Poor Charlie
Member-
Posts
157 -
Joined
-
Last visited
Recent Profile Visitors
435 profile views
Poor Charlie's Achievements
Newbie (1/14)
0
Reputation
-
036800.KQ - Nice Information & Technology
Poor Charlie replied to Poor Charlie's topic in Investment Ideas
How Asia Works Asia’s Next Giant Seoul Man The Birth of Korean Cool -
Li Lu: Transcription of his 2006 Columbia Business School Lecture
Poor Charlie replied to MattR's topic in General Discussion
Thanks for taking the time to do this! Any idea when/if an English edition of Li Lu’s book will be released? Given the reception it would receive, I’m surprised we haven’t seen anything yet.- 5 replies
-
- li lu
- himalaya capital
-
(and 2 more)
Tagged with:
-
The concerns you raise are issues all dominant tech companies face. And some of them are even more acute in the West. For instance, out of Apple, Amazon and Alibaba, who faces the least pricing pressure on takerates? I would argue Alibaba. My post related more to the existential threats that appear to be vivid in investors' minds: seizure and theft. I'm not saying these aren't risks. In fact, I believe they're risks you face investing anywhere, including the US. I'm just saying that investors may be overweighing them. That's all.
-
There's some truth to this. It's easy to look at Chinese companies, particularly those with the VIE structure, and dismiss them as uninvestable. And with the extra-vivid examples of Jack Ma being 'disappeared', the anti-monopoly investigation and the ANT deal, this applies even more so to Alibaba. But is this really the case? Loot at some of the recent changes in China's financial system: the zero-tolerance policy on misconduct; the Hong Kong / Shanghai Connect; the liberalization of ownership rules in banking, credit ratings and payments; the so-called National Team; the shift away from financial repression; the support of yuan-based commodity contracts, invoicing and reserves; the digital yuan; etc. It's clear that Beijing wants the financial sector to be a source of soft power going forward. Given this objective, are they really going to kneecap Alibaba? Are they going to allow wholesale theft of Alibaba's assets? I'm willing to bet they won't. Charlie Munger's involvement is also interesting. Charlie has made several large investments where the outcome hinged almost entirely on politics (e.g., Freddie Mac in 1988, the banks in March 2009). He's also avoided several 'slam dunk' investments because of politics (e.g., Detroit Bridge, Irvine Co.). It's clear he has his radar tuned for this stuff. And the fact that he took a position (his first position in nearly a decade) speaks to the reality that investing in China is more nuanced than the "you-don't-own-the-assets-the-Chinese-are-crooks-and-the-CCP-is-out-to-get-you" narrative would have you believe.
-
036800.KQ - Nice Information & Technology
Poor Charlie replied to Poor Charlie's topic in Investment Ideas
I agree on NICE Holdings. I’ve owned several of the NICE subsidiaries (NICE Information Services, NICE D&B, NICE I&T) for a long time but never paid much attention to the holding company. It was just too tough to analyze their (or any other Korean holding company’s) filings when I don’t speak the language. That being said, I’ve been buying NICE Holdings recently. I still don’t fully understand a few things (private equity put agreements, manufacturing strategy, etc.), but I made an exception because of the quality of the assets. I would be happy to talk about NICE with anyone interested. PIF owns both NICE Holdings and NICE I&T. +5% interests are disclosed on DART. -
Insurance Industry book recommendations
Poor Charlie replied to rossef2's topic in General Discussion
I recommend the trade journals. Schiff’s Insurance Observer no longer publishes, but the archive is available online at no charge. Dowling’s IBNR, which Alice Schroeder used to write, is good too. I’ve also enjoyed Fortune Magazine’s insurance-related reporting—particularly from Loomis and others in the 70s and 80s. Other suggestions: I learn by simply reading annual reports. Try reading the annual reports (and statutory filings) of successful insurance businesses. You can’t go wrong with Berkshire, but I’d also suggest companies like Progressive, WR Berkley, Markel, RLI, etc. It’s also interesting to learn about the failures. Why do great high-frequency-low-severity insurers like GEICO or 21 Century get into trouble (Loomis wrote a great article on GEICO’s issues in the 1970s). Why did Fairfax have problems? Why did Lloyd’s nearly fail (there are several good books on this)? -
I actually enjoy conversations on valuation math. I’m always looking to improve my understanding, so I welcome people poking holes in my posts. I just ask that you put forth coherent arguments, which we don’t seem to be getting from Thrifty. As soon as I sober up I'll see if I can clarify. Haha. Geez, I feel like I'm being baited. But, fine, if it makes you trolls happy... Normalized Per-Share Look Through Earnings - Year 0: $10.31 Projected Earnings: Year 1: $10.93 Year 2: $11.58 Year 3: $12.28 Year 4: $13.02 Year 5: $13.80 Present Value of Projected Earnings - Years 1 Through 5 (10% Discount Rate): $46.19 Residual Value: Residual Earnings (Year 5 Earnings x 1.06): $14.62 Capitalization Rate: 6% Capitalized Residual Value: $243.75 Present Value of Capitalized Residual Value (10% Discount Rate): $151.35 Total Present Value of Projected Look Through Earnings: $46.19 + $151.35 = $197.54 And there you have it. $197.54 is the precise intrinsic value of a Berkshire Hathaway B share down to the penny. I can carry it out to more decimals if you like. Haha. Obviously, you can model it out for more than 5 years, play with all the variables, add more inputs and variables, and derive pretty much whatever intrinsic value you want (why Warren Buffett has never wasted time on a DCF model, and why I feel slightly disgusted for wasting my own time). For me, the most important inputs are the normal earnings estimate and growth estimate. Naturally, those are the two numbers I originally shared, and are the two items I wish others would share and intelligently discuss (that goes for all investments on COBF), especially if they aren't just pulled out of the air, and are the result of quality research and personal experience. If you want to add value while attacking my (or anyone's) work, personally I'd prefer you challenge me to defend the effort and assumptions that went into deriving the look through earnings and growth estimates. Another way to be a hero would be to post your own estimates, and subject yourself to a little scrutiny. Bring it on! My posts had nothing to do with what I think Berkshire is worth. I was simply trying to point out that $10 in retained earnings aren’t the same thing as $10 in distributed earnings. You can’t capitalize earnings like you did (and continue to do) unless those earnings are distributed. Would you capitalize the reinvested interest when valuing a zero-coupon bond? If not, then why would you capitalize the retained earnings of Berkshire (Berkshire, which retains all its capital, is effectively a zero-coupon equity)? Aren’t they the same thing? If we can’t agree retained earnings ≠ distributed earnings, then I’m sorry for wasting your time. I was just looking to join a conversation about something I find interesting. All the best
-
I actually enjoy conversations on valuation math. I’m always looking to improve my understanding, so I welcome people poking holes in my posts. I just ask that you put forth coherent arguments, which we don’t seem to be getting from Thrifty.
-
If the only cash you get is when you sell the investment (the terminal year), then why are you capitalizing the yearly earnings [$10 / (.10 - .06) = $250]? You wouldn’t capitalize the reinvested interest when valuing a zero-coupon bond, so why would you capitalize the reinvested earnings when valuing an equity investment? Not worth commenting on. If Berkshire is earning 6% on incremental retained earnings, which is what you’re implying (6% growth * 100% retention = 6% ROEs), and you assume the market will discount cash flows at 10%, which is also what you’re implying [$10 earnings / (10% discount rate – 4% growth rate)], each dollar retained is indeed worth 60 cents. For example, retained earnings at the end of year 24 for would increase by $508.16 [($40.49 ending earnings – $10 beginning earnings) / 6% ROE] but the market value would only increase by $304.89 [($40.49 ending earnings – $10 beginning earnings) / 10% discount rate]. This means that each dollar retained is worth 60 cents ($304.89 increase in market value / $508.16 increase in retained earnings). Part of the problem is you’re conflating the market’s discount rate with your discount rate (or more specifically, your required rate of return). Rather than plugging the wrong numbers into a formula it seems you don’t fully understand, try thinking about it without using a formula at all. For instance, “I get $40.49 in cash flow every year after year 24. The market will capitalize cash flows at 6.25% (using the 16x you used above, but pick whatever multiple you want), which means I can exchange my $40.49 cash flow stream for an upfront payment of $647.83 at the end of year 24. I want a 10% compounded return (what you say you’d pay for an “earnings cash flow stream growing at 6%”), so I’d be willing to pay anything less than $65.77 for this now ($647.84 / 1.10^24).”
-
The $10 of current earnings are not distributable earnings, but retained earnings. In other words, the only way Berkshire can achieve growth rate of 6% in your model is by retaining the earnings. So you should re-work your model to come up with an intrinsic value estimate that incorporates this fact. It is not equal to $10/(10%-6%) = $250 per B share as you seem to be implying. The company earns $10 in year 1. It retains and reinvests that $10 earned in year 1, and as a result, it earns an additional $.60 in year 2, for total year 2 earnings of $10.60. It does the same in year 3. It reinvests the $10.60 it retained in year 2, and earns $11.24. That pattern continues in perpetuity. In 24 years, for example, it will be earning $40 per share according to the model. Why does that need to be reworked? Seems straightforward. Your’re capitalizing retained earnings rather than distributed earnings. The value of $10 in earnings growing by 6% a year depends on how much has to be reinvested to produce the 6% growth. Your economic assumptions ($10 initial earnings, 100% retention, 6% growth) and your valuation assumptions ($10 initial earnings, 0% retention, 6% growth) are not the same thing. Using your 10% discount rate, you get the following present values for Berkshire’s operating earnings (i.e., the value of Berkshire excluding cash and securities): (a) $10 earnings, 100% retention, 6% growth (using your terminal year of 24): ($40.49/.10) / 1.10^24 = $41.11 (b) $10 earnings, 0% retention, 6% growth (in perpetuity): $10 / (.10-.06) = $250 Under your economic assumptions of 100% retention, 6% growth and a 10% discount rate, Berkshire would be destroying value. In fact, each dollar retained would be worth only 60 cents. Here’s another way to look at it: If Berkshire needs to retain 100% of its earnings to grow by 6% a year, they’re earning 6% on equity. Berkshire is levered 2:1 and the liabilities cost zero (roughly). You’re therefore assuming Berkshire will earn just 3% on the asset side. Of course, assets that produce operating earnings only make up half the balance sheet, but you get the idea.
-
Anyone have his 2019 or 2018 letter?
-
One thing mentioned in the book I thought was telling was Simons’ Madoff investment. Madoff built his scheme around the idea he could deliver steady 12 to 13% returns. So what is Simons doing withdrawing from his fund, which is earning 66%, and investing in a fund earning a purported 13%? If anyone could/should have been reinvesting in Medallion it was Simons. And this wasn’t when he was running billions of dollars; this was in the early 90s when the fund had less than $100 million in capital. It’s tough to come up with a valid compounded return figure for Medallion given that (a) nearly all the fund’s earnings were distributed and (b) the guy running the fund was reinvesting his distributions at a much lower rate (even when the fund was small).
-
Berkshire Insurance Investing In Equities
Poor Charlie replied to hasilp89's topic in Berkshire Hathaway
The average insurance company writes something like 1.0x equity and each dollar of written premiums produces around a dollar in float (this will vary depending on whether they write property or casualty business). Berkshire, on the other hand, writes something like 0.2x equity and each dollar of written premiums produces around two dollars in float (it used to be more). So as long as they’re reserving properly, Berkshire is risking a fraction of its equity on their insurance book relative to the average insurance company (but still generating a disproportionate amount of float). This structure lends itself to risking more equity capital on investments, especially when you have a large cushion in deferred taxes. I don’t think Berkshire’s model is that aberrational. The Bermuda reinsurers write a similar amount of business in relation to equity (but generate less float as it’s all short-tail business) and have around 1x their equity capital in equity investments There’s also several mainstream insurers that follow the model, too (Cincinnati Financial comes to mind).