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Berkshire Q3 2020 Report


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https://www.berkshirehathaway.com/qtrly/links3rdqtr20.html

 

Copied from repurchase thread -

"Approximately $9 billion was used to repurchase Berkshire shares during the third quarter "

 

9/30 share count 1,570,636 A share equivalents

10/26 share count 1,563,152 A share equivalents.

 

So looks like an additional $2.38 Billion worth of repurchases completed after quarter end up to 10/26.  Quite the clip compared to his previous dribs and drabs.

 

Looks like he sold some AAPL near the top.  Have to dig into the numbers more but AAPL shares owned by BRK down to about 964.5 million shares instead of what would have been slightly over a billion shares post-split.  Maybe sold ~ $4.7 Billion at market value in the Q ?

 

Consolidated cash at $145.7 Billion after $9 Billion in repurchase activity in the Q

 

Other new information seems to be about $17.6 Billion in new stock purchases in Q3 (not net of sales) - likely showing up in the $15.275 Billion increase in the cost basis of equities in the Commercial, Industrial and Other category. (Japanese stocks would be here but hard to know how much of those was actually purchased in Q3 since he said he had been accumulating for some time.  Average price was certainly better for BRK if the bulk of Japanese trading company purchases was during Q3)

 

Banks (likely rest of WFC) continue to be sold with Banks, Insurance, Other Cost basis declining another $4 Billion in the quarter.

 

Some Apple shares sold near the recent highs - but only $1.69 Billion in net reduction in Cost Basis for consumer products.  Looks like Berkshire held about 964.5 million AAPL shares at quarter end.

 

Total sales of stock in the Q was $12.8 Billion (WFC and $4.7B of Apple?  We'll find out soon enough)

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End of quarter book value per B share was $176.22.  So Friday's close was around 1.185x quarter end book.  Sounds like that is the reason he repurchased so aggressively.

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why is he selling down financials? will they be depressed a long time? is it a view on chronically lower interest rates ?

 

I can't answer for buffet but to me it starts with acknowledging that these are extraordinary times.  We are in now our second decade in a row of deflation, or close enough to deflation.  You also have obscene levels of government spending with no end in sight.  So inflationary and deflationary forces pushing at each other.  As long as the government manages to keep these forces balanced it will be fine.  If they fail , they will of course, we really will get inflation.  Perhaps that is what is happening now with surges in lumber and tech stocks.  How meaningful is a WFC price to book valuation if there is inflation?

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Joel's Berkshire compilation [top link] pp. 4099 - 4101 [of 4966] :

 

Berkshire 2017 AGM, afternoon session, Q2 :

 

2. Pressure to deploy Berkshire’s cash grows as it nears $100B

 

WARREN BUFFETT: Jay?

 

JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion.

 

Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share repurchase threshold?

 

WARREN BUFFETT: Yeah, the — when the time comes — and it could come reasonably soon, even while I’m around — but [if] we really don’t think we can get the money out in a reasonable period of time into things we like, we have to reexamine then what we do with those funds that we don’t think can be deployed well.

 

And at that time, we’d make a decision. And it might include both, but it could be repurchases. It could be dividends.

 

There are different inferences that people draw from a dividend policy than from a repurchase policy that, in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in.

 

But if we really — if we felt that we had cash that was unlikely to be used — excess cash — in a reasonable period of time, and we thought repurchases at a price that was still attractive to continuing shareholders was feasible in a substantial sum, that could make a lot of sense.

 

At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But at a point, the burden of proof is definitely on us.

 

I mean, that — I — the last thing we like to do is own something at a hundred times earnings where the earnings can’t grow.

 

I mean, we’re — as you point out, we’ve got almost a hundred billion — it’s $90-plus billion invested in a business, we’ll call it a business, where we’re paying almost a hundred times earnings. And it’s kind of a lousy business.

 

CHARLIE MUNGER: It’s more after after-tax earnings.WARREN BUFFETT: Yeah. So, it — you know, we don’t like that. And we shouldn’t use your money that way for a long period of time. And, then, the question is, you know, are we going to be able to deploy it?

 

And I would say that history is on our side, but it’d be more fun if the phone would ring instead of just relying on history books.

 

And, you know, I am sure that sometime in the next 10 years — and it could be next week or it could be nine years from now — there will be markets in which we can do intelligent things on a big scale.

 

But it would be no fun if that happens to be nine years off. And I don’t think it will be, but just based on how humans behave and how governments behave and how the world behaves.

 

But like I say, at a point, the burden of proof really shifts to us, big-time. And there’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it.

 

Charlie?

 

CHARLIE MUNGER: Well, I agree with you. The answer is maybe. (Laughter) [<-Please read this in the context of Mr. Gelb's question, John]

 

WARREN BUFFETT: He does have a tendency to elaborate. (Laughter)

 

The above socalled "hundred times earnings & "not growing" business" is now - 3½ years later - even louzier, and we're near 150 B ... Inflection point with regard to share buybacks?

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I think owning and watching AAPL may have helped enlighten the old man as to the true force of buybacks. You dont need a growing business, but if you have one, all the better. You just need to start with a huge pile of cash. AAPL had what at the peak? I think $220B or so? There's a lot of similarities except a narrative change with BRK could be even more explosive as its been a dull and boring stock for the past half decade and shareholder base is mainly conservative folks and old geezers.

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I think owning and watching AAPL may have helped enlighten the old man as to the true force of buybacks.

 

C'mon man - Buffett talked about the importance of buybacks when he owned General Foods in the early 80s and they were buying back stock aggressively.  He was around to watch Henry Singleton make his tender offers to repurchase Teledyne stock in the 1970s.

 

Give the Old Fool some credit.  I think he understands it full well as he encouraged many of his investees to massively repurchase shares.  I think he just wanted to keep painting his canvas and thus never wanted to give back any paint until he absolutely had to.  Perhaps he feels he's reached that point.  My 2-cents is that he's stretched a lot to keep painting lately with sometimes poor results (Kraft, Oxy, the airlines, PCP) where his shareholders would've been better if he had returned those billions back via buybacks (not dividends).

 

wabuffo

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^ Quite a good comment. In many ways, Buffett may be a step ahead of the crowd. It's always great sport to second guess Buffett.

 

For a while, I owned a dull and boring stock, AutoZone - just not long enough to see the full impact of buybacks.

 

Yup, AZO, NVR, and DDS are terrific examples of the power of the repurchase.

 

I am sure Buffett is aware of what can be done with buybacks. And I agree with the point that he had greedily been hoarding cash for his own reasons, but he's also seemingly had a fairly large change of heart over the past couple quarters and on a relative basis there really isn't "that" much of a valuation difference in the shares with respect to its range over the past 4-6 quarters. Even at its cheapest prices, he wasn't really going insane. People thought Q4/Q1 activity was a big deal. Annualizing this Q puts the pace at about 7% s/o per year. That's nothing to sneeze at regardless of who you are, but quite incredible with respect to what the previous expectations were. Typically, when you see this sort of trend, it continues in a big way. Again, look at how AAPL really accelerated with this once they saw it paying off.

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Buffet had said in the past that low trading volume was a factor limiting buybacks without moving price materially. So, given the significance of the size in Q3 does that mean a whole lot of long term owners were selling out to BRK for whatever reason (tax etc) allowing BRK buy back without affecting prices a lot.

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I’ve been thinking about this a lot recently…and I realize this is extremely simplistic way to think…however there is some validity here imho– but I’d prefer Ohama not reduce its exposure to AAPL.  If you think about it: Utilities, Rails are all old-world oriented businesses…again, extremely simplistic thinking.  Insurance is its own unique animal – but generally doesn’t get associated with new-world economy stocks.  PCP, Lubrizol, etc…old world.  That means – as Buffett has repeatedly said – that he views AAPL is their 3rd largest business and NOT as a stock – it really does fit in nicely in Berkshires various groves. 

 

Also very interesting points above about BERK and AAPL regarding buybacks and capital allocation.  If you figure $1.1 - $1.2B is following into Ohama each month on a NET basis, where does that get us with shares outstanding in 5-10 years??  This might be a compounding machine if the buybacks remain.

 

Also – I was extremely impressed w/insurance results.

 

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It's obvious he was/is hoping to bag another elephant. And considering his success with BNSF and BHE who can fault him. Anyway, a combination of the current FED as well as record amounts of dry powder @ PE shops makes it seem like a very difficult task. Possibly for a very long time. At the same time, Berkshire is really not getting much credit for the formidable combination of businesses, their free leverage and the ability to invest large amounts of capital internally (although not enough - BHE should really pursue offshore wind...). Perhaps be came around to the idea that Buffett bagging Berkshire could be his final elephant?

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Guest longinvestor

He’s just being opportunistic with the buybacks as he’s always been with buying anything else, at all times over the past 50 years. “in relation to the next best opportunity” is operative with Stock repurchase as with other things. The sackful of cash allows Omaha to perhaps think in terms of “these two versus the next two” or three! This should go on, unhurried, for a very long time!

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It should be noted for those that haven't seen this already that consolidated cash was widely mis-reported, by myself as well, as we hastily missed the line item for a $6.795 Billion payable for purchase of U.S. Treasury Bills on the balance sheet.  Consolidated cash more like $138.9 Billion at quarter end.

 

hat tip to Christopher Bloomstran at Semper Agustus -

 

 

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Now you got the vaccine news. Names like Berkshire will benefit this morning on the back of the buyback as well. 

 

The real “juice” in my opinion is when BRK operating earnings will go back to normalization sometimes say in late 2021. That normalized operating earning will be passing through a much lower share count, boosting the EPS. Assuming anyone is following EPS for BRK.

 

 

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