Wedgewood Partners on selling their BRK stake

[LongTermView]

People are talking past each other in some respects. Arguments can be made that it is just as "unethical" to buy companies other than Microsoft. But it was silly for Wedgewood to single out Microsoft without mentioning all the times that Buffett has said he won't buy their stock because of his relationship with Gates.

[Gregmal]

Thats why I used Costco.

 

But its not about a specific name. It s about the oddity of, his macro outlook has actually been pretty spot on, but his investing style has been flaccid and completely contradicts what's he is saying. If he thinks what he thinks(ie at worst fairly valued and at best wildly undervalued...) he really can't find ANYTHING! to invest in? Especially companies he's pointed out as having missed but admires, like GOOG which was at $1000 not to long ago or Costco? Let alone myriad others? Theres something off. IMO its because he's selfishly invested in the idea of one last giant elephant hunt. But thats just my opinion and it could be any number of other things, which as a shareholder I dont like.

[DooDiligence]

Bump

 

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/sorry-warren!-another-year-of-dragging-ass/msg293189/#msg293189

[scorpioncapital]

I believe I read somewhere gates recounting a story that buffet came to him about thinking of buying msft or ibm and gates told him buy msft not IBM. He did in fact buy ibm. Probably it was a mistake.

If Berkshire only matches sp500 going forward it would not be a good result. Why exist at all then ? It really should outperform, even by a little.

 

[Guest cherzeca]

Buffett has always made sense to me when he points out that you are buying a piece of a business when you are buying a share of common. so my takeaway has been that while timing (buying right) is always important it is not the overarching criterion (especially when your targeted holding period is forever).  now comes the great FC and Buffett does quite well being the backstop (in addition to the Treasury, buying at the right time).  it seems to me that Buffett (having done well with the FC) is not willing to swing at a good pitch and is just waiting for the fat pitch (the punchcard concept).  the problem with buying only at the right time is that you can take too many pitches that are hittable.  there is no way you can justify building up a cash portfolio of >$120B during a period of low interest rates, extremely low employment, peace, and reasonable growth.  it means you are waiting for the next FC.  too conservative 

[Spekulatius]

Buffett has always made sense to me when he points out that you are buying a piece of a business when you are buying a share of common. so my takeaway has been that while timing (buying right) is always important it is not the overarching criterion (especially when your targeted holding period is forever).  now comes the great FC and Buffett does quite well being the backstop (in addition to the Treasury, buying at the right time).  it seems to me that Buffett (having done well with the FC) is not willing to swing at a good pitch and is just waiting for the fat pitch (the punchcard concept).  the problem with buying only at the right time is that you can take too many pitches that are hittable.  there is no way you can justify building up a cash portfolio of >$120B during a period of low interest rates, extremely low employment, peace, and reasonable growth.  it means you are waiting for the next FC.  too conservative

 

Yes, I see it in a similar way. His last really good deals with public markets was  BNSF. Everything after that was private deals (BAC, OXY etc). In a way, he has done a great deal reinventing himself, as a private market investor.

 

Even though he may have lost some edge as an investor, I really like BRK stock here and I don’t think he really needs to hit it out of the Park here in terms of investing in commons stock to do well. If he can just get a few good deals done in the next downturn, while his operating companies and resilient insurance ops put up good results, the BRK should outperform significantly in a downturn and do Ok in an upturn with overall very satisfying results.

[John Hjorth]

Thats why I used Costco.

 

But its not about a specific name. It s about the oddity of, his macro outlook has actually been pretty spot on, but his investing style has been flaccid and completely contradicts what's he is saying. If he thinks what he thinks(ie at worst fairly valued and at best wildly undervalued...) he really can't find ANYTHING! to invest in? Especially companies he's pointed out as having missed but admires, like GOOG which was at $1000 not to long ago or Costco? Let alone myriad others? Theres something off. IMO its because he's selfishly invested in the idea of one last giant elephant hunt. But thats just my opinion and it could be any number of other things, which as a shareholder I dont like.

 

Greg, what's your time horizon here?

 

-If you think carefully about it, really! - what does then matter -real long term?

[Gregmal]

Thats why I used Costco.

 

But its not about a specific name. It s about the oddity of, his macro outlook has actually been pretty spot on, but his investing style has been flaccid and completely contradicts what's he is saying. If he thinks what he thinks(ie at worst fairly valued and at best wildly undervalued...) he really can't find ANYTHING! to invest in? Especially companies he's pointed out as having missed but admires, like GOOG which was at $1000 not to long ago or Costco? Let alone myriad others? Theres something off. IMO its because he's selfishly invested in the idea of one last giant elephant hunt. But thats just my opinion and it could be any number of other things, which as a shareholder I dont like.

 

Greg, what's your time horizon here?

 

-If you think carefully about it, really! - what does then matter -real long term?

 

John,

 

I like to think of my time horizon as forever....however...forever doesn't last forever. I could wake up tomorrow and not need the cash, I could wake up and need the cash, or I could not wake up at all. Thats true for every day for the rest of our lives! I think as investors we need to be realistic about what we expect but also mindful that consistent returns are better than inconsistent ones, and that compounding early and regularly do more for us than later and greater in amount.

 

Ive owned a little BRK since January because I see the value, but I also cant help but think of the security as a product at this point, more so than a business like BAM for instance. Its probably a lower beta SPY or something like that, which is good. If your investment objectives are preservation of capital and probably willing to take on risk somewhere between a junk bond fund and an index fund, I think it's great. You're not going to lose your nest egg here, but if you're looking to compound at an average to above rate with consistency, I just dont see it here.

 

I also think if you have certain rate hurdles or expected returns, it might leave something to be desired for quite a while. I've detailed my thoughts on the Buffett overhang, and at this point, I'm mainly just a fish swimming by a feeding frenzy to take a look, rather than dive in to the crowd. I'd like to see certain things happen first, which I've also detailed prior.

 

I just dont think people are being intellectually honest when they derive some of these excuses when at the same time, we're talking about a guy who was so obsessed with making money that he neglected his wife and kids in ways he now regrets, BY ACCIDENT! He still buys food from the MCD's dollar menu! So to claim he's willfully leaving dollar bills all over the street is insanity to me.

 

I wish he would still go with his gut. You can tell he still has it to a degree. But I dont like thats he s obviously holding back, and that he hasn't really been forthright about why.

[John Hjorth]

Thank you, Greg,

 

-Actually, I think you have no idea how much I appreciate your push-back and skepticism towards being invested in Berkshire long term. For my part,  it's actually not a bet on Mr. Buffett, nor Mr. Munger [it's a quite morbid bet actually - none of those gents will last forever]. It's more a bet on that "the system " [after those gents] will not only endure, but also prosper.

 

- Some days, I feel extremely confident it will , and others not so much. - Right now, it's absolutely no given, at least to me ... time will tell.

 

But when we discuss about Berkshire long term here on CoBF, I really think it's not about Mr. Buffett nor Mr. Munger [morbid as it may seem]. More like about continued cash flow generation, combined with astute/reasonable capital allocation. [No existing Buffett/Munger patents on the last part].

 

In short, & to me, we need to let go of this "Buffett/Munger" angle, if we look at Berkshire [really] long term. To me, this kind of "Buffet/Munger" angle - long term - is a special kind of anchoring [if not just a real bias, that confuscates any real judgement].

 

- - - o 0 o - - -

 

Did I get away with posting this? - I'll check up on it tomorrow [ : - ) ]

[Dynamic]

Called me delusional, but I really like how Berkshire is positioned.

The cash balance is offset by float, so the portfolio is essentially unleveraged and the 2% earned on that cash is essentially free money. If things get REALLY cheap, Berkshire can spend $100bn or probably $150-$200 bn if they take on modest debt, which they could pay down in 2-4 years.

We don't have a clue when the next recession or bear market will come - 12 months or 4-5 years, who knows, or whether the economu will start to overheat and see interests rise to cool it off, but either way Berkshire will benefit. When it does crash, Berkshire will be ready for large investment deals with virtually no downside risk and with large upside potential, leveraged by $125bn in float capital that comes with zero-to-negative interest cost and is not callable. In the meantime, the stock portfolio is essentially matching the S&P500 even in a bull market, while the companies within it are probably much lower risk and much less debt-leveraged than the S&P500 as a whole and trading a lower mutiples.

 

I can imagine that a lot of the recession deals will start out as 6-8% preferred stock with warrants attached, like BAC and OXY, so they don't appear to be egregiously gouging by extracting excessive rates, but are a source of instant capital to the investee and simply benefiting from long term growth of the investee when they exercise the warrants (as with BAC), making the annualised return rise into the low-to-mid teens percent over 5-10 year horizons.

 

But right now, everyone's fearing a recession around the corner, and everyone's also complaining about Buffett sitting on his hands. Essentially they're shouting "swing, you bum!" at the baseball batsman mainly because the stock price has barely budged in 2 years. The patience will pay off, I believe, but it exceeds the patience of many investors looking on from the sidelines and seeing their BRK stock price going nowhere for 2 years.

 

Large surprises at Berkshire tend to be positive, when they make a giant acquisition, not negative like most companies missing earnings. Sure this is not Berkshire of the 1980s or 90s earning way more than the index, but it's still a fair low-risk, adequate return investment at the right price.

 

I think the fundamentals have not stagnated like the stock price has stagnated since Dec 2017, and that in a quarter or two, (early November or late February), short of a bear market, metrics like Price-to-Book-Value will probably see the 'soft floor' of 120%-125% of BVPS start to force even the pessimistic price upwards at a reasonable compound rate. I think 130% of BVPS is still towards the low end, and I wouldn't be surprised to see that exceed $210 per BRK.B on 2nd Nov 2019's Q3 results release, and that 120-125% soft floor would be about $195-$203 or so type of range unless markets plummet. To me, Berkshire is a good place to park capital awaiting a fat pitch, earning a respectable long-term return with very modest risk of even short-term loss. If I find a fat pitch at 50% of IV that I want to put 25-50% of my money in to earn 25%+ for a few years, I won't mind if I lose 5% or so if I find that fat pitch when Berkshire drops to 120% of IV, while earning a fairly certain 8-10% compound over the long run, if my wait exceeds a year or two. And if I don't find the fat pitch, Berkshire's compounding rate should still meet my goals and needs for many years to come.

[Cigarbutt]

Called me delusional, but I really like how Berkshire is positioned.

The cash balance is offset by float, so the portfolio is essentially unleveraged and the 2% earned on that cash is essentially free money. If things get REALLY cheap, Berkshire can spend $100bn or probably $150-$200 bn if they take on modest debt, which they could pay down in 2-4 years.

We don't have a clue when the next recession or bear market will come - 12 months or 4-5 years, who knows, or whether the economu will start to overheat and see interests rise to cool it off, but either way Berkshire will benefit. When it does crash, Berkshire will be ready for large investment deals with virtually no downside risk and with large upside potential, leveraged by $125bn in float capital that comes with zero-to-negative interest cost and is not callable. In the meantime, the stock portfolio is essentially matching the S&P500 even in a bull market, while the companies within it are probably much lower risk and much less debt-leveraged than the S&P500 as a whole and trading a lower mutiples.

 

I can imagine that a lot of the recession deals will start out as 6-8% preferred stock with warrants attached, like BAC and OXY, so they don't appear to be egregiously gouging by extracting excessive rates, but are a source of instant capital to the investee and simply benefiting from long term growth of the investee when they exercise the warrants (as with BAC), making the annualised return rise into the low-to-mid teens percent over 5-10 year horizons.

 

But right now, everyone's fearing a recession around the corner, and everyone's also complaining about Buffett sitting on his hands. Essentially they're shouting "swing, you bum!" at the baseball batsman mainly because the stock price has barely budged in 2 years. The patience will pay off, I believe, but it exceeds the patience of many investors looking on from the sidelines and seeing their BRK stock price going nowhere for 2 years.

 

Large surprises at Berkshire tend to be positive, when they make a giant acquisition, not negative like most companies missing earnings. Sure this is not Berkshire of the 1980s or 90s earning way more than the index, but it's still a fair low-risk, adequate return investment at the right price.

 

I think the fundamentals have not stagnated like the stock price has stagnated since Dec 2017, and that in a quarter or two, (early November or late February), short of a bear market, metrics like Price-to-Book-Value will probably see the 'soft floor' of 120%-125% of BVPS start to force even the pessimistic price upwards at a reasonable compound rate. I think 130% of BVPS is still towards the low end, and I wouldn't be surprised to see that exceed $210 per BRK.B on 2nd Nov 2019's Q3 results release, and that 120-125% soft floor would be about $195-$203 or so type of range unless markets plummet. To me, Berkshire is a good place to park capital awaiting a fat pitch, earning a respectable long-term return with very modest risk of even short-term loss. If I find a fat pitch at 50% of IV that I want to put 25-50% of my money in to earn 25%+ for a few years, I won't mind if I lose 5% or so if I find that fat pitch when Berkshire drops to 120% of IV, while earning a fairly certain 8-10% compound over the long run, if my wait exceeds a year or two. And if I don't find the fat pitch, Berkshire's compounding rate should still meet my goals and needs for many years to come.

Nice update on your line of thinking, which has been consistent.

Accepting the possibility that you may be right to "outsource", to some degree, the timing of investments (which really is not timing but sticking to internal yardsticks by Mr. Buffett {and IMO not thumb-sucking as implied by the Wedgewood move}), a potential weakness of the model may be that the IV floor that you describe may move down, as perceived by the markets, when fat pitches come along, given how progressively correlated BRK has become in downturns (typical time to use the elephant gun) and given BRK's relatively high exposure to financials.

As John Hjorth alludes to above, BRK is built to last but a question remains: is the relative advantage for BRK in downturns and the ensuing recoveries sufficient, on a relative basis?

[Munger_Disciple]

https://www.cnbc.com/2019/04/25/buffett-says-investors-would-be-served-equally-well-by-sp-or-berkshire.html

 

“I think the financial result would be very close to the same,” Buffett told the FT when asked if it would be better to own the S&P or Berkshire over a lifetime.

 

FWIW Buffett did the FT interview in April 2019 just before the AM.

[scorpioncapital]

This is horrendous. If Berkshire performs the same as the sp500 it has zero reason to exist. I hope he was being modest in that quote and harbored a secret desire to actually do a little better.

[Vish_ram]

Towards the end of the bull market runs, everyone starts advising Buffett. The same thing happened in 1999 & 2007. History repeats.

 

[CorpRaider]

He's been sandbagging expectations since like 1957; maybe this time he means it.  I'm not betting that way and neither is WEB.  People wax philosophical about the portfolio being too large, but then there's Munger running a ~$150MM portfolio at DJCO and he's basically 100% in banks.

[Guest longinvestor]

Jim “Mungofitch” over at TMF has a great way to describe where Berkshire is. Soon, (very soon hopefully), Intrinsic Value Growth should reach $100 per day per A share. And grow from there. That says a lot.

[Dynamic]

Nice update on your line of thinking, which has been consistent.

Accepting the possibility that you may be right to "outsource", to some degree, the timing of investments (which really is not timing but sticking to internal yardsticks by Mr. Buffett {and IMO not thumb-sucking as implied by the Wedgewood move}), a potential weakness of the model may be that the IV floor that you describe may move down, as perceived by the markets, when fat pitches come along, given how progressively correlated BRK has become in downturns (typical time to use the elephant gun) and given BRK's relatively high exposure to financials.

As John Hjorth alludes to above, BRK is built to last but a question remains: is the relative advantage for BRK in downturns and the ensuing recoveries sufficient, on a relative basis?

 

If the buybacks become truly significant, the IV/BV ratio would narrow somewhat, but otherwise (as is likely to persist for some years) I'd imagine that there are still quite a lot of people willing to pay 120% of BV, and probably also 125% of BV in normal circumstances, which acts as something of a backstop.

 

They might adjust last-reported BV down a little in the event of a market crash.

 

Certainly, if markets plummet, Berkshire is likely to fall too, by a somewhat similar amount, such that the perceived risk-adjusted returns are commensurate for all stocks.

However, 'somewhat similar' may still be less than the general market, which could be pegged to a few reasons:

1. If it was trading at the bottom of its range before the crash (e.g. P/BV < 1.30) as it is now, it likely to fall a little less .

2. It is seen as more defensive (i.e. lower risk, meaning lower business risk as well as lower 'beta' for those who subscribe to EMH or CAPM), hence on a risk-adjusted basis it ought to fall a little less. Some of the optionality of Berkshire's assumed ability to invest its excess cash profitably when markets are down is then priced in when markets fall markedly, reducing how much it falls compared to the wider market.

3. The stock portfolio of Berkshire might well fall less than the market because it's also relatively defensive. And even if the Berkshire portfolio experiences a 20% pre-tax decline, this $42 billion reduction in market value is only about 10.6% of Berkshire's Book Value, and after applying 21% deferred tax reduction to the unrealized capital loss, BV would only reduce by 8.4%. This would be partially offset by operating earnings too.

 

I would expect most things to decline in market panics, Berkshire included, and for Berkshire to gain IV and increase leverage by spending that float-funded cash hoard at such times if it can deploy capital, even if it that value might be hidden for a few years. I would not expect Berkshire to fall more than the general market, but not an awful lot less than it either (unless it was highly priced going prior to the crash, of course)

 

I don't try to side-step market crashes, aiming to remain fully invested as I would expect the compounding I'd miss out on by predicting the crash too often and too early to exceed the losses I'd avoid by going to cash.

[ScottHall]

Bump

 

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/sorry-warren!-another-year-of-dragging-ass/msg293189/#msg293189

 

<3

[Munger_Disciple]

He's been sandbagging expectations since like 1957; maybe this time he means it.  I'm not betting that way and neither is WEB.  People wax philosophical about the portfolio being too large, but then there's Munger running a ~$150MM portfolio at DJCO and he's basically 100% in banks.

 

We can only go by what Buffett says. It is clear he changed his tune recently. A few years back he used to say that Berkshire will beat the index by a tiny amount (by which I took it to mean by 1% or so per annum). So he may very well mean it this time as he is kind of proving it based on the last 15 years. We have two other data points which point towards convergence with S&P 500 performance:

 

1. There is a perception among investors that Berkshire beats the index during bear markets and lags during bull markets. So the theory says that Berkshire will outperform massively in the future if there is a bear market. History does not support this argument. Berkshire beat the pants off the index during the great 1982-1998 bull market. Similarly Berkshire suffered the same fate as the index during the 2008-2009 bear market. But unlike the past, it didn't beat the index during the 2009-2019 bull market. Without a doubt, size has become an anchor during the last 15 years and this very much had a negative effect on Berkshire's relative performance vs the index. In addition Berkshire has become more correlated to the overall US economy and hence the index (as other have pointed out). It is hard to make a logical argument as to why Berkshire will outperform the index very long term going forward. It doesn't mean it cannot outperform over the next five years, but if you look ahead to the next 10-15 years, I cannot see how it can beat the index. But investors should be happy to own it as opposed to the index due to tax advantages as long as it doesn't meaningfully lag the index over a long time.

 

2. If the low interest rate environment persists, float loses at least some of its advantage. Plus public and private asset prices are likely to remain high which will make acquisitions very difficult for Berkshire. Buffett pointed out IIRC at the 2019 AM that 10% growth in IV is basically off the table unless rates increase from the current level.

[stahleyp]

From 10/11/07-3/9/09, S&P 500 was down about 50% vs about 39% for Berkshire.

 

IYF (financial etf) was down 74% and KIE (insurance) was down 70% so Berkshire held up very, very well.

[CorpRaider]

Thanks for sharing your opinions, but I went through and looked at the quotes over time a few months back and my judgment was that he was maybe more conservative/pessimistic back then (in the 50's).  The beta and drawdowns of BRK are definitely lower than SPX or total market over history. 

 

I agree that if rates stay low and valuations stay high then expected future returns for all assets including those levered with float will be lower than history.  There are pretty much no tax advantages for holding the public securities in the c corp as Buffett just stated in the last AM, but I suppose there are tax advantages to investing in private businesses/PE generally. 

 

There are also probably bigger advantages to investing in a fee free private equity fund with proper incentives and the greatest investor who ever lived calling the shots.  U.S. P.E. AUM hit 5.8 trillion in 2018 (before raising probably another half a trillion+ this year)...

[Munger_Disciple]

From 10/11/07-3/9/09, S&P 500 was down about 50% vs about 39% for Berkshire.

 

If you look at peak to trough Berkshire was down more than 50% during this period.

 

Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)

Trough: 3/5/09 closing price 72,400 (intra-day low was lower)

 

Drawdown: -51.3%

 

Source: Yahoo Finance

https://finance.yahoo.com/quote/BRK-A/history?period1=1193900400&period2=1238569200&interval=1d&filter=history&frequency=1d

[Munger_Disciple]

First let me preface my response by saying that I am a huge Buffett+Munger+Berkshire fanboy (obvious from my username) and have owned Berkshire for > 17 years. And I would be delighted to be proven wrong if Berkshire crushes the index by a huge amount in the future.

 

I went through and looked at the quotes over time a few months back and my judgment was that he was maybe more conservative/pessimistic back then (in the 50's).  The beta and drawdowns of BRK are definitely lower than SPX or total market over history.

 

I think the last 25 years are more relevant to the future as Berkshire has naturally evolved into a very different company now than in the distant past. 

 

I agree that if rates stay low and valuations stay high then expected future returns for all assets including those levered with float will be lower than history.  There are pretty much no tax advantages for holding the public securities in the c corp as Buffett just stated in the last AM, but I suppose there are tax advantages to investing in private businesses/PE generally.

 

I am not referring to a C-corp structure being a tax advantage. It is obviously a disadvantage. Buffett minimizes this disadvantage by investing in public security holdings in a concentrated manner and holding these almost forever. The tax efficiency instead comes from (1) being able to allocate earnings from businesses with few reinvestment opportunities to the most promising parts in terms of ROIC w/o any frictional costs, (2) no dividend policy means no dividend taxes to be paid by shareholders, (3) buybacks are naturally tax efficient and (4) some businesses within Berkshire have PE characteristics w/o any fees paid to GP as you pointed out.

 

 

[wabuffo]

If you look at peak to trough Berkshire was down more than 50% during this period.

 

Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)

Trough: 3/5/09 closing price 72,400 (intra-day low was lower)

 

Drawdown: -51.3%

 

Munger_Disciple - this is an interesting example.  Before Buffett came out with his 1.1x and 1.2x book value buyback "floor" prices,  I liked to use price-to-book value as a short-hand way to buy and sell BRK.    Basically if the price approached 2x book value - you sold (or didn't buy) and if you got anywhere near book value - you bought. 

 

The drawdown you note neatly encapsulates this "rule".  The peak in Q4 2007 represented a price-to-book value of 1.96x book value.  The trough in Q1, 2009 represented a price-to-book of 0.95x book value.  Many people were buying BRK hand-over-fist in late 2008 and early 2009.  Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time.  He was actually selling his shares to his heirs near their lows on margin (95% margin IIRC).  It was actually a ringing of the bell to buy BRK because Munger was executing a deft tax-planning move.

 

There was another 50% draw-down with BRK that happened early in my investing career.  During Q4 1998 and Q1, 1999 (in the middle of the Gen Re acquisition), BRK sold briefly at 2.1x book value.  Then in March 2000, it sold as low as 1.06x book value.  I believe the fall in price from peak to trough was 49.8%.

 

My larger point is that 50% drawdowns do happen to BRK.  But they start from a point of very high valuation and the trough (when it happens) often represents an outstanding bargain investment. BRK's valuation today makes it unlikely you would see a 50% drawdown from today's prices.  And if you did, then you might want to buy it in size.

 

wabuffo

[wabuffo]

Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. 

 

https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml

 

Who says they don't ring a bell at the bottom.  Sometimes they do!

 

wabuffo