Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 4
Last summer Bank of England economist Andy Haldane stated that long term interest rates were the lowest in five thousand years.
https://www.businessinsider.com/chart-5000-years-o...I would argue that with rates that low Berkshire should have borrowed more money. (I should have, too. My neighbor refinanced his house with a 15-year, fixed rate mortgage at 2.0% interest with no points.) Over the past couple of years Berkshire has issued long dated, yen denominated notes at about 2% interest, but I would argue that Berkshire should have issued much more. Berkshire had a secure investment for the borrowed money, namely repurchase of Berkshire stock, which could be expected to return 8%-10% over the next 30 years, without leverage. If Berkshire made 8% on the equity it invested plus 8%-2%=6% on the borrowed money, then at a 1:1 ratio of equity to borrowed money (a conservative ratio with payments so low), Berkshire would make 14% on the equity used. Warren is rightly conservative about borrowing money, but the situation last summer was unique, on a thousand year time scale. He should have borrowed more. jmho.
No. of Recommendations: 10
I would argue that with rates that low Berkshire should have borrowed more money
Berkshire already had surplus accumulated capital plus ongoing cash generation. That meant more cash than could intelligently deployed so additional capital was not a problem that needed an urgent solution. If he were doing a large transaction I am sure he would have used additional borrowing to improve the returns based on the prevailing cost of borrowing but that wasn't the case last year.
He borrowed in Japan because he had clearly identified yen based investments lined up with a dividend yield on that portfolio alone significantly more than the interest costs. However, the size of the borwwing was based on the size of commitment to the sogo sosha basket.
Buffett is not a fan of leverage to earn a marginal bit of return anyway so it is not a surprise this was not a priority for him in the last couple of years.
No. of Recommendations: 8
Good posts on this subject. I do think Berkshire borrowed more, and for longer durations, than it otherwise would have.
It is important to remember that while most other businesses and individuals have lost access to the very low cost capital that was available during that interest rate environment, Berkshire has continuing access to leverage through float growth at near zero, often negative, cost.
What did Berkshire do when interest rates perked up off the floor? They bought Alleghany and a nice chunk of high quality, negative cost, growing float.
With the 10 year treasury at 3.48% and the 30 year at 3.65%, the options for Berkshire to partially fund an acquisition with new bonds are still pretty attractive if something comes along.
I don't think Warren thought Berkshire stock was cheap enough to do some aggressive leveraged recap and that really isn't how he's run the firm so not a great example to set right before you sign off. But sure, on paper and with hindsight it looks profitable if you ignore the lasting cultural damage.
No. of Recommendations: 10
This is just the parent company debt (not BHE or BNSF) and the .625% notes were just delisted, but it really is a thing of beauty. This is from the front page of the 10Q.
0.750% Senior Notes due 2023
0.625% Senior Notes due 2023
1.300% Senior Notes due 2024
0.000% Senior Notes due 2025
1.125% Senior Notes due 2027
2.150% Senior Notes due 2028
1.500% Senior Notes due 2030
2.000% Senior Notes due 2034
1.625% Senior Notes due 2035
2.375% Senior Notes due 2039
0.500% Senior Notes due 2041
2.625% Senior Notes due 2059
No. of Recommendations: 2
No. of Recommendations: 16
I get your point. It was in 2020, at the start of the pandemic, after he released his 2019 Annual Report, that Warren Buffett was on CNBC. He mentioned that it was stupid to be buying bonds at that point, because the 10-year rate was 1.8%, and you'd pay taxes on that, but the fed's inflation goal was 2%, so you'd lose purchasing power.
But if what you want is to borrow in order to buy Berkshire shares, you'll first need to convince Warren Buffett that there is enough transaction volume of the shares on the NYSE to allow him to buy more than he already does, because he's made it quite clear that is the reason for not purchasing more Berkshire shares. He spoke about it at the 2022 annual meeting:
"Charlie I think spoke the other day and I explained henry singleton -- uh i think he bought back 89 percent of the company over time and he sold stock like crazy or issued it much earlier when it was overpriced and they bought it back under priced --
but the key to that of course is having people think you're wrong in doing it so he was able to buy a ton of it and there's some other companies that have bought a ton of it. Berkshire isn't going to get the chance to do that because if people think we're buying then... we've got sensible shareholders that's what it amounts to. If we had the same group of shareholders that own two-day puts [referencing the situation Occidental had] and they were our shareholders we'd buy back the whole company you know and in a very short period of time."
It's worth repeating:
"If we had the same group of shareholders that own two-day puts and they were our shareholders we'd buy back the whole company you know and in a very short period of time."
It believe it was in the 2020 interview that said he was able to purchase such a large stake of Apple for Berkshire at the same time Apple was repurchasing their own shares because it too has a large volume. And that volume is missing from Berkshire.
