Is This Buffett's AT&T Moment?

[Nomad]

I recall reading in one of the Buffett biographies that WEB knew Ben Graham was ready to hang it up when Graham told investors to buy AT&T, the fully-valued large cap stalwart of its day. After reading the 2019 letter, I'm left wondering: Has Buffett himself reached a similar point?

 

This is not intended as criticism of WEB, who I admire very much and whose public statements and writings have been invaluable to me as an investor and a human being. But recent developments do make me wonder. In the last couple of years WEB has:

 

- Recommended market-cap-weighted indexing for most retail investors (not a bad approach IMO, but curious given his famous "Superinvestors of Graham and Doddsville" article from the 1980s and also possibly a route to heartbreak given recent market valuations and popularity of the strategy)

 

- Made several purchases, including AAPL and some VC-style investments, in the very technology sector he once considered anathema (these are probably the work of Todd and Ted but nevertheless reflect a marked change in approach for Berkshire)

 

- Written increasingly short letters to shareholders (50th anniversary edition notwithstanding)

 

- Told investors that the market value of Berkshire, not the book value, is the preferred valuation metric going forward (2019 letter)

 

The last of these was the most shocking for me given how much emphasis Bufffett has placed on the compound growth rate of Berkshire's book value over the past decades. Granted, in the long run, the market is a weighing machine, blah blah blah, but in the long run we're also all dead, as Keynes pointed out. Buffett has spent what seems like an eternity warning us about the vagaries of Mr. Market and how he can under-price companies for years at a time, only to suddenly switch gears and rely on Mr. Market's appraisal of Berkshire as the primary indicator of its intrinsic value.

 

Am I reading too much into things? It's true that recent accounting changes, the rise of intangible assets, etc. make book value a less accurate indicator of value today than it once was, but to throw it out entirely in favor of the market's appraisal of Berkshire seems bizarre to me given everything I know about WEB. It's certainly possible that this shift is a function of Berkshire's massive size, increasingly efficient capital markets, the sheer number of Munger's cod fishers casting nets in depleted waters, and frustratingly high equity valuations. But could it instead be an indicator that Buffett is content to slowly transition the reins to Todd and Tedd during his later years while remaining the public face of Berkshire?

 

In any event, I'm curious to hear the thoughts of the smarter, wiser folks on this board because I'm legitimately baffled by the seeming shift in Buffett's approach to investing.

[Gregmal]

I am hardly a BRK expert, but these where also kind of my feelings as well. IMO the Buffett we've seen the last half decade is hardly the man we all admire. We've seen a lot of high profile investors get eaten alive by what's occurred with the markets since the GFC, so maybe WEB is no different. It's just odd seeing it from him. Especially since he more or less shot the lights out and was vintage Buffett during the GFC. IDK, the dude is nearly 90, beat cancer, and probably has others areas of his life he neglected over the decades that maybe he feels deserve more of his time now. But to me, despite all of his wisdom, he is no longer a must follow investor and he is making obvious mistakes, not to mention, as you stated, doing things he never used to.

[Casey]

It seems like he made clear in the annual letter that the cash levels and not buying all that much during the Q4 drop was a market call. Something about the value of high quality businesses being "sky high". Perhaps that's just saving face, though.

 

If the market is 20-25% lower in 2020 then, no, I don't think this was Buffett's AT&T moment. If things just go churning on upwards and Berkshire underperforms the S&P by a few points each year, then yeah.

 

Basically, this could be an AT&T moment, but who can tell without hindsight.

 

About 40 or 50% of my portfolio has been in Berkshire for a while... just for context/disclosure.

[scorpioncapital]

"If things just go churning on upwards and Berkshire underperforms the S&P by a few points each year, then yeah."

 

If this happens, Berkshire will continue to chug along and outperform S&P upward too - and with 25% cash. From what I've seen it has kept up with SP and a little bit plus.

 

On the other hand if things go down, it has huge buying power.

 

Whatever happened to the idea of patience?

 

And no it won't do what a biotech stock or IT stock is doing right now. But then again it won't do what those stocks will do when things go in reverse either.

[Lemsip]

 

If this happens, Berkshire will continue to chug along and outperform S&P upward too - and with 25% cash. From what I've seen it has kept up with SP and a little bit plus.

 

Spot on. Reading a lot of commentary, you'd almost miss the fact that through Jan 1 2019, BRK has outperformed the S&P by a hefty margin each of 1,2,3,4 and 5 year time frames all the time keeping solid firepower, a defensive approach and outstanding business results.

 

[woltac]

Perhaps the change is for exactly the reasons he cites:

 

First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Charlie and I expect that reshaping to continue in an irregular manner. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.

 

Maybe the third reason should have been listed first.  Take a look at the equity of a company that buys back stock on a regular basis.  Moody’s is an extreme example, at 12/31/17 the MCO had negative equity of $114.9m.

 

I see this as a clear indicator that major stock buybacks are coming soon.

 

 

[DooDiligence]

Perhaps the change is for exactly the reasons he cites:

 

First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Charlie and I expect that reshaping to continue in an irregular manner. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.

 

Maybe the third reason should have been listed first.  Take a look at the equity of a company that buys back stock on a regular basis.  Moody’s is an extreme example, at 12/31/17 the MCO had negative equity of $114.9m.

 

I see this as a clear indicator that major stock buybacks are coming soon.

 

Aha, AZO comes to mind too.

[DanielGMask]

 

If this happens, Berkshire will continue to chug along and outperform S&P upward too - and with 25% cash. From what I've seen it has kept up with SP and a little bit plus.

 

Spot on. Reading a lot of commentary, you'd almost miss the fact that through Jan 1 2019, BRK has outperformed the S&P by a hefty margin each of 1,2,3,4 and 5 year time frames all the time keeping solid firepower, a defensive approach and outstanding business results.

 

Berkshire's total return has underperformed the S&P for the last decade. Graphic attached.

[scorpioncapital]

The one question I have but first a compliment. An incredible dedication to circle of competence. But what happens when that circle gets old due to disruption? Shouldn't Buffett start to improve his circle of competence? Ok Apple, a little. Only he knows how much he really gets that. If more businesses are getting disrupted it would seem Berkshire needs new competence in new kinds of businesses?

[stahleyp]

I think you guys are too hard on him. Have you looked at the performance of all most all "value" managers over the past 10 years? He's left most of them in the dust.

 

When Klarman, Watsa, Einhorn, Rominck (and several others) were bearish, he was buying - and optimistic.

 

1)The Superinvestors speech was from 1984. Things change over 35 years! Indexing is the best way for most people. I agree with him 100%. Are valuations high? Probably. But the index funds will still do better than most other options (before and after taxes).

 

2) He has the ability to adapt. If he stuck with the old ways always (even when a better way was found) he would have stayed at Graham's level. He far surpassed him.

 

3) I wish the letters were longer, too. But I don't think he wants to talk just to talk. Plus, he's almost 90. If anyone thinks he's the Buffett of 30 or 40 years ago...well, are you the same person you were a few (or couple) decades ago?

 

4) I agree here right now but need to think about it longer.

[meiroy]

What happened with Oracle is worrisome.  Did someone else buy it and he decided to sell, which is pretty bad by itself, or did he buy himself and then decide against it, which is even worse?

 

[meiroy]

 

What happened with Oracle is worrisome.  Did someone else bought and he decided to sell, which is pretty bad by itself, or did he buy himself and then decide against it, which is even worse?

He said that he bought and quickly decided that he didn’t understand it after all?! Rush of blood that is less frequently seen with him

 

Did it happen before, where he spent a few bil then got out in a few months?

[Gregmal]

Lol now he’s on tv saying he s not a buyer of AAPL here, but would be if it got cheaper!!!

First, it was cheaper, much cheaper not too  long ago, and he did nothing. Second, wasn’t he buying like a drunken sailor a couple quarters ago? At much higher prices? WTF happened to Warren Buffett?

[Guest longinvestor]

 

What happened with Oracle is worrisome.  Did someone else bought and he decided to sell, which is pretty bad by itself, or did he buy himself and then decide against it, which is even worse?

He said that he bought and quickly decided that he didn’t understand it after all?! Rare rush of blood.

[stahleyp]

do you guys have a link to the video you're referring to?

[meiroy]

do you guys have a link to the video you're referring to?

 

Check the latest videos section

 

https://www.cnbc.com/tv/

 

 

[WhoIsWarren]

I think this might be the one:

 

https://www.cnbc.com/video/2019/02/25/why-warren-buffett-sold-berkshires-stake-in-oracle.html

 

 

[stahleyp]

thanks. I assumed oracle was from Todd or Ted. Buffett buying and selling so quickly is a bit of a concern for me.

[Dynamic]

Lol now he’s on tv saying he s not a buyer of AAPL here, but would be if it got cheaper!!!

First, it was cheaper, much cheaper not too  long ago, and he did nothing. Second, wasn’t he buying like a drunken sailor a couple quarters ago? At much higher prices? WTF happened to Warren Buffett?

 

I haven't had a chance to watch the CNBC interviews yet but from what I've read, it doesn't sound like he's explicitly saying Berkshire didn't buy more Apple at the beginning of January when it spend a little time in the $140s, I think he probably said he's not buying NOW (meaning around $172), and we don't have much firm evidence of Berkshire buying much at prices above $180 or so even in 2018Q3. I certainly recall thinking they probably added most of their Q2 buys in the dips into the $150s, even though AAPL ended Q2 much higher.

 

In December, AAPL spent only about 10 trading days below $160 and only broke below $170 around 7th December.

 

I was thinking about at what price I'd buy back into AAPL in January, and I decided that based on opportunities elsewhere, it would probably need to be $125-$135 for me to have enough margin of safety for a large high conviction position, which would also have bagged me an extra 10-15% or so of return if those prices had come about, compared to the $145 or so it was selling for at the time for a day or two.

 

I think it's possible that Berkshire could have bought a little more AAPL early this quarter, though the lowest prices were only available for a short period right at the start of January, not allowing Berkshire to buy a lot, and we're probably not going to find out roughly how much (if any) until 4th May, and exactly how much on 15th May.

[gfp]

Buffett buys it, Gates calls him and tells him his take on it, Buffett reconsiders how much he really understands the future competitive dynamics of the industry and sells.  Better than the IBM situation!

 

thanks. I assumed oracle was from Todd or Ted. Buffett buying and selling so quickly is a bit of a concern for me.

[stahleyp]

good points gfp. Shame Buffett didn't call Gates first! ;)

[DanielGMask]

Lol now he’s on tv saying he s not a buyer of AAPL here, but would be if it got cheaper!!!

First, it was cheaper, much cheaper not too  long ago, and he did nothing. Second, wasn’t he buying like a drunken sailor a couple quarters ago? At much higher prices? WTF happened to Warren Buffett?

 

I haven't had a chance to watch the CNBC interviews yet but from what I've read, it doesn't sound like he's explicitly saying Berkshire didn't buy more Apple at the beginning of January when it spend a little time in the $140s, I think he probably said he's not buying NOW (meaning around $172), and we don't have much firm evidence of Berkshire buying much at prices above $180 or so even in 2018Q3. I certainly recall thinking they probably added most of their Q2 buys in the dips into the $150s, even though AAPL ended Q2 much higher.

 

In December, AAPL spent only about 10 trading days below $160 and only broke below $170 around 7th December.

 

I was thinking about at what price I'd buy back into AAPL in January, and I decided that based on opportunities elsewhere, it would probably need to be $125-$135 for me to have enough margin of safety for a large high conviction position, which would also have bagged me an extra 10-15% or so of return if those prices had come about, compared to the $145 or so it was selling for at the time for a day or two.

 

I think it's possible that Berkshire could have bought a little more AAPL early this quarter, though the lowest prices were only available for a short period right at the start of January, not allowing Berkshire to buy a lot, and we're probably not going to find out roughly how much (if any) until 4th May, and exactly how much on 15th May.

 

You are correct! He clearly stated that if it were cheaper he would be buying it. He said BRK's avg cost is around $140.

[cubsfan]

Buffett buys it, Gates calls him and tells him his take on it, Buffett reconsiders how much he really understands the future competitive dynamics of the industry and sells.  Better than the IBM situation!

 

thanks. I assumed oracle was from Todd or Ted. Buffett buying and selling so quickly is a bit of a concern for me.

 

Well - I'm not sure I totally understand the DB area anymore either with SAAS in the picture.

It may be that with Amazon's move away from Oracle DB, which is relatively recent, that creates some

fear of Oracle's moat eroding. Never thought I'd see it happen with Oracle, but who knows.

[rb]

It's been happening for a while now. Look at Oracle's DB sales, esp unit sales. They suck. Oracle's basically a dinosaur in the DB space. All they do now is try to monetize the hell out of their installed base. That's why I was shocked when I saw Oracle pop up on BRK's 13f. Glad it went away.

[cubsfan]

Well, trying to get rid of an Oracle database is like trying to get rid of all your Excel/Word suites - not so easy.

The conversion costs are going to be massive and take years.

 

Oracle will still make plenty of money on license upgrades, etc.  Most corporations have better things to

do then spending time & money converting applications that work.

 

I'll be real interested to see how Amazon pulls the off.