2017 letter

[Viking]

The biggest risk with BRK is WEB age. I think once WEb passes on the baton, BRK will fundamentally change. Nobody can fill WEB shoes and do the Job the same way he does, or they will do it badly. do BRK will have to change, my guess ist hat headquarter staff will significantly expand. I also think that BRK will have to to beef up their financial controls, the system in placebos probanly ver weak and build on a web of personal relationships and trust that won’t work past WEB departure.

 

Spekulatius, yes, Buffett’s age is the 800 pound gorilla in the room (and has been for years). My guess is the price of BRK would quickly fall to 1.2xBV and at that point the stock buybacks would kick in. Where the stock went from there would depend on the new leadership team and how they performed. It will be a very tough act to follow and expectations will be high. Very sad to think about...

[CorpRaider]

Enjoyed the letter.  Posted a few thoughts, most of which have already been discussed above.  I tweeted last night: You should all index. Value Investing is dead.  So sayeth the lord.

 

I'm a little depressed about it.  :D

[Guest longinvestor]

“Nice story. Need stories like yours being a concentrator myself. Would you please elaborate on why extreme concentration does not fit with capital preservation. Is it worry of permanent loss or underperformance with larger sums or something else? Just trying to understand.”

 

longinvestor, when I read Buffett’s quote in Cardboard’s post I added the words extreme concentration because it fits for me :-)  “Our aversion to leverage and extreme concentration has dampened our returns over the years. But Charlie and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need."

Thanks, “have and need” rule.

 

I too have wrestled with how much is the “need”. Thankfully it’s less and less impactful to important things like sleep. I cannot remember if I did lose sleep earlier as I set the concentration ball rolling. Not much but was I anxious? Of course, How I dealt with it was to read everything about the stuff I was invested in. Here is the real benefit of concentration. Especially in Berkshire, there is a genuine interest from the captain to keep me more than informed. He actually wants to educate me. It simply doesn’t get better than this. I remind myself of all the bs others tried to fill my head with, before. I know what reading I’m freed from. That’s big for me.

 

How has it worked out? Great, given that I started in 2002, actually in 2005 in earnest with a chunk of change that I wrested from the clutches of a 401K. My annual rate of return hovers around 13%. Given that the period includes 2009, it has been quite satisfactory. I started out concentrating but went extreme into Berkshire in 2009-2011. Another thing, my annual rate of return from inception (2005) has modestly gone up over the past 5 years. Enuff said, I intend staying extremely concentrated until I see some of the headlines on Berkshire turn out really or remain urban myth. In the meantime I’ve lowered my expectations to a 9% expected return. That will do. I will take any gravy as well. Semper Augustus is likely correct in projecting that Berkshire wallops the Index by a factor of 3x or more over the next 10 years.

[StubbleJumper]

Enjoyed the letter.  Posted a few thoughts, most of which have already been discussed above.  I tweeted last night: You should all index. Value Investing is dead.  So sayeth the lord.

 

I'm a little depressed about it.  :D

 

 

Well, I'm not sure that's exactly what he said.  My read of it was that he was basically rehashing the letter from four or five years ago in which he railed against all of the "helpers" in the financial industry who consume an inordinate amount of the return from equities.  That's why he made his bet against the hedgies beating the market; he knew that over 10 years, all of the alpha offered by a group of hedgies would be more than offset by their 2 and 20 fee structure.  The lesson here is not that indexing is necessarily the only solution, but rather that you need to avoid paying 2 and 20.  While an index fund will definitely do the trick because its costs are usually <20 bps, it can be equally well achieved through the judicious purchase of individual equities and not churning your account.

 

 

SJ

[ABM]

I enjoyed the letter thoroughly and though not my favorite it complements the 60+ annual letter collection well (includes BPL in count). 

 

The subtle implication throughout the letter is the almost unrealistic level of capital that will need to be deployed over the next 10 years in order for BRK to have a reasonable shot of beating the market.  I think it is becoming clear that a more robust capital return will need to be implemented so as not to hurt investors.  Do the simple math and to see the huge challenge that besets the organization at a time when stability will be tested with a likely leadership transition. 

 

In order to compound book value at just 10% implies >$550B will have to be deployed over next 10 years which is 1.6x more than has been deployed in the previous 53 years.  At the current P/B this will yield just a 6% IRR assuming P/B is 1x exit.  He is almost telling us to read between the lines of what he said about why investors are often left frustrated with money managers besides fees.  It is b/c gross returns often suffer as capital levels become larger and larger and the opportunity set remains the same size. 

 

The 53 year BRK record is amazing delivering a 20% IRR but look at the past 10, 15, and 20 year record on the BVPS growth and stock return. BVPS grew 9%, 11.5%, and 10.6% for  20Y/15Y/10Y periods it is no wonder the stock has delivered 8.9%, 11%, and 8.1% IRRs, respectively, over the same period.

 

Yes it is ahead of the market in by a slim margin in the longer periods but I think this frustrates Buffett more than anyone can imagine.  He is the guy that use to crush the market and he knows the margin of outperformance will only grow narrower over time, which at a point will only guarantee in line performance at best.

 

Btw, 20 year BVPS growth and stock returns match incremental returns on capital given BRK as deployed about $293B which generated about $32.5B in incremental AT earnings or 11.1% ROIIC.  Somehow the math always works out in the LT and Buffett understands this better than everyone. 

[gary17]

What would Brkshire’s net earnings be in the future with the lower tax?

i am a bit confused by the one time benefit

i thought most would have a one time liability and get the recurring benefits moving forward?

[Hielko]

What would Brkshire’s net earnings be in the future with the lower tax?

i am a bit confused by the one time benefit

i thought most would have a one time liability and get the recurring benefits moving forward?

That depends on the balance sheet. If you have/had overseas cash you incur a one time liability because you will have to pay taxes on that, even if you keep it overseas forever (which doesn't make sense anymore). If you have on the other hand lots of unrealized capital gain taxes on your balance sheet a lower tax rate will remove a big part of those liabilities with one stroke of the pen.

[nickenumbers]

When WEB says "Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less

than 8% annually, even if we were to experience a so-so economy."

 

Can I take that as WEB making an approximate low bar assumption that BRK should grow an an annual rate of 8% per year, even in a down economy?

 

I guess he is not referred directly to share price, but that has been the 2 prong yard stick of late (Book Value and Market Value.)

 

Can I assume that he thinks that BRK will grow at a low bar rate of 8% per year for the next 5-7 years?

[gfp]

He was probably commenting specifically on the price of Berkshire at the time of the switch from the zero coupon bond to the very attractively priced BRK.B shares.  At that time, 8% was a very conservative projection, which is the only way he would make a public projection for BRK.  Berkshire has done well since, but is not at a crazy valuation.  With luck, 8-10% is a realistic expectation.  But they need to buy something or repurchase shares in size to make it happen.

 

When WEB says "Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less

than 8% annually, even if we were to experience a so-so economy."

 

Can I take that as WEB making an approximate low bar assumption that BRK should grow an an annual rate of 8% per year, even in a down economy?

 

I guess he is not referred directly to share price, but that has been the 2 prong yard stick of late (Book Value and Market Value.)

 

Can I assume that he thinks that BRK will grow at a low bar rate of 8% per year for the next 5-7 years?

[rb]

When WEB says "Fueled by retained earnings, Berkshire’s growth in value was unlikely to be less

than 8% annually, even if we were to experience a so-so economy."

 

Can I take that as WEB making an approximate low bar assumption that BRK should grow an an annual rate of 8% per year, even in a down economy?

 

I guess he is not referred directly to share price, but that has been the 2 prong yard stick of late (Book Value and Market Value.)

 

Can I assume that he thinks that BRK will grow at a low bar rate of 8% per year for the next 5-7 years?

I think at the time they made the switch berkshire was trading at a fairly low price to book.

 

I also think it's safe to assume that Berkshire will grow book at 8% in the future if they don't start dividends. But also I don't think it's reasonable to think that you should get a 1.5 PB multiple on your 8% ROE company. So your mileage may vary.

 

Also my safe 8 is over a longish period (5 may be too short). Keep in mind that Berkshire has something like a 175 billion equity portfolio now that will get marked. If you have a market crash (they happen!) that will seriously distort book in the short term.

[John Hjorth]

... Keep in mind that Berkshire has something like a 175 billion equity portfolio now that will get marked. If you have a market crash (they happen!) that will seriously distort book in the short term. ....

 

They have already been marked, rb. The difference going forward compared to the past is the quarterly marking now will go over the income statement, not comprehensive income.

[gfp]

Brief notes from Buffett's CNBC interview this morning -

 

- wouldn't rule out owning 100% of a major airline

- will spend "probably all day" reading coming GE 10K "very very carefully"

- accounting at GE "has not been a model"

- "we haven't bought any stock at GE"

- might have to change 120% buyback threshold "a little bit" to get shares.  specifically mentioned 125-127% of book as examples

- on above, sounded like something he would change if a large block became available at those prices, as before.  Not necessarily in advance of a block becoming available.  Subsidiary founders passing away, etc...

 

- Set up a $6 billion liability at Berkshire Hathaway Energy for a portion of the tax windfall from deferred tax liability adjustment, in anticipation of regulators properly deeming that it should ultimately go to the customers

 

- net buyer of equities for the year, even including the large block sale of PSX stock back to the company. 

[John Hjorth]

Do I really need to go there?

 

There is just so much wrong with what Warren Buffett is saying these days.

 

For a start, he continues to beat the very worn drum that a basket of hedge fund, fund of funds will under perform an pre-specified index of his choosing. What's worse, is that he conflates that statement with the notion that all types of active management is bad. Not only that, but he states that in all his career (60 years plus of being in the market), that a maximum of ten people he has ever met can hope to achieve the goal of out-performing the index. It seems to me that he is in complete opposition with his previous teachings, namely that an investor with a small amount of capital has a very realistic chance of out-performing the market.

 

John Hjorth - I take it that you are an adherent of the cult of Buffett? If you are a devotee, then may I ask, have you adopted the advice of your protegé (excuse the pun) and adopted the index strategy? From the recent statements of Buffett, I think it's fairly clear that the circle of ten people that he identified as having the ability to out-perform the market are extremely unlikely to be inhabiting this particular discussion forum.

 

It seems to me that yourself and other adherents of Warren Buffett would do much better in your present investment strategies than to sell all your holdings and adopt index weighted holdings in the likes of Tesla and Snapchat, companies that truly represent the dynamism of American business (clearly, anything that is not American is abysmal by the standards of Buffet).

 

I apologize, if my - totally open question, out of pure interest - was bugging towards you.

 

Three reasons stated here about why I'm stock picking, in stead of indexing:

 

1. I'm absolutely allergic to and anal about recurring fees. I haven't paid as much as DKK 0,01 [that's called one øre here in Denmark] in recurring fees since I switched to stock picking from 15 years of bond investing. It took me a lot of time to find the right solution for that back then - more than a year.

2. To me, stock picking isen't easy. That does not imply to me, that it's difficult. And difficult is here not the same as hard. It's just - at least to me - extremely work intensive, and time consuming. And I just happen to love that activity.

3. About indexing: Of the S&P500 constituents, the FAANGs fills about 11 percent. S&P500 earnings yield about right now is ~ 4.3 percent. You can take that, or not. If one don't, one has to work, by doing search and analysis. It's not impossible - even today - to find companies with positive growth prospects, considering carefully the downside risks  - and at the same time with a postive judgement about overall quality, that have an earnings yield above ~4.3 percent.

 

- - - o 0 o - - -

 

Furthermore, personally I distinguish quite sharp between Mr. Buffett, the Berkshire CEO & Chairman, and Mr. Buffett, the private US citizen & ie. taxpayer, venting his personal opinions publicly. For several months now, "The Snowball" has been open here for my part at p. 543 - "White Nights", with absolutely no appeal for me read on.

 

With that angle, your post makes a lot of sense to me, too.

[CorpRaider]

Brief notes from Buffett's CNBC interview this morning -

 

- wouldn't rule out owning 100% of a major airline

- will spend "probably all day" reading coming GE 10K "very very carefully"

- accounting at GE "has not been a model"

- "we haven't bought any stock at GE"

- might have to change 120% buyback threshold "a little bit" to get shares.  specifically mentioned 125-127% of book as examples

- on above, sounded like something he would change if a large block became available at those prices, as before.  Not necessarily in advance of a block becoming available.  Subsidiary founders passing away, etc...

 

- Set up a $6 billion liability at Berkshire Hathaway Energy for a portion of the tax windfall from deferred tax liability adjustment, in anticipation of regulators properly deeming that it should ultimately go to the customers

 

- net buyer of equities for the year, even including the large block sale of PSX stock back to the company.

 

Anyone know the identity of the other NYSE company that doesn't give restricted stock awards and pay for directors E&O insurance?