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Whats Wrong, Warren? 2020


ValueMaven
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21 years ago the famous article in the WSJ asked such a question.  In a similar parallel faithful Berkshire shareholders are again asking this same question after a fairly material period of underperformance through 2018 - 2020 time-period.  Berkshire is a vastly different company then in 1999 - with a much more durable business model/operating income profile in my view.  Unlike the 1999 article, Berkshire has been buying back stock in decent size - but not all that all that aggressively, and is sitting on nearly 5x the amount of cash then was the case back then. 

 

With the world afloat of cash, central banks extremely accommodative, what should Berkshire do?

 

Here is an idea: Management should publicly state to shareholders that we will allow cash to grow to say: $175B MAX - anything more will go directly to share buybacks - unless we view shares as overvalued - in which case we will stop.  Stating a cash ceiling might be well received by investors, many of whom feel that the largest elephant Berkshire can bag is in an Omaha zoo.  Buffett has stated before that Omaha is bringing in between $400M - $500M NET a week. 

 

Should should be fun!

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Agree the Elephant in Omaha Zoo needs to be tagged, bagged, and put in the freezer.  But why do anything to cause a stir and raise ticket prices to shoot the beast? 

 

Prefer to lull the market to sleep while accumulating shares.....just gonna cost more in the end.  Prefer actually the price of the enterprise go down in value so the buy backs are more accretive.  Understood, my "stock portfolio balance" will be depressed and my "returns" will lag the market however that is the signal of an undervalued business I want to own over the long term - 25yrs or more.  As a believer in true cash flow and multiples of such rather than adjusted EBITDA - Berkshire is well positioned for the future as a wonderful business, not a stock.  So to your point, I'll take to $500M/week and sleep soundly...waiting for opportunity to find value. 

 

Remember both Mr. Buffett and Mr. Munger during an annual meeting 2 years ago (2019 meeting quotes below).  If we listen, they tell us what they are gonna do, we just gotta listen.  Its all there.  Merry Christmas Eve Eve to all!!

 

2019 Meeting:

 

Mr. Buffett: “Whether we had $100 billon or $200 billion would not make a difference in our approach to the repurchase of shares. The real thing is to buy back…repurchase shares…only when you think you’re doing it at a price where the remaining shareholders have had…are worth more the moment after you repurchased it than they were the moment before. But we want to be sure, when we repurchase shares, that those people who have not sold shares are better off than they were before we repurchased them. And it’s very simple.”

 

Mr. Munger: “Well, I predict that we’ll get a little more liberal in purchasing shares.”

 

 

 

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Berkshire the business has performed like I expected, shares have underperformed the S&P because the index got more expensive and Berkshire cheaper, this trend will not continue. Absolute cash holdings are high but relative to equity, market cap etc. it's not that high. Unfortunately the world is awash in cash and time doesn't stand still for anyone, not even the master.  That said I'm still quite confident that they'll find something reasonable to do with the cash hord. 

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seems Berkshire is a total play on unexpected inflation. short of some unknown relatively cheap growth at a reasonable price business they can acquire , what else will cause outperformance but a sudden event where money becomes valuable again due to rising interest rates ?

 

That thought never occurred to me, but does seem like a reasonable rationalization for a cash hoard.

This would be a provocative question to ask at the next virtual AGM.

 

“Do you and Charlie view cash as being more or less valuable in a rising interest rate environment?”

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Timely equity purchases?  Improved underwriting at GEICO/market-share growth? improved margins at BSNF/PCP/Lub? continued energy/utility integration? aggressive buybacks?  Need I continue? 

 

I have fair value pegged at around 68-70 cents right now.

Seems about right.  Share buybacks at a 5-10% of float along with 8-10% toplline growth will be just fine; should push share prices north at a 15% annual clip.  They have ~$2B / month coming in along with the current cash on the balance sheet.  As well, the utilities will add generation capacity which creates accelerated depreciation credits.  There is a long reinvestment runway and lots of optionality.

 

The negative Buffett / Berkshire pieces are good for selling online ads, but often precede a decent run-up in the stock price.

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The more I thought about this cash ceiling - the more stupid I think it is...

 

Also - does anyone know why BHHS is inside of BHE?  Shouldnt it be part of the MSR 'grove'

 

Just an accident of history.  MidAmerican bought Amerus HomeServices in 1998, before Berkshire's purchase of MidAmerican in 1999.  The company has remained inside MidAmerican and in fact Berkshire does not own 100% of BHE.

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