Berkshire 2020 Q1 Results

[rranjan]

Assume instead that the S&P 500 slowly fell down to say 2000 from late February till today. Would that change your view of how Buffett acted the past couple of months?

 

Vinod

 

If Buffett thought that Intrinsic value of BRK dropped a lot and stop doing buybacks at 160-170-180 when he was willing to do it at 220, then it's fine otherwise S&P level makes no difference.

 

 

 

 

 

[thepupil]

Also I’m really stretching here, but he did get long about $14 billion of index as his short puts got into the money (on a notional basis, less so on a delta basis)

[Viking]

Barron’s estimates of BV:

- March 31 = 1.2

- May 1 = 1.15 ($183 / $159 for B shares)

 

Buying BRK at less than 1.2x BV has historically been a very good entry point.

 

Especially considering:

- cash is at all time high now representing 30% of total market cap

- we are just starting what is expected to be the worst recession since Great Depression. Likely see lots of opportunities in coming years.

- equity values in BV are not excessive (after coming down during sell off)

- insurance is entering what looks to be long hard market

 

Warren Buffett’s Berkshire Hathaway Reports Big First-Quarter Loss After $54.5 Billion Hit to Its Investments

- https://www.barrons.com/articles/berkshire-hathaway-reports-huge-first-quarter-loss-after-writing-down-the-value-of-its-investments-51588423177

 

With Berkshire’s class A shares finishing Friday at $273,975, the stock trades at 1.2 times the March 31 book value. Barron’s is estimating the book value per share based on $371.6 billion of shareholder equity and 1.62 million shares outstanding, with Berkshire’s Class B stock (BRK.B) converted into an equivalent amount of class A shares. The class B shares ended Friday at $182.67.

 

Berkshire’s book value likely has risen since March 31 due to the rally in the stock market. Barron’s estimates that book value as of Friday was around $238,000 per class A share, meaning that Berkshire now trades for a little more than 1.1 times estimated book value.

 

That’s low relative to where the stock has traded in recent years at an average of 1.3 to 1.4 times book.

[UK]

"Some years, the gains in underlying earning power we achieve will be minor; very occasionally, the cash register will ring loud. Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do."

 

"America’s economic achievements have led to staggering profits for stockholders. During the 20th century the Dow-Jones Industrials advanced from 66 to 11,497, a 17,320% capital gain that was materially boosted by steadily increasing dividends. The trend continues: By yearend 2016, the index had advanced a further 72%, to 19,763. American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle. Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: “We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.” During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."

 

It seems that they really see this event as different. Maybe too much uncertainty/to early to act in a big way, or maybe not cheap enought to compensate for that uncertainty.

[Spekulatius]

I find it interesting they Buffet stopped buying back Berkshire shared on March 10. it can only mean that there must be something that really concerns him. My guess is future liabilities from the epidemic, but theta just a guess. I think there might be great opportunities in insurance near term,, either organic or inorganic via acquisitions.

[Munger_Disciple]

I thought this bit about derivative contract liabilities was interesting:

 

Substantially all open contracts as of March 31, 2020 will expire by February 2023. The weighted average life of unexpired contracts at March 31, 2020 was approximately 1.5 years. Future payments, if any, under any given contract will be required if the prevailing index value is below the contract strike price at the expiration date. We received aggregate premiums of $2.5 billion on the contract inception dates with respect to unexpired contracts as of March 31, 2020 and we have no counterparty credit risk. The aggregate intrinsic value (the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) was $2.0 billion at March 31, 2020 and $397 million at December 31, 2019.

 

Intrinsic value of liabilities is now $2.0 billion, still in the money by $500M (but barely) with an average life of 1.5 years left.

[omagh]

https://www.investopedia.com/terms/q/quietperiod.asp

"...For publicly-traded stocks, the four weeks before the close of a business quarter is also known as a quiet period. Here again, corporate insiders are forbidden to speak to the public about their business to avoid tipping certain analysts, journalists, investors, and portfolio managers to an unfair advantage – often to avoid the appearance of insider information, whether real or perceived. ..."

 

I believe that BRK doesn't repurchase shares during the quiet period preceding the quarter end as an integrity measure for their executives.

[Lemsip]

In 2019 they were repurchasing till March the 29th so I don't think this is an issue.

[vinod1]

Assume instead that the S&P 500 slowly fell down to say 2000 from late February till today. Would that change your view of how Buffett acted the past couple of months?

 

Vinod

 

If Buffett thought that Intrinsic value of BRK dropped a lot and stop doing buybacks at 160-170-180 when he was willing to do it at 220, then it's fine otherwise S&P level makes no difference.

 

Sorry, I was not clear. My point is that some of us could be evaluating Buffett based on what the market has done. I am saying if instead the market kept going down, it is possible that we would be applauding him on patiently waiting for the pitch. Just a thought.

 

Coming to buybacks. It is instructive to look at his purchase of Mid-Continent Tab Card Company. He really wants proof that he is not going to lose money before doing anything. During the sharp drawdown in March, and before Government came up with the $2 trillion relief (and I would argue even now), the economy could have been severely hurt with many companies going bankrupt. To someone like Buffett being 100% certain that Berkshire is safe is vastly more important than say increasing IV by 2% with a quick buyback.

 

Vinod

[Gregmal]

I dont think you can blame Buffett but I also think in hind site there may be some ego preservation in order. If activity stopped on March 10 and on March 21 or whenever he capitulated on airlines... Not that airlines are investment worthy, but broadly speaking when one, according to the timeline, should have been backing up the truck, Warren already had packed up his belongings and was speeding away....that has to be embarrassing as a professional investor, regardless of how seasoned or successful you are. Add doubly to the problem, the businesses he and most of us know and love well were completely decimated by this and still look shoddy, meanwhile the ones he doesnt know or understand well hold up tremendously and even rebound right back to highs. For these reasons I think there is good likelihood he gives a materially negative market outlook that may in the short term move markets a little bit. At least this is how I read the tealeaves and positioned myself going into the weekend.

[gfp]

Interesting that they are valuing their OXY warrants at $2 million now, and the $10 Billion face value of OXY preferred at $5.54 Billion (page 19).  They mentioned "the effects of subordination in liquidation" as a factor in their fair value calculation.

[rranjan]

Assume instead that the S&P 500 slowly fell down to say 2000 from late February till today. Would that change your view of how Buffett acted the past couple of months?

 

Vinod

 

If Buffett thought that Intrinsic value of BRK dropped a lot and stop doing buybacks at 160-170-180 when he was willing to do it at 220, then it's fine otherwise S&P level makes no difference.

 

Sorry, I was not clear. My point is that some of us could be evaluating Buffett based on what the market has done. I am saying if instead the market kept going down, it is possible that we would be applauding him on patiently waiting for the pitch. Just a thought.

 

Coming to buybacks. It is instructive to look at his purchase of Mid-Continent Tab Card Company. He really wants proof that he is not going to lose money before doing anything. During the sharp drawdown in March, and before Government came up with the $2 trillion relief (and I would argue even now), the economy could have been severely hurt with many companies going bankrupt. To someone like Buffett being 100% certain that Berkshire is safe is vastly more important than say increasing IV by 2% with a quick buyback.

 

Vinod

 

Either he saw a need to keep entire cash due to uncertainty or he thought that he had material information which made him not do buy backs to be fair to all shareholders. I don't agree with that logic, but he clearly wants to be fair to even departing shareholders. I am aware of fact that he bought other years before Q end, but there was no material information.

 

I am just speculating here. Anyway, let's see what he shares with us today.

[rranjan]

In 2019 they were repurchasing till March the 29th so I don't think this is an issue.

 

Not any material information just before the Q end. Just guessing here.....

[vinod1]

I dont think you can blame Buffett but I also think in hind site there may be some ego preservation in order. If activity stopped on March 10 and on March 21 or whenever he capitulated on airlines... Not that airlines are investment worthy, but broadly speaking when one, according to the timeline, should have been backing up the truck, Warren already had packed up his belongings and was speeding away....that has to be embarrassing as a professional investor, regardless of how seasoned or successful you are. Add doubly to the problem, the businesses he and most of us know and love well were completely decimated by this and still look shoddy, meanwhile the ones he doesnt know or understand well hold up tremendously and even rebound right back to highs. For these reasons I think there is good likelihood he gives a materially negative market outlook that may in the short term move markets a little bit. At least this is how I read the tealeaves and positioned myself going into the weekend.

 

How can you value an airline at this point? So much of the value is dependent on the kindness of Government & Politics.

 

So the fact that he sold them, to me shows how good he is. How many investors have we seen, where the stock goes down 50%, they say oh, IV only went down 20% and I am going to buy more.

 

This guy is pretty consistent. Cannot estimate IV. Do not buy. If bought, sell. Always keep an eye on risk/reward.

 

Add doubly to the problem, the businesses he and most of us know and love well were completely decimated by this and still look shoddy, meanwhile the ones he doesnt know or understand well hold up tremendously and even rebound right back to highs. For these reasons I think there is good likelihood he gives a materially negative market outlook that may in the short term move markets a little bit. At least this is how I read the tealeaves and positioned myself going into the weekend.

 

Yes the stocks that are in his circle of competence got impacted a lot and those that are out had not been impacted. The guy is super rational. So that would not have an impact. When is the last time you saw him act or say anything irrational?

 

Vinod

[rranjan]

Any one noticed that cost basis went up by around 3B for all held securities? Not sure if I am missing something or he bought few things.

[buffetteer1984]

Berkshire as an investment has been fine.  But I think as a shareholder it's constructive to see what buffett could be doing better.  It's not unfair to ask, would the company have been better off if buffett heeded to his own advice and just incrementally retired shares or even bought the index into his portfolio over the years instead of doing stuff like ibm, khc, airlines and oxy.  We shouldn't applaud him for cutting airlines (he still owns it by the way) when it was HIS mistake to begin with.  There was no moat there so why buy it.  So he plays around and makes these mistakes but when a fat pitch like his own stock tanks (meanwhile intrinsic value doesn't go down by much) he just sits there thumb sucking again, while having the liquidity to be greedy when others are fearful.  The question is, just how good of a company is berkshire and is it because of the durability of the companies or is it because its always sitting on large sums of cash.  If the latter is the case, an index fund is probably a better buy at this point

[BG2008]

I once wrestled a guy who look like he was cut from granite.  For some reason, I wrestled like I was in the matrix that day.  I was seeing his moves before he took them and I I felt like I was side stepping bullets.  I took him down and turned him to his back a few times.  Before he knew what hit him, he was down 13 points and 2 points from a "tech fall."  He came to life and started wrestling competitively.  I stalled like hell to preserve that victory and almost got points taken off for stalling.  The guy pulled his fist back and all my teammates swore that he was about to punch me because he was so frustrated.  Instead, he threw his head gear away and walked off the mat before the match was over.  My teammates can still recount that match (20 years later).  Yes, I am living in my glory days.

 

The moral of the story is that if you had a career like Buffet and you are 89 years old.  I think you have earned the right to "stall" and preserve an incredible legacy.  Why mess up and wind up getting thrown to your back and get pinned in the last 10 seconds?  I did say the guy look like he was cut from granite.  Maybe this Coronavirus is just as scary as that dude that I wrestled.  I think to expect Buffet to behave like a 40, 50, 60, or even 78 years old version of himself is asking too much of him.  Heck, I can't stay up till 3AM and crank through models like I used to anymore. 

[scorpioncapital]

A vast majority of the outperformance of SP500 is biomedical and tech. Those are the 2 sectors sorely missing from Berkshire (except maybe Apple). And that I think is the single biggest reason for underperformance. If he added more to those 2 sectors it would at least keep up with sp500.

[petec]

Haven’t looked at these results yet but I am starting to think Buffett’s insistence on deploying capital largely in the US, and his still-substantial reliance on himself for investing decisions, is a major failing.

 

It is very hard for one man to deploy $150bn sensibly in one country, even the US. Even if liquidity wasn’t an issue, the size of the necessary circle of competence is.

 

But a larger team, carefully chosen and operating on the same principles, and investing globally, would probably be able to do it. And it would be a major advantage to have deep knowledge of non-US markets at a time when the US is expensive (at the index level).

 

In the meantime the machine rolls on, and I’m not complaining.

[wescobrk]

Buffett has been talking for an hour straight so far. Very Lucid. He seems the same as usual. Still brilliant. :)

Loomis I'm hoping is wrong about it being a lot shorter this time. Buffett hasn't even gotten to the Q&A yet.

Should last, I'm guessing, about 3 hours.

Not bad to hear from Buffett for 3 hours.

[AzCactus]

Buffett is brilliant and Lucid, agreed!  Now just the question of that 137 billion.  He sounds like he's predicting this to be a long process

[AzCactus]

Also interesting to see him giving the Mr. Market analogy after he didn't hardly buy last quarter.  Here's to hoping we get a good explanation as to the reasons why.

[Gamecock-YT]

Also interesting to see him giving the Mr. Market analogy after he didn't hardly buy last quarter.  Here's to hoping we get a good explanation as to the reasons why.

 

yep, really teeing it up for somebody to ask.

[LC]

April 1-30

 

Repurchases: 0

Equity purchases: 426MM

Equity sales: 6500MM (airlines)

 

:-X

[bskptkl]

April 1-30

 

Repurchases: 0

Equity purchases: 426MM

Equity sales: 6500MM (airlines)

 

:-X

Quick calc seems like they held about 4B in airlines - so sold something else too.