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Berkshire Q2 2020 report


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I've had quite a few newer investors ask me about Berkshire's "big buyback" policy and it seems like folks expect this to be ongoing.  Looking at Page 47 of the 10-Q, it is very clear that this level of buyback was extremely price sensitive.  Look at these average prices and the average prices likely achieved during the month following quarter end.  Berkshire is likely back to their dribs and drabs at $215/share.  I had folks extrapolating $30 Billion annual buybacks to me...

 

i don't think a bumpy 3-4% / year ($15-$20B) is a crazy guess. If they don't do a big acquisition/net stock purchases, they need to buy like 25 yards/yr or so just to stay cash neutral. I agree that Berkshire is price sensitive, maybe some years its 1% or some years its 5%. But to see them actually executing at about max volume is a positive foil to the strawman that Berkshire will forever accumulate excess captital.

 

We're moving in the right direction

2018: $1.3B

2019: $4.8B

2020: $9.5B+

 

If 3-4% then that's about the same as S&P 500's net buyback + divvy yield, not that that matters.

 

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I've had quite a few newer investors ask me about Berkshire's "big buyback" policy and it seems like folks expect this to be ongoing.  Looking at Page 47 of the 10-Q, it is very clear that this level of buyback was extremely price sensitive.  Look at these average prices and the average prices likely achieved during the month following quarter end.  Berkshire is likely back to their dribs and drabs at $215/share.  I had folks extrapolating $30 Billion annual buybacks to me...

 

i don't think a bumpy 3-4% / year ($15-$20B) is a crazy guess. If they don't do a big acquisition/net stock purchases, they need to buy like 25 yards/yr or so just to stay cash neutral. I agree that Berkshire is price sensitive, maybe some years its 1% or some years its 5%. But to see them actually executing at about max volume is a positive foil to the strawman that Berkshire will forever accumulate excess captital.

 

We're moving in the right direction

2018: $1.3B

2019: $4.8B

2020: $9.5B+

 

If 3-4% then that's about the same as S&P 500's net buyback + divvy yield, not that that matters.

 

The feedback loop will be interesting.  I think the Q2 opportunity was there because they weren't aggressive in Q1.  Now that they've been aggressive in Q2, poof, the opportunity is gone (or, say, diminished).

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The stability of the operating income is remarkable.  I'm having a hard time however figuring out what normalized operating income are for BRK is however.  While I understand the writedown of PCP - I wouldnt totally write off this investment just yet...1) other aerospace part suppliers are up over 75% - 100% from the March bottom; and are generally lower quality then PCP - although have less oil & gas exposure, and 2) Initially everyone thought GenRe was a terrible acquisition in 00-01', only to have the co' in a few years really turnaround and help fuel BRK's growth in flow.  I am also of the view that at some point in the not to distance future - I believe Berk will start a small divy...not while Warren is around - but likely under Abel.  Kudos to everyone who was flagging this in the low $170s and $180s as being extremely cheap...will be an interesting 12-18months

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Is today the day that BRK will have to announce the material changes in its stock positions, or will we have to wait until Monday, close of market?

 

Thanks.

 

Probably today after the close (45 days from quarter end)

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As expected every airline share is gone. plus OXY shares

 

Sold financials:

85.6m shares of WFC

35.5m shares of JPM

8.3m shares of PNC

4.8m shares of BNY

0.8m shares of MTB

0.5m shares of USB

all GS shares

 

did not sell any AXP or BAC

 

sold 82.4m shares of Sirius XM

 

wabuffo

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Surprised by the JPM sale. Maybe it's tax harvesting? We know he's been adding to BAC recently, but I always thought that most of the big banks these days are very similar, with WFC being the exception because of all their legal issues.

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Yeah, given the sort of odd percentages and the selling PNC, BK, MTB, and USB, (but like not blowing completely out of any of them...as he does) etc... seems like he might be farting around with tax loss harvesting and keeping exposure to the sector via BAC. -$6B in sales and then +$2 billion just in reported BAC purchases.

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Bloomberg has two articles on this.

The only thing they could mention as highlight is the half-billion investment on Barrick Gold.

Marc Bristow is going to have field day.

 

I admit That guy is pretty good, I have been following him since he joined Rangold with Barrick. Both him and Thornton are big fan of the 8 CEO book. Sadly I never invested in.

 

Hopefully market will focus on what matters, which is BRK that is cutting down its collection of random financials and building up around one name. I think these recent moves of increasing concentration slowly and making the portfolio less of a jumble will pay dividend to BRK over the medium term l, hopefully with a re-rating.

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Could it be that Buffett is hedging against a Biden election win?

 

If Biden wins the presidency it's probable the tax cuts from Trump will be reversed. So it could make sense to cristallise the historic profits in some stocks before year end.

 

By selling f.e. WFC, he is offsetting the huge wins in WFC with losses elsewhere while at the same time keeping his bank exposure by buying more of BAC, a bank which he intends to keep anyways.

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A lot of that seems very macro brained and requiring clairvoyance for him to make a big bet (I acknowledge he does mess around with that stuff to keep out of the bars, as Munger put it).  Almost no chance the GOLD is his position, in my opinion.  Does he even get out of bed for half a billion?

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My guess is he has soured on banks because they are trading much where they were a year ago despite lower interest rates and mounting credit losses in the pipeline so they haven't really priced in the pain to come. They've been proactive taking large provisions and have very strong capital positions and have been stress tested for some pretty dire economic outcomes but they are still going to take a big hit.

 

It is interesting he hasn't trimmed Apple. I wonder if he is making the same mistake he made with Coca Cola. Wonderful business and very dominant with a lot of pricing power but 35x forward earnings is very expensive

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Re 35x forward earning being v. expensive. Makes sense for traditional valuation metrics. However, recently have been wondering if big tech is "different" because one doesn't know the TAM.  Unlike brick and mortar companies where there is a known market with a growing pie, big tech tends to evolve and add new pies.

 

So Aapl is expensive today if their TAM is computers, iPhones, AirPods, iWatch & services. However, if they add "health" or "?" then their valuation today may not be expensive. In the past 25 years Aapl has gone from being a computer company to something new every few years. Each time they add a product it creates network effects that strengthen the other components.

 

In some ways Amazon is similar. One could value it 25 years ago if one looked at the online books sales market. However, one couldn't envision retail sale and 3rd party sales and web services.

 

My guess is he has soured on banks because they are trading much where they were a year ago despite lower interest rates and mounting credit losses in the pipeline so they haven't really priced in the pain to come. They've been proactive taking large provisions and have very strong capital positions and have been stress tested for some pretty dire economic outcomes but they are still going to take a big hit.

 

It is interesting he hasn't trimmed Apple. I wonder if he is making the same mistake he made with Coca Cola. Wonderful business and very dominant with a lot of pricing power but 35x forward earnings is very expensive

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My guess is he has soured on banks because they are trading much where they were a year ago despite lower interest rates and mounting credit losses in the pipeline so they haven't really priced in the pain to come. They've been proactive taking large provisions and have very strong capital positions and have been stress tested for some pretty dire economic outcomes but they are still going to take a big hit.

 

It is interesting he hasn't trimmed Apple. I wonder if he is making the same mistake he made with Coca Cola. Wonderful business and very dominant with a lot of pricing power but 35x forward earnings is very expensive

 

He's bought $2 b of BAC since quarter end. Maybe he doesn't like the consumer franchise as much as those banks, ex-BAC; and doesn't foresee great things in investment banking going forward.

 

What's the mistake with Coca-Cola? He has billions a year coming in, what investment would be better than holding on to Coca Cola? He doesn't need to sell it, the business if fantastic - if you're an individual investor and bought 15 years ago, you're not looking at major gains, but that doesn't make it a mistake for Buffett; it is for you. He gets a share of the earnings being a part owner, and $650m a year in dividends.

 

Apple could easily be a similar type of investment, a third business if you will.

 

Bank of America is shaping up to be a hard never sell position; WFC used to be in that camp but screwed up big time over and over.

 

 

 

 

 

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The mistake with KO was not selling any in 1998.  He was sitting on massive gains, which were both a much bigger percentage gain and represented a bigger percentage of the Berkshire portfolio than AAPL does today, and then the stock languished for almost 20 years.

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The mistake with KO was not selling any in 1998.  He was sitting on massive gains, which were both a much bigger percentage gain and represented a bigger percentage of the Berkshire portfolio than AAPL does today, and then the stock languished for almost 20 years.

 

Again, that's not a mistake. His returns in KO vastly outperform the S&P since the initial investment. Further, are you discounting the dividends received by Buffett and his ability to reinvest those dividends elsewhere? If he had no further cash flow coming in, I'm sure he would have sold KO a while ago, and made new investments. But he hasn't needed to. I also wouldn't underestimate the intrinsic value of having such a rock-solid investment such as KO.

 

Besides, MSFT was dead money for a decade or so as well. Then it got a second life. What happens if KO gets a second life? Whose to say their investment in coffee, sugar free drinks, seltzer, water-based beverages might not hit it out of the park?

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Buffett is the one who said it was a mistake.

 

On Coca-Cola and Gillette:

"I made a mistake" in not selling them at their highs in the late 1990s. "They weren't the focal point of the bubble, but they achieved bubble prices."

 

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