Berkshire buyback--at 120% of book

[rjstc]

You're buying the same stock at the same price WEB would pay. How often does that happen?

 

Over the past 5 years: WFC, BNI, JNJ, USG, KFT, WMT, arguably even BAC at its lows. :)

 

Vinod

 

Yup, the surest way to have made money has been to have bought a company when Warren first bought a lot of their stock.  :)

 

For learning purposes, a few questions. What did he see that most didn't? What clues/signs? Or was he just willing to pull the trigger when most were afraid to but they saw the same thing he did?

 

Did you see it but it wasn't in your comfort zone, or did you buy some of these at this same time? I really respect your investing philosophy so just curious. It seems you mainly stick to certain really certain picks (BRK,etc). Even though you know historically by buying when Buffett does you do good.

 

 

[twacowfca]

You're buying the same stock at the same price WEB would pay. How often does that happen?

 

Over the past 5 years: WFC, BNI, JNJ, USG, KFT, WMT, arguably even BAC at its lows. :)

 

Vinod

 

 

 

Yup, the surest way to have made money has been to have bought a company when Warren first bought a lot of their stock.  :)

 

For learning purposes, a few questions. What did he see that most didn't? What clues/signs? Or was he just willing to pull the trigger when most were afraid to but they saw the same thing he did?

 

Did you see it but it wasn't in your comfort zone, or did you buy some of these at this same time? I really respect your investing philosophy so just curious. It seems you mainly stick to certain really certain picks (BRK,etc). Even though you know historically by buying when Buffett does you do good.

 

We have been in and out of a few of these, and also Munich Re And Cologne Re, always buying at least a few months after Warren first bought.  This has worked especially well when one of his big purchases continued to decline or even tanked as with USG in 2001 . In these cases the value of the business was still about as good as it was when Warren made his first purchase.  This has worked out much better thatrot would have if we had latched onto Warren's coattails immediately after one of his big purchases was disclosed. 

 

This follow the leader strategy has worked much better following Warren than following other value investors because of the extreme standards Warren has used especially in recent years when making a major purchase.  The depth of Warren's reasoning is not always obvious.  For example, I did not fully understand his key insight into USG until I had spent many long hours studying it.  :)

 

I was quite tempted to anticipate Combs and Weschler's recent purchases before they joined Warren because I was almost certain that they would buy for BRK what they liked best when they ran their hedge funds.  They are truly cut out of the same cloth as Warren.  The reason I didn't is because I became enamored with the Buffett "Put". 

 

I cut my teeth studying option pricing way back when.  I can assure the board that the value of a perpetual put with an increasing strike price on a great business selling at a enormous discount to it's benchmark is enormous.  (It's not a real put of course, and this is why Mr Market has assigned no value to it --YET.). Thus presents the opportunity to invest with great, but not absolute safety, and use hedge fund techniques to goose the returns if desired.  I think Warren's put is more valuable than a real put because of the rising quasi strike price.

[Charlie]

"This follow the leader strategy has worked much better following Warren than following other value investors because of the extreme standards Warren has used especially in recent years when making a major purchase.  The depth of Warren's reasoning is not always obvious.  For example, I did not fully understand his key insight into USG until I had spent many long hours studying it.  :)"

 

twacowfca, we follow the same strategy  :)

 

In terms of opportunity costs I have some regrets in 2012. The biggest opportunity cost was probably not buying USG, after Buffett said the housing market would soon recover and USG was still very cheap.

 

You know probably much more about USG than I do, so did you buy USG and if not, why not?  ;)

 

 

[rjstc]

TWACOWFCA.  Caps because your answers are always great! Thanks!!!

[giofranchi]

TWACOWFCA.  Caps because your answers are always great! Thanks!!!

 

+1

 

giofranchi

[Charlie]

"TWACOWFCA.  Caps because your answers are always great! Thanks!!!"

 

+2

[Charlie]

""This follow the leader strategy has worked much better following Warren than following other value investors because of the extreme standards Warren has used especially in recent years when making a major purchase.  The depth of Warren's reasoning is not always obvious.  For example, I did not fully understand his key insight into USG until I had spent many long hours studying it.  :)"

 

twacowfca, we follow the same strategy  :)

 

In terms of opportunity costs I have some regrets in 2012. The biggest opportunity cost was probably not buying USG, after Buffett said the housing market would soon recover and USG was still very cheap.

 

You know probably much more about USG than I do, so did you buy USG and if not, why not?  ;)"

 

Since to ask the question is answering the question I will answer my own thumb sucking  ;)

 

- rear-view mirror

- not looking at the housing numbers and thinking and reading of other unrealistic doomsday scenarios

- Management made some mistakes and there´s seldom one cockroach in the kitchen

- afraid of cyclical stock

- not knowing enough about USG

- Buffett stopped supporting USG, after one mistake.

 

[twacowfca]

"This follow the leader strategy has worked much better following Warren than following other value investors because of the extreme standards Warren has used especially in recent years when making a major purchase.  The depth of Warren's reasoning is not always obvious.  For example, I did not fully understand his key insight into USG until I had spent many long hours studying it.  :)"

 

twacowfca, we follow the same strategy  :)

 

In terms of opportunity costs I have some regrets in 2012. The biggest opportunity cost was probably not buying USG, after Buffett said the housing market would soon recover and USG was still very cheap.

 

You know probably much more about USG than I do, so did you buy USG and if not, why not?  ;)

 

Yes, we not only bought it, but jumped in with both feet after I finally understood why Warren loaded up on a stock that was obviously sliding down a slippery slope to bankruptcy.  I didn't understand it at first as other value investors were bailing out of a sinking ship while Warren was loading up his truck with 15% of USG's stock. 

 

What's wrong with this picture, I asked.  Has Warren suddenly become senile?  No, the evidence showed he was still as smart as ever.  He also knew more about asbestos liability than anyone else on the planet.  Therefore, I bought some USG stock and averaged down to $11/share on the falling knife.  I thought USG would lose 95% of its value as Dow Corning and WRGrace had done, and that's what happened. I stopped buying and a week later the stock bottomed at less than four dollars per share, and I'm sitting with a loss of about two thirds of my average purchase price, and USG is in Cpt 11 bankruptcy. 

 

This got my attention, and I started to spend some serious time (translation: become obsessed) studying USG and their situation.  Two weeks later I finally understood the key insight Warren had from his first purchase, and I backed up my truck and started throwing in the moneybags, but still with a little nagging thought: could these possibly be counterfeit?

[giofranchi]

"This follow the leader strategy has worked much better following Warren than following other value investors because of the extreme standards Warren has used especially in recent years when making a major purchase.  The depth of Warren's reasoning is not always obvious.  For example, I did not fully understand his key insight into USG until I had spent many long hours studying it.  :)"

 

twacowfca, we follow the same strategy  :)

 

In terms of opportunity costs I have some regrets in 2012. The biggest opportunity cost was probably not buying USG, after Buffett said the housing market would soon recover and USG was still very cheap.

 

You know probably much more about USG than I do, so did you buy USG and if not, why not?  ;)

 

Yes, we not only bought it, but jumped in with both feet after I finally understood why Warren loaded up on a stock that was obviously sliding down a slippery slope to bankruptcy.  I didn't understand it at first as other value investors were bailing out of a sinking ship while Warren was loading up his truck with 15% of USG's stock. 

 

What's wrong with this picture, I asked.  Has Warren suddenly become senile?  No, the evidence showed he was still as smart as ever.  He also knew more about asbestos liability than anyone else on the planet.  Therefore, I bought some USG stock and averaged down to $11/share on the falling knife.  I thought USG would lose 95% of its value as Dow Corning and WRGrace had done, and that's what happened. I stopped buying and a week later the stock bottomed at less than four dollars per share, and I'm sitting with a loss of about two thirds of my average purchase price, and USG is in Cpt 11 bankruptcy. 

 

This got my attention, and I started to spend some serious time (translation: become obsessed) studying USG and their situation.  Two weeks later I finally understood the key insight Warren had from his first purchase, and I backed up my truck and started throwing in the moneybags, but still with a little nagging thought: could these possibly be counterfeit?

 

WOW! That is very much “brain damage”! I mean, wonderful stuff, but so time consuming and difficult! … Sometime I think I must be a little dumb … I keep asking myself, why everybody try harder and harder to succeed in doing what’s so complicated?! Isn’t it much easier to extract all the cash possible from anyone’s business, job, or profession, and just buy some BRK, some FFH, and some LRE? And do it again and again, at least until you become financially independent?

Why do people enjoy so much outsmarting everybody else in the trading game? Isn’t it rewarding enough to run a honest and useful business every day as effectively as possible, to save as much cash as possible, to be able to identify a few great businesses, and to use all your saving to become part-owner of those great businesses?

Maybe, it is just an issue of lack of ambition on my part… but, twacowfca, on average how do your “trading experiences” fare, if compared with your investments in BRK, FFH, and LRE?

Thank you very much,

 

giofranchi

[Palantir]

What an excellent forum. I think I know what I'm doing, then I come on here and read what others do and I am immediately humbled.

[twacowfca]

"This follow the leader strategy has worked much better following Warren than following other value investors because of the extreme standards Warren has used especially in recent years when making a major purchase.  The depth of Warren's reasoning is not always obvious.  For example, I did not fully understand his key insight into USG until I had spent many long hours studying it.  :)"

 

twacowfca, we follow the same strategy  :)

 

In terms of opportunity costs I have some regrets in 2012. The biggest opportunity cost was probably not buying USG, after Buffett said the housing market would soon recover and USG was still very cheap.

 

You know probably much more about USG than I do, so did you buy USG and if not, why not?  ;)

 

Yes, we not only bought it, but jumped in with both feet after I finally understood why Warren loaded up on a stock that was obviously sliding doHwn a slippery slope to bankruptcy.  I didn't understand it at first as other value investors were bailing out of a sinking ship while Warren was loading up his truck with 15% of USG's stock. 

 

What's wrong with this picture, I asked.  Has Warren suddenly become senile?  No, the evidence showed he was still as smart as ever.  He also knew more about asbestos liability than anyone else on the planet.  Therefore, I bought some USG stock and averaged down to $11/share on the falling knife.  I thought USG would lose 95% of its value as Dow Corning and WRGrace had done, and that's what happened. I stopped buying and a week later the stock bottomed at less than four dollars per share, and I'm sitting with a loss of about two thirds of my average purchase price, and USG is in Cpt 11 bankruptcy. 

 

This got my attention, and I started to spend some serious time (translation: become obsessed) studying USG and their situation.  Two weeks later I finally understood the key insight Warren had from his first purchase, and I backed up my truck and started throwing in the moneybags, but still with a little nagging thought: could these possibly be counterfeit?

 

WOW! That is very much “brain damage”! I mean, wonderful stuff, but so time consuming and difficult! … Sometime I think I must be a little dumb … I keep asking myself, why everybody try harder and harder to succeed in doing what’s so complicated?! Isn’t it much easier to extract all the cash possible from anyone’s business, job, or profession, and just buy some BRK, some FFH, and some LRE? And do it again and again, at least until you become financially independent?

Why do people enjoy so much outsmarting everybody else in the trading game? Isn’t it rewarding enough to run a honest and useful business every day as effectively as possible, to save as much cash as possible, to be able to identify a few great businesses, and to use all your saving to become part-owner of those great businesses?

Maybe, it is just an issue of lack of ambition on my part… but, twacowfca, on average how do your “trading experiences” fare, if compared with your investments in BRK, FFH, and LRE?

Thank you very much,

 

giofranchi

 

 

We made a lot more on USG as a percentage of our portfolio value than with Lancashire, but owning BRK and LRE has been a joy compared to owning USG and even FFH during the short attack that finally worked out in our favor.  I never lost any sleep loading up on LRE, and continuing to own an increasingly large amount of LRE as we have reinvested our dividends is mostly within my comfort zone, perhaps because of the contrast with the anxiety I had about the uncertainty during the time we had the very large interest in USG. 

 

Perhaps there is some psychological anchoring involved in this attitude because of the satisfaction of the large compounded gain we have in LRE.  If LRE's stock price by some strange circumstance should contract back to its BV, I don't think I would lose any sleep, assuming that the value of the business was mostly unimpaired.

 

Giofranchi, I completely agree with you, and Warren shares this opinion.  It is much more satisfying to buy shares in a great company with excellent management that has lots of skin in the game and focuses on increasing shareholder value than making a big score and flipping the stock of a not so good company.  The great majority of our home runs have been with this type of company and management even when the situation was hairy as with USG. Bill Foote and his management team at USG during their five years in Chapter 11 exemplified the very best integrity, an absolutely essential quality to be able to persevere to a successful resolution. Without that quality, Warren would have passed on them, and I as well.  Same with Prem and his team at FFH during their difficulties.

 

Therefore, it was well worth it to be a small part of their supporting cast in those great dramas.  :)

[twacowfca]

Charlie. Please accept my apology for not answering your question about buying USG in the last year.  I think I understand USG as well as anyone does after spending a couple of thousands of hours studying it over the last decade and understanding the dynamics of their reorganization with a ringside seat.  It's a great business, but cyclical.  They would have had a Chapter 33 during the real estate meltdown had not Warren and Prem rescued them.  That's good, but it's not so good that most of their shareholders equity has gone poof during the depres Oops, I'm sorry, during the recession.  I've been in and out of the stock a couple of times since they bottomed out in 2008, but missed the latest run up because of other opportunities and because I have doubts that the real estate recovery will be robust for some time.

 

Clarification: I own a permanent, small number of USG shares and always will with the fondest memories for the company and all their supporters.  :)

[Charlie]

Thanks for your always great answers  :)

[Palantir]

 

I was quite tempted to anticipate Combs and Weschler's recent purchases before they joined Warren because I was almost certain that they would buy for BRK what they liked best when they ran their hedge funds.  They are truly cut out of the same cloth as Warren.  The reason I didn't is because I became enamored with the Buffett "Put". 

 

I cut my teeth studying option pricing way back when.  I can assure the board that the value of a perpetual put with an increasing strike price on a great business selling at a enormous discount to it's benchmark is enormous.  (It's not a real put of course, and this is why Mr Market has assigned no value to it --YET.). Thus presents the opportunity to invest with great, but not absolute safety, and use hedge fund techniques to goose the returns if desired.  I think Warren's put is more valuable than a real put because of the rising quasi strike price.

 

Ok, I'm a little lost now. What exactly are people in this thread referring to when they mention "Warren's put"? I just see the 1.2BV level as a resistance point, but I am lost as to what "put" means in this context.

[beerbaron]

Ok, I'm a little lost now. What exactly are people in this thread referring to when they mention "Warren's put"? I just see the 1.2BV level as a resistance point, but I am lost as to what "put" means in this context.

 

The theory is simple.

 

Buyback at 1.2xBV on a stock that has a daily volume of about 300 Millions $/day. The company has about 20 Billions of extra money in the bank and generates about 10B a year. If it ever goes under 1.2xBV BRK can therefore buy substantial amount of it's own stock and sustain it's price.

 

BeerBaron

[beerbaron]

By the way, does everybody arrive at a price of 91.53 for the buyback trigger?

 

I used the following numbers:

 

BV @ 31-09-12 :  189.074B

Economic units (ClassB=1 ClassA = 1500) : 2.478B

BV/Economic Units *1.2 = 91.53

 

Regards

BeerBaron

[StubbleJumper]

By the way, does everybody arrive at a price of 91.53 for the buyback trigger?

 

I used the following numbers:

 

BV @ 31-09-12 :  189.074B

Economic units (ClassB=1 ClassA = 1500) : 2.478B

BV/Economic Units *1.2 = 91.53

 

Regards

BeerBaron

 

 

My spreadsheet says $91.55, but that's close enough to $91.53!

[zarley]

By the way, does everybody arrive at a price of 91.53 for the buyback trigger?

 

I used the following numbers:

 

BV @ 31-09-12 :  189.074B

Economic units (ClassB=1 ClassA = 1500) : 2.478B

BV/Economic Units *1.2 = 91.53

 

Regards

BeerBaron

 

I use the BRK shareholder equity of 184.602B that omits the non-controlling interest line and wind up with a buy-back price of $89.40. 

[Palantir]

Ok, I'm a little lost now. What exactly are people in this thread referring to when they mention "Warren's put"? I just see the 1.2BV level as a resistance point, but I am lost as to what "put" means in this context.

 

The theory is simple.

 

Buyback at 1.2xBV on a stock that has a daily volume of about 300 Millions $/day. The company has about 20 Billions of extra money in the bank and generates about 10B a year. If it ever goes under 1.2xBV BRK can therefore buy substantial amount of it's own stock and sustain it's price.

 

BeerBaron

 

I understand that....but why is that a "put"?

[A_Hamilton]

Ok, I'm a little lost now. What exactly are people in this thread referring to when they mention "Warren's put"? I just see the 1.2BV level as a resistance point, but I am lost as to what "put" means in this context.

 

The theory is simple.

 

Buyback at 1.2xBV on a stock that has a daily volume of about 300 Millions $/day. The company has about 20 Billions of extra money in the bank and generates about 10B a year. If it ever goes under 1.2xBV BRK can therefore buy substantial amount of it's own stock and sustain it's price.

 

BeerBaron

 

I understand that....but why is that a "put"?

 

Because you can always sell your shares (put them) back to Berkshire at ~1.2x BV. 

[twacowfca]

Ok, I'm a little lost now. What exactly are people in this thread referring to when they mention "Warren's put"? I just see the 1.2BV level as a resistance point, but I am lost as to what "put" means in this context.

 

The theory is simple.

 

Buyback at 1.2xBV on a stock that has a daily volume of about 300 Millions $/day. The company has about 20 Billions of extra money in the bank and generates about 10B a year. If it ever goes under 1.2xBV BRK can therefore buy substantial amount of it's own stock and sustain it's price.

 

BeerBaron

 

 

That's a great short explanation.  The term, "The Buffett Put", that I have used loosely is merely that Warren said that he will buy back BRK's stock aggressively when it goes below 120% of book value per share.  That Q3 value is about $89.27/SH by most calculations. Today, the stock has been less than 1% below that value. 

 

It's not a sure thing, but when BRK has dropped below the repurchase price limit, it hasn't gone more than a little below the limit and then popped back up above the limit fairly soon.  With EOY selling, there may be more opportunity to pick up BRK below the limit than in the past.

 

BRK appears to me to have far less downside than the market itself with the intention to repurchase at the current level.  Time will tell if this proves to be true.  :)

[gfp]

By the way, does everybody arrive at a price of 91.53 for the buyback trigger?

 

I used the following numbers:

 

BV @ 31-09-12 :  189.074B

Economic units (ClassB=1 ClassA = 1500) : 2.478B

BV/Economic Units *1.2 = 91.53

 

Regards

BeerBaron

 

I use the BRK shareholder equity of 184.602B that omits the non-controlling interest line and wind up with a buy-back price of $89.40.

 

89.40 is much closer to correct than the 91.5x numbers.  Remember that large equity holdings are down since the favorable Q3 mark and that he did spend 1.2 billion dollars of that shareholders equity to reduce the share count.  Retained earnings are somewhat predictable and GEICO and Re losses for Sandy should be over a Billion dollars.

[StubbleJumper]

By the way, does everybody arrive at a price of 91.53 for the buyback trigger?

 

I used the following numbers:

 

BV @ 31-09-12 :  189.074B

Economic units (ClassB=1 ClassA = 1500) : 2.478B

BV/Economic Units *1.2 = 91.53

 

Regards

BeerBaron

 

I use the BRK shareholder equity of 184.602B that omits the non-controlling interest line and wind up with a buy-back price of $89.40.

 

Good catch.  That's more conservative.

[zarley]

89.40 is much closer to correct than the 91.5x numbers.  Remember that large equity holdings are down since the favorable Q3 mark and that he did spend 1.2 billion dollars of that shareholders equity to reduce the share count.  Retained earnings are somewhat predictable and GEICO and Re losses for Sandy should be over a Billion dollars.

 

Although, you seem to mix two separate issues.  1) is it appropriate to include non-controlling interest in the shareholder BV calculation?  and 2) how should one adjust the reported Q3 equity to approach a current BV estimate?

 

My $89.40 BRK.b buyback price reflects a no on #1 and does no adjustment to the reported Q3 numbers.  It may be appropriate to make adjustments as you noted to get to a more accurate "current" BV.  But, I haven't done that.

 

straight from the Q3 10Q:

shareholder equity = $184,602 million

shares outstanding = 1.652 million (A equivalents)

BV/A Share = $111,745

Buyback = 1.2 x BV = $134,093

1,500 B shares per A share ==> $89.40

[Palantir]

I wish there were more stocks like this bad boy.  :'(

 

Also while there were losses this qtr due to Sandy, you should also offset by rise in retained earnings due to operating income.