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2Q 2021


ValueMaven

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This is the best BWAR in the market, period. A term Ive coined for "brain work adjusted returns". You can buy this, and basically go away for 3/6/9/12 months(or years) without a worry or an ounce of due diligence. In line with @wabuffo remarks....the buybacks are the key to unlock market average or better performance. Its a nice spot to be in and much more preferable to something with a high brain work requirement like......eh, I won't go there today but you catch my drift. 

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Great recap.  Thanks for sharing!  

 

I'm starting to think: 6% organic growth + 5% share buyback + cash optionality = 10% - 13% over the long-term - I dont think that is unrealistic, and I dont think the shares are currently pricing in this high-level assumption 

 

 

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Buffett had mentioned that he cannot justify cash holding of more than $150bn. That seems to be his ceiling for cash on the balance sheet. As long as the share price is attractive, additional cash flows are going mostly to buyback now due to lack of investment or acquisitions after funding the growth capex.

If BRK price goes up higher than his threshold for buyback then maybe Berkshire will payout a dividend even during Buffett's lifetime. Most likely it will be a special/non-regular dividend rather than a fixed number. 

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7 hours ago, ValueMaven said:

Great recap.  Thanks for sharing!  

 

I'm starting to think: 6% organic growth + 5% share buyback + cash optionality = 10% - 13% over the long-term - I dont think that is unrealistic, and I dont think the shares are currently pricing in this high-level assumption 

 

 

I am thinking something similar. If we think over the coming ten years, it could also be that they make one or two large acquisitions. I think we will see somewhere around 10-15% CAGR FCF per share increase over the coming 10 years. That is my investment thesis. 

Edited by Swedish_Compounder
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17 minutes ago, Swedish_Compounder said:

I am thinking something similar. If we think over the coming ten years, it could also be that they make one or two large acquisitions. I think we will see somewhere around 10-15% CAGR FCF increase over the coming 10 years. That is my investment thesis. 

I think these numbers are too high. It assumes no recession or even slowdown in the economy  (BRK’s  MSR, investments are fairly economy sensitive). Buybacks get less bang for the buck  (in terms of % reduction in shares outstanding) at current valuations multiples. I think high single digits is far more likely.

 

It seems that everyone’s expectation for future returns are creeping up with valuation going higher.

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I think high single digits 8-9% is going to be blowout over the next 10+ years relative to the indices.  That is still 4-6% real return, really fantastic numbers for a realistic long term investor.  I don't see how the S&P can deliver in excess of that given so much of it's return has been multiple expansion.

Edited by no_free_lunch
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1 hour ago, Spekulatius said:

I think these numbers are too high. It assumes no recession or even slowdown in the economy  (BRK’s  MSR, investments are fairly economy sensitive). Buybacks get less bang for the buck  (in terms of % reduction in shares outstanding) at current valuations multiples. I think high single digits is far more likely.

 

It seems that everyone’s expectation for future returns are creeping up with valuation going higher.

I generally agree with this take, at least in terms of the sentiment. However I also think the recession worries are overblown. There were mountains of folks screaming "recession is imminent!" in January 2020, and February, and then "knew it" in March and April 2020...and Buffett didnt even navigate COVID all that well IMO, including being the ultimate contrarian indicator at the AGM and with his bank sales.....and yet, who's laughing now? 

 

A good company(which this is) with a conservative management(which this has) and a massive cash hoard(yup there too), with a business that will "earn" in any environment, just to varying degrees, will clean house over time with a consistent buyback...which I think is now the case. It gets too granular IMO saying, well one year of a recession with -15% share performance makes it hard to do 10-12% over time...however what Ive generally found is that during the -15% year if you crank up the buybacks it'll pay you back quite well in the follow years of rebound. I have a hard time seeing how this doesnt do 8-10% from here on out, with relative ease. Should shares pull back "hugely" I would simply adjust my allocation and also accordingly, my expected future return. 

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Returns also depend on starting and ending valuation (and finaly normal BB are very encouraging for the latter), but I remember him saying, that for 10 percent IV growth they would need "somewhat more normal rate environment". Also I think, that if recesion, or more importantly, some kind of market disllocation (but esspecially due to higher rates) comes in the next 5 or 10 years, BRK would be worth more at the end, then without any turbulences. Conservatively, from current valuation, I do not expect BRK to return more than 8-10 if rates and capital deployment oportunities stays as it is, but as WB said in last interview "sometimes conditions changes very very quickly in the market". So BRK even after recent run up stays quite atractive and defensive, given alternatives. Looking longer term I am almost starting to treat it as a place, instead of cash (or above certain max level of cash), to put capital if I dont have better ideas (depending on valuation ofcourse:)).

Edited by UK
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On 8/8/2021 at 1:18 AM, gfp said:

 

GEICO is certainly under-earning but that should be temporary.  Life/Health Reinsurance is also putting up bad numbers.  Berkshire has primary insurance subs and property casualty reinsurance shooting the lights out (especially on premium growth out of BH Specialty and MedPro), but Berkshire's insurance mix is much different from other insurers.  You should expect to continue to see underwriting losses out of Retroactive and maybe also the periodic payment business.  The AIG transaction alone is responsible for a lot of the retro losses that get reported.  The long duration of that float is key.

Agreed, about 43bn of the float was effectively written by BHRG based on higher interest rates, that profit has been locked in on the asset side, so there will be a continued drag on the combined CoR going forward.

For comparison purposes the 94.5% CoR for the P&C business should be used. 

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I use 8-10% as my rough estimate of what I think BRK will return over the next 5-10 years.  At today's price, I wouldn't build in any multiple expansion, but not contraction either (though, of course, either could happen).

 

As I see it, the attractiveness of BRK is the combination of safety, consistency and certainty.  Almost certain to go up over time at a reasonable pace.  Management isn't going to do anything dumb.  The buybacks and cash to fund them should ensure the stock won't trade exceptionally low for particularly long.

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Everyone else has summed this up well.  All things being equal, a conservative 8% CAGR is a high probability, a market hiccup of  “non central bank intervention regression to the mean” in the next five years may see this rise to 10-12%. The inevitable demise of one, then both of the most talented didactic business brains, we will see in our lifetimes might create some short term opportunities.  This company is indeed set up to reward the long term, rational investor. It Is the only asset that I own, that I am happy to margin against.  This creates some good opportunities over time as you start playing with the unrealised tax owing on your holding.  The benefit of the slightly lower but predictable compounder is not to be underestimated. 

Edited by nwoodman
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16 hours ago, Gregmal said:

However I also think the recession worries are overblown. There were mountains of folks screaming "recession is imminent!" in January 2020, and February, and then "knew it" in March and April 2020...and Buffett didnt even navigate COVID all that well IMO, including being the ultimate contrarian indicator at the AGM and with his bank sales.....and yet, who's laughing now? 

 

resilience of the BRK machine even with all this !!

 

 

On 8/7/2021 at 3:31 PM, wabuffo said:

but I think BRK may be coming out of its ho-hum phase that has lasted way too long while Buffett got sidetracked by PCP, KraftHeinz, IBM, the airlines, etc when he should've been using all that wasted capital in repurchasing BRK. 

 

wabuffo

 

To be fair that basket of so-so investments in the last decade were more than offset by the Apple homerun in the same period. So net +ve.

That said, i somewhat believe the post-Covid canvas-pivot theory.

 

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1 hour ago, Xerxes said:

Cant disagree with anything anyone about the earning streams said but i think folks are benchmarking the upside to past P/book multiples.....thats no longer relevant if berkshire buysback 100B worth of stock and moderate to attractive discounts over a 5 yr window..(say 2019 to 2024, since ~45B has already happened)....at that pt, berkshire likely has a 500B cash+equity portfolio.....and net income from owned businesses of 30B (assuming moderate growth)....if you just expect a 5 % return from the 0.5 Trillion pf....thats another 25B annualized...so you have 55B of the most resilient income in 2024... of course if there is a favorable  bunch of acquisitions that add to100B ...that earning figure likely goes up to 60-65B at least....where do comparable of berkshire trade at?  Are there any comparables given its defensive qualities qualities? What should be the fair premium for that moat? Where does  the market relative to earnings?  AT 20x multiple that's a 1.2Trillion market cap...at 28 x...we're at 1.5 Trillion or 3 times book.. which would be the fair multiple at these low interest times, if the cash is now getting deployed at a more reasonable pace.   

 

 

 

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16 hours ago, nwoodman said:

The inevitable demise of one, then both of the most talented didactic business brains, we will see in our lifetimes might create some short term opportunities.

 

Since from this years AGM it is official, I recently reread this article from 2019:

 

https://www.theglobeandmail.com/business/article-the-oracle-of-edmonton-is-greg-abel-the-next-warren-buffett/

 

Nobody will change Warren Buffett, but new management could have its own strengths, from more hands on operational matters, to more freer hands on divestment, or, maybe even (why not to dream a little) to going semi hostile/activist in acquisitions/larger holdings. Abel's approach and Ted/Todd's involvement with companies they invest, participating in hot tech IPO's when that makes sense, indicates that this is a possibility and why not?

 

 

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57 minutes ago, UK said:

Abel's approach and Ted/Todd's involvement with companies they invest, participating in hot tech IPO's when that makes sense, indicates that this is a possibility and why not?

No disagreement from me.  Ops and investments will do well, perhaps surprisingly so.  I would be amazed  if they don’t have an Ajit replacement in the wings, that even if only 80% as competent, will do well.   All  things considered there is a valuation that I would sell my shares, I hope it never gets there, and this behemoth just keeps chug, chugging along.  

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Nice plot UK. However as the share repurchases become more or less an on-going phenomenon, P/BV loses meaning more and more as time passes. In other words we expect to see P/BV keep increasing as shares are repurchased at a premium to book value but at a discount to intrinsic value. So I think a plot of P/IV is more meaningful. 

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4 hours ago, Munger_Disciple said:

Nice plot UK. However as the share repurchases become more or less an on-going phenomenon, P/BV loses meaning more and more as time passes. In other words we expect to see P/BV keep increasing as shares are repurchased at a premium to book value but at a discount to intrinsic value. So I think a plot of P/IV is more meaningful. 

Remind me of the math here. I remember learning it when first studying autozone long ago. If 5% of share are repurchased what exactly happens to p/b/bvalue? Can't remember the denominator. 

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Yes, sure, BV era is ending:) and I look at BRK more via "normalised earnings" (which you can conveniently borrow and adjust as you like from say Semper Augustus) and PE, however I am to lazy yet to calculate normalised profit back to 1996:). If anybody knows, maybe such data is already available (kind of look through earnings or similar)? Because also it would be nice and possible to compare BRK to SNP in such way.

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18 hours ago, flesh said:

Remind me of the math here. I remember learning it when first studying autozone long ago. If 5% of share are repurchased what exactly happens to p/b/bvalue? Can't remember the denominator. 

P/B post repurchase goes up if shares are bought back at a premium to book. The exact amount is a function of % of total shares repurchased and the premium to book the repurchases take place. It is simple algebra really .......

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17 hours ago, Xerxes said:

IIRC

 

Repurchase of shares (when above BV) will push down the BVPS

Repurchase of shares (when below BV) will push up the BVPS

 

Of course, repurchase of shares above or below intrinsic value has no bearing on the accounting.

Xerxes,

 

YDRC, thank you.

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