Halls of Shrewd'm / US Policy❤
No. of Recommendations: 6
No. of Recommendations: 4
excellent work by Rational on the retained earnings test...
I don't find it very convincing as he himself is doing several times what he says Warren did, "moving the goalpost".
First he states Warren's criterion:
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P
Then Rationalwalk looks at those 5 year periods, finding this:
Berkshire began to fail the retained earnings test in 2013, and this remained the case for five years. After passing the test in 2018 and 2019, the test again failed over the past three years.......... Berkshire has had difficulty consistently passing the retained earnings test, as revised in 2010, over the past decade.
Then he looks at 10 year periods, concluding this:
The story doesn’t change very much when looking at the situation on a ten year rolling basis.
So then he looks at 22 years:
Taking an even longer view, Berkshire has outperformed the index from 2000 to 2022. A big part of that outperformance has to do with the S&P 500’s dismal performance during the first three years of the period
Having to admit that without the first 3 years even that would not have looked that great he finally turns around 180 degrees, from price performance to valuation, coming with the usual argument of all "Berkshire cult members":
one can argue that Berkshire is undervalued today while the S&P 500 is overvalued.
As much as I am a fan of Berkshire: What would good ol' Divi & Kingran say to this? Constantly moving the goalpost to "save" Berkshire, until finally a yardstick is found on which Berkshire seems(?!) to beat the S&P?
No. of Recommendations: 0
And after Warren and Charley leave the building, under what criterion is it expected that BRKA will outperform? Any purchaser of Berkshire this century will have just as likely underperformed as over performed the index
No. of Recommendations: 3
If one had to pick between SPY and Berkshire for the next 10 or 20 years, and close your eyes, there is only one answer, SPY.
I, myself, own way more Berkshire than the SPY now, and each quarter I sell off a piece and reinvest it in the SPY. I sell off 3.2% per year of Berkshire. It’s not really denting the position, I may need to go to 4-5% per year.
Berkshire without Buffett will look very different, with untested leaders.
I think it will prosper, but who knows if it matches the index.
No. of Recommendations: 14
“ What would good ol' Divi & Kingran say to this?”
And these are your thought leaders ?😂
No. of Recommendations: 10
I don’t see the steady long term growth in BRK book value changing suddenly post Charlie/Warren. The company did not grow though some individual stock picking prowess, as it is often depicted. It grew through a long term adherence to principles elucidated pre-Buffett, by Benjamin Graham. I don’t see that adherence changing, nor do I expect it to stop being effective.
No. of Recommendations: 1
Without WEB at the helm I don't think we'll see another Apple type investment again (scale and conviction), this generated significant value and outperformance. Without it BRK would be lagging the SPY?. Something to note for BRK post WEB and CM in my opinion.
No. of Recommendations: 2
I think there is some validity to this POV. Apple was a score of mighty conviction.
That said, the Energy business will grow very well with decent returns on capital. Railroad time will tell. Insurance should remain a juggernaut.
Just need someone to allocate capital and buy back stock intelligently.
No. of Recommendations: 0
Should have added, post Ajit too. He's a silent partner but has added as much value as WEB (float and insurance nouse) a genius in his own right.
I note there was some concern following the AGM a few years ago about his health and longevity. He's another one off and cannot be replaced.
It'll be hard to replicate the "Three Amigos"and the informal / fluid setup to decision making with an investment committee headed by a general manager (Abel) from an operations and management background rather than an investment background (with a feel for the markets). "Be Greedy when other are fearful etc etc and with conviction.
In order to move the needle, bigger bets will have to be made during times of distress. This is where WEB thrives, I can't see a committee doing likewise?
So likely BRK will tick along and generate book value growth of 6-8% long term and likewise the share price?
No. of Recommendations: 0
Good morning, don’t overthink it bud. If you had been managing brks cash the past ten years, and you were buying 4 billion spy a year, what would BV be today? Just takes his advice.
No. of Recommendations: 4
If one had to pick between SPY and Berkshire for the next 10 or 20 years, and close your eyes, there is only one answer, SPY.
I, myself, own way more Berkshire than the SPY now, and each quarter I sell off a piece and reinvest it in the SPY. I sell off 3.2% per year of Berkshire. It’s not really denting the position, I may need to go to 4-5% per year.
Berkshire without Buffett will look very different, with untested leaders.
I think it will prosper, but who knows if it matches the index.
It is tricky.
Earnings Yield: Berkshire wins.
Berkshire earnings yield about 6 to 7%
SPY earnings yield about 4%
Interest rates are higher than the earnings yield. SPY is expensive!
Retained Earnings Test: Berkshire loses
As Rationalwalk points out, Berkshire has failed to meet the (revised) retained earnings test in 8 of the last 10 5-year periods.
It's on track to fail again this year.
Book value not a good measure anymore? I agree. Let's use the Buffett-approved 5-groves method:
Rolling 5-year periods comparing SPY price vs 5-groves IV:
-3.8% 2013-2017
3.6% 2014-2018
1.2% 2015-2019
-1.5% 2016-2020
-2.5% 2017-2021
3.2% 2018-2022
-3.8% 2019-2023
Berkshire has lost out to SPY in 3 of the last 6 periods and is on track to lose again this year.
On market price Berkshire has lost for the last 4 periods and is on track to lose again this year.
No. of Recommendations: 2
In order to move the needle, bigger bets will have to be made during times of distress. This is where WEB thrives, I can't see a committee doing likewise?
Does he, though?
Maybe he did back in the day. Has he really gone in big in the last 20 years?
No. of Recommendations: 22
Maybe he did back in the day. Has he really gone in big in the last 20 years?
BNSF (2010) and Apple (beginning in 2016) are both in the last 20 years, so, yeah. He also paid $32 billion (which he later acknowledged was too much) for Precision Castparts in 2016.
Given the enormous current cash pile, I would not be surprised to see him make another big bet before he exits.
I also wouldn't be surprised to see Greg Abel pursue an elephant or two in the energy space after he takes over. He has been the point man for the growth of BHE from a $2 billion acquisition in 1999 to its current value around $90 billion. There are numerous large potential targets in the energy infrastructure space.
No. of Recommendations: 0
<<Maybe he did back in the day. Has he really gone in big in the last 20 years?>>
“BNSF (2010) and Apple (beginning in 2016) are both in the last 20 years, so, yeah. He also paid $32 billion (which he later acknowledged was too much) for Precision Castparts in 2016.”
Context for my comment was “in times of distress”.
Has he gone in big during times of distress?
No. of Recommendations: 20
Context for my comment was “in times of distress”.
Has he gone in big during times of distress?
The BNSF deal was struck in the fall of '09, coming out of the Great Financial Crisis. He served as a bank of last resort during the earlier part of that period, providing capital at terms advantageous to Berkshire when credit markets were largely frozen. He famously called Treasury Secretary Hank Paulson to recommend the government funnel money directly into banks rather than buying their assets. Paulson took his advice, which is widely credited for avoiding a worse crisis. He played a big enough role in this time of distress to be portrayed by Ed Asner in the movie version of Andrew Ross Sorkin's book Too Big To Fail. His transactions were good for Berkshire; his advice was good for the country. Even if you count only the railroad purchase coming out of this period, he went in pretty big.
"Times of distress" is a subjective term, but I assume in this context it is a complaint about his inaction during the Covid-related crash in the spring of 2020, which he explained quite thoroughly in his Great Depression soliloquy at the virtual annual meeting that May. His fears proved unfounded, mostly because of unprecedented government intervention to keep the economy running, but for a Depression baby (born 1930) his frame of reference was understandable.
The spring of 2019 was a time of distress for Occidental Petroleum, when it overextended itself outbidding Chevron for Anadarko. Mr. Buffett stepped in on short notice, as he had during the GFC, to provide $10 billion of capital, receiving preferred shares and common stock warrants. Today Berkshire holds a 26% stake in OXY common stock worth about $14 billion, mostly if not entirely through open-market purchases, and some $8-9 billion worth of preferred shares that Occidental has been recently buying back at a 10% premium owing to their 8% yield. So he went in pretty big on this particular time of distress.
No. of Recommendations: 2
It's amazing to see how transformative the Apple investment is looking at the whole portfolio, it dwarfs everything else in the portfolio. 50%!
We always used to talk about Coke but it doesn't get a mention nowadays and is now a only 7%
https://www.dataroma.com/m/holdings.php?m=BRK
No. of Recommendations: 4
No. of Recommendations: 1
“Given the enormous current cash pile, I would not be surprised to see him make another big bet before he exits.”
What would a big bet amount to, in your opinion?
Berkshire has about $152bn in cash, and says they won’t go below $30bn.
No. of Recommendations: 15
That is a pretty good summary of the opportunities in the last 15 years. And I think that you could say that the answer to "Has he gone in big during times of distress?" is a pretty resounding no.
The BNSF deal was struck in the fall of '09, coming out of the Great Financial Crisis.
Yes, well out of the crisis, far enough for the stock of BNSF to have already redoubled before the purchase. When Buffett announced the deal, the crisis was already pretty much dead and buried.
He famously called Treasury Secretary Hank Paulson to recommend the government funnel money directly into banks...
Yes, this was helpful for the USA, but not helpful for Berkshire particularly. Going big, in this context, would have been buying bank shares. Buffett has said that in investing, there are no called strikes, but this was definitely a pitch in the strike zone that could have been swung at, and wasn't.
...complaint about his inaction during the Covid-related crash in the spring of 2020, which he explained quite thoroughly in his Great Depression soliloquy at the virtual annual meeting that May. His fears proved unfounded, mostly because of unprecedented government intervention...
Yes, that was another sweet pitch. Is COVID a super-big deal, enough to send us into a depression, or not? Buffett clearly thought it might be, and sat on his hands, and even sold the airline shares, at about their lowest point. It turns out it was not the beginning of a depression, either because of government intervention (not my view) or because the pandemic was way over-hyped to begin with, and we didn't have a depression DESPITE the government-induced disruption. In either case, no swing, and no home run.
The spring of 2019 was a time of distress for Occidental Petroleum, when it overextended itself outbidding Chevron for Anadarko. Mr. Buffett stepped in on short notice, as he had during the GFC, to provide $10 billion of capital, receiving preferred shares and common stock warrants.
This was a good deal, but it was small, and not very risky. When your market cap is $500b and you invest $10b in preferred shares, you are not going to change the prospects of your conglomerate very much, one way or the other. If you really have contrarian conviction about oil and gas, you invest in a big way when oil is sub-$40 (2015-2016, most of 2020), not in 2019 when oil is at $60 and the economy is doing fine, and you buy shares, not bonds with conversion options.
I'm not saying I did any better - crises are scary, and most people's instinct is to keep their hands away from the falling cutlery. But it turns out that Buffett is just like most people, in that sense, and the idea of being greedy when others are fearful is not something he has talked about, but not put into practice, at least not recently.
dtb
No. of Recommendations: 1
"Berkshire has about $152bn in cash, and says they won’t go below $30bn."
while he said $30b in the past, it is likely more like $70- $100b given the growth of the firm
No. of Recommendations: 1
I thought Buffett originally said 20 billion. Then it became 30 billion and latter 40 billion. Right now I say 40-50 billion.
No. of Recommendations: 3
His big purchase was a little company called Berkshire Hathaway in the Covid period . Face it, selling the airlines was the right move looking back at it now.The real question is why did he buy them in the first place. People complain about Berkshire losing 1.5 billion on the airlines, yet they remain silent on the 10 billion gain from Apple during that time .
No. of Recommendations: 3
It saddens me to say but,,,,, I think a large part of the cash hoard will be deployed
just after Warren leaves the building for the last time.
It will be per his instructions, in a time of distress for Berkshire, and it will greatly benefit
his remaining partners
T
No. of Recommendations: 4
BHE will have an opportunity with western US utilities soon IMO.
Wildfire risk and yields seem to be moving share prices down.
No. of Recommendations: 26
But it turns out that Buffett is just like most people, in that sense, and the idea of being greedy when others are fearful is not something he has talked about, but not put into practice, at least not recently.
I would suggest he is putting that famous aphorism into practice right now. The major indices are up double digits in 2023 but Berkshire has been a net seller of stocks, by something like $23 billion, if the reporting is accurate, contributing to the record cash pile. One might draw the inference that Mr. Buffett, like some other value investors, sees no fundamental basis for this year's rally and is fearful while others are greedy.
On the other hand, when the market thought Vicki Hollub had made a terrible mistake, overpaying for Anadarko and putting her own company at risk, Mr. Buffett provided not only financing but also cast a vote of confidence in Ms. Hollub's management by establishing a large ownership stake in her company. He was greedy while others were fearful.
It is a mistake, I think, to view this aphorism in a vacuum. Mr. Buffett is famous for saying other things as well, among them that Rule No. 1 is to not lose money and that forecasting macro events is a fool's errand. To expect him to dive into market crashes based on dramatic macro events to serve the first aphorism, an act that might violate either or both of the latter two, underestimates the complexity of his mental process.
When he feels he has a handle on appropriate valuations, he acts accordingly, often contrary to the enthusiasms of market sentiment. When there are body bags on the sidewalks of New York and the stack of unknown unknowns has grown higher than usual, he reverts to Rule No. 1. I don't view this as a contradiction.
No. of Recommendations: 1
Agreed. I've been running some fag packets and think the market is c30% overvalued atm (S&P based on 2023 181 x 18 earnings).
This is my estimated value factoring in the interest rate hikes which are not reflected in valuations. Maybe we'll see this in 2024. That's a drop to 3250.
No. of Recommendations: 6
I would suggest he is putting that famous aphorism into practice right now. The major indices are up double digits in 2023 but Berkshire has been a net seller of stocks, by something like $23 billion, if the reporting is accurate, contributing to the record cash pile.
Yes, I largely agree, and I too hope that this is the reasoning. If you look at Dataroma for purchases and sales, in Q3, Berkshire purchased shares worth a total of 0.17% of the US stock portfolio (worth $313b at the end of Q3) and sold shares worth a total of 1.89% of the portfolio. Looking at previous quarters, it was buys of 0.52% in Q2 with sales of 1.96%. For Q1, it was buys of 2.02% and sells of 2.75%, and for Q4 2022 it was buys of 0.04% and sells of 3.31%. For the 4 quarters, that makes stocks worth an average of 2.75% of the portfolio bought and stocks worth 9.91% sold, for a net sale of 7.16%. 7% of $300B is $21b, so your number sounds about right. Given that about 75% of the portfolio is in stocks that Buffett is unlikely to ever sell (I'm arbitrarily counting Apple, American Express, Coca Cola and Occidental in that group), he has sold a much bigger proportion of what one might call the 'active' portfolio.
It's true that, as a percentage of Berkshire's assets, the cash pile isn't really very much bigger than it has ever been ($12b in Berkshire share repurchases has helped keep it from increasing much), but still, it's in the right direction to support half of the aphorism, the "be fearful when others are greedy" half.
I'm not so sure that the Rule #1 and the 'no forecasting of macro events' rule get him off the hook for 2008 and 2020, though. If you like "be greedy when others are fearful", you actually have to buy when others really are fearful, and there's usually some good reason to be fearful. You can only be contrarian if you are making a sort of market forecast, the forecast that says that Mr Market's pessimism is overblown. In retrospect, 2008-2009 and early 2020 were great times to be greedy, not fearful along with the crowd, and if you can just quote Rule #1 every time the market is in turmoil, then the aphorism doesn't mean much. Or at least the "be greedy when others are fearful" half of it.
dt
No. of Recommendations: 1
And as for trades, I doubled my JD.com position last week at $25 per ADR (now almost a 10% position and one of my 100k to a $1m plays in 10 years!).
That was half of a lump sum I had to invest but am planning to hold the rest and see what happens in 2024.
No. of Recommendations: 6
if you can just quote Rule #1 every time the market is in turmoil, then the aphorism doesn't mean much. Or at least the "be greedy when others are fearful" half of it.
But that's the less important part, especially for the Berkshire of today. There's a reason why rule #1 is number 1 - - - especially when you are responsible for many people who entrust you their money. And in the case of the Berkshire Hathaway of today it's not as if they give you a small portion of their assets to speculate with it, in the hope of doubling it within 5 years. As we know investors (partners!) of the Berkshire Hathaway of today often entrust you the majority of their life's savings, and that clearly shifts the balance of importance of those two halfs of said aphorism.
No. of Recommendations: 13
There's a reason why rule #1 is number 1 - - - especially when you are responsible for many people who entrust you their money. And in the case of the Berkshire Hathaway of today it's not as if they give you a small portion of their assets to speculate with it, in the hope of doubling it within 5 years.
That part of the assets would be for Fairfax, not Berkshire! Doubling in 5 years would require 14% a year in returns, and while Watsa still talks about the 15% number, Buffett has virtually promised us not to get more than the market average plus 0-2%, which probably means less than inflation, in the next 5-10 years.
But seriously, I think the point of the "Be greedy when others are fearful" idea is not to speculate with assets that have a chance of making a big return, it's buying great businesses cheaply when the market is in a panic. The big insight is that the greatest part of most companies' value lies far in the future, and some present catastrophe actually doesn't affect the long term value very much. Of course it has to be a good business, and the present catastrophe has to be survivable - you don't buy WeWork just because there's a glut of office space on the market and the market thinks they will go bankrupt. It means you buy a railroad, even if this year's volumes are bad, or you buy a company that makes a drink people have been drinking all their lives, or a solvent bank that is embroiled in a scandal that can be dealt with.
DTB
No. of Recommendations: 8
"I'm not so sure that the Rule #1 and the 'no forecasting of macro events' rule get him off the hook for 2008 and 2020, though. If you like "be greedy when others are fearful", you actually have to buy when others really are fearful, and there's usually some good reason to be fearful. You can only be contrarian if you are making a sort of market forecast, the forecast that says that Mr Market's pessimism is overblown. In retrospect, 2008-2009 and early 2020 were great times to be greedy, not fearful along with the crowd, and if you can just quote Rule #1 every time the market is in turmoil, then the aphorism doesn't mean much. Or at least the "be greedy when others are fearful" half of it."
I think DTB has this right.
There has to be obvious value available in the market, and there has to be confidence that Berkshire is in sound shape in order for it to take advantage of such opportunities.
I think 2020 can be forgiven in part because of the situation Berkshire Hathaway found itself in with uncertainty about many of its operating businesses and how much its insurance businesses could be on the hook for. Buffet also found himself with fewer options than usual to deploy money as a financier of last resort.
No. of Recommendations: 5
Digging into my quotes file:
4/19/2020
Charlie: "Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it. We're always going to be on the safe side. That doesn't mean we couldn't do something pretty aggressive or seize some opportunity. But basically we will be fairly conservative. And we'll emerge on the other side very strong."
2020AM @$183
Warren: "Our airline position was a mistake. Berkshire is worth less today because I took that position than if I hadn't. There other decisions like that, and it is not more compelling to buy the shares now [$183] than it was when we were buying them [$203-$226]. It's not less compelling. I mean it's a wash. But the price has not gotten to a level or not been at a level where it really feels way better to us than other things, including the option value of money to step up in a big, big way."
[They bought $23bn worth after this in 2020, and another $27bn in 2021]
2023 AM
Warren: “What we'd really like to do is buy great businesses. If we could buy a company for $50bn or $75bn, $100bn, we could do it”.
No. of Recommendations: 14
"Berkshire has about $152bn in cash, and says they won’t go below $30bn."
while he said $30b in the past, it is likely more like $70- $100b given the growth of the firmThis is in every quarterly report:
https://berkshirehathaway.com/qtrly/3rdqtr23.pdfPage 52:
"The program does not specify a maximum number of shares to be repurchased or obligate Berkshire to repurchase any specific
dollar amount or number of Class A or Class B shares and there is no expiration date to the repurchase program. Berkshire will
not repurchase its common stock if the repurchases reduce the total value of Berkshire’s consolidated cash, cash equivalents and
U.S. Treasury Bills holdings to less than $30 billion."
But in practice they don't take cash + fixed income far below float amount, and even then not for very long.
That's based on observations since 2010.
Cash+Fixed/Float
2010 to 2023
105%
92%
100%
94%
101%
99%
102%
109%
105%
111%
113%
109%
92%
104%
No. of Recommendations: 3
Decision time coming up for me as I have some profitable DITM BRKB options expiring in 1/23. I do love how we are positioned in todays very uncertain world and don’t really have a lot of other businesses that highly interest me at these valuations. I think I may simply let them expire and buy the shares (150 & 200 strikes).
Looking back, I don’t think I’ve ever regretted accumulating more BRK shares, esp. in uncertain times. Appreciate any thoughts, esp. if counter to my current thinking. Thanks & Happy Thanksgiving to All!
