Look through earnings are ~$12b—so plus op earnings—let's call it around ~$35b total.

 

Berkshire is trading around 13x earnings which seems like a fair deal to me.

[sleepydragon]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

 

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

 

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

 

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

 

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

 

Look through earnings are ~$12b—so plus op earnings—let's call it around ~$35b total.

 

Berkshire is trading around 13x earnings which seems like a fair deal to me.

 

If excluding the 100b cash, the pe becomes around 11ish I think

[SlowAppreciation]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

 

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

 

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

 

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

 

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

 

Look through earnings are ~$12b—so plus op earnings—let's call it around ~$35b total.

 

Berkshire is trading around 13x earnings which seems like a fair deal to me.

 

If excluding the 100b cash, the pe becomes around 11ish I think

 

Yup, even "fairer"

[Swedish_Compounder]

I would add 8 BUSD or so for expected increase in float. Buffett has said that due to its long term nature, float increase can be seen as earnings.