Berkshire Q2 2020 report

[Guest]

So I am sure WEB wasn't lying, or doing his best Billy Boi Ackman impression, but given the figures....he'd have to have started buying back a more reasonable chunk of stock....right around the time of the AGM. Which, given what his tone was...is surprising.

 

Yeah this is very surprising given how much he was talking about the Great Depression.

[rranjan]

So I am sure WEB wasn't lying, or doing his best Billy Boi Ackman impression, but given the figures....he'd have to have started buying back a more reasonable chunk of stock....right around the time of the AGM. Which, given what his tone was...is surprising.

 

Yeah this is very surprising given how much he was talking about the Great Depression.

 

He talks to Gates frequently. Gates initially thought 5 years of doom. Now Gates has changed his mind about it and thinks rich countries will be done with virus issue by the end of 2021. Range of outcome has become narrower. I am just speculating here.

 

 

[LC]

So I am sure WEB wasn't lying, or doing his best Billy Boi Ackman impression, but given the figures....he'd have to have started buying back a more reasonable chunk of stock....right around the time of the AGM. Which, given what his tone was...is surprising.

 

Yeah this is very surprising given how much he was talking about the Great Depression.

 

He talks to Gates frequently. Gates initially thought 5 years of doom. Now Gates has changed his mind about it and thinks rich countries will be done with virus issue by the end of 2021. Range of outcome has become narrower. I am just speculating here.

I agree with this

[CorpRaider]

Yeah, it seems like he either dumped Wells or JPM (or a lot of both).  Sold 2% of JPM as of last 13F, so could be continuation of that.  I think JPM basis is $6 billion and some change.  The Wells would have triggered like a billion realized gain this quarter, I think if he closed out the position.

 

The special dispensation he sometimes gets from SEC to defer reporting on positions under accumulation would not apply to the Q would it?

 

Wells issued like 2 billion shares incident to the GFC (versus almost 8 billion from BAC).

[Gregmal]

It is indeed very thought provoking. Theres a few things to look at and wonder.

 

-Buffett said, in a not so veiled way that BRK was effectively "more cheap" at 225 in Feb than it was at 175 or so in early May at the time of the AGM.

 

-Buybacks had stopped

 

-His tone at the meeting was death

 

-He sold airlines and WFC

 

-BUT! Bought back a record number(in absolute terms, and in terms of pace) shortly thereafter

 

-Has been adding aggressively to BAC

 

 

If we eliminate the idea that he was laying it on thick, and trying to scare people into selling their stock...all Im left with is that he basically came to a radically different conclusion than he had previously, (big thing for some here)---->Admitted he missed the big opportunity in March/April, but also, seems to believe there is very different potential outcomes, even within similar sectors...IE WFC is so rotten its not even worth holding but BAC is still steaming cheap....And that, BRK is in pretty damn good shape....There's more too, but all in all there is a lot to process here but it does seem compelling in terms of garnering insight into how the man is thinking.

[John Hjorth]

In terms of valuation – I view BRK right now as a 65-68 cent dollar, with limited downside due to cash.  I’ve valued the biz all sorts of ways: DCF, SOTP, float as a negative carry, % of stock portfolio income etc etc.  For me the purest and simplest way know; knowing full well, that it is better to be roughly right, then precisely wrong:

 

•BRK Market Cap ($500B) – stock portfolio ($230B) – BNSF ($110B) – Cash ($145b) = $480B.  This tells me you are getting ALL Insurance – which generates 45% of pre-tax income, Utilities – which is extremely stable, and the whole MSR group of businesses at call it $20B.  Does that make sense from a valuation perspective?  NO.  Which is why we’ve seen nice buybacks over the past few months. 

•The real question is what the IV of the BIZ is 

 

ValueMaven,

 

How the heck does that math add up? - You seem - at least to me - to be cherry-picking on the asset side & liabilities side of the group balance sheet here.

[bizaro86]

It is indeed very thought provoking. Theres a few things to look at and wonder.

 

-Buffett said, in a not so veiled way that BRK was effectively "more cheap" at 225 in Feb than it was at 175 or so in early May at the time of the AGM.

 

-Buybacks had stopped

 

-His tone at the meeting was death

 

-He sold airlines and WFC

 

-BUT! Bought back a record number(in absolute terms, and in terms of pace) shortly thereafter

 

-Has been adding aggressively to BAC

 

 

If we eliminate the idea that he was laying it on thick, and trying to scare people into selling their stock...all Im left with is that he basically came to a radically different conclusion than he had previously, (big thing for some here)---->Admitted he missed the big opportunity in March/April, but also, seems to believe there is very different potential outcomes, even within similar sectors...IE WFC is so rotten its not even worth holding but BAC is still steaming cheap....And that, BRK is in pretty damn good shape....There's more too, but all in all there is a lot to process here but it does seem compelling in terms of garnering insight into how the man is thinking.

 

I wonder if this is partially related to the recent permission to go to 25% of BAC. Seems possible that he doesn't want more than $X of banks, and likes BAC the best. So the selling of the others could be rotating in to his first choice which was previously not permitted.

[thepupil]

This could be wacky and I have no position in BAC or WFC ( I outsource that to Berkshire) but is there any thought that there was a gentle nudge from regulators that in exchange for going up to 25% on BAC, he should not be the top shareholder of other mega banks for systemic reasons.

 

I assume he just wants to blow out of WFC and that’s that, but just throwing it out there

[gfp]

Not to mention double counting "Insurance" in a major way.  But the point stands - if you start subtracting full valuations for big parts of Berkshire from the market cap you are going to get to zero and still have a bunch of businesses left.  But conglomerates run by 90 year old one-in-a-generation types probably get a discount in the market.  It really is a fine situation to be in - to have repurchases available as an accretive option for Berkshire and to have Berkshire available at a reasonable price for those of us that prefer it to the index at current relative valuations.

 

In terms of valuation – I view BRK right now as a 65-68 cent dollar, with limited downside due to cash.  I’ve valued the biz all sorts of ways: DCF, SOTP, float as a negative carry, % of stock portfolio income etc etc.  For me the purest and simplest way know; knowing full well, that it is better to be roughly right, then precisely wrong:

 

•BRK Market Cap ($500B) – stock portfolio ($230B) – BNSF ($110B) – Cash ($145b) = $480B.  This tells me you are getting ALL Insurance – which generates 45% of pre-tax income, Utilities – which is extremely stable, and the whole MSR group of businesses at call it $20B.  Does that make sense from a valuation perspective?  NO.  Which is why we’ve seen nice buybacks over the past few months. 

•The real question is what the IV of the BIZ is 

 

ValueMaven,

 

How the heck does that math add up? - You seem - at least to me - to be cherry-picking on the asset side & liabilities side of the group balance sheet here.

[gfp]

This could be wacky and I have no position in BAC or WFC ( I outsource that to Berkshire) but is there any thought that there was a gentle nudge from regulators that in exchange for going up to 25% on BAC, he should not be the top shareholder of other mega banks for systemic reasons.

 

I assume he just wants to blow out of WFC and that’s that, but just throwing it out there

 

It is certainly possible - but the way he was talking to Becky or whoever it was earlier this year made it sound like he wasn't pleased with their pick for CEO and he went out of his way to clarify that when he starts selling something he usually finishes - he doesn't trim and rebalance was the gist of it.  I can try to find the quote but it was probably a CNBC interview earlier this year when asked about selling WFC beyond what was necessary to stay below 10%.  He got that cagey look and was like, "I must like what I am buying better than what I am selling..."

[John Hjorth]

It is indeed very thought provoking. Theres a few things to look at and wonder.

 

-Buffett said, in a not so veiled way that BRK was effectively "more cheap" at 225 in Feb than it was at 175 or so in early May at the time of the AGM.

 

-Buybacks had stopped

 

-His tone at the meeting was death

 

-He sold airlines and WFC

 

-BUT! Bought back a record number(in absolute terms, and in terms of pace) shortly thereafter

 

-Has been adding aggressively to BAC

 

 

If we eliminate the idea that he was laying it on thick, and trying to scare people into selling their stock...all Im left with is that he basically came to a radically different conclusion than he had previously, (big thing for some here)---->Admitted he missed the big opportunity in March/April, but also, seems to believe there is very different potential outcomes, even within similar sectors...IE WFC is so rotten its not even worth holding but BAC is still steaming cheap....And that, BRK is in pretty damn good shape....There's more too, but all in all there is a lot to process here but it does seem compelling in terms of garnering insight into how the man is thinking.

 

Greg,

 

As already posted by me in this topic, your line of thinking is very interesting to me, and makes sense, to me. - Thank you!

 

[gfp]

This interview at 25:15 in the timeline through about 26:51 has Buffett looking awfully coy on selling Wells

 

https://buffett.cnbc.com/video/2020/02/25/buffett-coronavirus-threat-shouldnt-change-how-you-invest.html

[DooDiligence]

This interview at 25:15 in the timeline through about 26:51 has Buffett looking awfully coy on selling Wells

 

https://buffett.cnbc.com/video/2020/02/25/buffett-coronavirus-threat-shouldnt-change-how-you-invest.html

 

I love when they were talking about reaching for yield & he says, "eventually, midnight comes & everything turns into pumpkins & mice..."

[ValueMaven]

the more I look over the Q - to me the story is: 1) How strong the operating biz's are and 2) the aggressive nature of the buyback post AGM... looks like its going to be close to $9-$10B including July....

[Gregmal]

Typically a non 105b would dictate you must wait 3 days after an earnings announcement as a start. Then you also have to consider 2 weeks before the Q ends, up until you announce. Obviously there are ways around this, but if you want to see what the most aggressive scenario here could be, it is that. BRK did all of their repurchases between May 6, and June 16th....

[CorpRaider]

This interview at 25:15 in the timeline through about 26:51 has Buffett looking awfully coy on selling Wells

 

https://buffett.cnbc.com/video/2020/02/25/buffett-coronavirus-threat-shouldnt-change-how-you-invest.html

 

Yeah at the time a lot of people thought he might be exiting but since he filed a 13 with no more sales.  Would have been better to exit in the 50's of course.

[gfp]

the more I look over the Q - to me the story is: 1) How strong the operating biz's are and 2) the aggressive nature of the buyback post AGM... looks like its going to be close to $9-$10B including July....

 

Be sure to back out the GEICO windfall and look at operating businesses that way - there is definitely some carnage but Berkshire has plenty of income streams that are unrelated to one another.  PCC is particularly bad, but many were down 20-30%.  I assume thats the worst of it.  We'll see.

 

If they did sell mostly out of Wells, the dividend cut becomes a non issue.  Seems like they are selling the OXY dividend shares as they come in.

 

It will be very interesting to see if there were new purchases in the 13F when they release it. 

[Xerxes]

I must be the only one here genuinely astonished to see the $10 billion write off on the PCP.

That was a $32 billion purchase and seeing a third of its value impaired was shocking. It was one thing with the airlines (which are genuinely the weakest link in the aerospace value chain) but a write off on PCP, which you cannot reverse, was surprising.

 

Am wondering if I will see RTX write off a portion of its Rockwell Collins purchase, which had a cash component to it. Unfortunately asset bought whole or mostly by cash have the most to lose in an impairment. Unlike a stock purchase where the burden (Dilution) is shifted on shareholders.

 

If the airline bet went sour the way Oxy bet went sour, I hope there is no parallel in the bulked up oil and gas with Diamond going sour some years from now just like PCP did today.

[John Hjorth]

Xerxes,

 

I must admit, that at first glance, I was personally stunned, too. But I quickly regained posture about it. It's honest accounting, because the destruction of value here is real.

 

Edit:

 

Yes, reversal of impairment losses on goodwill is prohibited, ref. IAS 36.124.

[Cigarbutt]

Xerxes,

I must admit, that at first glance, I was personally stunned, too. But I quickly regained posture about it. It's honest accounting, because the destruction of value here is real.

Edit:

Yes, reversal of impairment losses on goodwill is prohibited, ref. IAS 36.124.

This reminded me of previous comments about principles guiding goodwill impairment. It involved GenRe and the adjustments that had been made before (adjustments made without a requirement) to more conservative discounting of workers comp reserves. Combining what both said, i guess the goodwill impairment means facing reality with a dose of a margin of safety. The way it's always been. The comment about decreasing transparency with modern (and more detailed) disclosure (1960s vs 2000s) is food for thought.

[scorpioncapital]

Didn't Buffett always say he would warn shareholders and the market if Berkshire stock was undervalued BEFORE buying back shares so the market had a chance to make up its mind about it and so that he wouldn't be taking advantage of exiting shareholders? Whatever happened to this sentiment?

 

To the person who was worried about the pcp write off, I wouldn't be. This could easily be reversed when aerospace returns. It is just conservative accounting for this year given the magnitude of the drop - but it could still be very temporary.

[Guest longinvestor]

Xerxes,

I must admit, that at first glance, I was personally stunned, too. But I quickly regained posture about it. It's honest accounting, because the destruction of value here is real.

Edit:

Yes, reversal of impairment losses on goodwill is prohibited, ref. IAS 36.124.

This reminded me of previous comments about principles guiding goodwill impairment. It involved GenRe and the adjustments that had been made before (adjustments made without a requirement) to more conservative discounting of workers comp reserves. Combining what both said, i guess the goodwill impairment means facing reality with a dose of a margin of safety. The way it's always been. The comment about decreasing transparency with modern (and more detailed) disclosure (1960s vs 2000s) is food for thought.

 

That plus the desire to pass along the gift of a better earnings stable to the successor has been expressed by Buffett previously. Take the pain now.

[gfp]

He literally placed an ad in the annual letter with a phone number to call and specific times of day to call with your offer of stock.  Its been years of repurchases now and the main complaint has been that he didn't buy enough volume.  Then the price went down for more than a couple days.

 

In past reports, we’ve discussed both the sense and nonsense of stock repurchases. Our thinking, boiled down: Berkshire will buy back its stock only if a) Charlie and I believe that it is selling for less than it is worth and b) the company, upon completing the repurchase, is left with ample cash.

 

Calculations of intrinsic value are far from precise. Consequently, neither of us feels any urgency to buy an estimated $1 of value for a very real 95 cents. In 2019, the Berkshire price/value equation was modestly favorable at times, and we spent $5 billion in repurchasing about 1% of the company.

 

Over time, we want Berkshire’s share count to go down. <b>If the price-to-value discount (as we estimate it) widens, we will likely become more aggressive in purchasing shares.</b> We will not, however, prop the stock at any level.

Shareholders having at least $20 million in value of A or B shares and an inclination to sell shares to Berkshire may wish to have their broker contact Berkshire’s Mark Millard at 402-346-1400. We request that you phone Mark between 8:00-8:30 a.m. or 3:00-3:30 p.m. Central Time, calling only if you are ready to sell.

 

Didn't Buffett always say he would warn shareholders and the market if Berkshire stock was undervalued BEFORE buying back shares so the market had a chance to make up its mind about it and so that he wouldn't be taking advantage of exiting shareholders? Whatever happened to this sentiment?

[ValueMaven]

Xerxes,

I must admit, that at first glance, I was personally stunned, too. But I quickly regained posture about it. It's honest accounting, because the destruction of value here is real.

Edit:

Yes, reversal of impairment losses on goodwill is prohibited, ref. IAS 36.124.

This reminded me of previous comments about principles guiding goodwill impairment. It involved GenRe and the adjustments that had been made before (adjustments made without a requirement) to more conservative discounting of workers comp reserves. Combining what both said, i guess the goodwill impairment means facing reality with a dose of a margin of safety. The way it's always been. The comment about decreasing transparency with modern (and more detailed) disclosure (1960s vs 2000s) is food for thought.

 

 

AWESOME FIND!! Thank you

[UK]

It seems he changed his mind regarding BRK, but they were net sellers of equities and ultimately cash increased to 147 B from 137 B at the end of q1. So was it really a big change of mind in general?

 

It is indeed very thought provoking. Theres a few things to look at and wonder.

 

-Buffett said, in a not so veiled way that BRK was effectively "more cheap" at 225 in Feb than it was at 175 or so in early May at the time of the AGM.

 

-Buybacks had stopped

 

-His tone at the meeting was death

 

-He sold airlines and WFC

 

-BUT! Bought back a record number(in absolute terms, and in terms of pace) shortly thereafter

 

-Has been adding aggressively to BAC

 

 

If we eliminate the idea that he was laying it on thick, and trying to scare people into selling their stock...all Im left with is that he basically came to a radically different conclusion than he had previously, (big thing for some here)---->Admitted he missed the big opportunity in March/April, but also, seems to believe there is very different potential outcomes, even within similar sectors...IE WFC is so rotten its not even worth holding but BAC is still steaming cheap....And that, BRK is in pretty damn good shape....There's more too, but all in all there is a lot to process here but it does seem compelling in terms of garnering insight into how the man is thinking.