Is This Buffett's AT&T Moment?

[rb]

That's precisely correct. It's the IBM strategy. IBM's been doing it for yeeeears across all their products. It will make a good chunk of change. But in the end it is a loosing strategy. Look at where IBM is today compared to say Microsoft (who has been feasting at Oracles's DB trough).

 

Since you've brought up office suites, when I was buying Microsoft back in 2011 I noticed that IBM still had close to a 10% market share is office suites with Lotus. So it was still milking it. But when one thought office suite, no one thought IBM or Lotus.

[Viking]

Well, trying to get rid of an Oracle database is like trying to get rid of all your Excel/Word suites - not so easy.

The conversion costs are going to be massive and take years.

 

Oracle will still make plenty of money on license upgrades, etc.  Most corporations have better things to

do then spending time & money converting applications that work.

 

I'll be real interested to see how Amazon pulls the off.

 

This sounds like an insurance business in runoff... can be profitable if handled the right way. Perhaps Berkshire should create a ‘runoff’ packaged goods operation to give legacy brands a home :-)

[meiroy]

I don't really follow BRK so this might be complete nonsense but after watching this whole interview:

 

1. He says they can't really sell due to size-illiquidity issues.

2. He realized that a position he held was over-valued in advance.

 

My conclusion:

 

1. These days, don't invest in such big illiquid positions.

2. If unable to invest in the private market then return money to shareholders.

 

 

This seems to be the conclusion as he also slowly realizes how disruptive markets have become, it's not just that investors have access to information.

 

Now, he is an awesome investor and one does not have to be right all the time, but Heinz failed due to concept failure as he puts it.  Couldn't this same concept be applied to Coke as well?  Huge illiquid investment.

 

His buying/selling of Oracle pretty much says that he now realizes this is out of his circle of competence.  And to a sense, he knew that before. So why did he do it?  Did they not buy any more Apple because of this?

 

 

 

 

[Spekulatius]

Well, trying to get rid of an Oracle database is like trying to get rid of all your Excel/Word suites - not so easy.

The conversion costs are going to be massive and take years.

 

Oracle will still make plenty of money on license upgrades, etc.  Most corporations have better things to

do then spending time & money converting applications that work.

 

I'll be real interested to see how Amazon pulls the off.

 

Yes, most companies have better things to do, but over time, companies do change their systems. Then there is also natural attrition from mergers etc. , where the merged companies typically pick the cheaper system/application/SAAS system and the dinosaur application will get sunsetted.

[rb]

It is a bit of a mystery. I'd say that Buffett generally doesn't like to sell. There was the mia culpa about not selling Coke in 97/98 when it went insanely high. But then a few years ago he went huge into Exxon and was out just as quickly. Then there was IBM.

 

In my opinion it probably has to do with taxes. In the 90s they were sitting on huge unrealized gains in coke (still are). So if there are large unrealized gains he's less likely to exit. With KHC there may also be a handshake deal with 3g that he's not gonna bail and leave them in the lurch. I don't buy the liquidity argument as much. They have moved out of large stakes they've had in the past. Including Kraft. So it's not like they don't have the ability.

[meiroy]

 

Thanks rb.

[Dynamic]

Also in the Chairman's Letter p12 he states something to the effect that he and Charlie view these businesses not as ticker symbols to be bought and sold on the news cycle but as a collection of great businesses that are hard to come by at good prices that collectively earn about 20% on their equity.

 

Read his words, they're more finely honed than mine.

 

The reduced tax liability on any gains would make it easier to sell these if grossly overvalued, but it's still unnecessarily interrupting the compound growth of great investments and lowering the compound return by introducing a taxable event, so you'd need a pretty great alternative investment (possibly an acquisition) to make it worthwhile. I suspect we might see a few more tax free swaps like the Duracell acquisition than sales of these long established large moat positions like AXP and KO. It's possible that some investees will make mergers that aren't to Berkshire's liking and cause some sort of changes.

 

I wonder if some good companies in cyclical industries could find a good long term home with Berkshire at the bottom of the cycle. For the right price, Berkshire would not care much about the lumpiness of the earnings generated so long as their discounted value far exceeds the price paid.

[aws]

Can someone refresh my memory as to what was the most recent home run that Buffett has hit with open market purchases?  Meaning something that resulted in over $1 billion of gains which was also at least a double.

 

He obviously had some great gains on crisis era investments in GS, BYD, later in BAC, but those were all private deals.  Airlines and Apple have been decent, but nothing to write home about.  Same with the banks, some WFC shares bought in 09-11 are roughly doubles but then so is most of the market.

[rb]

Well he hasn't done that much open market stuff until lately. So you barely have anything to pick. I guess he just wanted to go on safari. The open market taps have only recently opened with Apple and more banks.

[Dynamic]

Apple has been more than a double at times such as during Q4 especially since the initial purchases in the 90-100 dollar region. With dividends it may still be a double at the mid 170 dollar range.

 

That's pretty good going in a little over 2 years and I myself got a 24 month double before I sold my Apple in May 2018. He still looks right to have continued buying at higher prices up to the 150s and 160s giving an average cost basis nearer 140, but less spectacularly so.

[AdjustedEarnings]

Total return on BRK since the 2009 low has been lower than the S&P500 (dividends reinvested). If that low period following the recession was not good enough to find enough opportunity to outperform for a value seeker like BRK, will a garden variety recession provide the opportunity to put out $100 billion and then outperform?

 

Increasingly, I'm skeptical that they'll EVER get all the money out and the cash drag has to be thought of as permanent. If we are waiting for MAJOR panics to put out $50 billion, we'll get one every 30 years or so. So even if you have good returns on that deployment, over that period of time it hardly makes a good showing. To this cash pile is added $25 billion per year.

 

So one argument is they'll buy more stocks. Here, they are restricted to large companies only... hence (in my view) the need to go into AAPL, IBM, KHC, ORCL, etc. and the corresponding mistakes. Buffett is as rational as they come, but I'm wondering whether it's possible that his historical success and love of investing is coloring his judgment? (Didn't CM say something like it's hard to change things when they have worked). When he was doing net-nets, it took him a LONG time to shift approaches. How much longer before he decides the size is now just too big and it's time to finish the "painting"?

 

Second option is a buyback. Here, it also seems the possibility is not very high. At any given time they are showed all types of transactions, so they'll always be considering some purchase or another. This was also the case in 2017...remember the "hyena" reference v/s the elephant?... if bankers call them every time there's a large transaction and WEB wants to have money on hand, the possibility of seriously seeing large buybacks is low low low. He says it right there... his pulse is racing just writing about acquisitions. That didn't sound like someone who would suddenly buy back $10 billion of stock... EVEN THOUGH they've said multiple times that the decisions to not buy back in the past were mistakes. At this multiple for BRK, it's hard to imagine a large negotiated transaction with a premium giving a better return. Yet he didn't say his pulse races thinking of buying back BRK. I can't reconcile the two except to think that he loves acquisitions and is 'hoping' for a price so good so as to make this cash drag and opportunity cost of not buying back BRK worth it.

 

The idea that we want to share more information with "shareholder partners" doesn't quite sit right either. They said this in the year... 2000! and again in 3Q2018... At what point does your quest to be fair to LEAVING shareholders become UNFAIR to CONTINUING shareholders? I seriously wonder (but don't have a conclusion yet) whether Buffett's combination of success, love of investing, acquisitions, tax efficiency (witness the opportunity cost of Coca cola), and general mental make up ever allow him to do any type of capital return (just talking about it doesn't count) in size.

 

Third possibility is a dividend. If a buyback at today's price is not something WEB will do, we don't need to talk about a dividend much. Not going to happen.

 

Several years ago, he said that getting up to $100 or $150 billion would be kind of silly and, yet, that's where we are headed. I don't mean this is criticism of Buffett. I admire him as much as you guys do but we do have to look at the facts clearly and decide what future returns on BRK will look like. If they are not good, we'll pay a serious opportunity cost as well.

[Dynamic]

It's quite interesting viewing a chart of BRK.B in comparison to SP500TR.

 

For example, https://finance.yahoo.com/quote/BRK-B/chart?p=BRK-B

 

If you use a mouse scroll wheel over the graph to expand to around 15-20 years, then drag the bottom of the graph near the volume lines, you can change the starting point and see whether BRK.B or SP500TR is ahead at the present day in terms of total return (ignoring taxes on the S&P 500 dividends, which don't apply to BRK.B).

 

Even picking the top of the market in 2007-2008, you can show either BRK.B or SP500TR winning until today. If SP500TR is winning the margin is usually small, if BRK.B is winning it's usually a little bigger but not dissimilar, perhaps showing that BRK.B spends more time being a little more undervalued than S&P500.

 

In the Global Financial Crisis of 2008-2009, BRK.B, being involved in the Financial Sector, got its price hit essentially as hard as the SP500TR. At certain other times of market collapse, such as 2003, Berkshire was not hit as hard, so a starting point in mid 2002, say, sees BRK.B way ahead, despite not including the dot-com crash where BRK.B would easily outperform the tech heavy index.

 

To me, I'm glad to see intrinsic value and book value of Berkshire rising at a slightly higher rate than the market price, and for my holding period since 17 July 2003 purchase at a slightly rich 1.6xBV, it has outperformed the very tough SP500TR competitor by a small but significant annual amount.

 

It's certainly not the Berkshire of old, but to me it's a great mainstay of my portfolio with sufficient diversification and superior quality to the S&P500, and worthwhile tax advantages. Buying BRK.B near low points, seems (in my case) to increase by IRR by enough to make it a superior investment in total return as well as safety, and it's a good place to park cash and let it compound while awaiting high conviction value purchases that come along rarely. I wouldn't know how to price my purchases of SP500 to low points to enhance my returns.

[RadMan24]

Warren clearly explained what he got wrong, and the realities going forward. Nobody questioned the strategic move, it just didn't work out as planned. And unlike everyone else, he still didn't lose money.