Berkshire 2020 Q1 Results

[Spekulatius]

My takeaway in terms of value 1. buffett believes the s&p index is likely a better investment than berkshire moving forward

 

I think he pretty much said as much, either this meeting or in the interview he did prior.

 

I feel like he is overly worried about this virus, possibly due to his old age.

 

I also agree here, he did seem exceedingly worried. But he made it clear that he knows just as much about this virus as we all do - so perhaps he is more worried about the economic fallout vs. the virus itself?

 

But that view doesn't make total sense either in the context of buffetteer's point #2: "2. Berkshire at 185 is now equally as valuable as at 220 a few months back therefore impairment of actual long term value of 15% more or less so far from corona.

"

 

I feel like the value of a lot off business has been impaired and while prices are a bit lower, they are not cheaper. He also mentions a lot of uncertainty and a wide range of outcomes. So with a margin of safety concept, the threshold to actively buy something is higher if you can’t really estimate the value of what you buy.

 

I really enjoyed this online only shareholder meeting more so than all the others before. The question were much better on point and there was much less cheerleading and more substance.

[clutch]

I really enjoyed this online only shareholder meeting more so than all the others before. The question were much better on point and there was much less cheerleading and more substance.

 

I do miss Munger and his no BS jokes, though.

[Viking]

One key takeaway for me is that Buffett feels certain industries are uninvestable. He discussed airlines. (He sounded very surprised - and almost a little guilty - when saying how quickly they were able to sell all of their airline positions in April.) But his logic likely also applies to hotels, sit down restaurants, cruise ships, travel, events (sports, music etc). These businesses are all going to need large amounts of cash to stay alive, some have high fixed costs and will likely be revenue impaired for some time; so their models are completely broken. Why would a rational person put any new money into these businesses given the high probability of loss of capital. The future path of the virus is still unknown. This is a very large swath of the US economy which is consumer and service focussed.

 

This then perhaps feeds his current very somber mood and likely explains his building of cash. That Buffett used the Great Depression as a tool to help people understand recent decisions/current thinking is interesting to say the least. One book he mentioned worth reading was Galbraith’s the Great Crash 1929.

 

Buffett definitely is in no hurry to invest Berkshire’s cash.

 

PS: it was nice to have Greg Abel answer questions. Didn’t disappoint or wow me with his answers.

[spartansaver]

One key takeaway for me is that Buffett feels certain industries are uninvestable. He discussed airlines. (He sounded very surprised - and almost a little guilty - when saying how quickly they were able to sell all of their airline positions in April.) But his logic likely also applies to hotels, sit down restaurants, cruise ships, travel, events (sports, music etc). These businesses are all going to need large amounts of cash to stay alive, some have high fixed costs and will likely be revenue impaired for some time; so their models are completely broken. Why would a rational person put any new money into these businesses given the high probability of loss of capital. The future path of the virus is still unknown. This is a very large swath of the US economy which is consumer and service focussed.

 

This then perhaps feeds his current very somber mood and likely explains his building of cash. That Buffett used the Great Depression as a tool to help people understand recent decisions/current thinking is interesting to say the least. One book he mentioned worth reading was Galbraith’s the Great Crash 1929.

 

I thought this part was amazing, he didn't want to give away too much, but seemed extremely surprised at how easy it was to exit at the prevailing prices.

 

The depression discussion became very real. This was one of the most somber meetings if not the most somber I've watched, but it was also for me the most illuminating. I don't think I've given enough weight a depression scenario being a very legitimate possibility, but when WEB seems to spell it out, I'm all ears.

[PhatKing]

I too enjoyed this meeting since we got to hear from WEB for 4.5 hours, basically continuously. Also I liked Greg Abel and feel that he will be a good CEO - not that I doubted WEB's ability to choose an excellent successor to the Berkshire legacy. But it was good introduction to Greg Abel.

 

Based in my observation of him for 26 years, I thought he was quite cautious in his general outlook till we have a firmer handle on the virus  - unusually so -  inspite of his generally optimistic nature. I think Warren is extremely rational, and so do not believe that his "fear" of the virus is due to his age or anything like that. I think he fears that the range (or dispersion) of possible outcomes for the economy, due to the virus, is too large and he is unable to handicap a central outcome. He did mention that he cannot tell (and nobody can), how the American public will react if the virus were to recur in the fall, or how long the virus would be around. A lesson from the story of the great depression that he narrated, showed that the trauma of the depression did not allow the DJIA to regain its old highs for 22+ years. The great depression was around for about 4 years (1929-1933), and caused a severe trauma in the psyche of the populace. In our present situation, there do exist scenarios wherein the virus and its economic effects could last multiple years. So in light of so many unknowns I think it is better to have plenty of cash around, both for safety, and, for the optionality that cash confers should "distressed like" opportunities arise in the fall.   

[Guest longinvestor]

They have zippered the wallet and waiting for Uncle Sam's largesse to end and the begging bowls to come out.

 

Money is made not by selling or buying but waiting - Munger. The waiting began on March 6.

 

 

[LC]

Money is made not be selling or buying but waiting - Munger. The waiting began on March 6.

 

Of which year? 2017?  ;D

[fareastwarriors]

Who's a buyer of BRK shares on Monday?

[Gregmal]

Who's a buyer of BRK shares on Monday?

 

Probably no one.

 

His tone was pretty much what I expected going heavily short into the weekend. Furtures should be down nicely given the markets knee jerk reliance on short term narratives of late.

 

But on a larger scale, I was disappointed. Most investors, earn our future dollar because we recognize past mistakes and adapt. Buffett to me, seemed like a bewildered old man. I know its heresy to most, but whatever. He has broken his own rules over the past decade... only to end up costing shareholders because of such lack of discipline. AAPL worked, but IBM was bad, and missing the FANG stuff is a huge opportunity cost as well. He's admitted as much but then when the time came to buy into these business he decided to stand pat with Wells Fargo and Coke...yea, so much for reputations and decency!

 

The tune from value investors for a while has been reliance on old cliches about how "this time isn't different". The truth is that no, this time isn't different. Because it started changing a long time ago.

 

I think its reasonable to say Berkshire is impaired. They own businesses that got taken to the mat and the referee is currently counting and at 5 or 6...Insurance may very well be a bright spot. But banks, airplanes, and all the old economy stuff is on the ropes. The best selling Coke products during the pandemic are the Dasani water...yea, if you haven't got Covid yet, go drink some liquified sugar so you develop diabetes, and die when you get the virus!

 

I admire the man greatly. But I also think its time to call a spade a spade. He has failed to get with the times and his investments since the GFC have been largely dismal. I have tried speculating on what is the reason, but at the end of the day it doesnt matter. You dont need to be a buyer of Amazon to see e-commerce booming, nor do you need to buy Tesla to see old auto is done. But you cant sit there and acknowledge these trends and admit your mistakes while continuing to invest in airlines, traditional auto, and bricks and mortar business. Nor can you be the worlds largest owner of banks while previously ackowledging the very real possibility of continuing ZIRP.

 

Are we predicting deflation? Because theres a way to make that bet. Same for inflation. But with Buffett, he's continually, year after year, made the excuse for doing nothing. And thats not a reality I think most have admitted is costly. I often hear people say "follow what he does, not what he says". Well, I also hear people say "the markets are where they were in 2019". Well, Buffett and BRK are were they have been for a while, much further back than 2019... nothing has changed. There is just a convenient story to tell in 2020.

[steph]

Who's a buyer of BRK shares on Monday?

 

Probably no one.

 

His tone was pretty much what I expected going heavily short into the weekend. Furtures should be down nicely given the markets knee jerk reliance on short term narratives of late.

 

But on a larger scale, I was disappointed. Most investors, earn our future dollar because we recognize past mistakes and adapt. Buffett to me, seemed like a bewildered old man. I know its heresy to most, but whatever. He has broken his own rules over the past decade... only to end up costing shareholders because of such lack of discipline. AAPL worked, but IBM was bad, and missing the FANG stuff is a huge opportunity cost as well. He's admitted as much but then when the time came to buy into these business he decided to stand pat with Wells Fargo and Coke...yea, so much for reputations and decency!

 

The tune from value investors for a while has been reliance on old cliches about how "this time isn't different". The truth is that no, this time isn't different. Because it started changing a long time ago.

 

I think its reasonable to say Berkshire is impaired. They own businesses that got taken to the mat and the referee is currently counting and at 5 or 6...Insurance may very well be a bright spot. But banks, airplanes, and all the old economy stuff is on the ropes. The best selling Coke products during the pandemic are the Dasani water...yea, if you haven't got Covid yet, go drink some liquified sugar so you develop diabetes, and die when you get the virus!

 

I admire the man greatly. But I also think its time to call a spade a spade. He has failed to get with the times and his investments since the GFC have been largely dismal. I have tried speculating on what is the reason, but at the end of the day it doesnt matter. You dont need to be a buyer of Amazon to see e-commerce booming, nor do you need to buy Tesla to see old auto is done. But you cant sit there and acknowledge these trends and admit your mistakes while continuing to invest in airlines, traditional auto, and bricks and mortar business. Nor can you be the worlds largest owner of banks while previously ackowledging the very real possibility of continuing ZIRP.

 

Are we predicting deflation? Because theres a way to make that bet. Same for inflation. But with Buffett, he's continually, year after year, made the excuse for doing nothing. And thats not a reality I think most have admitted is costly. I often hear people say "follow what he does, not what he says". Well, I also hear people say "the markets are where they were in 2019". Well, Buffett and BRK are were they have been for a while, much further back than 2019... nothing has changed. There is just a convenient story to tell in 2020.

 

I believe this is too hard on Berkshire.  When looking at a track record it is important to take the entire cycle of bull and bear market.  I like to look at track records since 2006 or 2007, because only looking since 2010 favours the 'high quality' or 'high tech' investors'.  Berkshire since 2006 or even 2007 is bang in line with the s&p 500 even though I think that Berkshire is valuated cheaper today than back then and the S&P is valuated more expensive than back then.  So on an underlying basis Berkshire has probably been better.  And more important, the S&P is in line with Buffett of course with dividends on which one had to pay taxes.  So, Berkshire was better for shareholders ona net basis.  Not bad for an old man and for such a large amount to manage.

Not being more in tech is a mistake.  But the amount he put in Apple makes up for all this. It is probably one of the best investments made ever.  Having the guts is quite impressive.

 

[Viking]

My read is Berkshire is being run for the very long term shareholders many of which are very wealthy (hold lots of shares). Preservation of capital is much more important than return on capital. Both Munger and Buffett both have spoken about the obligation they feel to these people and also their estates. I am pretty sure both have also used Trustee to describe that responsibility.

 

So having an exceptionally high cash balance is very rational in the current environment.

 

Berkshire is a very different company from 40 years ago and Warren also is also much older. I hold Berkshire as a bond substitute. Happy to get a 6 to 8% annual return. I do not hold it as a substitute for the S&P 500 which is dominated by 4 stocks: Microsoft, Apple, Alphabet and Amazon.

 

I like the core holdings as long term businesses: Apple, US banks, BNSF, Mid-American and Insurance

 

Do i have confidence in Buffett? Yes. If i did not i would not own the shares.

 

PS: i see some parallels with both Berkshire and Fairfax today. Both companies still have strong willed founders running them and are much, much larger now. Both also have very good long term track records. Both are morphing as companies. Both also have underperformed expectations in recent years with lots of questions over how they are allocating capital. Interesting. (Berkshires performance - near term and long term- has been much better than Fairfax’s and it still has a large number of long term shareholders who likely are quite happy with Buffett’s performance; My guess is Fairfax has lost many long term shareholders due to its terrible performance the past 7 years.)

[adhital]

He is certainly bearish. However, he was not bearish when he bought delta on 2nd march so his view changed rather quickly within a month. That is not quite like buffet. He may be right to be bearish and reminding  the "depression".  This virus can be contained (e.g. China, Korea etc.). As soon as there is a mass testing capability, which I think is not too far in the future, things might change rather rapidly. Gilead drug is promising. Vaccine can come our way rather quickly too. Comparing 30s to now is like comparing a kid to an adult who has a matured brain (technology) and an immunity to a shock (fed/govt monitory & fiscal policy). It’s a fact that the world economy is much matured now vs then, and as such, recovery time gets compressed (30s, 70s, 00 and 08 ). BRK is my largest holding, and his decision to be cautious is warranted given his investor base; however, Mr. Buffett is not always right on his  assessments, as can be seen from last few years of his investment’s decisions.   

[mattee2264]

 

On the 2nd of March the S&P 500 was at 3,000 so I do not think Buffett was alone in thinking this would just end up being like the other pandemics and blow over pretty quickly without a major economic impact.

 

It is a shame that Charlie wasn't in attendance as he is a lot more plain spoken. But I think you can usefully combine his comments last month with those of Buffett to make a reasonably good guess at their collective thinking.

 

I think it is pretty clear that they think that stock prices (including BRK) have not fallen enough to adequately reflect the heightened risks and uncertainties.

 

I am pretty pleased he hasn't followed Ackman and Tilson's advice to do massive buybacks. The upside from buying Berkshire stock at these levels is pretty limited while the downside is still pretty high.

 

I think that what they are really hoping for is the chance to do a big acquisition. But as Charlie says the phones are not ringing. However it says something about their discipline that even at their advanced age they would rather be patient and wait for a fat pitch.

 

I do not know what to make of the history lesson. I don't think he thinks a depression is on the cards. But I think he believes that it could take some time for consumer and business confidence to return and therefore a V shaped economic recovery is far from guaranteed.

 

In that scenario having a lot of cash on hand is going to be incredibly useful and putting it to work will set Berkshire up for very good prospective returns.

 

In the event that there is a V shaped economic recovery then shareholders have not really lost anything. The share price will recover to pre-Covid levels.

 

 

[scorpioncapital]

137 billion in cash is insurance that the tide against the old world businesses is permanently changing. This is a very slow moving process. No rush. But I hope they're studying tech and biomedical fields as those are likely to be with us forever in the future. Berkshire textile mills took a long time to close down. Meanwhile they took capital and put it elsewhere. The big debate here seems to be is there a rush to do so? Or is there time to do so? I mean berkshire may have underperformed a bit the sp500 but not enough to suggest that a rush is mandatory yet. Berkshire is not a bond alternative - it dropped like 30% in March! and several times before 50%. This not a bond. Also in a low rate world for a long time, value of low cost float is diminished. Everything Berkshire is doing - or not doing - seems to be safety for a changed environment. It is highly likely to happen at some point.

 

[Gregmal]

Its not so much the underperformance, thats part of investing. Ive typically been critical of some of the decision making, or lack thereof, but can live with it because his is still pretty damn sharp and when he talks he seems consistent and often is in the right place. IE stocks are cheap if rates stay low. Big tech is where the future is, etc. Berkshire is loaded with world class people as well. But there also gets to be a point where you have to question what one is saying/doing and what they are doing/saying.

 

So if stocks are cheap if rates stay low, why arent you buying stocks? And if rates are low why do you continue to be massively overweight banks? If you admit "missing" Google, Amazon, etc...years ago, what prevents you from starting to buy them now(or years ago)? If you are incredibly bearish, why do you continue to hold the most economically sensitive companies? If $135B is "not all that much" under certain scenarios, what implications does that have on the rest of the portfolio? And yea, with that comment, you can guarantee the "hoard" is only going to continue to grow. If nothing was attractive back in March, but all the companies in need of capital found it and on better terms, is this not another acknowledgement that maybe the landscape is changing and that there is currently a surplus of cheap capital still waiting to be put to work? Look at the bond market in April; holy fuck.

 

I mean its cool and great and all to have this idea of being a pay day lender or loan shark to the biggest companies in the world, but at the same time, what company in their right mind is dying to do a deal with Berkshire when by now I think both his words and his actions clearly indicate that Berkshire will only do a deal with you if they are ripping you off. Sure you will get desperate companies like Occidental, or Seritage, but for the most part I think he's too anchored to the past here. 08 happened and the playbook changed. Now, if quality companies have liquidity problems, the Fed is there. Greatly eliminating Berkshire's pool of potential deals and muddying what remains in the pool. And then even for that, there's a massive supply of PE firms and whatnot, with tons of cheap capital too.

 

If Google can take some of its cash and make a few hires, and start a PE arm, there is no reason Berkshire cant. Not in any crazy speculative sort of way but in a way that brings in people to scour the horizon for new and exciting businesses. This is how you get into tech and biomedical fields. Every interesting biotech Ive looked at the past half decade...."early investors"...Gates Foundation, Google Ventures. It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.

 

But at the same time, I get that, regardless of what he does, people will do mental gymnastics to justify it. My favorite is still "its too small to move the needle for Berkshire"...Like "oh yea, awesome. What a great business"..."Yea, but its too small. Fuck it"...This is an appropriate attitude from a capital allocator? Or the other side of that...He has to buy in size. So take the field of "big enough" companies. Then eliminate ALL of tech. Anything having any relation to ANYONE he's been friendly with because we're scared of the appearance of insider trading or whatever the absurd excuse was with Gates... then look at what's left? Well not very much and hardly anything attractive. No wonder we are where we are.

[vinod1]

Its not so much the underperformance, thats part of investing. Ive typically been critical of some of the decision making, or lack thereof, but can live with it because his is still pretty damn sharp and when he talks he seems consistent and often is in the right place. IE stocks are cheap if rates stay low. Big tech is where the future is, etc. Berkshire is loaded with world class people as well. But there also gets to be a point where you have to question what one is saying/doing and what they are doing/saying.

 

So if stocks are cheap if rates stay low, why arent you buying stocks? And if rates are low why do you continue to be massively overweight banks? If you admit "missing" Google, Amazon, etc...years ago, what prevents you from starting to buy them now(or years ago)? If you are incredibly bearish, why do you continue to hold the most economically sensitive companies? If $135B is "not all that much" under certain scenarios, what implications does that have on the rest of the portfolio? And yea, with that comment, you can guarantee the "hoard" is only going to continue to grow. If nothing was attractive back in March, but all the companies in need of capital found it and on better terms, is this not another acknowledgement that maybe the landscape is changing and that there is currently a surplus of cheap capital still waiting to be put to work? Look at the bond market in April; holy fuck.

 

I mean its cool and great and all to have this idea of being a pay day lender or loan shark to the biggest companies in the world, but at the same time, what company in their right mind is dying to do a deal with Berkshire when by now I think both his words and his actions clearly indicate that Berkshire will only do a deal with you if they are ripping you off. Sure you will get desperate companies like Occidental, or Seritage, but for the most part I think he's too anchored to the past here. 08 happened and the playbook changed. Now, if quality companies have liquidity problems, the Fed is there. Greatly eliminating Berkshire's pool of potential deals and muddying what remains in the pool. And then even for that, there's a massive supply of PE firms and whatnot, with tons of cheap capital too.

 

If Google can take some of its cash and make a few hires, and start a PE arm, there is no reason Berkshire cant. Not in any crazy speculative sort of way but in a way that brings in people to scour the horizon for new and exciting businesses. This is how you get into tech and biomedical fields. Every interesting biotech Ive looked at the past half decade...."early investors"...Gates Foundation, Google Ventures. It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.

 

But at the same time, I get that, regardless of what he does, people will do mental gymnastics to justify it. My favorite is still "its too small to move the needle for Berkshire"...Like "oh yea, awesome. What a great business"..."Yea, but its too small. Fuck it"...This is an appropriate attitude from a capital allocator? Or the other side of that...He has to buy in size. So take the field of "big enough" companies. Then eliminate ALL of tech. Anything having any relation to ANYONE he's been friendly with because we're scared of the appearance of insider trading or whatever the absurd excuse was with Gates... then look at what's left? Well not very much and hardly anything attractive. No wonder we are where we are.

 

This is a much better critique than saying the old man is getting scared. Good points and many are valid.

 

It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.

 

If you look at the critique and negative case for Kraft, the most incisive and best bear case came from...

 

wait for it...

 

Buffett!

 

No one put the competitive challenges it is facing better than Buffett. Also read his explanation on why he would not be exciting it.

 

Or look at the airlines and see how quickly he changed his mind. On the other hand, I can imagine Bill Miller loading up on them as we speak.

 

So I do not think he is in denial. Far from it.

 

Vinod

 

 

[scorpioncapital]

"So if stocks are cheap if rates stay low, why arent you buying stocks?"

 

An IF statement is just that. IF. As such it is a probability. It is a risk assessment. People can judge the risks differently because on the other side of that IF statement is exactly what Berkshire is preparing for - the chance that the opposite happens. Berkshire still owns vast amounts of equity and business. More than 60%. But I think it would be imprudent to make an IF statement a 100% certainty. There has been massive strange going ons in Fed actions, interest rates, behaviour globally. This has led the sp500 and others to outperform taking the IF bet all the way to 100%. But if they are wrong eventually, I wonder if Berkshire will be on the other side being able to outperform in some future 10 year period. He is a little passive for my tastes too, but perhaps it will pay off and all the more aggressive investors are going to be giving back some gains in the years ahead.

[LC]

But scorpion, how many times has WB said he can't predict rates and does not take that into account when evaluating investment options?

 

Holding cash would make sense if you expect deflation/negative IR. Perhaps the large cash balance is his hedge against the large lending portfolio he has (banks, insurance & bonds). It's the only rationale that seems to make sense (at least to me)

[buffetteer1984]

This seems to contradict what he said is one of the keys to investing and that is rates are like gravity to valuations.  So i think he means he can't predict exact rates but more or less ie 1.25 vs 1.5, which doesnt change the valuation all that much but 1.25 and 3.5 makes a huge difference when discounting present values.

 

But scorpion, how many times has WB said he can't predict rates and does not take that into account when evaluating investment options?

 

Holding cash would make sense if you expect deflation/negative IR. Perhaps the large cash balance is his hedge against the large lending portfolio he has (banks, insurance & bonds). It's the only rationale that seems to make sense (at least to me)

[Spekulatius]

This seems to contradict what he said is one of the keys to investing and that is rates are like gravity to valuations.  So i think he means he can't predict exact rates but more or less ie 1.25 vs 1.5, which doesnt change the valuation all that much but 1.25 and 3.5 makes a huge difference when discounting present values.

 

But scorpion, how many times has WB said he can't predict rates and does not take that into account when evaluating investment options?

 

Holding cash would make sense if you expect deflation/negative IR. Perhaps the large cash balance is his hedge against the large lending portfolio he has (banks, insurance & bonds). It's the only rationale that seems to make sense (at least to me)

 

The problem with anchoring valuation on interest rates is that stocks are a long duration assets and while you know rates are low now and perhaps for the next 2 years, you do not know what they will be in 15 years. If rates go up In due time any owner of stock or real estate for that matter to looking at significantly compressed valuations upon exit.

[rranjan]

Its not so much the underperformance, thats part of investing. Ive typically been critical of some of the decision making, or lack thereof, but can live with it because his is still pretty damn sharp and when he talks he seems consistent and often is in the right place. IE stocks are cheap if rates stay low. Big tech is where the future is, etc. Berkshire is loaded with world class people as well. But there also gets to be a point where you have to question what one is saying/doing and what they are doing/saying.

 

So if stocks are cheap if rates stay low, why arent you buying stocks? And if rates are low why do you continue to be massively overweight banks? If you admit "missing" Google, Amazon, etc...years ago, what prevents you from starting to buy them now(or years ago)? If you are incredibly bearish, why do you continue to hold the most economically sensitive companies? If $135B is "not all that much" under certain scenarios, what implications does that have on the rest of the portfolio? And yea, with that comment, you can guarantee the "hoard" is only going to continue to grow. If nothing was attractive back in March, but all the companies in need of capital found it and on better terms, is this not another acknowledgement that maybe the landscape is changing and that there is currently a surplus of cheap capital still waiting to be put to work? Look at the bond market in April; holy fuck.

 

I mean its cool and great and all to have this idea of being a pay day lender or loan shark to the biggest companies in the world, but at the same time, what company in their right mind is dying to do a deal with Berkshire when by now I think both his words and his actions clearly indicate that Berkshire will only do a deal with you if they are ripping you off. Sure you will get desperate companies like Occidental, or Seritage, but for the most part I think he's too anchored to the past here. 08 happened and the playbook changed. Now, if quality companies have liquidity problems, the Fed is there. Greatly eliminating Berkshire's pool of potential deals and muddying what remains in the pool. And then even for that, there's a massive supply of PE firms and whatnot, with tons of cheap capital too.

 

If Google can take some of its cash and make a few hires, and start a PE arm, there is no reason Berkshire cant. Not in any crazy speculative sort of way but in a way that brings in people to scour the horizon for new and exciting businesses. This is how you get into tech and biomedical fields. Every interesting biotech Ive looked at the past half decade...."early investors"...Gates Foundation, Google Ventures. It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.

 

But at the same time, I get that, regardless of what he does, people will do mental gymnastics to justify it. My favorite is still "its too small to move the needle for Berkshire"...Like "oh yea, awesome. What a great business"..."Yea, but its too small. Fuck it"...This is an appropriate attitude from a capital allocator? Or the other side of that...He has to buy in size. So take the field of "big enough" companies. Then eliminate ALL of tech. Anything having any relation to ANYONE he's been friendly with because we're scared of the appearance of insider trading or whatever the absurd excuse was with Gates... then look at what's left? Well not very much and hardly anything attractive. No wonder we are where we are.

 

You can make some money in one scenario and lots of money in other scenario without assuming that one scenario will play out. Knowing that interest rate will remain near zero for 10 years is lot different than interest being low at any given time.

 

I don't get the logic of not doing buybacks in small amounts when stock was in 160-170. Intrinsic value has not declined by that large margin and even he made it clear that it was down so much for a small period as explanation, but why not buy on those small periods. It's not as if buying will take out 50B cash.

 

If small buying is not going to work then why even buy at 220 with similar discount. You don't know how long 220 will last. I think he dodged the question.

 

Anyway, Buffett is human and he can make mistakes. He has been mostly consistent with how he operates. Investors can make up their own mind about risk reward and invest appropriately.

 

 

 

 

[Peregrine]

One thing that doesn't get much mention about Berkshire's massive cash hoard is the fact that they have a massive reinsurance operation. Who knows the kind of claims that come out of this pandemic and Berkshire's first obligation above all is to ensure that they have the capital to withstand even the most dire of scenarios.

 

That the market as a whole isn't cheap? I think most of us can agree on that. The spike down was swift and didn't stay there long.

[buffetteer1984]

I completely agree it's impossible to forecast exactly but it's still necessary to have some opinion of it otherwise how are people valuing companies if they don't include some kind of discounting rate in their valuations?  I see so many professionals go on tv and just throw out a p/e number for a current year to determine if something is cheap or not without other variables.  That to me is myopic and a horrible way to invest millions if not billions of dollars.

 

This seems to contradict what he said is one of the keys to investing and that is rates are like gravity to valuations.  So i think he means he can't predict exact rates but more or less ie 1.25 vs 1.5, which doesnt change the valuation all that much but 1.25 and 3.5 makes a huge difference when discounting present values.

 

But scorpion, how many times has WB said he can't predict rates and does not take that into account when evaluating investment options?

 

Holding cash would make sense if you expect deflation/negative IR. Perhaps the large cash balance is his hedge against the large lending portfolio he has (banks, insurance & bonds). It's the only rationale that seems to make sense (at least to me)

 

The problem with anchoring valuation on interest rates is that stocks are a long duration assets and while you know rates are low now and perhaps for the next 2 years, you do not know what they will be in 15 years. If rates go up I due time any owner of stock or real estate for that matter to looking at significantly compressed valuations upon exit.

[buffetteer1984]

There are people saying the price wasn't low long enough for berkshire to buy back it shares and that makes no sense.  I can understand that for a fund trying to build an entire position in a company that would require more time but that doesn't explain why you're not at least buying on that day.  Even if berkshire was only in the 160s for 2/3 days it makes no sense not to buy some for those 2/3 days. They don't need to retire 10% of float to take an initial action. My only understanding of why he's not buying back any is he doesn't believe berkshire is as solid a company as he thought.  There's clearly companies buying back stock now does that mean they have better moats than berkshire and can withstand even the most violent economic environments?

 

Its not so much the underperformance, thats part of investing. Ive typically been critical of some of the decision making, or lack thereof, but can live with it because his is still pretty damn sharp and when he talks he seems consistent and often is in the right place. IE stocks are cheap if rates stay low. Big tech is where the future is, etc. Berkshire is loaded with world class people as well. But there also gets to be a point where you have to question what one is saying/doing and what they are doing/saying.

 

So if stocks are cheap if rates stay low, why arent you buying stocks? And if rates are low why do you continue to be massively overweight banks? If you admit "missing" Google, Amazon, etc...years ago, what prevents you from starting to buy them now(or years ago)? If you are incredibly bearish, why do you continue to hold the most economically sensitive companies? If $135B is "not all that much" under certain scenarios, what implications does that have on the rest of the portfolio? And yea, with that comment, you can guarantee the "hoard" is only going to continue to grow. If nothing was attractive back in March, but all the companies in need of capital found it and on better terms, is this not another acknowledgement that maybe the landscape is changing and that there is currently a surplus of cheap capital still waiting to be put to work? Look at the bond market in April; holy fuck.

 

I mean its cool and great and all to have this idea of being a pay day lender or loan shark to the biggest companies in the world, but at the same time, what company in their right mind is dying to do a deal with Berkshire when by now I think both his words and his actions clearly indicate that Berkshire will only do a deal with you if they are ripping you off. Sure you will get desperate companies like Occidental, or Seritage, but for the most part I think he's too anchored to the past here. 08 happened and the playbook changed. Now, if quality companies have liquidity problems, the Fed is there. Greatly eliminating Berkshire's pool of potential deals and muddying what remains in the pool. And then even for that, there's a massive supply of PE firms and whatnot, with tons of cheap capital too.

 

If Google can take some of its cash and make a few hires, and start a PE arm, there is no reason Berkshire cant. Not in any crazy speculative sort of way but in a way that brings in people to scour the horizon for new and exciting businesses. This is how you get into tech and biomedical fields. Every interesting biotech Ive looked at the past half decade...."early investors"...Gates Foundation, Google Ventures. It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.

 

But at the same time, I get that, regardless of what he does, people will do mental gymnastics to justify it. My favorite is still "its too small to move the needle for Berkshire"...Like "oh yea, awesome. What a great business"..."Yea, but its too small. Fuck it"...This is an appropriate attitude from a capital allocator? Or the other side of that...He has to buy in size. So take the field of "big enough" companies. Then eliminate ALL of tech. Anything having any relation to ANYONE he's been friendly with because we're scared of the appearance of insider trading or whatever the absurd excuse was with Gates... then look at what's left? Well not very much and hardly anything attractive. No wonder we are where we are.

 

You can make some money in one scenario and lots of money in other scenario without assuming that one scenario will play out. Knowing that interest rate will remain near zero for 10 years is lot different than interest being low at any given time.

 

I don't get the logic of not doing buybacks in small amounts when stock was in 160-170. Intrinsic value has not declined by that large margin and even he made it clear that it was down so much for a small period as explanation, but why not buy on those small periods. It's not as if buying will take out 50B cash.

 

If small buying is not going to work then why even buy at 220 with similar discount. You don't know how long 220 will last. I think he dodged the question.

 

Anyway, Buffett is human and he can make mistakes. He has been mostly consistent with how he operates. Investors can make up their own mind about risk reward and invest appropriately.

 

 

 

 

[Guest longinvestor]

“I don’t know” is the biggest lesson I learned yesterday from Buffett. It’s an attitude that I hopefully can tell myself all day long as I make decisions. But saying this in an anonymous message board where lots of people seem to know and know better than Buffett is a chuckle. The important difference is that Buffett represents about $400 billion of long term shareholders wealth, including 99% of his. Happy that he’s taking me on as a partner.