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20190506 CNBC interview - post AGM


kiwing100
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Guest cherzeca

underwhelmed by the due diligence/analysis that WB seemed to exercise in connection with oxy commitment.  not to mention that CM was sleeping at the time.

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They keep saying their investment process is proprietary, thats probably because if people knew it revolved around a one sentence thesis , with a little bit of experience and an acute sense of mental models ,people might be abhorred how little goes behind moving billons. Or perhaps they might be amazed how easy it is when you have a few simple principles and avoid big mistakes . It would show anyone can do this , on a certain level If they have good temperament , are patient and think of a few big things. you probably don't need to crunch any numbers much greater than 3 x 4 and so forth.

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underwhelmed by the due diligence/analysis that WB seemed to exercise in connection with oxy commitment.  not to mention that CM was sleeping at the time.

 

The OXY financing commitment is essentially a credit decision  -  i.e

1) will they default?

2) if they default, how much will BRK recover? 

 

For the credit risk, BRK is receiving a 5.55% spread over UST 10yr (8% coupon vs 2.45% UST 10yr), as well as a $50mn financing commitment fee.

 

The warrants are icing on the cake.

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Yeah, I'm not too worried about limited due diligence on the OXY decision.  Remember that Warren's public statements on this stuff are 100%  an advertisement of how great it is to come to Berkshire with these proposals.  He wants to use this as an ad to get people to call him.  Same with the FT interview.  He just wants the advertisement so a few more people call BRK with deals.

 

He was extremely familiar with OXY, Anadarko, Oil price factors, and the Permian Basin in particular.  He's read the annuals for years.  He knows a lot more about how he can lose money on the deal than he lets on.  It's a really good deal for Berkshire.  The 10 year minimum duration is extremely important, and I think he realizes that 11 year warrants, even on a measly $5 Billion cost basis of stock, are extremely valuable.

 

The dude has some experience with this stuff...  The public characterizations are all advertisement.  Look at how often he trumpeted the "No MAC clause."  Why else would he highlight the permissive terms of his deal

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Guest longinvestor

Yes, it is all a giant ad to attract more white knight deals without getting in the mud themselves. A certain profile of a CEO/BOD would go for this.

 

Hope there are 10 of them right now!

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Guest cherzeca

underwhelmed by the due diligence/analysis that WB seemed to exercise in connection with oxy commitment.  not to mention that CM was sleeping at the time.

 

The OXY financing commitment is essentially a credit decision  -  i.e

1) will they default?

2) if they default, how much will BRK recover? 

 

For the credit risk, BRK is receiving a 5.55% spread over UST 10yr (8% coupon vs 2.45% UST 10yr), as well as a $50mn financing commitment fee.

 

The warrants are icing on the cake.

 

I disagree with this.  the warrants are the cake and WB basically said I dont care how much oxy pays for apc, he has no outs, so he is letting someone else (apc ceo) drive his investment (warrants).  I say warrants are the cake because while 8% is a great div yield, brk is not a credit spread hedge fund...at least it used not to be

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Guest cherzeca

They keep saying their investment process is proprietary, thats probably because if people knew it revolved around a one sentence thesis , with a little bit of experience and an acute sense of mental models ,people might be abhorred how little goes behind moving billons. Or perhaps they might be amazed how easy it is when you have a few simple principles and avoid big mistakes . It would show anyone can do this , on a certain level If they have good temperament , are patient and think of a few big things. you probably don't need to crunch any numbers much greater than 3 x 4 and so forth.

 

meshalum riklis used to say, I will let you (seller) set the price if you allow me to set the terms.  I see this in the recent oxy terms.  except things can get very sloppy if you dont maintain discipline all along the investment process.  while I agree that investing is simple but not easy (as per WB), I dont agree that getting your terms means you can be a patsy elsewhere in the deal process

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  • 2 weeks later...

Warren and Charlie know the Permian. Very well. This is about swapping some regulatory capital Tbills into something with a yeild and then getting the kicker - the warrant exercised eventually once they're right about OXY/Permian.

Charlie in particular knows it inside and out (I'm sure Warren does to...) - plus CM knows the engineering... and the pipeline changes coming online and OXY's unique ability to operate well in the basin.

If you listened well to the interview on CNBC on Monday AM - Becky tried to get Charlie to speak about the Permian and what the future looks like down there and he wouldn't bite. They were speaking about this very thing on the weekend.

He just didn't want to be on the record IMO.

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underwhelmed by the due diligence/analysis that WB seemed to exercise in connection with oxy commitment.  not to mention that CM was sleeping at the time.

 

The OXY financing commitment is essentially a credit decision  -  i.e

1) will they default?

2) if they default, how much will BRK recover? 

 

For the credit risk, BRK is receiving a 5.55% spread over UST 10yr (8% coupon vs 2.45% UST 10yr), as well as a $50mn financing commitment fee.

 

The warrants are icing on the cake.

 

I disagree with this.  the warrants are the cake and WB basically said I dont care how much oxy pays for apc, he has no outs, so he is letting someone else (apc ceo) drive his investment (warrants).  I say warrants are the cake because while 8% is a great div yield, brk is not a credit spread hedge fund...at least it used not to be

He looks for a minimum 10%pre tax. Taxes on prefered stocks are lower, so he might accept a little less.the warrants are the return above threshold.

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He looks for a minimum 10%pre tax. Taxes on prefered stocks are lower, so he might accept a little less.the warrants are the return above threshold.

 

FYI, here is what Buffett had to say about the preferreds in the past (in BRK AGM's)

 

1) on the US Airways convertible preferred

 

"By the terms of our preferred, in just a little over two years, we are due to be paid back our principal amount. It was really a loan in equity form, with a kick — possible kicker on the upside because of the conversion privilege on the preferred."

 

 

"we have the convertible preferreds of Champion, of US Airways, and of Salomon. And those are three industries — I don’t think we’ve ever owned an airline stock, common stock. I don’t think we’ve ever owned a paper company common stock.  And we’ve only had a very limited amount of investment in the investment banking businesses.

 

Those are industries that we don’t feel that we’ve got the same kind of long-term economic advantage that we have in something like a Coke or a Gillette. So those are not natural places for us to be common shareholders. And the issuance of that exchangeable debt reflected that view."

 

 

2) on the Goldman Sachs preferred

 

So every day that goes by that Goldman does not call our preferred is money in the bank. It’s been pointed out that our preferred is paying us $15 a second. So as we sit here, tick —(laughter) — tick, tick, tick, that’s $15 every tick. (Applause) I don’t want those ticks to go away. (Laughs)  I just love them. They go on at night when I sleep — (laughter) — on weekends.

 

And frankly, Goldman would love to get rid of that preferred. I mean, they only agreed to sell us that preferred because it was sort of at the height of the crisis.

 

 

Now, there were different risk profiles, obviously, in investing. And the truth is, I don’t know whether Harley-Davidson equity is worth $33 or $20 or $45. I just have no view on that.  You know, I kind of like a business where your customers tattoo your name on their chest or something. But — (laughter) — figuring out the economic value of that, you know. I’m not sure even going out and questioning those guys I’d learn much from them. (Laughter)

 

But I do know, or I thought I knew, and I think I was right, that, A) Harley-Davidson was not going out of business. And that, B) 15 percent was going to look pretty damned attractive.

 

And the truth is, we could probably sell those bonds, I don’t know, probably at 135 or something like that. So we could have a very substantial capital gain, a lot of income.

 

I knew enough to lend them money; I didn’t know enough to buy the equity. And that’s frequently the case. And, you know, we love buying equities, but we love buying the Goldman preferred at 10 percent.

 

Now, let’s say Goldman, instead of offering me the 10 percent preferred and warrants had said, “You can have a 12 percent preferred, non-callable,” I might have taken that one instead. I mean, the callable — so there’s a tradeoff involved in all these securities.

 

And obviously, if I think I can make very good money, as we did on Harley-Davidson, with a very simple decision, just a question of, “Are they going to go broke or not?” as opposed to a tougher decision, “Is the motorcycle market going to get diminished significantly? And, you know, are the margins going to get squeezed somewhat?” And all of that. I’ll go with a simple decision.

 

 

 

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