2019 Annual Letter Out

[DanielGMask]

After a few reads I actually thought the letter helpful in addressing, or at least, maybe being a little more transparent on the future. We can all do the run down on the financials, but I think thats a waste of time here in the same sense it was a waste of time getting too granular on Apple a year or so ago(and no one was more guilty of this than I). Berkshire will make lots of money regardless of where the economy or the world go. I think addressing the future gives clarity, and the buybacks, while minimal, are creeping up and setting a floor that should continue to shift supply/demand skews and thus risk/reward profile. Performance wise, who the heck knows but at worst this is kind of an index fund proxy with a world class active manager(s) overseeing it. If $226 was a price they were willing to pay, you can only imagine that turret starts firing more rapidly at 21X, 20X, and definitely 1XX. Again, stacking the deck in the favor of outperformance.

 

Regardless IMO this was somewhat better/more than I had hoped for, with the operating results, good enough. I'll probably add a bit to my position in the coming weeks if its still under 230.

 

Oh yea, and anyone who thinks this has any shot and going down 50% from here is crazy. No way this ever trades at 50% cash. If it even gets remotely close, I'll eat my foot. Mortgage my house. Open up, and take cash advances on Synchrony cards at 26% interest rates, etc. Because as its heading towards those decline levels, I take it they'll be taking action in ways that is substantially increasing the IV. Whereas many fund managers have underperformed and blamed it on lack of opportunity, Ive seen enough here(especially note the "any holder of $20m who wants to sell" quip), that the team here will hit that opportunity out of the park if they get it. They've been waiting waaayyyy tooo long not to.

 

Avg daily volume is 80M+ on the As and 800M on the Bs. Why would you call?

[John Hjorth]

After a few reads I actually thought the letter helpful in addressing, or at least, maybe being a little more transparent on the future. We can all do the run down on the financials, but I think thats a waste of time here in the same sense it was a waste of time getting too granular on Apple a year or so ago(and no one was more guilty of this than I). Berkshire will make lots of money regardless of where the economy or the world go. I think addressing the future gives clarity, and the buybacks, while minimal, are creeping up and setting a floor that should continue to shift supply/demand skews and thus risk/reward profile. Performance wise, who the heck knows but at worst this is kind of an index fund proxy with a world class active manager(s) overseeing it. If $226 was a price they were willing to pay, you can only imagine that turret starts firing more rapidly at 21X, 20X, and definitely 1XX. Again, stacking the deck in the favor of outperformance.

 

Regardless IMO this was somewhat better/more than I had hoped for, with the operating results, good enough. I'll probably add a bit to my position in the coming weeks if its still under 230.

 

Oh yea, and anyone who thinks this has any shot and going down 50% from here is crazy. No way this ever trades at 50% cash. If it even gets remotely close, I'll eat my foot. Mortgage my house. Open up, and take cash advances on Synchrony cards at 26% interest rates, etc. Because as its heading towards those decline levels, I take it they'll be taking action in ways that is substantially increasing the IV. Whereas many fund managers have underperformed and blamed it on lack of opportunity, Ive seen enough here(especially note the "any holder of $20m who wants to sell" quip), that the team here will hit that opportunity out of the park if they get it. They've been waiting waaayyyy tooo long not to.

 

Avg daily volume is 80M+ on the As and 800M on the Bs. Why would you call?

 

Daniel,

 

Likely nobody from CoBF would use that line to offload Berkshire shares in this actual environment [because they don't want to sell at all].

 

Posted by alwaysinvert in the "tender topic" :

 

... But maybe you can frame this as a form of "sneaky" tender offer which could potentially give extra large volumes from institutional owners if we ever see significant outflows from the market again. ...

 

Frankly & honestly, I consider this a brilliant move! ... Friendly help & support to the indexing community, when fear is raging!

[Guest longinvestor]

... But maybe you can frame this as a form of "sneaky" tender offer which could potentially give extra large volumes from institutional owners if we ever see significant outflows from the market again. ...

 

Frankly & honestly, I consider this a brilliant move! ... Friendly help & support to the indexing community, when fear is raging!

 

Think so too! How many fish in this 20 Million pond? I don’t believe that the index fund crowd is the one he’s after. It is the estate settlement variety, most likely. The brilliant part of this is the open endedness of the offer. This will rattle the price clearance mechanism of Mr. Market. Having the incremental buyer “out there”

 

 

[Guest longinvestor]

... But maybe you can frame this as a form of "sneaky" tender offer which could potentially give extra large volumes from institutional owners if we ever see significant outflows from the market again. ...

 

Frankly & honestly, I consider this a brilliant move! ... Friendly help & support to the indexing community, when fear is raging!

 

Think so too! How many fish in this 20 Million pond? I don’t believe that the index fund crowd is the one he’s after. It is the estate settlement variety, most likely. The brilliant part of this is the open endedness of the offer. This will rattle the price clearance mechanism of Mr. Market. Having the incremental buyer “out there”

 

In 2011 the Ueltschi estate of 1.2B settled this way. There was no 800 number published then. They’re casting a net now!

[John Hjorth]

Thanks for the exchange, longinvestor,

 

Your interpretation of this move may be even better, and more relevant, as of now.

[wisowis]

Why would there be a difference if a large holder sells in the open market and Berkshire buying from the open market, than Berkshire buying from a large holder directly? There shouldn't be.

 

And if Mr. Buffet truly cared about bringing down the share count through some large blocks, he'd start to cancel some of his own shares. But he doesn't because of how much he enjoys writing "I haven't sold a single share and don't plan to" every letter.

[alwaysinvert]

After a few reads I actually thought the letter helpful in addressing, or at least, maybe being a little more transparent on the future. We can all do the run down on the financials, but I think thats a waste of time here in the same sense it was a waste of time getting too granular on Apple a year or so ago(and no one was more guilty of this than I). Berkshire will make lots of money regardless of where the economy or the world go. I think addressing the future gives clarity, and the buybacks, while minimal, are creeping up and setting a floor that should continue to shift supply/demand skews and thus risk/reward profile. Performance wise, who the heck knows but at worst this is kind of an index fund proxy with a world class active manager(s) overseeing it. If $226 was a price they were willing to pay, you can only imagine that turret starts firing more rapidly at 21X, 20X, and definitely 1XX. Again, stacking the deck in the favor of outperformance.

 

Regardless IMO this was somewhat better/more than I had hoped for, with the operating results, good enough. I'll probably add a bit to my position in the coming weeks if its still under 230.

 

Oh yea, and anyone who thinks this has any shot and going down 50% from here is crazy. No way this ever trades at 50% cash. If it even gets remotely close, I'll eat my foot. Mortgage my house. Open up, and take cash advances on Synchrony cards at 26% interest rates, etc. Because as its heading towards those decline levels, I take it they'll be taking action in ways that is substantially increasing the IV. Whereas many fund managers have underperformed and blamed it on lack of opportunity, Ive seen enough here(especially note the "any holder of $20m who wants to sell" quip), that the team here will hit that opportunity out of the park if they get it. They've been waiting waaayyyy tooo long not to.

 

Avg daily volume is 80M+ on the As and 800M on the Bs. Why would you call?

 

You can sell faster, with less brokerage costs and no risk of pushing down the market price if you are in a hurry. Let's say Ackman gives up his activism, is hit by large outflows or finds another cheap opportunity that he wants to reallocate to because it offers higher returns. What will he do, drip feed stock into the market or call up Berkshire and get stock taken off his hands immediately? The rational answer is obvious.

[merkhet]

There are a number of benefits to block transactions.

[John Hjorth]

Why would there be a difference if a large holder sells in the open market and Berkshire buying from the open market, than Berkshire buying from a large holder directly? There shouldn't be.

 

And if Mr. Buffet truly cared about bringing down the share count through some large blocks, he'd start to cancel some of his own shares. But he doesn't because of how much he enjoys writing "I haven't sold a single share and don't plan to" every letter.

 

wisowis,

 

Mr. Buffett can't sell [the bulk of [<- ?]] his shares, because they are pledged to charity. [i haven't made the exact calculations.]

[alwaysinvert]

There are a number of benefits to block transactions.

 

Right. There is a reason why block transactions between market participants customarily, in normal markets, go for a discount to market. Buffett offers the open-ended opportunity to trade large blocks at market. It's a great deal for high-volume sellers.

[Guest longinvestor]

If you’ve , say, $100million and your cost basis is a small fraction of that, say in $xx thousands, selling in single blocks is the easiest way out. It’s reasonable to think that once the decision is made to sell, chiseling is not on their minds.

 

What this brings up is the eerie similarity to 1969-70 when the Buffett partnership was wound down.

[alwaysinvert]

I see that people extract from the letter that Buffett is implying that Berkshire is trading at 95 cents on the dollar. This is a severe case of bad reading comprehension. He is saying the *exact opposite* of that. By juxtaposing that passage, which is a hypothetical, with the fact that he has been buying at current levels, he's emphatically signalling that in his view the stock is trading below 95% of IV (and likely comfortably below).

[MarioP]

I see that people extract from the letter that Buffett is implying that Berkshire is trading at 95 cents on the dollar. This is a severe case of bad reading comprehension. He is saying the *exact opposite* of that. By juxtaposing that passage, which is a hypothetical, with the fact that he has been buying at current levels, he's emphatically signalling that in his view the stock is trading below 95% of IV (and likely comfortably below).

I came to say the exact  same thing. He bought back for 5 billions of stock and peoples tell it is nothing. If he had bought that amount in any other stock everybody would be analysing the move and tons of copycat would buy. Just look at Kroger where Berkshire put 1/10th of this amount.

 

And he is willing to buy a lot more at this price if it is not going to push the price higher (re: private transactions for at least 20M)

[Guest longinvestor]

I see that people extract from the letter that Buffett is implying that Berkshire is trading at 95 cents on the dollar. This is a severe case of bad reading comprehension. He is saying the *exact opposite* of that. By juxtaposing that passage, which is a hypothetical, with the fact that he has been buying at current levels, he's emphatically signalling that in his view the stock is trading below 95% of IV (and likely comfortably below).

I came to say the exact  same thing. He bought back for 5 billions of stock and peoples tell it is nothing. If he had bought that amount in any other stock everybody would be analysing the move and tons of copycat would buy. Just look at Kroger where Berkshire put 1/10th of this amount.

 

And he is willing to buy a lot more at this price if it is not going to push the price higher (re: private transactions for at least 20M)

+1 exactly what it is. I am predicting that Mr Market is going to drive itself crazy between SEC reporting periods over these “single transactions “ . Omaha has Mr. Market by the ba$@s.

[rb]

I don't think it's comfortably below. If it was comfortably below then they would be buying ooodles of stock but they're not. They weren't buying ooodles around the 200 level either.  So I'd say that they're probably not overly excited the discount.

[CorpRaider]

Makes sense to do less with all the insane PE and VC money sloshing around.  Time to be fearful.

[alwaysinvert]

I don't think it's comfortably below. If it was comfortably below then they would be buying ooodles of stock but they're not. They weren't buying ooodles around the 200 level either.  So I'd say that they're probably not overly excited the discount.

 

This would be a foolproof argument if they *could* easily buy oodles of stock over the market. But they can't. I'm not saying that he thinks it's at 50% of IV, but probably - at most - something like 80%. There is room to be somewhat more aggressive with bids over the market, but likely not as much as people seem to believe. If suddenly buyback volumes in a quarter were ratcheted up 100% from these levels, the stock would take off, making further buybacks that much harder. There is both a volume problem and a serious front-running issue. Also, as Munger expresed recently, other opportunities are dwindling while cash is growing.

 

He has every incentive to undersell the fact that they were doing buybacks all the way up until Dec 31 and that's what the overall effect of the letter was, while still, oh-so-galantly, offering to relieve people of large blocks of stock. Just like he last did in the 1999 letter, mind you:

 

Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to

delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find

that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we

will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call

Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the

NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not

engage in transactions involving fewer than 10 shares of A or 50 shares of B.

Please be clear about one point: We will never make purchases with the intention of stemming a decline in

Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the

Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our

stock’s intrinsic value.

[nickenumbers]

If shareholders DO respond to the 1-800 number and sell $10M, or $20M or $50M..  How will we, the normal Joe/Jill, investing public find out about it?

 

• Will it be reported at the end of a trading day as a block sale?
   
  
• Or will we have to wait until the end of a quarter and look in the 10-Q, or 10-K?
   
  

 

Thanks.

[Viking]

I judge Buffett by what he says but mostly by what he does. BRK has looked dirt cheap for 18 months. Berkshire has a growing mountain of cash. Yes, he has bought back 1% of shares outstanding. But that is simply not a significant number.

 

And I find it highly unlikely that BRK buying back 1.5 or 2% of shares outstanding over the course of 12 months is going to materially move the share price. Are there not a few large forced sellers out there like the Gates foundation?

 

Normally the simplest explanation is the correct one. Either Buffett does not think the shares are cheap at current levels. Or he simply has no interest in buying back Berkshire stock.

 

With all the time he has spent over the years writing and talking about what it would take for Berkshire to buy back stock the fact there has been pretty much zero repurchases tells investors all they need to know (on this issue). With regards to stock repurchases it sounds like ‘big hat no cattle’.

 

When i SEE meaningful buyback i will change my mind :-) Having said all that, i do like the company and i own shares :-)

[MarioP]

 

When i SEE meaningful buyback i will change my mind :-) Having said all that, i do like the company and i own shares :-)

 

What is a meaningful buyback for you? How many shares and up to what price?

[thepupil]

I don't think we need to see some dramatic tender offer or anything like that for the buyback to be meaningful. of course it would be nice.

 

the S&P 500 total shareholder yield is 4-5%, 1.8% via divvies and 3.1% from buybacks. https://www.yardeni.com/pub/buybackdiv.pdf

 

While there will be some variability, at about $2.2 billion / quarter (1.6% annualized) and rising, Berkshire has started to close the gap with S&P 500 with respect to capital return.

 

The buyback helps slow the growth of excess capital (or eventually reverses it). A 2% buyback yield (hopefully more over time, unless there are better opps) removes the straw man of "what if they just build cash forever".

 

Cash built by $16 billion over 2019, but it stopped building in 4Q as buybacks went up. berkshire's a slow moving beast, but the trend is your friend.

 

one man's "pretty much zero repurchases" is another man's "1.6% annualized buyback yield = 1/2 the S&P 500, perhaps more over time, particularly if stock goes down"

 

media reported cash pile:

4Q2017: $116 billion

4Q2018: $112 billion

3Q2019: $128 billion

4Q2019: $128 billion

 

 

 

 

 

[rb]

I don't think it's comfortably below. If it was comfortably below then they would be buying ooodles of stock but they're not. They weren't buying ooodles around the 200 level either.  So I'd say that they're probably not overly excited the discount.

 

This would be a foolproof argument if they *could* easily buy oodles of stock over the market. But they can't. I'm not saying that he thinks it's at 50% of IV, but probably - at most - something like 80%. There is room to be somewhat more aggressive with bids over the market, but likely not as much as people seem to believe. If suddenly buyback volumes in a quarter were ratcheted up 100% from these levels, the stock would take off, making further buybacks that much harder. There is both a volume problem and a serious front-running issue. Also, as Munger expresed recently, other opportunities are dwindling while cash is growing.

 

He has every incentive to undersell the fact that they were doing buybacks all the way up until Dec 31 and that's what the overall effect of the letter was, while still, oh-so-galantly, offering to relieve people of large blocks of stock. Just like he last did in the 1999 letter, mind you:

 

Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to

delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find

that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we

will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call

Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the

NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not

engage in transactions involving fewer than 10 shares of A or 50 shares of B.

Please be clear about one point: We will never make purchases with the intention of stemming a decline in

Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the

Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our

stock’s intrinsic value.

I'm sorry, but I'm with Viking on this one.

 

I don't buy the it's hard to buy stock argument. You have to keep in mind that this is Buffett we're talking about. He may be a geezer but he's probably one of the savviest stock traders that ever walked the face of the Earth. He didn't have a problem buying huge amounts of stock in ANY company if it meant making money. And we're not talking here just large companies like Coke and Apple. We're talking obscure shit like Sanford Map and other stuff. The man know how to buy stock if he wants to. But all of a sudden it's hard for him to buy stock in the 5th largest corporation in America? Nah man.

 

If he's not buying huge amounts of stock is because he doesn't want to, not because he can't or doesn't know how.

[Guest cherzeca]

how many prank buyback calls do you think that guy has received? unless that telephone number was to the Omaha Pizzahut, in which case kudos to warren.

[jschembs]

Like everyone here, I grew up on Buffett and Munger writings. That being said, at what point does one need to be skeptical of his defense of the portfolio holdings? KO, WFC, and AXP seem like obvious examples where you look at their diminishing competitive position and/or long-term growth prospects relative to the unrecognized capital gains and question the narrative.

[Jurgis]

Like everyone here, I grew up on Buffett and Munger writings. That being said, at what point does one need to be skeptical of his defense of the portfolio holdings? KO, WFC, and AXP seem like obvious examples where you look at their diminishing competitive position and/or long-term growth prospects relative to the unrecognized capital gains and question the narrative.

 

Realizing the cap gains sucks though and is a huge hit to return. As I've said in other threads, Buffett's saying to sell never makes a lot of sense in taxable accounts. Paying cap gains taxes makes it just so much harder to outperform an index.