berkshire - cheap?

[karthikpm]

https://www.marketwatch.com/story/breaking-up-berkshire-hathaway-may-be-the-best-idea-in-a-post-buffett-world-2018-06-26

 

Maybe this is a sign it's cheap

[Dynamic]

I think perhaps it's a sign that the general market is not cheap. These stories also tend to surface when Berkshire happens to be trading near the bottom of its range, making the unfavorable comparisons with the total return index 'work' in supporting the premise over a number of years, making it easier to mask cherry picking of data points for the comparisorn because the cherry picked end date is the obvious point of comparison - today

 

In the last couple of days we've seen price to intrinsic value about as low as any time in the last two years, so many n-year periods will look bad for Berkshire.

 

To my mind the suggestions made might please "the market" in the short term but not help Berkshire in the long term, but the refusal to act on them might sustain or even improve the shareholder constituency of Berkshire to those with a more long term value focus.

 

One of the nice things with Berkshire is the number of surprises that are positive. They are few and far between in such a low interest rate, high market price environment hence the build up of low yielding cash, but it's possible that the next deal that significantly moves the needle in the way Precision Castparts did will create a significant surge in intrinsic value.

 

For Berkshire's IV growth to pretty much match or slightly beat the pre tax market growth while building up so much cash and deducting tax deferrals from Berkshire's gains is no mean feat. When that cash is deployed in good deals at fair prices, it might start to look like it in the superficial terms the general market recognises.

 

So yes, I'd take that article as a decent contrarian indicator

[Cigarbutt]

For Berkshire's IV growth to pretty much match or slightly beat the pre tax market growth while building up so much cash and deducting tax deferrals from Berkshire's gains is no mean feat. When that cash is deployed in good deals at fair prices, it might start to look like it in the superficial terms the general market recognises.

 

1+

 

The more things change…

 

60 years ago, when reflecting on 1958 performance and previous comments, Mr. Buffett had discussed this contrarian concept:

 

“Our performance, relatively, is likely to be better in a bear market than in a bull market so that deductions made from the above results should be tempered by the fact that it was the type of year when we should have done relatively well. In a year when the general market had a substantial advance, I would be well satisfied to match the advance of the averages.”

 

He also explained how he could benefit from unexpected decreases in prices out of proportion to the decline of intrinsic value of even undervalued securities.

 

In 1958, the 10-year treasury yield was standing pretty much where it is today but the stock market to GDP ratio was depicted differently despite what Mr. Buffett described then as a psychology animated by mercurially-tempered people.

 

Some things change but some stay the same. The challenge is to differentiate between the two.

 

From my humble perspective, the most outstanding accomplishment in this market is not that BRK will outperform going forward, it is that BRK was able to match recent advances in price. Because of its size, BRK is unlikely to hit it out of the park but is well positioned to outperform the S&P in the event that seemingly inevitable profits don’t show up.

 

I guess BRK could be called a sleep well at night modified barbell strategy large market cap stock. A unique combination.

 

 

[Dynamic]

https://investorplace.com/2018/06/dont-sell-berkshire-hathaway-stock-despite-recent-underperformance/

 

The above article, while still thinking it likely that Berkshire will get broken up in future (possibly by the government, not the management) and thinking that this will result in a shareholder windfall, is much more reasonable about why Berkshire is good value especially compared to richly priced areas of the market such as FANG stocks.

[Guest longinvestor]

OK, in the boring world of BRK ownership, just thought of updating the #s for FANG versus BRK

FANG       Mkt cap: $2321 Net Earnings: $31.6 Book: $257.3 P/E 73.4 P/B 9.0

BRK         Mkt Cap $483 Net Earnings: $45 Book: $348 P/E 10.7 P/B 1.4

 

Mkt cap are today's numbers the rest are Dec 17 numbers, so the current ratios could be quite a bit off, especially for the  FANG stocks. Also notable is that FB and GOOG make up 90% of the FANG's $31.6B and 85% of the book.

 

It's all over for BRK. The FANG's have won and they will take it all!

 

 

How are you coming up with $45B earnings for BRK?

 

He's  taking last year's GAAP which includes the change in the DTL which is one-time in nature, which I think is what you are getting at. ($21 billion of the $45 billion for 2017 was negative tax expense)

 

To use a reasonable neutral third party, JP Morgan estimates ~$28 billion for 2019 ($5B investment income, $2B of underwriting = $7 Billion insureance + $29 billion operating+$4 billion investment gains +- some other crap for $34 billion of pre-tax income less $6.6 b of taxes = $28 billion of earnings), with upside in the event of deployment of excess capital.

 

I think Berkshire is safe and relatively cheap and it is my largest position (and my family's). $45 billion of earnings ain't happening (unless the stock portfolio zooms up, which you wouldn't capitalize those earnings)

 

EDIT: What I mean is that $45 billion of operating earnings ain't happening any time soon. Because of the accounting changes made recently you could get there with stock value change, but that's not the same thing. Overall, I think longinvestor just took 2017 GAAP NI and did not mean it as a representation of anything more than that, 2017 NI.

 

Fwiw, all of the numbers above, BRK and FANG alike, are lazily taken from the summary financials. Non-intellectual, non-analytical,

just numbers. From those numbers, it is evident that the market has clearly picked the winners and it is not BRK. It doesn't matter a bit that the sum of FANG earnings< that of BRK. Pre- or post Tax, before the tax act or after etc. etc.  It has been so last year and the year before and. But for the market, it is all about the future. BRK is from the past!

 

Now here is something to chew on; if virtually all of the FANG earnings have come from advertising, specifically online advertising, one should wonder as to just how important they are to those who pay for those ads and what kind of value they get from it. Meaning additional sales from reaching individual eyeballs. Yes, your and mine. While we are searching and socializing. So I dug into this topic and ran into this,

 

http://www.thedrum.com/opinion/2018/03/19/marketers-who-prioritise-digital-advertising-have-delusions-effectiveness

 

So, I wonder why we still see ludicrous statements such as this one from Stephan Croix, Pizza Hut’s chief sales and brand office for Europe, at the Millennial 20/20 conference in London last week: "We used to invest 70% in traditional media; now we're investing 100% in digital media."

 

That giant sucking sound you hear is masses of people going to Domino's Pizza.

 

Perhaps there is some rational thinking behind Geico's predominant use of traditional advertising as they brand their way to the #1 auto insurer in the USA. Maybe, just maybe, they figured out that paying $12 per click to Google doesn't pay off. Or even $11 or $8 or $1. Stick with real world advertising. Leave the hope-of-sales-advertising to the wannabes who are desperate for any sales.

 

And one more thing to chew on, the N in FANG is irony in itself. A big part of why they are so ubiquitously popular is the no-ad viewing. People hate ads, many stupid marketers pretend that this hate doesn't exist. And Mr. Market loves online ads, to the tune of 2 Trillion!

 

 

 

 

 

 

[alwaysdrawing]

Not sure why there is so much animosity towards FANG stocks.  Generally they are companies that are growing fast and taking over from legacy business models.  Lower profits today is just tax efficient--growing is faster and more efficient if you pay less tax by recognizing less profit (see:  expansion of CapEx of Berkshire's railroads and utilities)....the runrates of those companies are wildly profitable.  Not saying they are great value stocks, but I'm shaking my head thinking about people actually thinking that software companies should ever be valued on a price to book basis....book value is meaningless when the assets are code.

 

 

Anyway, there is no need to rehash the investment thesis of BRK on this board, however currently BRK is trading at a level that makes OK sense relative to the market as a whole.  Despite investments in companies with truly egregious valuations (e.g. AXP and KO), the industrial and insurance businesses both look to be positioned well, and at least the $100 billion in cash is earning higher returns as interest rates kick up. 

 

I'm not really excited about the stock portfolio:  KHC, WFC, AXP, BAC and KO...yikes!  Hopefully those will provide a bond-like 3-4% return.  WFC has their issues, but with BAC hopefully they do better with higher interest rates and less regulatory burden.  Unfortunate that WFC can't grow....that's going to hurt.  Could be worse!  At least Uncle Warren sold IBM!

 

 

[John Hjorth]

alwaysdrawing,

 

To me, your post here is refreshing, because it's providing Berkshire pushback [, of which there isen't much in this forum here on CoBF].

 

Personally, I think differently about the investments in KHC, WFC, AXP & KO. I'm considering them financed by Berkshire insurance float [not to be confused with any other insurance float], making them basically nobrainers, longterm. [berkshire has the ability to hold on to these positions.] [¹]

 

Also, personally, I consider BAC an investment with really good potential [also financed by Berkshire float], even from recent price levels [please see the BAC topic here on CoBF in the Investment Ideas forum].

 

- - - o 0 o - - -

 

Edit - added note:

 

[¹] You also have to take into consideration deferred taxes on unrealized gains in your investment calculations of proceeds eventually available for reinvestment anywhere else.

[alwaysdrawing]

alwaysdrawing,

 

To me, your post here is refreshing, because it's providing Berkshire pushback [, of which there isen't much in this forum here on CoBF].

 

Personally, I think differently about the investments in KHC, WFC, AXP & KO. I'm considering them financed by Berkshire insurance float [not to be confused with any other insurance float], making them basically nobrainers, longterm. [berkshire has the ability to hold on to these positions.]

 

Also, personally, I consider BAC an investment with really good potential [also financed by Berkshire float], even from recent price levels [please see the BAC topic here on CoBF in the Investment Ideas forum].

 

Thanks.  As for AXP, KO, WFC, KHC....obviously they are part of the float, however they are priced for perfection.  All are slow growth companies with earnings that are tiny relative to their share value.  It's tough to see a world where any of those companies can grow a dollar invested today at even 10%, and I would guess most will grow at half that rate, with a risk that the market value reprices the equity as interest rates rise. 

 

Without getting into numbers, Kraft Heinz is a dying company with products that are losing market share and even traditional marketplaces to upstart differentiated brands.  Sure, they will keep cashing ketchup checks for years to come, but not exactly a business poised to make much incremental money on invested capital.

 

American Express squandered their opportunity to become a truly global brand, and their model is harder to grow than Mastercard or Visa.  This isn't exactly like it was 20 years ago when the rest of the world wanted to be like America, and revered the US.  With "America" in the name, and losing their panache among younger people, and even facing competition from Chase Sapphire Reserve and other luxury cards, it's hard to see AXP growing like the old days.  The business isn't dead--they will keep cashing checks for a long time--but what young person loves their American Express card?  They may have lost an entire cohort.

 

Wells Fargo is a fine bank that had poor oversight and used aggressive tactics to expand their relationships with customers.  They were caught with their hand in the cookie jar, and have to pay the penalty of not growing via M&A, and reforming the tactics that made them a superior business.  That's a bad combination.

 

Coca Cola is a sugar business in a world that may start to face a serious sugar backlash.  They may have other products, but Coke only has room to lose market share not gain it.  I don't see them having superior power to raise prices significantly (i.e. beyond inflation), and they already sell about as much Coke as will be sold in the world.  The equity is priced extremely richly and I expect in the bull case, Coke makes a few % per year for buyers of their stock today.

 

BAC possibly an exception, as they are not restricted to grow like WFC and will start earning materially higher returns on their assets as interest rates rise.  Even so, they aren't exactly going to grow the way their share price has grown in the last 10 years post-2008.

 

For the others, the only reason I believe Buffett still owns those companies is A) there is a giant deferred tax liability that will have to be realized if they are sold, and B) there aren't a lot of attractive large cap stocks out there right now, and C) Buffett doesn't care anymore about maximizing returns as his record is basically set. 

 

None of those companies would be bought by Buffett today, and certainly not when Buffett actually cared about maximizing returns.

[gfp]

Does AXP have a "truly egregious valuation" ? 

[SlowAppreciation]

 

Perhaps there is some rational thinking behind Geico's predominant use of traditional advertising as they brand their way to the #1 auto insurer in the USA. Maybe, just maybe, they figured out that paying $12 per click to Google doesn't pay off. Or even $11 or $8 or $1. Stick with real world advertising. Leave the hope-of-sales-advertising to the wannabes who are desperate for any sales.

 

 

Actually GEICO is one of the top 5 spenders on Google's DoubleClick platform (and has been for a long time). In fact, they alluded to it a bit in the 2017 shareholder meeting:

 

CHARLIE: Well, we avoided the tech stocks, as we felt we had no advantage there and other people did. And I think that’s a good idea not to play where the other people are better. But you know, if you ask me in retrospect, what was our worst mistake in the tech field, I think we were smart enough to figure out Google. Those ads worked so much better in the early days than anything else. So I would say that we failed you there and we were smart enough to do it and didn’t do it. We do that all the time, too.

 

WARREN: We were their customer very early on with GEICO, for example, and we saw—these figures are way out of date—but as I remember, we were paying them $10 or $11 a click (or something like that). And any time you’re paying somebody $10 or $11 bucks every time somebody just punches a little thing where you got no cost at all, you know, that’s a good business unless somebody’s going to take it away from you.

[alwaysdrawing]

Does AXP have a "truly egregious valuation" ? 

 

Not if you are happy owning a company with 0 revenue growth and a 4% return.  Not going to get rich owning stocks like AXP.  Maybe you stay rich, maybe not.  People view AXP as no risk and are valuing the equity like a bond.  Well, owning perpetual bonds in a rising interest world is a great way to destroy purchasing power. As interest rates go up, that 4% return looks worse and worse and will be re-priced.

 

If that's your idea of a good investment, then enjoy your returns.  I'd rather earn 2% in a savings account than own AXP.  It's the opposite of what I want in a stock:  limited upside and big downside if the price falls or earnings falter.  AXP has been complacent for years because it just kept cashing the checks each month.  Now they have a luxury product that is losing appeal and facing increasing competition, at the same time that growth has stalled out for years.

 

Where's the margin of safety?  Just that the checks are rolling in each month?  I seriously can't believe how many investors are happy with 4%!  4% is a horrible return!

 

 

 

 

 

 

[John Hjorth]

alwaysdrawing,

 

To me, your post here is refreshing, because it's providing Berkshire pushback [, of which there isen't much in this forum here on CoBF].

 

Personally, I think differently about the investments in KHC, WFC, AXP & KO. I'm considering them financed by Berkshire insurance float [not to be confused with any other insurance float], making them basically nobrainers, longterm. [berkshire has the ability to hold on to these positions.]

 

Also, personally, I consider BAC an investment with really good potential [also financed by Berkshire float], even from recent price levels [please see the BAC topic here on CoBF in the Investment Ideas forum].

 

Thanks.  As for AXP, KO, WFC, KHC....obviously they are part of the float, however they are priced for perfection.  All are slow growth companies with earnings that are tiny relative to their share value.  It's tough to see a world where any of those companies can grow a dollar invested today at even 10%, and I would guess most will grow at half that rate, with a risk that the market value reprices the equity as interest rates rise. ...

 

The point here is, that you don't even need growth to make good money, because of the Berkshire float financing these Berkshire positions. [so far, you have got growth, on the mentioned basket, as a whole. I think it'll still grow at a decent clip going forward.]

 

Personally, I disposed of all WFC shares recently, held directly by family members and myself, but that was just another [more or less short term] consideration [i saw better possible outcomes elsewhere with US banks], not including leverage.

[alwaysdrawing]

 

The point here is, that you don't even need growth to make good money, because of the Berkshire float financing these Berkshire positions. [so far, you have got growth, on the mentioned basket, as a whole. I think it'll still grow at a decent clip going forward.]

 

Personally, I disposed of all WFC shares recently, held directly by family members and myself, but that was just another [more or less short term] consideration [i saw better possible outcomes elsewhere with US banks], not including leverage.

 

Amazing that on a board that is devoted to Warren Buffett, people justify holding any random stock with a positive yield because it's bought using someone else's money.  Buffett got rich through buying large concentrated positions in undervalued securities using the float.  Nonetheless, the underlying investments should be analyzed on merit. 

 

I recognize that there is a large deferred tax benefit from owning hugely appreciated positions in AXP and KO, however those investments will not from today perform satisfactorily by any standard measure of investment success.  The optimistic scenario is 5% returns for those companies.  Is that OK to earn on float in a 0% interest world?  Sure, but as interest rates go up, there will be alternative investments--especially investment grade bonds--and I would guess those "blue chip" companies will be revalued to reflect that the equity in no growth companies is riskier than the cash coupons from investment grade bonds.

 

 

[John Hjorth]

alwaysdrawing,

 

I'll be pleased to read your suggestions to reallocations of these positions, including tax consequenses, to make things better for Berkshire. Don't you think Mr. Buffett has been through this mental excersise?

[gfp]

Have you decided there is a 4% return here?  Or is that based on some arithmetic?  I don't own American Express stock, except I suppose indirectly through my Berkshire shares.  My wife and I use a Chase Sapphire Reserve Visa as our primary card, and I am happy with them.  But with a quick look I see a stock trading a few bucks shy of an all-time high, at $96.96 per share, which will earn about $7.10 per share in net eps this year.  13.6x earnings at an all time high with a bit of a brand and market position with high spending card users, an established share repurchase program.  Doesn't seem egregious but I don't own it so what do I know?  If I had a block with a huge deferred tax liability and my percent ownership of the company kept marching upward I don't think I would be stressing about 13x earnings at an all time high market price.

 

Does AXP have a "truly egregious valuation" ? 

 

Not if you are happy owning a company with 0 revenue growth and a 4% return.  Not going to get rich owning stocks like AXP.  Maybe you stay rich, maybe not.  People view AXP as no risk and are valuing the equity like a bond.  Well, owning perpetual bonds in a rising interest world is a great way to destroy purchasing power. As interest rates go up, that 4% return looks worse and worse and will be re-priced.

 

If that's your idea of a good investment, then enjoy your returns.  I'd rather earn 2% in a savings account than own AXP.  It's the opposite of what I want in a stock:  limited upside and big downside if the price falls or earnings falter.  AXP has been complacent for years because it just kept cashing the checks each month.  Now they have a luxury product that is losing appeal and facing increasing competition, at the same time that growth has stalled out for years.

 

Where's the margin of safety?  Just that the checks are rolling in each month?  I seriously can't believe how many investors are happy with 4%!  4% is a horrible return!

[John Hjorth]

alwaysdrawing,

 

Off topic here:

 

I have actually been looking at AXP within the last few days, and honestly, I have quite a few questions about the company, and what it's doing, from my local perspective.

 

I will post about it in the AXP topic in the Investment Ideas forum soon, and I hope you'll chim in. Small position for me during many years. Peace.

[rb]

Let em pick at another thread here.

 

Coca Cola is a sugar business in a world that may start to face a serious sugar backlash.  They may have other products, but Coke only has room to lose market share not gain it.  I don't see them having superior power to raise prices significantly (i.e. beyond inflation), and they already sell about as much Coke as will be sold in the world.  The equity is priced extremely richly and I expect in the bull case, Coke makes a few % per year for buyers of their stock today.

 

Coke has no pricing power beyond inflation? Coke revenue is about $0.09 per 8 oz serving. A standard 330 ml can is just shy of 1.5 servings. Are you seriously telling me that Coke's maximum pricing power is $0.0018 per serving or $0.0027 per can? If coke raises prices by $0.01 per serving or $0.015 per can, it's earnings go up by 25%. That's serious pricing power.

 

C) Buffett doesn't care anymore about maximizing returns as his record is basically set.

 

Anyone who think that Buffett doesn't care about making money and only cares about his record clearly doesn't know much about the man.

 

None of those companies would be bought by Buffett today, and certainly not when Buffett actually cared about maximizing returns.

 

BAC, KHC are fairly recent acquisitions. Not that long ago BRK was adding to its WFC stake. It's application to the FED to waive the 10% threshold on WFC is also quite recent.

[alwaysdrawing]

alwaysdrawing,

 

I'll be pleased to read your suggestions to reallocations of these positions, including tax consequenses, to make things better for Berkshire. Don't you think Mr. Buffett has been through this mental excersise?

 

On a high level, taxes will have to be paid eventually, and if you have the opportunity to compound at higher rates it's worthwhile to do so. 

 

Whether AXP earns $5 or $7 a share, at the end of the day, the company is not growing revenues and haven't for years.  The increase in earnings will be due to changes in the tax code, not improvements in the business.  In fact, the business is deteriorating, as the company is run by people who think millennials want a partnership with Uber as a feature of their credit card (maybe they do--however I don't see many young people using AmEx or many who perceive it as a status symbol that they want). 

 

Look at the returns of AXP stock vs. the S&P 500 or Visa or Mastercard or Paypal.  Which would you rather have owned?  Simply cashing the same checks every year, without the ability to grow the business is not a recipe for success.  Even with all that EPS, the true return to shareholders isn't that high because it's been (mostly) wasted trying and failing to grow, or buying back stock.  Even with the buybacks, you would still have rather owned S&P, V, MA, PYPL or others.

 

My contention is that Buffett doesn't care about maximizing returns to shareholders anymore.  He cares about preserving his legacy, and because of that he will not take any chances like selling stocks like AXP for something better, because there is an immediate tax consequence, he's a high % owner so it may hurt the value of the stock, and it should hopefully still earn some positive return.  Is that the excellence you expect from Buffett?

 

In the large cap space, it becomes tougher to invest in companies, however there are still companies that are growing that will have reasonable returns on dollars invested today.  I don't want to muddy the waters too much with specific companies I like, however I will say that there are better options out there.

 

Buffett should consider alternatives particularly in the regulated utility and industrial space where he can earn solid returns on incremental capital.  The best opportunities would be utilities where there has been a lack of investment, and he can deploy cash into tax advantaged CapEx, and earn a return on investment, like his investment in Burlington Northern Santa Fe Railroad.

 

One other alternative is to buy back Berkshire stock at a higher threshold than in the past, but where his return on invested capital would be higher than in stocks like AXP or KO.  That is a tax efficient way to return capital to shareholders, and is likely better than the returns on the pile of cash and stalled out businesses he currently has.

 

 

 

 

 

 

 

[alwaysdrawing]

BAC, KHC are fairly recent acquisitions. Not that long ago BRK was adding to its WFC stake. It's application to the FED to waive the 10% threshold on WFC is also quite recent.

 

Unless I'm mistaken, BAC was due to the preferred shared converting upon the common dividend yielding a higher return than the prefs, and although I don't especially like BoA, it's not as bad as the others.

 

I wouldn't particularly call KHC a successful investment, would you?

 

Wells Fargo is only gaining as a percentage of ownership because of buybacks by WFC, not because Buffett has been buying in the open market.

[sleepydragon]

Why does people think AXP and KO and WFC are currently bad investments? It’s laughable. I think they are great investments at current price. Are you sure that you know these companies well enough, better than Buffett? How long have you been following these companies ? Have you even read the 10K?

[rb]

BAC, KHC are fairly recent acquisitions. Not that long ago BRK was adding to its WFC stake. It's application to the FED to waive the 10% threshold on WFC is also quite recent.

 

Unless I'm mistaken, BAC was due to the preferred shared converting upon the common dividend yielding a higher return than the prefs, and although I don't especially like BoA, it's not as bad as the others.

 

I wouldn't particularly call KHC a successful investment, would you?

 

Wells Fargo is only gaining as a percentage of ownership because of buybacks by WFC, not because Buffett has been buying in the open market.

 

As far as I recall BRK paid about 12 billion for KHC back in 2013. That investment is now worth about 20 billion at market cap plus a whole slew of massive dividends because I think about 8 of the 12 billion was the 9% preferred. So without crunching the numbers I think it washes out at around a double over the 5 years. That's after the stock took it in the shorts this year.

 

Since you've asked: Yes I would consider that a successful investment. I have no problem with just doubling my money every 5 years.

 

In the case of WFC Buffett was making open market purchases as recently as Q4 2015.

 

Based on what you write here tells me that you don't actually know much of what you're talking about.

[alwaysdrawing]

 

 

As far as I recall BRK paid about 12 billion for KHC back in 2013. That investment is now worth about 20 billion at market cap plus a whole slew of massive dividends because I think about 8 of the 12 billion was the 9% preferred. So without crunching the numbers I think it washes out at around a double over the 5 years. That's after the stock took it in the shorts this year.

 

Since you've asked: Yes I would consider that a successful investment. I have no problem with just doubling my money every 5 years.

 

In the case of WFC Buffett was making open market purchases as recently as Q4 2015.

 

Based on what you write here tells me that you don't actually know much of what you're talking about.

 

I believe Buffett bought an addition $5 billion in Kraft as the merger completed in 2015, raising his basis to $17 billion, although I could be wrong there.  If that's the case it's not exactly the best return during the 2013-2018 period.  Correct me if I'm wrong on his basis, but I believe the prefs were the only part of that deal that did OK.

 

Q4 2015 isn't all that recent, and how well have those purchases done?

 

None of this affects what my overarching point is:  much of the current common stock portfolio will not outperform over the next 10 years.  I think the S&P 500 is probably in a better position than BRK [edit: BRK's common portfolio.  I think the controlled businesses will do fine and better than the S&P], with the exception that in a downturn Buffett's pile of cash is likely to get some deals similar to previous sweetheart deals like the Goldman and BAC prefs in 2008.  That optionality does not make those common shares any better investments.

[Cigarbutt]

alwaysdrawing,

 

The answers you’re getting are mostly deserved but I think you raise an interesting point which is related to another question: once you made a stock a core holding, should one refrain from selling whatever the market is offering for it?

 

For example the goal may not be to determine if KO is an “inevitable” or “bad” investment. It’s a price value assessment. Can’t comment in details about all the investments you mentioned but KO still has an amazingly strong franchise (brand and distribution) and will still be around in 20 years earning more than it is now. However, IMO, the moat has been decreasing (retail environment is changing, evolving tastes, private labels, health issues and retailer pricing power against KO) and the price now, IMO, implies relatively low returns going forward. 

 

If you look back at what happened to KO and compare your assessment of intrinsic value versus price over time, I conclude, like you, that KO is not undervalued.

 

I suspect Mr. Buffett looks at capital allocation decisions in order to maximize returns but he has, in the past, discussed regrets about not selling Coke in the late 90’s.

 

https://www.barrons.com/articles/SB10670404744196300

 

“Berkshire has done very well with its Coca-Cola and Gillette stakes, accumulated in the late 1980s. But Buffett says he erred by not selling them at their late 1990s peaks. Coke, at 45, and Gillette, at 30, are about 50% below their highs. "Coke and Gillette weren't the focal point of the bubble, but they achieved bubble prices," the Berkshire chief observes. At their highs, Coke and Gillette traded for about 50 times earnings.”

 

But others are right to point the tax reasons and the opportunity costs as Mr. Buffett, these days, does not seem to be able to compete on price for both stocks and whole businesses but I think that the major reason for Mr. Buffett not selling the “inevitable” stock holdings that you mention is because he considers them to be permanent, pretty much like Geico or BNSF. Do you think that he would sell Geico even if offered an insane price?

 

KO closed at 43.07 today.

 

In the past, I have held Fairfax as a “core holding” but the % exposure varied a lot over the years (giving rise to improved results over time, even with tax accounted for) and I considered doing the same for BRK. I continue to wonder if that’s the “right” thing to do for core holdings.

 

[alwaysdrawing]

I believe Buffett also believes that some of the long held common stock holdings are overvalued and that is why he added this note in the 2016 letter:

 

[alwaysdrawing]

alwaysdrawing,

 

The answers you’re getting are mostly deserved but I think you raise an interesting point which is related to another question: once you made a stock a core holding, should one refrain from selling whatever the market is offering for it?

 

For example the goal may not be to determine if KO is an “inevitable” or “bad” investment. It’s a price value assessment. Can’t comment in details about all the investments you mentioned but KO still has an amazingly strong franchise (brand and distribution) and will still be around in 20 years earning more than it is now. However, IMO, the moat has been decreasing (retail environment is changing, evolving tastes, private labels, health issues and retailer pricing power against KO) and the price now, IMO, implies relatively low returns going forward. 

 

If you look back at what happened to KO and compare your assessment of intrinsic value versus price over time, I conclude, like you, that KO is not undervalued.

 

I suspect Mr. Buffett looks at capital allocation decisions in order to maximize returns but he has, in the past, discussed regrets about not selling Coke in the late 90’s.

 

https://www.barrons.com/articles/SB10670404744196300

 

“Berkshire has done very well with its Coca-Cola and Gillette stakes, accumulated in the late 1980s. But Buffett says he erred by not selling them at their late 1990s peaks. Coke, at 45, and Gillette, at 30, are about 50% below their highs. "Coke and Gillette weren't the focal point of the bubble, but they achieved bubble prices," the Berkshire chief observes. At their highs, Coke and Gillette traded for about 50 times earnings.”

 

But others are right to point the tax reasons and the opportunity costs as Mr. Buffett, these days, does not seem to be able to compete on price for both stocks and whole businesses but I think that the major reason for Mr. Buffett not selling the “inevitable” stock holdings that you mention is because he considers them to be permanent, pretty much like Geico or BNSF. Do you think that he would sell Geico even if offered an insane price?

 

 

To answer the above, no I don't think he'd sell Geico because of his aversion to selling controlled businesses, but I think he would have sold if he was back in the profit maximization days.

 

As far as core holdings--I find the whole concept laughable.  Buffett himself regularly says that at one price a security makes sense and at another price it's silly.  I believe Buffett should sell some of the stocks at silly prices, and I believe that some of his "core" holdings are at silly prices relative to their future prospects.  In fact, if he does view them as core holdings that he would never sell, he is tying his hands behind his back and billions of dollars of shareholder capital for a silly reason.

 

At today's prices, these companies will not make Buffett or his investors materially richer over the next 10 years.  There are huge opportunity costs.  I believe Buffett himself would not buy these stocks if he had $10 million, and I also think he wouldn't buy them if he only had $10 billion.  In fact, if his ownership stake wasn't so huge, and selling wouldn't itself possibly cause disruptions in the stock price, I believe he already would have sold.  I have not heard a cogent argument that any of those stocks are poised to earn superior returns over the next 1, 5 or 10 years.

 

Buffett earned his reputation, deservedly, on concentrated positions in undervalued securities.  Anyone who thinks the stocks in Buffett's portfolio resemble the stocks of 40, 30 or 20 years ago is crazy.  Even 10 or 5 years ago the portfolio looked better than now.  Part of the difference is because stocks have done better than their underlying performance.  The prices today are silly, and neither offer a margin of safety, or the prospect of superior future returns.

 

I'll take my own portfolio against Buffett's common stock holdings.

 

That is not to say that Buffett isn't an incredible analyst or that Berkshire's operating companies aren't going to do fine.  It's merely a comment on the construction of the current common stock portfolio.