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Berkshire buying, position size, cash [from General:What Are You Buying Today?]


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There has been quite a bit of Berkshire discussion over on General Topics/What Are You Buying Today? that probably ought to move over to this board, so I've used the Quote button to copy/paste the relevant discussion here, and perhaps people would like to reply here (but if you reply to this first post by quoting it, please edit down the 'Quote' as it's an enormous post to quote back 2 or 3 more times! - otherwise just hit Reply instead of quoting.

 

Here goes:

 

Added more BRK.B today.

 

Me 2 because it's the 1st trading day of the month.

 

This is my 2nd month in a 12 month plan (equal amounts every month.)

 

Just layin' the strategy out for any lurkers.

 

It's kind of liberating 2 have 1 company 2 buy regardless of price (might break me of chasing 1/8's & 1/4's on stuff I plan 2 hold semi-4ever...)

 

I believe Berkshire itself does something like this when building a position.

 

Only that their buy parameters are a little different from ours;  a % of trading volume, daily buying, and of course a shitload more quantity of stock until they get to just under the 10% ownership of the entire damn company (we start to sweat when it gets close to 10% of our portfolio) ;D

 

I look at BRK's BV & it amazes me.

Could anyone take Berkshire's mkt cap in cash & re-create the company?

I don't think so.

 

I'm not counting on a re-rating by markets over the next decade or so but...

 

Just what, exactly, holds BRK at such levels?

 

I feel comfortable dollar cost averaging over the next year.

 

The 1/8's & 1/4's thing is really stupid (kinda like playing Lunar Lander on an old punch card machine) & I'm just not gonna do it any more.

 

I range from 3% to 6% positions & will prob wind up with 10% or more in BRK (call it a capitulation of sorts.)

 

If Berkshire is a buy at $185 now, what was it 5 years ago at half this price?

"Could anyone take Berkshire's mkt cap in cash & re-create the company?"

 

I think yes, easier than others, except the private owned businesses. From this I conclude the vast value is in the excess of goodwill over purchase price (almost always cash) over the years not accounted for (revised upward) on the balance sheet. Although the market price may reflect some of that difference. Still the input of energy, time, and opportunism definitely is the bulk of the value. In investing, unlike what some cigar butt investors claim, the bulk of the value is in factors that cannot be measured on a balance sheet or income statement. Most value is hidden which makes number crunchers somewhat uncomfortable :)

 

True that it is not showing up in current value on the balance sheet, but another way it is being revealed over time is in robust earnings growth. Munger put it as "trading liquid securities for illiquid ones". This is precisely where number crunchers are left behind. They are also expecting the eg to slow down but it ain't, for 20 years.

 

Not quite 20 years, but I can look back 14 years, when I made my initial purchase of the old BRK.B at $1,562 or the equivalent of $31.24 post-split on 15th July 2003 in a tax-exempt UK ISA account. I probably invested about 80-90% of my portfolio in BRK.B at the time, knowing I had less time to check my portfolio in the coming years and being comfortable with BRK representing so much of my main 2-stock portfolio to which I wouldn't be adding cash for a few years at least due to investment of money and time in a family business.

 

I realise that I didn't buy it really dirt cheap in 2003, unlike say my purchases at around $125 in Feb 2016, where I went to almost 100% position at a bargain price and felt very comfortable doing so.

 

Being 'reasonably priced' much like today, rather than 'dirt cheap' like in Feb 2016 I was hoping to slightly beat the index and comfortably outpace inflation in the long run, and not expecting anything like the 19-20% annualised returns of the previous 30+ years. As it turns out, inflation since then has been much lower than it averaged in the previous 30+ years.

 

Today, 14.25 years later, at $185.41 that initial investment is a 4.48x bagger (11.12% annualized), while the S&P500TR (Total Return index) is a 3.39x bagger (8.96% annualized). That's annualized outperformance of 2.16% for BRK.B. (all in USD)

 

That still represents sustained outperformance compared to the index (with no fees), and significant growth above inflation.

 

Now, you might perhaps argue that the S&P500 today is overpriced by a factor of, say, 1.3 while BRK is correctly priced, so the 'adjusted' performance of S&P500TR should only be 2.61x bagger (6.97% annualized), meaning BRK.B outperformed by 4.15% annually in 'adjusted' terms, perhaps giving a better indication of the 'economic' outperformance rather than the quotational outperformance. I think much more than that as an assumption of BRK's outperformance would be a stretch, but I'd be happy to hear your thoughts if you disagree.

 

If whichever level of outperformance can be expected to continue, how much more should BRK.B be worth? I guess that depends on how long you think it will continue. Perhaps 5 years outperforming by 4.15% would justify a premium of 22.5% = 100 *(1.0415^5 - 1) or 10 years outperforming would justify a premium of 50.2% = 100 *(1.0415^10 - 1) over the index, but a lower premium might be justified on a risk-adjusted basis.

 

I suspect that in the eyes of the market, they wouldn't wish to pay much of a premium for a few percent per year of 'boring' growth, when they could have glamorous and exciting companies showing recent growth of 20, 30, 40% with a commensurate record of recent stock 'performance' to get them excited about rapid gains quarter by quarter.

 

Equally, there may be other factors making the broader market shy away from BRK. I suspect the current ages of Buffett and Munger and the potential for a sudden decline if one of them died or hit serious ill-health is one. The reported GAAP P/E looks relatively high (about 21 today, unless you use look-through earnings instead, bringing it to about 16 today). These could serve to put the casual market participant off for fear of short-term quotational loss. Plus Buffett rightly warns that Berkshire cannot continue to compound at 19%+ per annum given its size.

 

For those who can look through the reported numbers and see the value, BRK seems to trade at a very reasonable price now, while the S&P500 seems pretty fully valued, but I don't think we who view BRK this way constitute a large proportion of the market and so we get to continue to have opportunities to purchase a great company at a reasonable price compared to the market at large.

 

So would I be buying now at $185? The answer for me is no, but because of my exposure, not because of valuation.

 

Reason: The deliberately concentrated portfolio I manage now has exposure to BRK.B just under 60%, and cash just under 10%, so I'm not inclined to add much right now unless the price drops quite a bit further to real bargain prices, even though we expect to add more cash in the next year. I think a price close to $150 at the moment would encourage me to weight BRK.B as much as 100% of our portfolio again. That's about 15% more than the $130 or so I would have been willing to pay in Feb 2016 when going almost all-in, reflecting mostly the growth in IV I perceive to have occurred in the meantime, with a similar discount to IV applied to my all-in buy price.

 

I might also consider increasing exposure to as much as 100% at higher prices than $150 if another holding such as AAPL gets very high-priced or represents an uncomfortably large percentage of my portfolio (currently almost 27% of my non-look-through weighting at about $154 or 29.5% of my look-through exposure, which is comfortable to me as a concentrated investor still expecting to invest a lot of additional cash over the next 15 years).

 

I did the opposite trade in May 2016, selling a good chunk of BRK.B while still undervalued at $142 to buy a 25% position in AAPL, even more deeply undervalued at $95 and with good prospects of outing some of its value. While BRK.B is up almost 31% since I sold that chunk, AAPL is up almost 62%, and both are a lot less undervalued now and I've added a lot more new cash to the portfolio too, keeping AAPL's weighting from getting out of hand.

 

I can only think of maybe one stock I'm comfortable with other than BRK.B that I might hold more than 60% of my portfolio in were it cheap enough (and that stock, HLMA.L is at least 2.7x the price for which I'd risk that exposure right now having sold it at just about 2.1x my buy price to max out my BRK.B exposure back in Feb 2016, getting a lucky 15-20% USD:GBP currency boost on top later that year by going 100% USD before the Brexit vote). HLMA.L earned me over 14% annualized total return over about 14.35 years as a simple buy quality dirt-cheap and hold position.

 

Of the companies I know, only in BRK.B would I hold a 100% weighting.

 

I'm sure I'm happy being a lot less diversified than most would be comfortable with, but I think people with 7-10 stocks and cash to invest could happily keep adding to BRK at current prices up to a 15-25% position, recognising that it has hidden value that GAAP misses and do pretty well over 5+ years. Although my spouse and I do have some modest pensions invested in index funds, one of which we add to monthly through payroll at the level to get an employer match, I think I'd rather invest additional money in BRK at $185 if we weren't already so heavily weighted.

 

Directionally, we are in the same boat (BRK) with similar rationale!

1) I've continuously and increasingly owned BRK since 2006 and got into it in a big way in 2008-12. Talk about fortuitous timing!

2) I'd like to buy more BRK at the $150 range. I tried over the past year, didn't work. Fortunately, I am only talking about relatively small buy quantities.

3) Just as you, BRK is the one stock I'd like to be 100% in. I will. I am pretty damn close. Since 2006, I've gradually sold other things to buy BRK. I don't give a hoot about weighting in this case.

 

I have little doubt that BRK will be higher 10 to 30 years (my horizon); Reasonable people may disagree on how much higher. With that in mind, the mistake I just made (trying to buy at $150 or some random price), is much like Phil Fischer's example in Common Stocks, Uncommon profits. If you are reasonably assured that a stock that is selling for $180 is going to, who knows $ 500 or $1000 more in your time horizon and that is "quite satisfactory" for your foreseeable purchasing power needs, it is irrational behavior trying to scrape the bottom. Doodiligence just recently posted the approach of buying equal amounts at a set interval, say for a year. That's what I would do, if I was in a position of buying. I have an opportunity coming up in the near future.

 

Good luck to you (us, I suppose).

 

Thanks, Phil Fisher's is a useful way to look at it.

 

I'm happy to be highly exposed to two companies I feel should do well in my time horizon at the moment (and a few dribs and drabs in other positions).

 

I guess I feel I have sufficient exposure to BRK to meet my needs 15-50 years out and AAPL too, though I am less certain of the truly long-term future in the latter company. I'm willing to leave some more on the sidelines to give me optionality and some ability to trade relative valuation from one company to another, and from cash to a fairly deeply undervalued stock in future. I do realise that the latter part of value-trading is a zero-sum game, so I hope that my interpretation of discount to IV will be right more often than it's wrong and that I'll get enough opportunities to play within the universe of stocks I'm comfortable owning.

 

Folks dont forget: someone who is now 100 % in BRK means: app 25 % in cash and app. 75 % in excellent companies. No need to keep cash by yourself, WEB and his team are investors, who will do the right actions.

 

BRK is the best cash you can keep.

 

Don't forget: BRK fell 50% in 2008-9.

 

Cash is the best cash you can keep.

 

If it did so today I'd go all in.

 

You'd only be able to do so if you held cash rather than BRK.

 

Which I do...

 

Concerning BRK is the best cash:

 

The argument to keep a part in cash because BRK tanked 50 % in 2008 / 09 is not logical: Because that anticipates, that you know in advance 1) a big crisis is ahead, 2) BRK is tanking in the crisis 3) further you have to know how deep the price will go and 4) on what exat day it is the lowest price. On this day you have to invest the cash.

 

Further lets see the 2 cases:

1) Full invested on 14. Sept 2008 (highest point before Lehmann) in BRK with 1 A share      147.000 $

Today you have                                                                                                              278.700 $

Multiple 1,896

 

2) You are 75 % in BRK and 25 % in cash on 14. Sept. 2008   

This means 110.250$ in BRK and in Cash 36.750

Than you are the goodblessed investment super-star and you are so smart and you find the exact point, the absolute low of BRK, on 1 Mach 2009 with  73.195 $ for a A share, and you invest your cash in it: mutilple to today 3,808

 

The result is if it turns out

110.250 $ BRK x 1,896      gets 209.025 $ today

  36.750 $ x 3,808            gets 139.930 $ today

TOTAL                                      348.955 $ ............. thats a 25 % better result compared to be all time full invested

 

If it does not trun out, because there is no lehman

you have today 209.025$ in BRK and still 36.750 $ cash = 245.775 $ ........... thats a 13,3 % gap missing, compared to be all time full invested

 

I would always choose to be full invested, because there is no method / compass to fix the lowest point in a crisis on the exact day.

 

I would never sell my house or a part of it and keep the cash because i think that there is a crisis ahead and I will be able to buy my house back for a cheaper price. think about it

 

I need know only that 1) the market is overvalued by most measures and will likely tank, 2) BRK will likely tank with the market (as it has previously), and 3) that P/B 1.2 is a steal.

 

Remember that if you're replying please don't quote everything above!

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Interesting.

The CAGR of the cash position at BH since 2009 has been higher than the CAGR of the S/P index.

 

This brings up the concept of yardstick.

If the yardstick is BH, then one will likely do well over time even if market price undershoots intrinsic value of BH at some point.

If the yardstick is WB, then the reward is potentially larger.

To enjoy a larger reward though, one has to do better than BH.

Simple but not easy.

 

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Wow, a fascinating insight, Cigarbutt

 

I looked back to 2003 Q2 and there seemed to be 4,019 + 24,425 $mn in cash & equiv, coming to $18,529 per A share.

 

2017 Q2's 10-Q gives 20,142 + 66,008 + 4,962 + 1,314 + 7,323 = 99,749 $mn in cash & equiv, coming to $60,653 per A share.

 

The ratio is 3.27x in 14 years, a CAGR of 8.84% in cash and equivalents per share.

 

I make the CAGR of the S&P500TR index (including reinvested dividends), 9.00% from 15 July 2003 to 5 Oct 2017, which is very similar.

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Wow, a fascinating insight, Cigarbutt

 

I looked back to 2003 Q2 and there seemed to be 4,019 + 24,425 $mn in cash & equiv, coming to $18,529 per A share.

 

2017 Q2's 10-Q gives 20,142 + 66,008 + 4,962 + 1,314 + 7,323 = 99,749 $mn in cash & equiv, coming to $60,653 per A share.

 

The ratio is 3.27x in 14 years, a CAGR of 8.84% in cash and equivalents per share.

 

I make the CAGR of the S&P500TR index (including reinvested dividends), 9.00% from 15 July 2003 to 5 Oct 2017, which is very similar.

 

Interesting. Another way to look at this; In 2003, cash/eq was 33% of market cap; today it is 35%.

 

Percentages are less relevant over time, the dollar amounts are yuuge now and poised to get yuuger. Buffett is keenly aware of the problem as he addressed this in the 50th year letter saying that over the next two decades, return of capital would be necessary.

 

Interestingly, in 2003, Buffett was the lone deployer of capital, (I suppose Lou Simpson was there); Now we have many charged with deploying Berkshire's billions. It appears that their MO on acquisitions has evolved from cigar butts to quality to now businesses with jockeys who are good at capital allocation even before they come to Berkshire. Marmon, PCP, Iscar, BH Automotive and even Pilot/Flying J all fit this narrative. Munger alluded to this at this year's meeting; We used to be wiseasses talking about buying businesses that can be run by idiots, now we have wised up enough to get good at finding businesses with a good jockey. . If you watch Buffett interviews after buying companies, he never fails to mention that the deal is only attractive with the jockey in place. He said this about Donegan, Van Tuyl and now Haslam. Usually it is a joint interview.

 

 

 

 

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The other thing is that those subsidiary businesses without good places to deploy the capital are encouraged (including by their managers' compensation packages, I believe) to return it to Omaha to be deployed by HQ. Those who find a good opportunity for capital allocation can also call HQ with the details and get sound plans to deploy it approved quickly.

 

As such Berkshire frees each unit from the growth imperative. For example, an expansion of See's Candy nationwide would not produce good returns on incremental invested capital, yet if it were a public company See's would probably face pressure to invest in growing the top line or expand by acquisition, rather than simply paying almost 100% of its free cash flow out to its owners. BH Energy, on the other hand, may do well reinvesting virtually all profits and supplementing them with cheap debt not secured against Berkshire Hathaway, generating a regulator-approved return of as much as 12%, allowing it to compound its growth substantially, while competitor utilities feel compelled to maintain healthy dividends.

 

I can well imagine that Berkshire will find it harder to deploy excess capital at market-beating returns in coming decades, and so return of capital to shareholders in one way (buybacks, dividends or spin-offs) or another is eventually going to happen, but I also suspect it could be later than many people with a dividend fetish who post on the internet seem to think. For me, the later the better, especially as I get taxed on US dividends and not capital gains in my main accounts, and as I can thus sell shares if in future I want to generate an income.

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Long term, things will tend to equilibrate.

It is fair to agree though that the Market and individual firms market caps diverge from their intrinsic trend.

Isn't this why we play this game?

Stock picking, way to go.

Market wise, this is another question, even if opportunities for stock picking or the absence thereof may help answer the question.

Fully invested or market timing (or somewhere in between)?

Who cares what I think?

But, where does the Master stand on this question?

What he says ("stocks are cheap") versus what he does may not be the same thing.

The end points from 2003 to 2017 seem to indicate that he is relatively agnostic.

If you look at the 2009-2017 period, there seems to be a particularly strong logarithmic taste for cash.

 

http://www.investmentu.com/article/detail/54917/cotw-warren-buffett-cash-reserves-midcap-stocks#.WdZG5oWcHug

 

If you look at the 1994-5-6 starting point, (time period chosen because then some were already alluding to an irrational exuberance era(!), a time period when wise heads should have considered fearfulness?) you find that the cash/eq to be much lower than the numbers mentioned for the most recent periods and you find that the CAGR of cash (1994-5-6) to now to be somewhat high. But then again, we may be in new era.

 

The burning question remains: Why is he holding so much cash?

 

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Why holding cash?

 

He's in the same ol' boat as ever, waiting for the phone to ring. 100 B would make mere mortals itchy. The phone has rung in the past. Besides there are many more 1-800 numbers today.  If it don't ring often enough, return cash. But wait for the phone to ring for as long as possible so he won't have to do it.  ;)

 

Why not buying stocks?

Would rather buy businesses. He's got others doing the stock buying thing.

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The disposition effect is well documented in the academic literature: investors sell winners too early, and hold onto to loser for too long.I just analyzed whether my personal investment decisions have also suffered from this problem, and I wanted to share this here as it might be a useful for exercise for other investors to undertake.Basically, I looked at the performance of stocks *after* I sell them, relative to an appropriate benchmark (for a complete picture I may also study performance prior to sale in the future).

The result is that my winners perform better post-sale than my losers. So I may indeed suffer from the disposition problem! As my winners still underperform the benchmark post-sale (even though they are better than the losers), it does not mean though that I should hold onto winners for longer. However, I may try to shorten the holding period for the losers.

 

This is another topic from the Strategies section, that I felt like quoting and replying here versus there. Sorta relates to fewer(larger) position sizes that some of us have, directly related to the concentration habit.

 

If you re-word the OP as sell (winners) too soon, sell (losers) too late, to me it is obvious that it is as much about selling as it is finding winners and losers. Again, learning from the masters, Buffett/Munger, well then, don't sell. But for this to happen, you need to avoid buying shitty stuff. How do you do that, well, don't stray too far from your circle of competence, keep that circle small to only include non-shitty stuff. Then you can buy a few times when Mr. Market offers it to you. There you go, I spun this around to fit the cult mode.

 

But, this has worked for me. I have triangulated my investing habits to this over the past 12 years. I don't sell much at all, most sells are to raise cash for living etc. I've stopped trading for quite some time now. It feels surreal, but I'm completely rid of things like tax loss selling, re-balancing, short term capital gains etc. for many years now. I  feel like pinching myself, because this was the norm before 2005. But, lest I forget, BRK is the one vehicle that allows me to do this. Don't try this at home ;D

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longinvestor,

 

Impressive.

You may be interested in what Benjamin Graham used to say:

"Quod licet lovi, non licet bovi".

 

I think this referred to his unusual large and concentrated position in Geico.

I would guess it's all about conviction. No?

No, the vehicle.

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"No, the vehicle."

So, self-driving car or you care about the driver?

Driver who's passing along good driving habits. On familiar roads. If the car sways too much, will look closer when that happens.

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This is a question directed to Valuehalla, I think. I certainly understand your calculations, and also your reasoning. It has - at least to me - a lot of sound reasoning.

 

However, I have one question, though - actually two, I think.

1. What's your mental model for considering your cash level [based on look through considerations]  in your total portfolio while doing this? [Meaning totally specific: If I asked you today: "How much cash do you hold today in your investable portfolio?"] [Also, please don't take my question too literally ...]

 

2. What do you think about having a look trough floating cash level, out of your own control? [Within quarters, ref. Berkshire reporting available to you]?

 

- - - o 0 o - - -

 

Edit:

 

Elaboration to #1:

 

Perhaps a calculation like this:

 

[Cash plus value of T-Bills minus the USD 20 B "rainy day"/ Berkshire Crisis Fund money]/share, divided by price/share. [for your Berkshire position]

 

- I'm trying to understand fully how you think about this. [ : -) ]

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This is one more quote out of the other thread on selling, this one is from Uccmal. The subject of the no-dividend policy has been discussed in the Berkshire pages. What do Berkshire owners think of the bolded words in post? I'm currently in favor of not receiving a dividend from Berkshire. Main reason in my case is that I have no current need for distributions and even if I do in the future, am comfortable selling BRK stock to raise cash. Is there no other stock that we should trust the steward with deploying our money? Not that I follow a lot of other stocks, but trusting the Steward with money for no more than 12 months? 

 

Interested in others' thoughts on this? Again, I am posting here versus there because it is likely that the post there will grow into a Buffett thread.

 

Interesting topic.  In April 2009 I bought Leaps on HD, Sbux, Ge, and AXP.  Rather than exercising them I sold them.  HD, Sbux, and axp, are all up multiples of what they were when I bought the Leaps. 

 

After that I have really worked at keeping my winners and selling my losers.  I am merciless with the losers now.  When the tide turns for whatever reason I have learned that they usually get worse before they get better.  So I unload quickly and completely.  I have done this with Seaspan, and Aimia Prefs this past year.  I am willing to take a loss.  After 30 days I can always buy back. 

 

Aimia prefs as it turned out came back to above my PP, but this was very uncertain when I sold them.  And the uncertainty has only grown.  The thesis is totally different. 

 

It helps that I adjusted my style to only buy long term GARP stocks as cheap as I can.  But this is partly a sign of the times.  Nothing has been cheap since Canadian stocks in late 2015/early 2016. 

 

Some degree of diversification helps, and holding stocks that pay you to wait, and even better pay you more each year to wait.  I hold only one stock that doesn't pay a dividend.  Its alright for Buffett to pay no dividend but ALL other established companies should be paying dividends that they increase each year.

 

The longer I have been at this the more I subscribe to GARP.  Over the long term, widely held stocks, that are necessary for the economy to function will outperform the indexes.  The objective is to not have sell your losers because you hold none.  You aren't going to hit the ball out of the park with any one investment, but right now, at this stage of the cycle, thats not going to happen anyways.

 

 

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This is one more quote out of the other thread on selling, this one is from Uccmal. The subject of the no-dividend policy has been discussed in the Berkshire pages. What do Berkshire owners think of the bolded words in post? I'm currently in favor of not receiving a dividend from Berkshire. Main reason in my case is that I have no current need for distributions and even if I do in the future, am comfortable selling BRK stock to raise cash. Is there no other stock that we should trust the steward with deploying our money? Not that I follow a lot of other stocks, but trusting the Steward with money for no more than 12 months? 

 

Interested in others' thoughts on this? Again, I am posting here versus there because it is likely that the post there will grow into a Buffett thread.

 

Interesting topic.  In April 2009 I bought Leaps on HD, Sbux, Ge, and AXP.  Rather than exercising them I sold them.  HD, Sbux, and axp, are all up multiples of what they were when I bought the Leaps. 

 

After that I have really worked at keeping my winners and selling my losers.  I am merciless with the losers now.  When the tide turns for whatever reason I have learned that they usually get worse before they get better.  So I unload quickly and completely.  I have done this with Seaspan, and Aimia Prefs this past year.  I am willing to take a loss.  After 30 days I can always buy back. 

 

Aimia prefs as it turned out came back to above my PP, but this was very uncertain when I sold them.  And the uncertainty has only grown.  The thesis is totally different. 

 

It helps that I adjusted my style to only buy long term GARP stocks as cheap as I can.  But this is partly a sign of the times.  Nothing has been cheap since Canadian stocks in late 2015/early 2016. 

 

Some degree of diversification helps, and holding stocks that pay you to wait, and even better pay you more each year to wait.  I hold only one stock that doesn't pay a dividend.  Its alright for Buffett to pay no dividend but ALL other established companies should be paying dividends that they increase each year.

 

The longer I have been at this the more I subscribe to GARP.  Over the long term, widely held stocks, that are necessary for the economy to function will outperform the indexes.  The objective is to not have sell your losers because you hold none.  You aren't going to hit the ball out of the park with any one investment, but right now, at this stage of the cycle, thats not going to happen anyways.

 

I'd rather BRK buybacks but that view may change into retirement.

 

Or not; like you said, sell if you need supplemental cash.

 

Other companies with better places to deploy cash should do so.

 

Screw dividends, except maybe with something like Altria (seems like they'd be able to find a way to spend some $$$ to expand alcoholic bevs but shareholders would go nuts if the dividends started getting diverted.)

 

When I learned about BRK Energy & how they started putting former dividends back into the company, it helped me understand (I'm only assuming that these investments are digging a moat around the operation.)

 

---

 

Many people imagine that it's easy to extrapolate a steadily increasing dividend will return x% of my investment & the rest should be provided by a bigger business down the road (whether it works out that way or not WTFK.)

 

Is is that much harder to figure out if cash deployed (instead) towards organic or acquisitive growth will result in more value? (You bet it's friggin harder with 2nd level thinking & all that.) - not saying I can think like that but a lot of people here & on FinTwit sure as shit can...

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This is a question directed to Valuehalla, I think. I certainly understand your calculations, and also your reasoning. It has - at least to me - a lot of sound reasoning.

 

However, I have one question, though - actually two, I think.

1. What's your mental model for considering your cash level [based on look through considerations]  in your total portfolio while doing this? [Meaning totally specific: If I asked you today: "How much cash do you hold today in your investable portfolio?"] [Also, please don't take my question too literally ...]

 

2. What do you think about having a look trough floating cash level, out of your own control? [Within quarters, ref. Berkshire reporting available to you]?

 

- - - o 0 o - - -

 

Edit:

 

Elaboration to #1:

 

Perhaps a calculation like this:

 

[Cash plus value of T-Bills minus the USD 20 B "rainy day"/ Berkshire Crisis Fund money]/share, divided by price/share. [for your Berkshire position]

 

- I'm trying to understand fully how you think about this. [ : -) ]

 

Valuahalla preferred to answer this post to me directly by PM, which I will not go in detail with here.

 

But I'll mention, that Valuehalla consider the cash and T-Bills at hand at Berkshire [his share of it] his dry powder cash, immediately available for the Berkshire investment team, i.e. a look through view.

 

- - - o 0 o - - -

 

Somehow a bit related: SA: Don't forget To Copy Warren Buffett's Biggest Position.

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Haha, I sometimes despair at SA writers though!

 

An article came up yesterday I think about why we should consider Bank of America and it said

"Why would Buffett swap a 6% yielding preference share for a 2% dividend yield?" then proceeded to talk about growth prospects of BoA as if that were the reason.

 

Fortunately the first commenter provided the obvious answer that 6% of $5bn is less than around 2% of $18bn after exercising the warrants by trading in the prefs.

 

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Let’s dig a bit here.

 

What does the rising cash pile (absolute and relative basis) tells us?

 

Obviously, Mr. Buffett buys stuff when it makes sense to buy stuff. He’s been the Master at that. Inverting though, it may be useful to try to answer why he is not buying and having to resort to a larger cash position.

 

He hates cash and has said something to the effect that he considers cash as a holding position until he finds something else.

 

A part of the cash position is related to the rainy-day fund idea. He has mentioned in the past that he took this idea of a reserve fund from his grandfather. My understanding is that he has mentioned a few years ago that he kept a 20 billion cushion at the holding company largely to absorb large intermittent insurance losses. With inflation and growing insurance and reinsurance subs, this number may need to be adjusted upwards. However, the rest of the cash pile has to be explained by a relative lack of opportunities and has been used in the past for the other component of financial flexibility: opportunities.

 

Said before: “During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offence while others scramble for survival”.

 

I don’t buy the idea that the phone does not ring. The discipline showed around the Oncor acquisition tells us that he may simply find that, in this low interest rate environment, he cannot compete on price with firms that can effectively finance projects at such low rates.

 

In terms of numbers, the insurance and other assets versus total assets for BH has decreased in the last 10 to 12 years and the cash to total equity may not be the best measure to assess the lack of opportunities index that Mr. Buffett provides in his yearly statements.

 

Here are some numbers (not audited) cash and CE over total insurance and other assets.

 

2006  20,3%    2007  18,1%    2008  12,0%    2009  12,4%    2010  14,9%    2011  13,4%  2012  15,3%    2013  13,8%    2014  17,4%    2015  17,6%  2016  17,3%  Q2 2017  19,1%

 

These numbers show a similar pattern to the link that John provided for us.

 

However, if you subtract what you evaluate to be the “cushion required” for unusual insurance losses, the upward trend in cash accumulated versus potential opportunities since 2008-9 is greatly magnified.

 

So this is not a forecasting tool but it would tend to go against the remain fully invested at all times rule and certainly gives credence to the idea that cash may be a call option on opportunities.

 

No?

 

 

 

 

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... However, if you subtract what you evaluate to be the “cushion required” for unusual insurance losses, the upward trend in cash accumulated versus potential opportunities since 2008-9 is greatly magnified.

 

So this is not a forecasting tool but it would tend to go against the remain fully invested at all times rule and certainly gives credence to the idea that cash may be a call option on opportunities.

 

No?

 

At least to me, very good points, Cigarbutt,

 

I think we should look at what Mr. Buffett actually do, not what he says [also posted by several board members here on CoBF earlier], ref. the "Stocks are still cheap" interview recently, where it was evident, that he was actually speaking relatively to other available investment alternatives in the current interest rate environment.

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... However, if you subtract what you evaluate to be the “cushion required” for unusual insurance losses, the upward trend in cash accumulated versus potential opportunities since 2008-9 is greatly magnified.

 

So this is not a forecasting tool but it would tend to go against the remain fully invested at all times rule and certainly gives credence to the idea that cash may be a call option on opportunities.

 

No?

 

At least to me, very good points, Cigarbutt,

 

I think we should look at what Mr. Buffett actually do, not what he says [also posted by several board members here on CoBF earlier], ref. the "Stocks are still cheap" interview recently, where it was evident, that he was actually speaking relatively to other available investment alternatives in the current interest rate environment.

Yes it is a "relative to" statement. But you have to always lace his comment with where the interviewer is coming from. Without fail, the folks at CNBC or wherever are always asking " What are stocks going to do in November?" and Buffett never lets that chance to go to waste by quoting Aesop and that he can afford to wait 15 years for the birds to emerge. Two completely different perspectives.

 

It is funny how many posters want to prove that Buffett is a liar by saying one thing and doing another. He is always opportunistic and if a $50 or $100 B deal comes to his desk that he likes, he'll buy in a heartbeat. If someone wants to draw a correlation between those opportunities not coming fast enough to Omaha especially at a time when most are expecting the world to come to an end, go ahead, call him whatever. The Dow is going to a million in a 100 years. That should be the Buffett headline of the year! 

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"It is funny how many posters want to prove that Buffett is a liar by saying one thing and doing another. He is always opportunistic and if a $50 or $100 B deal comes to his desk that he likes, he'll buy in a heartbeat."

 

I agree with the second statement. But the first statement may be a slight mischaracterization.

 

I submit that his job as a public persona is distinct from his job as CEO of BH.

You see this for instance when he generally discusses how tax rates should be higher for the rich and then explains in details why BH should opportunistically sell losses now in order to benefit from coming tax changes.

 

My take is that he is sincere. It may be that when you integrate his comments, as an individual investor, you may want to keep in mind what hat he is wearing when communicating with the outside world.

 

BTW, we all have to deal with contradictions and I find that WB has done quite a good job given his pro-eminence.

 

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His argument on taxes is that a) the players should and will play the game as best they can, and b) the rules need to be improved.

 

Nothing inconsistent about it.  He isn't going to forgo personal tax savings because he wants rich people to pay more in taxes. That won't make a difference.

 

He wants the rules changed so all rich pay more in taxes. Don't hate the player, hate the game

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