Ted and Todd Results

[ValueArb]

I have zero doubt that Ted and Todd are talented investors, certainly far more than I. But as I have said repeatedly on this forum, I think the problem for Berkshire isn't how good Ted and Todd will be once Warren is gone, its that Berkshire has grown so much that beating the market with such a large portfolio is extremely difficult for anyone, including Warren. Since January 1, 2009 its close but BRK appears to be trailing the SP 500 with dividends. Thats a 15+ year period where the portfolio started at $120B and ended at $350B. 

 

I don't know what strategy Warren or his successors can come up with to make it easier to produce market beating returns. I think buybacks have been helping, when made at attractive prices they not only improve future returns but also keep investment capital from growing too much. They could pay dividends to reduce the size of the investment portfolio as well, but they probably can't reduce it too much because of insurance requirements. 

 

I think one area where Berkshires size doesn't handcuff it too terribly is in acquisitions. I mean it still makes it harder to take advantage of small opportunities but Berkshires structure with a trustworthy management that can make quick decisions with huge amounts of capital is unique. So will T&T pile up dry powder for opportunities that only occur when Mr Market is in his depressive stages? That strategy could mean accepting decade long periods of underperformance between opportunities.

 

I predict that a decade or so after Warren passes that whoever is running Berkshire will try to split it up to deal with criticism over market lagging returns. Breaking up Berkshire might sound like a failure, but it beats the alternative of having a Ballmer like CEO who decides the way to deal with its enormous size is to find and enforce synergies across all the disparate businesses. I would shudder to find someday GEICO cross selling Sees Candies, every subsidiary required to ship on BNSF whenever possible and every Pilot location forced to host a Dairy Queen.  

[KPO]

23 minutes ago, charlieruane said:

Gotta think in risk-adjusted terms. Since January 1, 2009, the index's P/E multiple has expanded to untenable heights, especially at current interest rates; Berkshire's has expanded back to its average, more or less. Berkshire's growth in earnings, meanwhile, has been solid. Berkshire roughly matching the index's return over this period really means Berkshire outperformed—substantially—in risk-adjusted terms, especially when taking the dividend tax benefit into account. 

 

When one considers how leveraged the S&P500 is relative to Berkshire, as well as Berkshire's much larger cash allocation, the risk-adjusted superiority magnifies. I wish Ted and Todd had a different benchmark. 

Exactly the right way to think about this and why index comparisons are overrated if returns are achieved with less risk, but otherwise equal.

[Hektor]

37 minutes ago, ValueArb said:

I don't know what strategy Warren or his successors can come up with to make it easier to produce market beating returns.

May be they will take a leaf out of the Templeton/Watsa playbook and go truly global for opportunities.

[xboojum]

55 minutes ago, ValueArb said:

I don't know what strategy Warren or his successors can come up with to make it easier to produce market beating returns. I think buybacks have been helping, when made at attractive prices they not only improve future returns but also keep investment capital from growing too much. They could pay dividends to reduce the size of the investment portfolio as well, but they probably can't reduce it too much because of insurance requirements. 

 

I think one area where Berkshires size doesn't handcuff it too terribly is in acquisitions. I mean it still makes it harder to take advantage of small opportunities but Berkshires structure with a trustworthy management that can make quick decisions with huge amounts of capital is unique. So will T&T pile up dry powder for opportunities that only occur when Mr Market is in his depressive stages? That strategy could mean accepting decade long periods of underperformance between opportunities.

 

I think this is 100% correct and one of the reasons that the annual letter this year was somewhat distressing; if Buffett is down on BNSF on labor concerns and utilities for a multiplicity of reasons, where's does the money go? There's a New Mexico-based utility, PNM, that is at multiyear lows after a blocked acquisition, and on geographic grounds it seems like it would slot so nicely into BHE, but it sounds like Buffett isn't interested in expanding his utility holdings.

 

I had hoped that Marmon would turn out to be something like a mini-ITW or (pre-biotech) -Danaher, but that doesn't seem to have been the case. The realtor rollup is maybe secularly threatened, and I don't even know if the car dealership acquisitions are still ongoing. The "platform business" idea that got Valeant's stink all over it, that a company was vastly more valuable if it could reproducibly grow through acquisition, would be well suited to just this sort of circumstance, but unless you're Constellation it's hard to see how you could scale it to tens of billions of dollars a year, every year.

 

Genuinely a tough problem, even though Berkshire (juiced by the Apple grand slam) has performed really well all things considered over the past ten years. Like a lot of you, I think there are going to be significant capital returns at some point after Abel takes over, if not a carveout of some of the businesses.

[ValueArb]

1 hour ago, charlieruane said:

Gotta think in risk-adjusted terms. Since January 1, 2009, the index's P/E multiple has expanded to untenable heights, especially at current interest rates; Berkshire's has expanded back to its average, more or less. Berkshire's growth in earnings, meanwhile, has been solid. Berkshire roughly matching the index's return over this period really means Berkshire outperformed—substantially—in risk-adjusted terms, especially when taking the dividend tax benefit into account. 

 

When one considers how leveraged the S&P500 is relative to Berkshire, as well as Berkshire's much larger cash allocation, the risk-adjusted superiority magnifies. I wish Ted and Todd had a different benchmark. 

 

The SP 500's PE has been at "untenable" heights for most of the last 15 years and its earnings have tripled since 2009. But lets agree that its due for a correction and that its Berkshire beating returns of the last 15 years are going to be given back, and that Berkshire will be "winning" when hat happens. 

 

The problem is that before 2000 there never was a need to come up with excuses for Berkshires performance. So even conceding the S&P 500 seems significantly overpriced, the comparison wouldn't even be close matter if Berkshire was increasing in value over 15% a year. But since 2000 book value is barely growing 9% a year, making it unlikely Berkshire is going to increase in value at any higher rate in the future. 

 

It just gets harder every year as that portfolio grows. 

Edited May 29 by ValueArb

[Eldad]

I used to think there was a super secret plan for BRK after WB but now I don’t really think so. 
 

Board will drag feet for way too long out of nostalgia. They are already rebranding as the super safe alternative to the S&P. Super safe investors will want a dividend. I still hold as my largest position for emotional reasons and because the market is in a crazy bubble and WB may have one more trick up his sleeve. 

[Masterofnone]

Mr. Buffett is rational and proud of his achievement creating Berkshire. He knows that it is a certainty that at some point he won't be steering the ship. Don't worry about there being a clear and concrete plan in place.

[Intelligent_Investor]

I think the most rational thing for Greg is to break up Berkshire by splitting insurance/operating company into separate companies so each manager can stick to what they do best. But it might be Greg's successor that does that, if Greg wants to keep Warren's vision

[Eldad]

1 hour ago, Intelligent_Investor said:

I think the most rational thing for Greg is to break up Berkshire by splitting insurance/operating company into separate companies so each manager can stick to what they do best. But it might be Greg's successor that does that, if Greg wants to keep Warren's vision

Yeah I seriously doubt the board would let Greg do that. 
 

I was thinking do like 20 spin-offs with an insurance company coupled with a few operating companies and then BRK maintains 51% ownership like CSU is doing. That way you maintain and reinvigorate the insurance float plus investment business model on a smaller scale. 
 

It is pretty clear that CSU has studied everything about BRK and is getting in front of the too big problem way earlier. 

[John Hjorth]

2 hours ago, Intelligent_Investor said:

I think the most rational thing for Greg is to break up Berkshire by splitting insurance/operating company into separate companies so each manager can stick to what they do best. ...

 

Here we go again. Opinion obviously based on no clue of the structural consequences, including taxes, capital levers, financing terms group wise, insurance and reinsurance capacity and float.

 

Also, please see topic title.

[MarioP]

Ok the base argument to do a break up is that Berkshire is too big to beat the S&P500…But which is the biggest capitalisation, BRK or S&P500 ? 

[Eldad]

14 hours ago, MarioP said:

Ok the base argument to do a break up is that Berkshire is too big to beat the S&P500…But which is the biggest capitalisation, BRK or S&P500 ? 

It’s not a bad point. Charlie said that BRK was a better collection of businesses than the S&P, but the bottom line is SPY has had a way higher ROIC than BRK for some time. Deploying capital into new businesses could help BRK overcome this, but they will not. 
 

This is mainly due to Meta, GOOGL, Msft, aapl, Nvidia, Amzn being some of the most profitable businesses of all time with incredible growth rates. This is why Charlie said you basically have to own them to compete. The giant AAPL position helps but is not enough. 
 

Now you have WB saying in the latest letter, we are better than the average S&P company. The problem is BRK is way worse than whatever the market weighting of those superstars is and the S&P as a whole because of those giants. 

 

 

[KPO]

1 hour ago, Eldad said:

It’s not a bad point. Charlie said that BRK was a better collection of businesses than the S&P, but the bottom line is SPY has had a way higher ROIC than BRK for some time. Deploying capital into new businesses could help BRK overcome this, but they will not. 
 

This is mainly due to Meta, GOOGL, Msft, aapl, Nvidia, Amzn being some of the most profitable businesses of all time with incredible growth rates. This is why Charlie said you basically have to own them to compete. The giant AAPL position helps but is not enough. 
 

Now you have WB saying in the latest letter, we are better than the average S&P company. The problem is BRK is way worse than whatever the market weighting of those superstars is and the S&P as a whole because of those giants. 

 

 

But will they continue to be super stars? It kind of reminds me of the “twenty largest companies” exercise from the 2021 meeting.  In a flat or down market environment I wouldn’t be surprised to see Berkshire have a market beating result, and potentially materially so.

 

https://finance.yahoo.com/news/buffett-shares-lessons-for-new-retail-investors-190611968.html

[Eldad]

1 hour ago, KPO said:

But will they continue to be super stars? It kind of reminds me of the “twenty largest companies” exercise from the 2021 meeting.  In a flat or down market environment I wouldn’t be surprised to see Berkshire have a market beating result, and potentially materially so.

 

https://finance.yahoo.com/news/buffett-shares-lessons-for-new-retail-investors-190611968.html

Who knows. I was big on the train of  tech bubble 2.0 will burst eventually prior to Covid. Then Covid came along and they really showed everyone that they were a completely superior new class of business. 

 

 

[DooDiligence]

Capital efficiency and tax avoidance seem to be the big rationale(s) for keeping it all together. This will rankle many (and rightfully so) but I still see Easter eggs at some point. I might be dead by then but...

[John Hjorth]

11 hours ago, DooDiligence said:

Capital efficiency and tax avoidance seem to be the big rationale(s) for keeping it all together. This will rankle many (and rightfully so) but I still see Easter eggs at some point. I might be dead by then but...

 

I'm chewing and brewing on a post in this topic to elaborate on my sour outpourings above in here. This Saturday is however earmarked to struggles with a rollator and crutches etc.after operation Tuesday [-A fight which I'm determined, - hell bent -, to win, but things take time!].

[DooDiligence]

3 hours ago, John Hjorth said:

 

I'm chewing and brewing on a post in this topic to elaborate on my sour outpourings above in here. This Saturday is however earmarked to struggles with a rollator and crutches etc.after operation Tuesday [-A fight which I'm determined, - hell bent -, to win, but things take time!].

 

Oh damn. I hope you're doing better. Gentle and restorative yoga as soon as your physician says it's ok. Seriously, if you do it for a while you'll get so familiar with the positions that you'll pick a few favorites to randomly and effortlessly do throughout the day. It makes a world of difference.

[tyler@pellom.org]

On 5/29/2024 at 6:14 PM, Eldad said:

I used to think there was a super secret plan for BRK after WB but now I don’t really think so. 
 

Board will drag feet for way too long out of nostalgia. They are already rebranding as the super safe alternative to the S&P. Super safe investors will want a dividend. I still hold as my largest position for emotional reasons and because the market is in a crazy bubble and WB may have one more trick up his sleeve. 

 

Warren has talked in the last few years about how much he valued being able to save certain companies during/after the GFC, and, while I don't think he's preparing for a crisis of that magnitude, it is my belief he is accumulating cash in order to allow Greg to be the "savior" should such a need arise after Warren's death. It would also present great buying opportunities, too, of course. 

[Eldad]

2 hours ago, tyler@pellom.org said:

 

Warren has talked in the last few years about how much he valued being able to save certain companies during/after the GFC, and, while I don't think he's preparing for a crisis of that magnitude, it is my belief he is accumulating cash in order to allow Greg to be the "savior" should such a need arise after Warren's death. It would also present great buying opportunities, too, of course. 

Yes I agree. ML talked about this on the Constellation call. Saying Munger wanted to lever up more but that WB wanted to be the backstop for the American economy. And that this had not really worked out well for BRK. (I am much more in camp Munger on most things they disagree on). 
 

That is a noble aspiration and WB certainly has the right to do that, but it doesn’t really help me as a shareholder. 
 

I have gone from about 20% BRK in 2021 to 10% now. I think that is still probably too much, but it’s hard to sell it for me. 

[Sweet]

On 5/29/2024 at 9:45 PM, charlieruane said:

Gotta think in risk-adjusted terms. Since January 1, 2009, the index's P/E multiple has expanded to untenable heights, especially at current interest rates; Berkshire's has expanded back to its average, more or less. Berkshire's growth in earnings, meanwhile, has been solid. Berkshire roughly matching the index's return over this period really means Berkshire outperformed—substantially—in risk-adjusted terms, especially when taking the dividend tax benefit into account. 

 

When one considers how leveraged the S&P500 is relative to Berkshire, as well as Berkshire's much larger cash allocation, the risk-adjusted superiority magnifies. I wish Ted and Todd had a different benchmark. 

 

How does thinking in risk-adjusted terms help Berkshire shareholders outperform?

 

Unless you the investor uses leverage to buy Berkshire on margin to risk match the SP-500 what difference does it make to say risk-adjusted?

 

OK, I get it, close to retirement, more stable business etc... what of the rest of us not close to retirement just looking to compound as fast as possible?

 

Edited June 3 by Sweet

[charlieruane]

3 hours ago, Sweet said:

How does thinking in risk-adjusted terms help Berkshire shareholders outperform?

 

 

The outperformance is in risk-adjusted terms, and it doesn't have anything to do with being "close to retirement." If you're young and trying to compound as fast as possible, you too should care about risk, i.e. the chance of permanent capital impairment. Seth Klarman says this over and over—"we don't have an absolute hurdle rate, we target risk-adjusted rates of return."

Take an extreme example. What would you rather own, an investment that is certain to offer 5% p.a. every year with 0 risk of blowing up, or an investment that offers 10% p.a. but has a 2% chance of being wiped out in a 100 year period? You must own either investment for 100 years. I'll pick the former every time because the odds that the "better compounder" gets wiped out at some point are way too high, rendering all gains moot. If someone thinks he/she can "trade around" this blow-up risk, well, best of luck with that. 

Berkshire used to offer both risk-adjusted and absolute outperformance. Going forward, it's likely to offer just risk-adjusted outperformance... but in reality, risk-adjusted outperformance is what true investors really care about. So, Berkshire is still worth looking at and owning for those of us who do not need to get rich quickly by taking on a lot of existential risk. 

 

Edited June 3 by charlieruane

[Eldad]

2 hours ago, charlieruane said:

 

The outperformance is in risk-adjusted terms, and it doesn't have anything to do with being "close to retirement." If you're young and trying to compound as fast as possible, you too should care about risk, i.e. the chance of permanent capital impairment. Seth Klarman says this over and over—"we don't have an absolute hurdle rate, we target risk-adjusted rates of return."

Take an extreme example. What would you rather own, an investment that is certain to offer 5% p.a. every year with 0 risk of blowing up, or an investment that offers 10% p.a. but has a 2% chance of being wiped out in a 100 year period? You must own either investment for 100 years. I'll pick the former every time because the odds that the "better compounder" gets wiped out at some point are way too high, rendering all gains moot. If someone thinks he/she can "trade around" this blow-up risk, well, best of luck with that. 

Berkshire used to offer both risk-adjusted and absolute outperformance. Going forward, it's likely to offer just risk-adjusted outperformance... but in reality, risk-adjusted outperformance is what true investors really care about. So, Berkshire is still worth looking at and owning for those of us who do not need to get rich quickly by taking on a lot of existential risk. 

 

Isn’t it sort of a reach to say over a long period of time a single stock is less risky than an ever changing index of 500 stocks? Even BRK? There is really no chance of the S&P 500 going to zero. I would argue there is a bigger chance of BRK going to 0 in a crazy insurance event.
 

Let’s just assume neither one is going to 0. WB himself says I would rather have a lumpy 15% than a less volatile 12. I think if we are here reading about BRK we all understand that volatility is not risk. If volatility is not risk and the S&P has no chance of permanent loss then S&P is probably the better choice going forward. 

[ValueArb]

On 5/30/2024 at 6:58 PM, MarioP said:

Ok the base argument to do a break up is that Berkshire is too big to beat the S&P500…But which is the biggest capitalisation, BRK or S&P500 ? 

 

This comparison isn't very useful because the S&P 500 isn't a single entity, it's a combination of 500 different stocks with 500 different CEOs. Almost all of the those CEOs are likely significantly worse at capital allocation than Warren, but almost all have easier allocation decisions and more allocation options.

 

And in reality, it's the biggest 7 companies and their CEOs that drive most of the present day S&P 500 value. Hard to pace it when nVidia appears to be growing to the moon and the rest, even Apple, have an AI shine.

[whatstheofficerproblem]

From the messages section of the recent VIC short rated write-up on BRK, titled Todd 'The Charlatan' Combs.

Quote

Not to go too far off on a tangent, but am I the only one who thinks Todd Combs is so overrated that he might actually be massively below average? Let's take a look at a couple of data points:

- First, before charming Munger and joining Berkshire, he ran his hedge fund Castle Point for a grand total of five years? His returns were unspectacular, but, irrespective, five years is too small of a sample size. Moreover, he ran his fund with low nets, financials-only, long/short. Pretty much the anti-thesis of how Buffett and Berkshire invest.

 

- Since he joined Berkshire in 2011, he has materially underperformed the broader indices while being concentrated, long-only, and fully-invested. He has now underperformed these broader indices going on 14 years. That is a much larger sample size than the five years he ran his fund. He hasn't shown any ability to add value via stock-picking. I would bet that over his entire investment career now, on a time-weighted and certainly a capital-weighted basis, he has lagged any reasonable passive alternative.

 

- Importantly, he lost discipline on valuation at the very peak of the recent market bubble -- a classic sign of someone with the wrong temperament to be doing Berkshire's investing. He first bought Amazon in 2019, and it was basically a zero return until quite recently. Even now, Amazon has lagged the NASDAQ over the last 5+ years. But of course, he's made far, far worse decisions than Amazon. He did a lot of private tech investing right before the recent profitless tech bubble burst, getting suckered in right at the top... he invested in Paytm in India for huge losses over a period of time when the broader markets were up a ton. His position in NuBank has generated relatively mediocre returns. He invested in the IPO of Snowflake (!) -- a sweetheart IPO allocation in the hottest thing in tech... imagine that for Berkshire -- and then proceeded to actually drink the Kool-Aid for real, not selling a share of the stock even though it popped 100%+ immediately and was trading at an ungodly valuation. He then held that IPO until this year when the stock crashed, and then he dumped it, making no returns (maybe losses?) in a cumulative period when the market has again been up massively. These are just examples off the top of my head. I'm sure there are many other examples given the fact that his entire portfolio has underperformed for so many years.

 

- But it gets worse. He seems arrogant and disingenuous to anyone who isn't just a blind worshipper and takes a more discerning eye. His arrogance is in the fact that he treats managing a $20B+ portfolio for Berkshire like a part-time job. He goes off on wild tangents like "trying to fix healthcare" with Jamie Dimon and Atul Gawande (and failing, spectacularly, at that)... or becoming the literal permanent CEO of GEICO while AT THE SAME TIME managing a $20B dollar investment fund. To me, this is a staggering overestimation of his own abilities. Managing money is tough enough. Staying on top of a dozen-plus stocks is tough enough. To think you can do this, while also doing private VC/tech investments in India and Brazil, while also then helming the CEO spot of one of the largest auto insurers in the world, while also saving healthcare in America, while also doing about 10+ other things... to me this reeks of unbelievable arrogance. And oh yea -- so far, he's shown himself to be bad at ALL OF THEM! Geico is getting absolutely crushed by Progressive. The VC investments were all made in 2020-2021 and have been absolute and relative disasters. The public long-only book can't hold a candle to the S&P. And healthcare was "too hard" (which should have been obvious to anyone with any humility from 5,000 miles away).

 

- Todd's disingenuousness also comes through in the various podcasts and lectures he (frequently) gives. I won't belabor the point but for anyone who listens with a critical ear it is quickly obvious. Contrast this to Ted who doesn't give almost any podcasts or lectures at all. In various public forums, Todd has claimed to read for "12 hours a day" (Buffett has said he personally reads 5-6 hours a day). He has claimed that he "didn't want" anything from Charlie Munger when they first met. He has claimed to have been called a "young Charlie Munger" -- yes, he actually said this. He has claimed to analyze "between 200-300 private equity deals per year". Yes, on top of all of the above. I wonder how he reads 12 hours a day while also running GEICO. 

 

- And in case he wasn't busy enough, Todd also sits on the boards of JPMorgan Chase, Precision Castparts (another disaster), Duracell, among others. 

 

- Finally, peep the headlines on Reddit of employees' opinions of Todd Combs -- must be that 12 hours a day of reading, LOL.

 

[LC]

The comments on reddit about Combs as Geico CEO are pretty brutal - even for disgruntled employees.