Berkshire closed down to near book value

[Spekulatius]

Mephistophelese, Sam Zell said the current government bailout while necessary only likely buys the economy 60-90 days. If the economy is still in the toilet in a couple of months the government will not be able to do a second bailout. To your point, Buffett will be ready, able and willing :-)

 

I am wondering if we are not seeing Berkshire being re-valued as a true conglomerate. They are usually valued at a discount to BV.

 

In the past Buffett has talked about 1.2xBV as an important level for buybacks. His recent commentary almost sounded like he wasn’t interested in doing buybacks regardless of the price. Perhaps he spooked some investors.

 

The perception was Berkshire, largely due to its cash hoard, would provide investors some downside protection during the current downturn. That clearly has not happened with BRK down 25% and the S&P 500 only down 13% (from Jan 2 to now). Interesting...

 

Yes, I think they the gist of it. BRK is valued like a conglomerate at a discount to the sum of parts. Can’t be taken out or broken up either. Buffet definitely spooked some investors at the somewhat ghastly annual meeting.

 

[mattee2264]

Yup I think it is the conglomerate discount and perhaps also the "key men" risk and the unwillingness to court Wall Street resulting in a lack of analyst coverage. And yeah taking losses on the airlines and refusing to buy the dips or buyback shares isn't helping at the moment either. Not to mention insurance is a large part of the business and insurers are out of favour because of lower interest rates and policy losses. If anything it is a wonder that Berkshire is not trading even more cheaply and I also think there is the prospect in the future of a true conglomerate discount.

 

I am not familiar with US politics but I think generally governments can do whatever they like especially when they can justify their actions by reference to the virus. And with QEI they have the Fed as a willing buyer for any additional debt they issue.

[scorpioncapital]

I'm just worried he isn't expanding his circle of competence. Nothing wrong to be focused but when do you decide it's time to move on from horses to cars? Or an entire new field with better future? Sure the old businesses can pump out profits for decades but if growth is slowing or negative, it can trade like IBM or a value trap. There are a few cutting edge businesses inside Berkshire (or investment portfolio), but not many. Inaction is also problematic as it has the price of deferring future growth to the next Berkshire CEO at the expense of current shareholders. Underperformance has occurred for perhaps 10-15 years. That seems somewhat long period when one could have been riding the SP500 horse.

 

[longterminvestor]

Look at Microsoft after Ballmer left or Apple post S. Jobs era.  Monster returns.  Different horses, but it can be done.  I believe there are A TON OF LEVERS for Greg Able to pull when Mr. Buffett is no longer with firm.  You've got use of data from phone app on GEICO to better underwrite policies (Progressive has been using for years), precision rail-roading with BNSF, those are 2 HUGE softballs for Greg Able to use and deliver positive earnings growth ORGANICALLY in already very profitable businesses. 

 

Optionality of cash has drag on returns however if proper allocated, possibilities are very good for compounding returns.  Tedd/Todd have shown they have larger circle of competence than Mr. Buffett. 

 

I understand and think about S&P, 10 year comparison is not pretty - S&P is outperforms.  I just like the business - so for me its easy. 

 

[scorpioncapital]

Sure...although ideally I would like the bright future to happen under Buffett too. He's 90. He could be around another 5? years. I really don't want to wait another 5 years of just being a trustee added onto 10 years of somewhat tracking SP500. I'm actually happy to hold Berkshire with slight underperformance to SP500 because I own other securities that complement the circles of competence he's deficient in. However, I'm not sure what the underperformance to SP500 is, but any meaningful divergence , say over 2-3%/yr could be huge over time.

 

 

[buffetteer1984]

Both Aapl and msft started to really outperform when they increased their capital allocation to share buybacks and dividends.  That alone brought in a new hoard of investors that pushed up the multiple.  I feel Berkshire is generally lagging the index as of late mainly due to disappointment that they didn't deploy any capital both into buybacks and equities.  It probably held up better pre covid due to belief that cash hoard protected on the downside but would be accretive on the upside.  Obviously this could all change if Warren does a deal at some point but I'd be more happy if he would just send more capital to ted and todd or hire a third guy to run another 15-20bil.

 

Look at Microsoft after Ballmer left or Apple post S. Jobs era.  Monster returns.  Different horses, but it can be done.  I believe there are A TON OF LEVERS for Greg Able to pull when Mr. Buffett is no longer with firm.  You've got use of data from phone app on GEICO to better underwrite policies (Progressive has been using for years), precision rail-roading with BNSF, those are 2 HUGE softballs for Greg Able to use and deliver positive earnings growth ORGANICALLY in already very profitable businesses. 

 

Optionality of cash has drag on returns however if proper allocated, possibilities are very good for compounding returns.  Tedd/Todd have shown they have larger circle of competence than Mr. Buffett. 

 

I understand and think about S&P, 10 year comparison is not pretty - S&P is outperforms.  I just like the business - so for me its easy. 

 

[Bryggen]

Quick question from a newbie: what is the premium paid for having Buffett as a CEO? Another way to ask the same thing is how much could we expect the share price to go down the day WEB steps down? That is if there will be an impact, but I suspect it would.

 

Curious to hear you on that.

 

Thanks!

[rb]

Both Aapl and msft started to really outperform when they increased their capital allocation to share buybacks and dividends.  That alone brought in a new hoard of investors that pushed up the multiple.  I feel Berkshire is generally lagging the index as of late mainly due to disappointment that they didn't deploy any capital both into buybacks and equities.  It probably held up better pre covid due to belief that cash hoard protected on the downside but would be accretive on the upside.  Obviously this could all change if Warren does a deal at some point but I'd be more happy if he would just send more capital to ted and todd or hire a third guy to run another 15-20bil.

 

Look at Microsoft after Ballmer left or Apple post S. Jobs era.  Monster returns.  Different horses, but it can be done.  I believe there are A TON OF LEVERS for Greg Able to pull when Mr. Buffett is no longer with firm.  You've got use of data from phone app on GEICO to better underwrite policies (Progressive has been using for years), precision rail-roading with BNSF, those are 2 HUGE softballs for Greg Able to use and deliver positive earnings growth ORGANICALLY in already very profitable businesses. 

 

Optionality of cash has drag on returns however if proper allocated, possibilities are very good for compounding returns.  Tedd/Todd have shown they have larger circle of competence than Mr. Buffett. 

 

I understand and think about S&P, 10 year comparison is not pretty - S&P is outperforms.  I just like the business - so for me its easy. 

 

BS! MSFT had a large and growing dividend and doing plenty of buybacks when the stock was in the dumps. I know that because I was in the dumpster picking up stock. Kept staying in the dumps for a few years after that.

[rb]

Quick question from a newbie: what is the premium paid for having Buffett as a CEO? Another way to ask the same thing is how much could we expect the share price to go down the day WEB steps down? That is if there will be an impact, but I suspect it would.

 

Curious to hear you on that.

 

Thanks!

It's probably around minus 15% or 20%.

[Mephistopheles]

Call me crazy but I think Buffett premium is non-existant at this point given all the impatience over him not spending that cash. The stock may even go up once he steps down because the new managers may be perceived as more willing and energetic towards spending that money on deals or buybacks or both.

[jgyetzer]

It's probably around minus 15% or 20%.

 

The Buffett discount

 

[bizaro86]

I think there is probably still a Buffett premium, but it's on top of the conglomerate discount. If you dont have superior and inexpensive capital allocation Berkshire doesnt really make sense, and would absolutely trade at a big conglomerate discount.

[buffetteer1984]

I don't know when you bought it but it certainly took off after valueact got on board and advocated more for shareholders. MSFt never looked back after that.

 

https://www.reuters.com/article/us-microsoft-buyback/microsoft-raises-payout-22-percent-ahead-of-investor-meet-idUSBRE98G0N120130917

 

Both Aapl and msft started to really outperform when they increased their capital allocation to share buybacks and dividends.  That alone brought in a new hoard of investors that pushed up the multiple.  I feel Berkshire is generally lagging the index as of late mainly due to disappointment that they didn't deploy any capital both into buybacks and equities.  It probably held up better pre covid due to belief that cash hoard protected on the downside but would be accretive on the upside.  Obviously this could all change if Warren does a deal at some point but I'd be more happy if he would just send more capital to ted and todd or hire a third guy to run another 15-20bil.

 

Look at Microsoft after Ballmer left or Apple post S. Jobs era.  Monster returns.  Different horses, but it can be done.  I believe there are A TON OF LEVERS for Greg Able to pull when Mr. Buffett is no longer with firm.  You've got use of data from phone app on GEICO to better underwrite policies (Progressive has been using for years), precision rail-roading with BNSF, those are 2 HUGE softballs for Greg Able to use and deliver positive earnings growth ORGANICALLY in already very profitable businesses. 

 

Optionality of cash has drag on returns however if proper allocated, possibilities are very good for compounding returns.  Tedd/Todd have shown they have larger circle of competence than Mr. Buffett. 

 

I understand and think about S&P, 10 year comparison is not pretty - S&P is outperforms.  I just like the business - so for me its easy. 

 

BS! MSFT had a large and growing dividend and doing plenty of buybacks when the stock was in the dumps. I know that because I was in the dumpster picking up stock. Kept staying in the dumps for a few years after that.

[aws]

Apple keeps on trucking, and now Berkshire's stake is worth 80b at the current market value.  That's about 19% of Berkshire's market cap.  It's not quite a big as weighting as coke was back in the 90s, but it's getting there.

[rb]

I don't know when you bought it but it certainly took off after valueact got on board and advocated more for shareholders. MSFt never looked back after that.

 

https://www.reuters.com/article/us-microsoft-buyback/microsoft-raises-payout-22-percent-ahead-of-investor-meet-idUSBRE98G0N120130917

 

Both Aapl and msft started to really outperform when they increased their capital allocation to share buybacks and dividends.  That alone brought in a new hoard of investors that pushed up the multiple.  I feel Berkshire is generally lagging the index as of late mainly due to disappointment that they didn't deploy any capital both into buybacks and equities.  It probably held up better pre covid due to belief that cash hoard protected on the downside but would be accretive on the upside.  Obviously this could all change if Warren does a deal at some point but I'd be more happy if he would just send more capital to ted and todd or hire a third guy to run another 15-20bil.

 

Look at Microsoft after Ballmer left or Apple post S. Jobs era.  Monster returns.  Different horses, but it can be done.  I believe there are A TON OF LEVERS for Greg Able to pull when Mr. Buffett is no longer with firm.  You've got use of data from phone app on GEICO to better underwrite policies (Progressive has been using for years), precision rail-roading with BNSF, those are 2 HUGE softballs for Greg Able to use and deliver positive earnings growth ORGANICALLY in already very profitable businesses. 

 

Optionality of cash has drag on returns however if proper allocated, possibilities are very good for compounding returns.  Tedd/Todd have shown they have larger circle of competence than Mr. Buffett. 

 

I understand and think about S&P, 10 year comparison is not pretty - S&P is outperforms.  I just like the business - so for me its easy. 

 

BS! MSFT had a large and growing dividend and doing plenty of buybacks when the stock was in the dumps. I know that because I was in the dumpster picking up stock. Kept staying in the dumps for a few years after that.

About 2 years before that.

[ValueMaven]

Bought a decent chunk below $168 this morning !!  Trading below 1.1BV by my estimates right now ...  cheers!

[Peter_Falk]

Apple keeps on trucking, and now Berkshire's stake is worth 80b at the current market value.  That's about 19% of Berkshire's market cap.  It's not quite a big as weighting as coke was back in the 90s, but it's getting there.

 

So buying 100 of BRK is buying 81 pears and 19 Apples. Wondering who will buy $1500 iPhones this fall? Cola, well, different story in a depression..

[fareastwarriors]

Apple keeps on trucking, and now Berkshire's stake is worth 80b at the current market value.  That's about 19% of Berkshire's market cap.  It's not quite a big as weighting as coke was back in the 90s, but it's getting there.

 

So buying 100 of BRK is buying 81 pears and 19 Apples. Wondering who will buy $1500 iPhones this fall? Cola, well, different story in a depression..

 

What

 

[aws]

By tomorrow morning I'll own another 100 shares when the $170 put I sold gets assigned, which will result in my cheapest shares since 2016.  I also have more short puts out there for future months, from $165 down to $110 so maybe I'll get them much cheaper still if this price action keeps up. 

[aws]

Today's low close prompted me to ask a simple question I sought to answer.  When was the most recent day in the past where if you had the choice of buying either the S&P 500 or Berkshire and holding until today that you would have been better off with Berkshire?  That is, which would have had the better returns up to today, for each and every day in the past 20 or so years?  So I quickly pulled the daily close for each Berkshire and the S&P 500 total return index from Yahoo and calculated the returns for each to see which days were better for which.

 

Out of the past 4636 trading days since 12/13/2001 (the day before the S&P generally started taking over), the returns to date have been better for Berkshire on just 10.  So 4626 times you'd have been better off buying the S&P, roughly 99.8% of the time.  The most recent day where Berkshire was better was 4/20/2006, and if you held since then you'd have 1.3% of outperformance to show for it.

 

Now while this isn't telling you anything you don't already know about relative performance, I did think that was a striking figure that I thought I'd share.

[mattee2264]

 

The way I think about Berkshire is that it will probably earn no more than its cost of capital over the cycle. So say a 10% ROE. So if you buy around book value you can expect 10% returns. I think the main risk is that a conglomerate discount could emerge although I would expect aggressive share repurchases should temper that risk. I also think that if a conglomerate discount did emerge then steps would be taken to spin off divisions to unlock value.

So I think that you'd probably end up with 7-10% shareholder returns with a reasonable degree of certainty which is quite attractive.

Another attractive feature is that rising interest rates will hurt returns a lot less than they would for the S&P 500.

 

S&P 500 returns are a lot less certain.

 

You could get double digit returns if a) there is some multiple expansion because of low interest rates, confidence in growth prospects and less perceived risk because of supportive monetary and fiscal policy b) the winner takes all scenario in tech continues to play out for some time allowing S&P 500 earnings to grow appreciably faster than GDP c) The economy recovers pretty well and gets back to a Goldilocks scenario of non-inflationary growth

 

You could get zero returns or even negative returns if a) there is multiple contraction because of rising interest rates, stagflation etc b) tech companies run into difficulties as their markets become saturated and they start competing with each other or start to get disrupted by new upstarts c) The economy does badly and you either get deflation or stagflation and it becomes apparent monetary and fiscal policy is either powerless or painful

 

Or of course something in the middle.

 

So I can see if you are investing for capital preservation or are a conservative investor happy with moderate returns Berkshire remains an attractive vehicle.

[rb]

Today's low close prompted me to ask a simple question I sought to answer.  When was the most recent day in the past where if you had the choice of buying either the S&P 500 or Berkshire and holding until today that you would have been better off with Berkshire?  That is, which would have had the better returns up to today, for each and every day in the past 20 or so years?  So I quickly pulled the daily close for each Berkshire and the S&P 500 total return index from Yahoo and calculated the returns for each to see which days were better for which.

 

Out of the past 4636 trading days since 12/13/2001 (the day before the S&P generally started taking over), the returns to date have been better for Berkshire on just 10.  So 4626 times you'd have been better off buying the S&P, roughly 99.8% of the time.  The most recent day where Berkshire was better was 4/20/2006, and if you held since then you'd have 1.3% of outperformance to show for it.

 

Now while this isn't telling you anything you don't already know about relative performance, I did think that was a striking figure that I thought I'd share.

I think that's a rather simplistic look at the situation. It's pretty easy to dump some things in excel, do some correlation and the say "Aha, see!". I like to look at what I actually own. So let's take a look at that. I went a bit further back to 2000 because 2001 was a messed up year and looking at 2000 to 2019 is actually peak to peak so it works out nicely.

 

In 2000:

S&P500=1336

S&P500 EPS=74.17

 

BRK pre tax ex insurance earnings =871M

BRK equity position=37.6B

BRK cash=bonds=34.2B

BRK total financial position=71.8B

 

In 2019

S&P500=3278

S&P500 EPS=140.09

 

BRK net ex insurance earnings =17,700M

BRK equity position=248B

BRK cash=bonds=143B

BRK total financial position=491B

 

So S&P500 EPS CAGR=3.4%, BRK operating earnings CAGR=17.2%. 2019 earnings are post tax and 2000 are pretax I just didn't adjust cause it's Saturday and I'm lazy. But it doesn't actually make much of a difference

 

S&P500 CAGR=4.8%. I'm not gonna go back and check for the divvies for all the years (again lazy) so I'll throw in a 3% for that and call S&P500 CAGR=7.8%. BRK financial position CAGR=10.6%

 

So basically since 2000 BRK wins hands down. Total smoke show.

 

Let's look though from 2010 to now - the "lost decade".

 

In 2010:

S&P500=1282

S&P500 EPS=91.09

 

BRK pre tax ex insurance earnings =6,100M

BRK equity position=61.5B

BRK cash=bonds=87.8B

BRK total financial position=149.3B

 

Here the S&P EPS CAGR is higher at 4.9%. BRK net operating earnings CAGR 12.6%.

 

S&P 500 CAGR=11%. Again throw in 3% for divvies and call S&P CAGR 14%. BRK financial position CAGR=14.1%.

 

While this is not the absolute annihilation of the S&P that happened over the past 20 years and I would still prefer to own BRK over the S&P based on the numbers. Then I really prefer to own BRK once I know how those numbers were made - rail, utilities, huge cash in the bank, low leverage, etc. The S&P over performance over BRK has not been due to underlying performance. It has been due to multiple expansion. Picking the S&P over BRK is akin to buying a stock because it went up.

 

BRK is basically this city on top of a hill with huge walls, surrounded by rows of moats filled with crocodiles and sharks and with dragons flying around. The S&P is the slum down below. If the economic performance is the same you should pick the castle. Sure the slum can be more fun than the stodgy castle. But when the Mongol hoards come around being in the castle is pretty sweet. And those damn Mongols have a tendency to come with some regularity to ruin the party.

[meiroy]

 

BRK is basically this city on top of a hill surrounded by rows on moats filled with crocodiles and sharks and with dragons flying around. The S&P is the slum down below. If the economic performance is the same you should pick the castle. Sure the slum can be more fun than the stodgy castle. But when the Mongol hoards come around being in the castle is pretty sweet. And those damn Mongols have a tendency to come with some regularity to ruin the party.

 

Nicely put. What if there's already a trojan horse inside the city walls?

[rb]

The dragons will take care of it.

[Jurgis]

BRK is basically this city on top of a hill with huge walls, surrounded by rows of moats filled with crocodiles and sharks and with dragons flying around. The S&P is the slum down below. If the economic performance is the same you should pick the castle. Sure the slum can be more fun than the stodgy castle. But when the Mongol hoards come around being in the castle is pretty sweet. And those damn Mongols have a tendency to come with some regularity to ruin the party.

 

BRK is this city on a top of a crumbling hill with dilapidated walls, surrounded by half empty moats with couple of zebra fish floating in them.

 

FAAMG are shining metropolis in the cloud(s) with glass and steel skyscrapers, flying cars zooming around, protected by laser beams, firewalls, and army of Agent Smiths.

 

SP500 actually includes the metropolis. Includes some slums too.

 

Your pick.