Semper Augustus

[Cigarbutt]

Skip his monetary policy/Fed section ("The Point of No Return") - he clearly doesn't understand how any of this works.

wabuffo

What's the difference between when somebody is wrong and when one is 'clearly' wrong?

Outside of some specific factual inconsistencies and a different perspective, what is so clearly wrong concerning the 'point-of-no-return' section?

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Looking at his results from the letter (before fees i assume?), Mr. Bloomstran has returned (since 2000 not audited GIPS or otherwise, CAGR) about 10.9% versus 8.0% for BRK and 6.6% for the S&P 500. Is that alpha enough to go through (sometimes irrelevant?) what he says, on an annual basis?

Anyways, the coin on page 29 was 'printed' to the effigy of Julia Domna, wife of Septimius Severus and mother of Caracalla, two emperors who were critical actors in the Roman Empire decline. The decline is still looking for an explanation but currency debasement was certainly a symptom, if not a cause. Julia Domna was unusually powerful for a woman and was known for her moderation. She must have been concerned when Caracalla issued new coins with the same face value but with 25% less metal but the emperor was known to be irrational, if not psychotic and that was the name of the game, then. The Roman Empire could tolerate a slow debasement but could not eventually tolerate the seeds of destructive debasement that the two emperors sowed. During that period, the outcome for emperors was death by killing, 86% of the times.

http://money.visualcapitalist.com/deaths-roman-emperors-vs-silver-coin-content/

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One thing which is nice with the Semper Augustus letter is that the author provides the reasons for his conclusions which makes it an interesting exercise for independent thought.

[ValueMaven]

While his style is extremely verbose – this is hands down the most complete and comprehensive valuation update on Berkshire.  Period.  Really interesting example on what buybacks and a shrinking sharecount could look like over the next 5 – 10 years, and what this might mean for future returns for shareholders.  He has shares currently at a deep discount to IV valuation among his various methodologies.  Extremely interesting to see BHE have a negative effective tax-rate.  Not many distressed utility deals out there - but I'd love to see BHE be more active there (ONCOR anyone??) over the coming years. 

[Xerxes]

The only authority worth learning from on the Decline penned a total of six volumes on the topic.

I read all six something like 20 years ago, unfortunately as great historical work that was, it was not easy to pin down one element.

 

As a side note, Asimov's Foundation Trilogy was partially based on Edward Gibbon' work.

Perhaps there is a gem worth exploring in the Foundation Trilogy that can be linked to Fed M2 expansion.

[ValueMaven]

Isnt it fairly aggressive to consider the equity portfolios % of retained earnings as part of Berkshire's normalized earnings profile?  I realize Warren has written about this a lot in the past - I just struggle with any model that does this.  What do others think?

[Lemsip]

I think it is fair to consider these if you are looking at an estimate of earning power.  Obviously for valuation purposes, the public securities portfolio is quoted regularly so the maket's valuation is included in book value.

 

Berkshire owns 5.4% of Apple and as it stands you would not be able to get an accurate picture of Berkshire's true earning power derived from its Apple stake as only dividends received show up on the income statement.

 

In comparison, KHC earning power is regularly reflected on the income statemen due to equity accounting although the form of ownership is essentially the same with a 26.4% ownership in this case.

 

The issue is whether Bloomstran is being aggressive in the numbers he is using. I don't think he is. The 2019 Annual report had a table at the start of the letter which shows the retained earnings for just the top 10 portfolio holdings were $9b. Bloomstran uses $10b for the entire portfolio a year later so it doesn't look like he has applied unduly optimistic values here.

 

 

[thepupil]

I don’t think using look through earnings is aggressive, as long as one doesn’t then double count the stock portfolio.

 

What’s more aggressive is to normalize the earnings power for interest rates without any other adjustments. He points out how much of the earning power this is so it’s easy to get rid of/not include.

 

 

We measure Berkshire’s normalized profitability at roughly $42 billion for 2020. How much of that is available for investment? Consider that $10 billion is spoken for because it stays with the stock market investees as retained earnings. Another $7 billion, at least, represents capital expenditures in excess of depreciation charges. Much of this is contemplated growth capital spending at predictable returns. Finally, another $5 billion of “assumed income” is presently not being earned thanks to interest rate suppression by the Fed. Our method for

deriving normalized profitability assumes that a portion of Berkshire’s current cash will ultimately be

invested in higher-earning assets. $5 billion represents the present value of the portion of cash likely be

deployed in the intermediate term, perhaps on share repurchases. In all, of the $42 billion in “profit,” just

over half is already accounted for (or doesn’t exist yet as cash profit).

 

 

Overall, appreciate his work.

 

EDIT: on second thought, this may actually not be that aggressive in that at reasonable earnigns multiples, you'll get a value lower than the actual cash amount.

[ValueMaven]

great points.  thank you

[HeadOfLeverage]

Hi :)

 

I think that counting all of the retained earnings is just slightly aggressive, since Buffett most likely wouldn't own the same companies if he didn't have to pay taxes when selling them. But I think that giving them credit for deploying so much of the cash pile is quite aggressive given the historic cash to float ratio.