Jump to content

Two Questions about Berkshire


Recommended Posts

1) Buffett turns 90 later this month. What happens when the greatest capital allocator in human history is gone?

 

Honestly, I think Buffett's successor will have a difficult time of it unless (a) the company can be broken up and/or (b) a dividend can be put in place. Berkshire has become so large and unwieldy that I struggle to see it outperforming the S&P 500 with a mere mortal making the capital allocation decisions. It needs to be cut down to a more reasonable size.

 

2) Berkshire's AAPL position is now valued at over $100 billion. How is everyone thinking about this position in the context of valuing Berkshire?

Link to post
Share on other sites

1) Buffett turns 90 later this month. What happens when the greatest capital allocator in human history is gone?

 

Honestly, I think Buffett's successor will have a difficult time of it unless (a) the company can be broken up and/or (b) a dividend can be put in place. Berkshire has become so large and unwieldy that I struggle to see it outperforming the S&P 500 with a mere mortal making the capital allocation decisions. It needs to be cut down to a more reasonable size.

 

2) Berkshire's AAPL position is now valued at over $100 billion. How is everyone thinking about this position in the context of valuing Berkshire?

 

Seems overweight from a Buffett perspective. Also, Apple's valuation seems a bit stretched right now. On the flip side BRK nets about 800m in dividends.

Link to post
Share on other sites

1) Buffett turns 90 later this month. What happens when the greatest capital allocator in human history is gone?

 

Honestly, I think Buffett's successor will have a difficult time of it unless (a) the company can be broken up and/or (b) a dividend can be put in place. Berkshire has become so large and unwieldy that I struggle to see it outperforming the S&P 500 with a mere mortal making the capital allocation decisions. It needs to be cut down to a more reasonable size.

 

2) Berkshire's AAPL position is now valued at over $100 billion. How is everyone thinking about this position in the context of valuing Berkshire?

 

1) I agree with you. A lot of people don't though.  8)

 

2) I hold some AAPL outside my BRK position. I bought most of it before Buffett bought it for BRK. I think that AAPL is currently valued for ~5% return assuming 7% growth rate (that's what Morningstar expects - this might be optimistic or not) and terminal 15PE. Assuming higher growth rate or higher terminal PE, the expected return could be higher. I have trimmed AAPL at lower prices and might trim again. In most situations it is a mistake to trim/sell forever holds. Anyway, this is not AAPL thread. AAPL discussion should be moved to AAPL thread.  8) From Berkshire perspective, I don't expect Buffett to trim, but he has surprised in the past. Taxes on gains is a crap though.

Link to post
Share on other sites

Honestly, I think Buffett's successor will have a difficult time of it unless (a) the company can be broken up and/or (b) a dividend can be put in place. Berkshire has become so large and unwieldy that I struggle to see it outperforming the S&P 500 with a mere mortal making the capital allocation decisions. It needs to be cut down to a more reasonable size.

 

2) Berkshire's AAPL position is now valued at over $100 billion. How is everyone thinking about this position in the context of valuing Berkshire?

 

Please elaborate.

Link to post
Share on other sites

1) Buffett turns 90 later this month. What happens when the greatest capital allocator in human history is gone?

 

Honestly, I think Buffett's successor will have a difficult time of it unless (a) the company can be broken up and/or (b) a dividend can be put in place. Berkshire has become so large and unwieldy that I struggle to see it outperforming the S&P 500 with a mere mortal making the capital allocation decisions. It needs to be cut down to a more reasonable size.

 

2) Berkshire's AAPL position is now valued at over $100 billion. How is everyone thinking about this position in the context of valuing Berkshire?

 

1) I think the successor will be more than one person, meaning, one CEO but several people doing capital allocation. I can imagine Ajit doing all the capital allocation in the insurance industry including acquisitions, and Greg doing the same within the energy space. BH Energy will have a lot of opportunities in capex going forward. Aside from that, I think Buffett himself is a mere mortal has had some prominent misses in the last 20 years. So I think a combo of Ajit/Greg/Todd/Ted will make for excellent capital allocaters, not any worse than Buffett in my humble opinion. I think buybacks will be ramped up significantly, which they already have. I think most people prefer buybacks at below or fair value, and I think that will happen instead of dividends.

 

2) Unsure about Apple

Link to post
Share on other sites

Silly question:

 

What happens when the so-called “our third business” start to dwarf the second and the first business in terms of sheer size.

 

Or will Apple will always be “our third” business by virtue of BRK not being the controlling shareholder regardless of its sheer size.

Link to post
Share on other sites

1) Buffett turns 90 later this month. What happens when the greatest capital allocator in human history is gone?

 

Honestly, I think Buffett's successor will have a difficult time of it unless (a) the company can be broken up and/or (b) a dividend can be put in place. Berkshire has become so large and unwieldy that I struggle to see it outperforming the S&P 500 with a mere mortal making the capital allocation decisions. It needs to be cut down to a more reasonable size.

 

2) Berkshire's AAPL position is now valued at over $100 billion. How is everyone thinking about this position in the context of valuing Berkshire?

 

I think there is a greaterthanzero chance some Berkshire subsidiaries are wound down or divested after Warren.

 

Simply put for a long time, Berkshire's acquisitions were personal commitments between Warren Buffett and the selling owner(s). With Warren gone, that commitment is weaker.

 

Secondly, I think (hope?) there is a muchgreaterthanzero chance the buyback program is expanded. One criticism of WB is he has sheltered us shareholders from his potential replacements. We are only just now getting a feel for Greg Abel as a person, businessman, investor etc. How will he behave once WBCM are not looking over his shoulder?

 

On Apple, this I think is essentially the big consumer staple to replace KO/PG in the Berkshire lineup. I know WB says he never trims positions, but I hope he does at these valuations. How many times has he reminded us about his mistake not selling KO back at 40x earnings or so?

Link to post
Share on other sites

1) I've long maintained that Buffetts exit, and thus the step up of the successors, is the catalyst. To some, Buffett's departure is a negative. To me, its hard to say the greatest investor ever, leaving is a positive, but I think it is. This is not to be confused with saying that Warren is "bad" for BRK. But I think new blood sets this thing free.

 

2) As a shareholder, I'd prefer they pare down some AAPL at 21 vs 28%...but its not really material to me. They dont need more cash, so stay invested.

Link to post
Share on other sites

They dont need more cash, so stay invested.

This is my thought as well.  They already have a cash problem.  Why add to it?

I disagree for two reasons:

 

First, I don't think this is a good reason to own an overvalued security. Assuming of course WB thinks Apple is overvalued.

 

Secondly, I don't think they have a cash problem. Having loads of cash isn't a problem, the problem is WB did not use it a few months ago. So if you think they should hold Apple today, then you must also think WB made an error in Mar-Apr not diving into equities head first.

Link to post
Share on other sites

They dont need more cash, so stay invested.

This is my thought as well.  They already have a cash problem.  Why add to it?

I disagree for two reasons:

 

First, I don't think this is a good reason to own an overvalued security. Assuming of course WB thinks Apple is overvalued.

 

Secondly, I don't think they have a cash problem. Having loads of cash isn't a problem, the problem is WB did not use it a few months ago. So if you think they should hold Apple today, then you must also think WB made an error in Mar-Apr not diving into equities head first.

 

I agree with LC. Needing cash (or not needing cash) isn't a good reason to make buy or sell decisions. Imagine running your own portfolio that way. I know multiple people who took cash out of 401Ks during the Great Recession because they lost their jobs and needed cash. This kind of thing is the polar opposite of value investing.

 

The fact that arguments like this about Berkshire (shouldn't sell possibility overvalued positions because marginal value of additional cash is low given how overcapitalized and cash generative the company is) make some intuitive sense speaks to Berkshire's size being an issue.

 

 

 

Link to post
Share on other sites

They dont need more cash, so stay invested.

This is my thought as well.  They already have a cash problem.  Why add to it?

I disagree for two reasons:

 

First, I don't think this is a good reason to own an overvalued security. Assuming of course WB thinks Apple is overvalued.

 

Secondly, I don't think they have a cash problem. Having loads of cash isn't a problem, the problem is WB did not use it a few months ago. So if you think they should hold Apple today, then you must also think WB made an error in Mar-Apr not diving into equities head first.

 

I agree with LC. Needing cash (or not needing cash) isn't a good reason to make buy or sell decisions. Imagine running your own portfolio that way. I know multiple people who took cash out of 401Ks during the Great Recession because they lost their jobs and needed cash. This kind of thing is the polar opposite of value investing.

 

The fact that arguments like this about Berkshire (shouldn't sell possibility overvalued positions because marginal value of additional cash is low given how overcapitalized and cash generative the company is) make some intuitive sense speaks to Berkshire's size being an issue.

 

There are three connected issues really:

- Selling appreciated stock in taxable account is always a high hurdle, since any alternative (cash or other position) would have to outperform taking into account tax hit

- This is further aggravated by existing and increasing cash position

- This is further aggravated by very limited universe of investment options due to the size

Link to post
Share on other sites

They dont need more cash, so stay invested.

This is my thought as well.  They already have a cash problem.  Why add to it?

I disagree for two reasons:

 

First, I don't think this is a good reason to own an overvalued security. Assuming of course WB thinks Apple is overvalued.

 

Secondly, I don't think they have a cash problem. Having loads of cash isn't a problem, the problem is WB did not use it a few months ago. So if you think they should hold Apple today, then you must also think WB made an error in Mar-Apr not diving into equities head first.

 

I agree with LC. Needing cash (or not needing cash) isn't a good reason to make buy or sell decisions. Imagine running your own portfolio that way. I know multiple people who took cash out of 401Ks during the Great Recession because they lost their jobs and needed cash. This kind of thing is the polar opposite of value investing.

 

The fact that arguments like this about Berkshire (shouldn't sell possibility overvalued positions because marginal value of additional cash is low given how overcapitalized and cash generative the company is) make some intuitive sense speaks to Berkshire's size being an issue.

 

There are three connected issues really:

- Selling appreciated stock in taxable account is always a high hurdle, since any alternative (cash or other position) would have to outperform taking into account tax hit

- This is further aggravated by existing and increasing cash position

- This is further aggravated by very limited universe of investment options due to the size

 

 

I think all those points hit on why AAPL position, assuming the stock is fairly valued* at the current price,  should be valued at a significant discount to market price.

 

 

 

* I recognize that this is a big assumption, but this discussion is probably better off not veering into "where should AAPL trade?"

Link to post
Share on other sites

They dont need more cash, so stay invested.

This is my thought as well.  They already have a cash problem.  Why add to it?

I disagree for two reasons:

 

First, I don't think this is a good reason to own an overvalued security. Assuming of course WB thinks Apple is overvalued.

 

Secondly, I don't think they have a cash problem. Having loads of cash isn't a problem, the problem is WB did not use it a few months ago. So if you think they should hold Apple today, then you must also think WB made an error in Mar-Apr not diving into equities head first.

 

I agree with LC. Needing cash (or not needing cash) isn't a good reason to make buy or sell decisions. Imagine running your own portfolio that way. I know multiple people who took cash out of 401Ks during the Great Recession because they lost their jobs and needed cash. This kind of thing is the polar opposite of value investing.

 

The fact that arguments like this about Berkshire (shouldn't sell possibility overvalued positions because marginal value of additional cash is low given how overcapitalized and cash generative the company is) make some intuitive sense speaks to Berkshire's size being an issue.

 

There are three connected issues really:

- Selling appreciated stock in taxable account is always a high hurdle, since any alternative (cash or other position) would have to outperform taking into account tax hit

- This is further aggravated by existing and increasing cash position

- This is further aggravated by very limited universe of investment options due to the size

 

 

I think all those points hit on why AAPL position, assuming the stock is fairly valued* at the current price,  should be valued at a significant discount to market price.

 

 

 

* I recognize that this is a big assumption, but this discussion is probably better off not veering into "where should AAPL trade?"

 

I think it should trade straight out of the portfolio unless he's trying to engineer a purchase of the whole business (not likely...)

 

Pigs get fat...

 

Sell & pay the taxes before you get slaughtered with another period of analysts screeching "peak iPhone" again.

Link to post
Share on other sites

What is another investment the size of the AAPL position that could be taken on and get the same result?  If you're going to sell AAPL, you should have a better investment lined up.

 

Well, that mainly just gets back to the whole size issue. It is difficult to allocate $100+ billion in an intelligent way.

 

I disagree about only selling something if you have a superior investment alternative lined up. Hypothetical: An investor owns a position in a stock that he believes to be ridiculously overvalued, but he also doesn't have any good ideas at the moment. You think that person should continue to hold the stock instead of selling?

Link to post
Share on other sites

There is "ridiculously overvalued" and then there is "Im kinda uncomfortable about the valuation". The later is where I think Apple falls. Unless you are predicting a giant macro pullback, I dont see how AAPL doesnt at least hold its own. Further, if you sell, I hardly want to think of what it will take to become bullish enough to redeploy that capital, especially given what we saw from Buffett in March/April. Would probably be waiting an eternity. In which case, just stay the course.

Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
×
×
  • Create New...