Complaining About Berkshire?

[Guest ValueCarl]

The only complaint that seems realistic, is when this man will DECIDE unilaterally to pay his starving owners a DIVIDEND in order to be like and stay up with S&P companies he is now part of! Other than that, what's to complain about?  ;)

 

<Buffett also reminded investors that Berkshire has little chance of matching its past stellar performance because the company is so large.

 

Buffett still strives to beat the returns of the S&P 500 index each year, but he said there is no chance of exceptional performance because Berkshire has investments of stock, cash and bonds worth $158 billion.

 

Buffett's preferred measure of Berkshire's performance is the growth in its book value, which is a calculation of the company's assets minus its liabilities. Buffett said Berkshire's book value grew 13 percent to $95,453 in 2010. The S&P 500, which Berkshire joined last year, gained 15.1 percent last year when dividends were factored in.>

 

http://finance.yahoo.com/news/Berkshire-Hathaways-4Q-net-apf-4169778798.html?x=0&sec=topStories&pos=main&asset=&ccode=

[Buffetteer]

Oh, valuecarl, I really don't think BRK shareholders are "starving". I continue to trust that Mr. Buffett will be able to invest earnings more effectively than I can. As long as he can do that I'd rather not receive a dividend and would prefer for him to invest Berkshire's earnings.

 

But look at the bright side, as long as he doesn't pay a dividend, you and Ms. Shroeder can have something to complain about. 

 

But I guess you're right, a 20%+ ROI for the past 45 years is not good enough. Maybe you & alice could teach him a thing or two.

[Guest ValueCarl]

I am sorry Buffetteer. I was just trying to follow Mr. Buffett's Vice Chairman rules by simplifying. If Mr. Buffett would pay his owners a dividend, then Mr. Munger along with his legacy would be less likely to sell their stock in order to create periodic liquidity as they have in the past. There must be something in the supply/demand formula which would sustain the stock price by keeping men like Mr. Munger from selling their securities untimely or otherwise. It might even make it harder for men like Mr. Pabrai to act like trading bandits pulling and tugging at IV in the name of Buffett, his mentor.   

 

It seems pretty simple to me that the 2010 spread between BRK's book value, and the S&P gain with the dividend is 2.1 percent, advantage S&P(less the dividend's tax rate)! I'm sure shareholders would be very happy to see that spread made up in a dividend going forward even while paying their taxes knowing how hard he says it's going to be to grow owners' capital and corresponding book values at the same time he's getting "itchy fingers" which sometimes leads to mistakes! 

 

It would be healthy for the USA's tax base too, the country Mr. Buffett is so confident about and loves. Uncle Sam will finally get some share of Berkshire's stock market SPOILS which The Oracle should be dancing over while he rants on about how the more wealthy and affluent in this country don't pay enough in taxes. What did America get that Bill Gates didn't?       

 

By the way, using a before flood timeline for Noah's Family when nascent growth bolstered the compounding rate-your aggregate numbers-is less fair than the nine to eleven percent CAGR during the past eleven to twelve years of time even including all the Buffett Magic and White Elephant shooting which has occurred!     

 

As for Ms. Schroeder, the last time I asked her what the employee count of the Marmon Group was in the US vs. out of the US since Mr. Buffett's Pritzker Family take over, I never heard back. I do not anticipate much teaching there, but I remain open to learning all the time. 

 

Do you know the answer to that question, Buffetteer? It might tell men who like to simplify how much another man really loves his country. imo       

[Guest Bronco]

Dividend?

 

Why don't people get this guy yet?

 

You turn a crappy textile mill into a 200 billion dollar company, and yet there are so many critics.

 

He was one of the best "hedge fund" managers ever, before taking over brk.

 

When will people just say, wow, this is a great philosophy...well done.

 

Pay a dividend, buy puts on positions....is it us that knows better than him or the other way around?

 

Maybe the secret sauce isn't perfect, but you still don't mess with it.

[Parsad]

Personally, I totally get Buffett and I'm of the opinion that perhaps it is time for Berkshire to start paying a small dividend.  The reason being the obvious...the company is really enormous now, and to move the needle is going to take one gigantic move each time.  The Berkshire acquisition letter states they are interested in businesses that earn $75M pre-tax.  That won't do anything now.  A $75M pre-tax acquisition is something Marmon would look at.  That's too small for MAE and GenRe now already, let alone Berkshire in its entirety. 

 

I'm not saying pay a consistent dividend each year, but Berkshire should look to do what Fairfax has done, and pay a dividend based on the last year's performance and increase in intrinsic value, and the amount of cash in the holding company.  Some years that will be big, and some years it will be small.  But setting this precedent now, will make it easier for any future CEO to continue the process without any real shareholder revolt.  Just like hiring Todd Combs now, rather than leaving it to the board to decide after Warren and Charlie are gone.  Cheers! 

[Rabbitisrich]

A steady dividend might unravel a great deal of Buffett's efforts to attract business oriented shareholders. Google dividend aristocrats, or check out the defenses of people who owned ALD prior to the recession, or survey JNJ shareholders. Consistent dividends seem to attract or induce cash fetishism.

 

Berkshire Hathaway already has an ironically worshipful contingent. Dividend entitlement might be like a Madonna statue crying.

 

Buybacks or special dividends!

[Parsad]

A steady dividend might unravel a great deal of Buffett's efforts to attract business oriented shareholders.

 

Possibly.  I would think that Michael Jordan is still a pretty decent player at his age...making up for his physical deficiencies by his understanding of the game.  The same analogy is probably true of Buffett...he's aged, but he's better intellectually at what he does. 

 

Now how does Jordan's intellect make up for his physical deficiencies if I ask him to play with a 50 lb. medicine ball, while Kobe Bryant plays with a normal basketball?  Heck, how does Jordan compete with that medicine ball even against Chris Bosh? 

 

Buffett is now playing with one heavy medicine ball!  Let's examinine the final 10-year period that Buffett uses in his letter this year...2000-2010.  In 2000, Berkshire had total assets of $136B and equity of $62B.  There were plenty of public companies that were larger than Berkshire in 2000 by equity...27 American companies to be exact.  In 2010, Berkshire had total assets of $372B and equity of $163B.  Only 6 U.S. public companies had more in assets at the end of 2009, and only 3 U.S. companies had more in equity!

 

Berkshire has to look abroad now, because there is no choice.  Buffett now has to also seek out more large private companies globally as well.  A dividend now isn't just a realistic business option for Berkshire, but is more and more looking like a very rational solution.  It would also aid the charitable institutions that Berkshire has endowed with its shares.  Those foundations are required to distribute 5% of their assets that are in Berkshire stock.  If a 5% dividend were paid by those shares, it is likely that the Bill & Melinda Gates Foundation et al, would not have to sell those shares.  Berkshire would still retain the rest of their earnings and would be able to grow intrinsic value without harming any of its subsidiary businesses or its credit rating. 

 

Again, I'm not suggesting that they necessarily pay a consistent annual dividend...only that they should now consider paying one based on each year's performance and retained earnings.  It would also alleviate the pressure on the future CEO and investment managers, because they will not be able to allocate that capital as well as Buffett.  It would be very unlikely, as he is the best there has ever been and large sums are an anchor for him now too.  Cheers!

[Guest longinvestor]

A steady dividend might unravel a great deal of Buffett's efforts to attract business oriented shareholders.

 

Buffett is now playing with one heavy medicine ball!  Let's examinine the final 10-year period that Buffett uses in his letter this year...2000-2010.  In 2000, Berkshire had total assets of $136B and equity of $62B.  There were plenty of public companies that were larger than Berkshire in 2000 by equity...27 American companies to be exact.  In 2010, Berkshire had total assets of $372B and equity of $163B.  Only 6 U.S. public companies had more in assets at the end of 2009, and only 3 U.S. companies had more in equity!

Berkshire has to look abroad now, because there is no choice.  Buffett now has to also seek out more large private companies globally as well.  .....  It would also alleviate the pressure on the future CEO and investment managers, because they will not be able to allocate that capital as well as Buffett.  It would be very unlikely, as he is the best there has ever been and large sums are an anchor for him now too.  Cheers!

With the imminent possible big aquisition, I don't believe that there is/will be a big pressure to pay out dividends. With Munger and Warren so comfortable sitting on cash, there never is pressure with the cash hoard. This year's letter clearly states that. Besides as you point out assets have tripled during the last 10 years. IMO, the successors will be under tremendous pressure to not change the long standing no-dividend policy. And there are many, many more idiots like the ones on the other side of the derivative bet who will come & deliver it on a platter. There is so much more folly in the market which will provide the successors ample opportunity to deploy the cash hoard. From a selfish point of view, I'd like them to keep deploying capital for the next decade like they have done in the last decade and then pay out big dividends long after Warren. That timing kinda works for me.  ;)

 

 

[Guest ValueCarl]

In the mean time, The Great Safari Hunter seeking White Elephants in The Savanna with "itchy fingers" is being encouraged by the mass media to fire his Elmer Fudd shot gun! 

 

With few exceptions, The Great Safari Hunter is going to need another crisis like The Great Crash of 09, in order to shoot, however.  ;D

 

Nice analysis, and analogies, Sanjeev!

 

http://finance.fortune.cnn.com/2011/02/26/berkshire-hunting-for-another-megadeal/ 

[Guest Bronco]

I think this is just conversation (which is great by the way)

 

Until Buffett dies or retires, no dividend and no buyback (thankfully).

 

Would a buyback make sense for a capital allocation machine where brk is never the best value on the market?  What a joke.

 

And I don't forsee dividend tax policy getting more favorable in this country.  Ericolopy, health care bill made it worse already?

 

Rest assured, there will be another crash soon enough, and hopefully there will be one guy to take advantage (yet again).  And he'll take advantage with capital retained, not paid out.  And that's just the way it is.

[Guest ValueCarl]

I agree with one additional oxymoron from his earliest days as a Graham student. Buffett is a chameleon unopposed to changing colors when market conditions warrant "change." 

 

6. Buffett hates railroads.

 

 

<The dividends are a question of when and not if. In the meanwhile, let the masters (Munger and Buffett) do what they does best. Note that the former doesnt get much press time by the so called analysts.>

 

[txlaw]

With few exceptions, The Great Safari Hunter is going to need another crisis like The Great Crash of 09, in order to shoot, however.  ;D 

 

Disagree here, Carl. 

 

Insurance companies are trading at cyclical lows.  Some on the board have proposed that a big reinsurer will be the target of Berkshire's excess cash. 

 

Many also believe there will be further financial freak outs fairly soon, whether in the muni markets, in the developed country markets, in the emerging markets, etc.  Nice chance to deploy there.

 

It's also clear that there are a lot of companies in the US and in the developed world that still need to be recapitalized, which will result in huge returns to the guys who can provide the large wads of cash. 

 

Finally, WEB is now able to scour the world to search for great businesses in countries that will diversify Berkshire's earnings streams into currencies that have more attractive futures than the dollar.

 

I wouldn't mind Berkshire paying a dividend, but not yet.  Let's allow him to deploy capital and diversify our earnings stream into different currencies while the environment is good. 

[shalab]

Yup - the railroad. I think it was Greenblatt who said Buffett did a mistake or doesnt get it or something in that vein.

 

And Alice Schroeder - the person who spent so much time with Buffett and got all the insider material.

 

I mean the person who spent so much time with Buffett doesnt get Berkshire which is sad to say the least. She would have done a great service to the world if she had gone into how Berkshire was built and the value system. No coverage of Munger in that book at all who is rated as being in a different league by none other than Bill Gates.

 

Instead she writes this psycho analysis book there are tons of such books which added very little to a person's knowledge. As much as our environment shapes us, these guys did it in a unique way which was completely lost.

 

I am glad Buffett is fixing some of these through his letters.

[PlanMaestro]

In the mean time, The Great Safari Hunter seeking White Elephants in The Savanna with "itchy fingers" is being encouraged by the mass media to fire his Elmer Fudd shot gun!

 

Let's hope he has read Orwell's "Shooting an Elephant" and does not fire just to avoid looking like a fool.  "When the white man turns tyrant it is his own freedom that he destroys".

 

http://en.wikipedia.org/wiki/Shooting_an_Elephant

[Zorrofan]

I will contribute my meager $0.02 worth......WEB has already stated that he will pay a dividend when he feels it is no longer possible for BRK to  outperform the S & P. That should be the end of the matter as long as WEB is in charge. Having said that, BRK should pay a dividend once the Gates Foundation holds all of WEB's shares. This way the foundation could receive funds it needs to meet the IRS requirements without having to sell BRK shares. I would like the foundation to hold the BRK shares forever, and help preserve what WEB has spent the last 50 years building.....in the meantime it should be most interesting to see what WEB buys next.

 

cheers

Zorro

[merkhet]

 

Yup - the railroad. I think it was Greenblatt who said Buffett did a mistake or doesnt get it or something in that vein.

 

 

I believe it was Bruce Greenwald and not Joel Greenblatt.

[txlaw]

 

Yup - the railroad. I think it was Greenblatt who said Buffett did a mistake or doesnt get it or something in that vein.

 

 

I believe it was Bruce Greenwald and not Joel Greenblatt.

 

Yeah, it was Bruce Greenwald -- the same guy who thinks that Comcast is the investment of the century.

[gfp]

I will contribute my meager $0.02 worth......WEB has already stated that he will pay a dividend when he feels it is no longer possible for BRK to  outperform the S & P. That should be the end of the matter as long as WEB is in charge. Having said that, BRK should pay a dividend once the Gates Foundation holds all of WEB's shares. This way the foundation could receive funds it needs to meet the IRS requirements without having to sell BRK shares. I would like the foundation to hold the BRK shares forever, and help preserve what WEB has spent the last 50 years building.....in the meantime it should be most interesting to see what WEB buys next.

 

cheers

Zorro

 

A dividend will not change the fact that the Gates Foundation is required to sell Berkshire stock to comply with federal excise tax rules limiting excess business holdings by private foundations.  It's the same law that forced the sale of Pabst Blue Ribbon (that foundation was out of compliance for years).

[Guest ValueCarl]

After much introspection and meditation since starting this thread, I concur with txlaw. He is a wise man, and I always gravitate towards wise men. He is spot on whilst referencing insurance valuation metrics-Fairfax owners will agree-especially overseas as he says, where Buffett has been releasing small amounts of ammo, little bits at a time!  ;D

 

http://economictimes.indiatimes.com/personal-finance/insurance/insurance-news/buffet-makes-modest-entry-into-insurance-business-in-india/articleshow/6072882.cms

 

As for making shooting mistakes in India, this Safari Hunter will "justify" the means when the "end" comes!  ;D  

 

http://orwell.ru/library/articles/elephant/english/e_eleph

 

<Afterwards, of course, there were endless discussions about the shooting of the elephant. The owner was furious, but he was only an Indian and could do nothing. Besides, legally I had done the right thing, for a mad elephant has to be killed, like a mad dog, if its owner fails to control it. Among the Europeans opinion was divided. The older men said I was right, the younger men said it was a damn shame to shoot an elephant for killing a coolie, because an elephant was worth more than any damn Coringhee coolie. And afterwards I was very glad that the coolie had been killed; it put me legally in the right and it gave me a sufficient pretext for shooting the elephant. I often wondered whether any of the others grasped that I had done it solely to avoid looking a fool.>

 

No matter what I say about this man, he remains the greatest financial mind the earth and its inhabitants will ever know! He should be embraced with "Jungle Love" and not shunned by spectators including me.  ;)  I still want to know how many Marmon Group employees went overseas post Buffett's continuous foray into their operations, however.  

 

http://www.youtube.com/watch?v=vFGWU7fu32A  

[Guest Bronco]

No disrespect to txlaw, but rule one - better to gravitate towards hot woman than wise man.

[Parsad]

Indeed, it was Greenwald, the author of "Graham, Buffett and Beyond" that said "Buffett has lost his mind". May be he will have the courage to come forward and apologise.

 

Well, I think Greenwald was just overly excited over the deal...in a negative way.  As I said then, we won't know exactly how good this deal was for some time.  Most of us felt Netjets was a good deal, and it really wasn't.  It has potential now under Sokol's watch, but that is ten years later. 

 

BNSF was a $44B deal, for a company that earned $2.5B in 2010.  That's a decent price for such a business with its competitive advantages, but that's not a great price.  And that's part of the problem...the great deals will now be few and far between.  Berkshire shareholders will have to be satisfied with above average returns. 

 

As long as they don't fool themselves, that is perfectly fine and better than the respective indices.  But it won't be anywhere near what Berkshire did in the recent past, and definitely nowhere near the heady days of Berkshire's history.  It's just not possible mathematically any longer.  Cheers!

[Guest Bronco]

Parsad - maybe u have an interesting point. With bill gates on the board, will there be any shift in fiduciary duty (or the ol' dual mandate) from shareholders to the foundation?

 

Very very interesting point which I honestly didn't account for.  Whe Buffett leaves, do they pay a dividend merely to satisfy any foundation needs?

 

Don't know the answer, but I'll be interested to see.

[woltac]

If BNSF earned $2.5B in 2010 and Buffett expects to invest $2B in capex in excess of depreciation in 2011, BNSF will only contribute $.5B in actual free cash flow for 2011 (plus any increase in net income)? 

 

Am I missing something? 

 

Will the capex earn a decent return or is this the price to continue to operate?

[Parsad]

If BNSF earned $2.5B in 2010 and Buffett expects to invest $2B in capex in excess of depreciation in 2011, BNSF will only contribute $.5B in actual free cash flow for 2011 (plus any increase in net income)? 

 

Am I missing something? 

 

Will the capex earn a decent return or is this the price to continue to operate?

 

Alice Schroeder had a very good article on her blog...there's always a first time...in which she discusses how regulated businesses generally have a guaranteed return on capital due to their rates being regulated.  So much of this capital at MAE and BNSF over time will be consumed, rather than drifting into the hands of future investment managers, and Berkshire will receive a reasonable return on that capital reinvestment over time.  Nothing fantastic, but a reasonable, assured rate over the long-term.  Cheers! 

[treasurehunt]

  BNSF was a $44B deal, for a company that earned $2.5B in 2010.  That's a decent price for such a business with its competitive advantages, but that's not a great price.  And that's part of the problem...the great deals will now be few and far between.  Berkshire shareholders will have to be satisfied with above average returns. 

 

BNSF was actually a $34B deal, along with $10B of debt. Since $2.5B is what BNSF earned after interest payments on the debt, I think the appropriate comparison is $2.5B in earnings to $34B in cost. That doesn't look half-bad.

 

But as you say, it will be a few years before we know how good a deal this was.