Will you sell BRK?

[biaggio]

I have held BRK for a while. Given its perpetual 'under value' status, now I'm considering selling it for much cheaper financial stocks, given BAC and AIG are very likely to double in 2 years. However, my BRK was intended for retirement, so there is a psychological barrier to get over. I'm wondering if anyone on the board have thought about (or have done it).

 

Is it a crime against humanity or otherwise morally repugnant to own them all?  Hell, I mean someone could actually have 4 or 5 positions.  Ok, ok, that's crazy talk.

 

I own them all.

Add in gradually with price weakness over the long term.

My experience has taught me that I am not smart enough to have just a couple positions, or sell one to buy another (unless valuation is grossly out of line)

 

I would be happy to do as well as Mr Watsa , Buffet, etc.

I am impressed though with some of the posters here that run a very concentrated portfolio, especially with some of their picks over the last few years. They have been instructive + fun to read and follow along.

[PlanMaestro]

It is no just about overconfidence, a lack of ego can be a problem too — Howard Marks

[rmitz]

It is no just about overconfidence, a lack of ego can be a problem too — Howard Marks

 

But a problem for whom?

[DCG]

 

We love to pick up deep valued bargains.  But our greatest success has been investing with owner/founder CEOs who have most of their fortunes in their companies, great long term records, and a history of treating other shareholders fairly. This narrows the field.

 

BRK is basically a collection of these types of companies.

[giofranchi]

 

Well,

if it really is so, then I don’t like it. When I invest, I want to know exactly whom I am partnering with. If Mr. Buffett is no longer essential to BRK, then I like BRK much less than I used to. I just don’t believe in sustainable outperformance, without an outstanding manager who achieves it. Look, for instance, at JNJ: it is probably the large cap company with the best historical track record in the world, and yet it is clearly underperforming (I am talking about revenue and earnings growth, not share price). Compare it, if you want, with NVS, whose Chairman Mr. Vasella is one of the most accomplished individuals in the pharma industry today. JNJ is trailing NVS both on a revue growth and on an earnings per share growth basis, both on a 5 year and on a 10 year basis.

 

My problem with BRK is only one: to make a $200 billion company grow at a very good rate, an outstanding underwriter is not enough, an outstanding stock picker is not enough, an outstanding businessman is not enough: you need all three. Mr. Buffett is that extraordinary individual, no doubt about that. But he is 82.

 

Here is where I believe you are mistaken. BRK already has these outstanding managers. They are the ones that truly run the firm, they broadly report to WEB, but he gives them total freedom in their operations. I feel you have not given his lieutenants enough credit. I confidently feel that if one of his lieutenants like Jain, Abel, Nicely, or Weschler became CEO, BRK would continue to prosper.

 

I do not know anything about FFH, so I don't have an opinion vis a vis BRK.

 

 

Palantir,

of course you might be very well right! I have never actually managed something as big and as complex as BRK is today! Not even something that is 1/1000 of BRK! So, I cannot be sure… All I can do is to try an educated guess with my business knowledge and experience.

 

To paraphrase Mr. Munger, BRK’s success lies in their abilities (his and Mr. Buffett’s) to constantly shift capital from failing businesses to thriving businesses. And I tend to believe it is true. Mr. Schumpeter’s “creative destruction” is becoming more and more relevant in today’s hyper-competitive world, and the best way to deal with this reality is to embrace and to apply Mr. Munger’s lesson.

I see those outstanding managers you referred to as a part (maybe the most important part!) of each thriving business Mr. Buffett acquired. But neither Jain, nor Abel, nor Nicely, nor Weschler have ever applied Mr. Munger’s lesson. At least, not to such a complex organization as BRK is today. Each one of them knows extremely well his own business… but what about the remaining 74 businesses of the BRK family? Can you be sure whoever succeeds Mr. Buffett will be able to take the right decisions in shifting capital among 75 different businesses? And among all the other acquisitions that will come in the future? It will be a collection of businesses studied and put together, during the course of a lifetime, by an extraordinarily gifted individual… his successor’s task won’t be an easy one!

 

Most of all, the more I study the performances of outstanding business founders/owners the more I realize that each one of them achieved extreme success in his or her own way. Each one of them did what really worked for him/herself, what most fitted his or her own personality. Not one of them copied another, and was as successful! They were all originals. So, I cannot believe in replicating Mr. Buffett, or in finding someone who will be so intimate with BRK in the future, as Mr. Buffett is today.

 

Please, remember that I am not talking about a good and safe business: BRK will always be a good and safe business! I am talking about outperformance (very, very, very tough!).

 

As I said at the beginning, I might very well be completely wrong! But it is a long time that I have been studying the lives, the habits, and the achievements of outstanding business founders/owners, and I hope my perspective could at least be some food for thought!

 

giofranchi

[twacowfca]

 

Well,

if it really is so, then I don’t like it. When I invest, I want to know exactly whom I am partnering with. If Mr. Buffett is no longer essential to BRK, then I like BRK much less than I used to. I just don’t believe in sustainable outperformance, without an outstanding manager who achieves it. Look, for instance, at JNJ: it is probably the large cap company with the best historical track record in the world, and yet it is clearly underperforming (I am talking about revenue and earnings growth, not share price). Compare it, if you want, with NVS, whose Chairman Mr. Vasella is one of the most accomplished individuals in the pharma industry today. JNJ is trailing NVS both on a revue growth and on an earnings per share growth basis, both on a 5 year and on a 10 year basis.

 

My problem with BRK is only one: to make a $200 billion company grow at a very good rate, an outstanding underwriter is not enough, an outstanding stock picker is not enough, an outstanding businessman is not enough: you need all three. Mr. Buffett is that extraordinary individual, no doubt about that. But he is 82.

 

Here is where I believe you are mistaken. BRK already has these outstanding managers. They are the ones that truly run the firm, they broadly report to WEB, but he gives them total freedom in their operations. I feel you have not given his lieutenants enough credit. I confidently feel that if one of his lieutenants like Jain, Abel, Nicely, or Weschler became CEO, BRK would continue to prosper.

 

I do not know anything about FFH, so I don't have an opinion vis a vis BRK.

 

 

Palantir,

of course you might be very well right! I have never actually managed something as big and as complex as BRK is today! Not even something that is 1/1000 of BRK! So, I cannot be sure… All I can do is to try an educated guess with my business knowledge and experience.

 

To paraphrase Mr. Munger, BRK’s success lies in their abilities (his and Mr. Buffett’s) to constantly shift capital from failing businesses to thriving businesses. And I tend to believe it is true. Mr. Schumpeter’s “creative destruction” is becoming more and more relevant in today’s hyper-competitive world, and the best way to deal with this reality is to embrace and to apply Mr. Munger’s lesson.

I see those outstanding managers you referred to as a part (maybe the most important part!) of each thriving business Mr. Buffett acquired. But neither Jain, nor Abel, nor Nicely, nor Weschler have ever applied Mr. Munger’s lesson. At least, not to such a complex organization as BRK is today. Each one of them knows extremely well his own business… but what about the remaining 74 businesses of the BRK family? Can you be sure whoever succeeds Mr. Buffett will be able to take the right decisions in shifting capital among 75 different businesses? And among all the other acquisitions that will come in the future? It will be a collection of businesses studied and put together, during the course of a lifetime, by an extraordinarily gifted individual… his successor’s task won’t be an easy one!

 

Most of all, the more I study the performances of outstanding business founders/owners the more I realize that each one of them achieved extreme success in his or her own way. Each one of them did what really worked for him/herself, what most fitted his or her own personality. Not one of them copied another, and was as successful! They were all originals. So, I cannot believe in replicating Mr. Buffett, or in finding someone who will be so intimate with BRK in the future, as Mr. Buffett is today.

 

Please, remember that I am not talking about a good and safe business: BRK will always be a good and safe business! I am talking about outperformance (very, very, very tough!).

 

As I said at the beginning, I might very well be completely wrong! But it is a long time that I have been studying the lives, the habits, and the achievements of outstanding business founders/owners, and I hope my perspective could at least be some food for thought!

 

giofranchi

 

 

 

Losing the founder's edge is alway's a risk, but this risk is probably less with BRK than with almost any other company. 

 

There is perfect age staging in the Headquarters staff.  Marc Hamburg has been managing the routine capital transfers between the operating units and the Holdco for some time and holding the managers accountable.  He's now onthe BODs of BNSF, Mid Am & Lubrizol. If a busness starts to decline, the surplus cash flows will be redirected to the Holdco or Holdco directed investments. There is a high hurdle the operating businesses have to jump over before they are allowed to reinvest.

 

Agit reports directly to Warren.  I suspect there may have been a little friction between him and Marc several years ago, and this may be why Warren always goes out of his way to praise Ajit.  If something should happen to Ajit, there are people like Tad Montross or perhaps others who could do very well.  Perhaps Joe Brandon might come back to BRK. 

 

Marc is 62. Ted is about 50 and Todd is 38.  Ajit is about 60, I think.  This is merely the HQ leadership.  The managers of the major operating units are some of the best in the world.  Ted works very well with people, but likes to spend considerable time reading annual reports and 10Ks the way Warren does.  I wouldn't be surprised to see his taking on more responsibility if something happened to Warren.

 

The BOD and the shareholders understand BRK.  BRK's future leaders will be protected from the institutional imperative that makes the managers of other companies do stupid things.

[Palantir]

Why do you feel there was conflict between Ajit Jain and Hamburg?

[tombgrt]

Very good points and great info twacowfca. The whole "without Buffett, BRK will do a lot worse" discussion is getting old imo. Statistically he even has another 6-7 years left!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

[FrankArabia]

what if Warren passes but Munger lives another 10 years?

[tombgrt]

what if Warren passes but Munger lives another 10 years?

 

Then we should probably all buy DJCO aggressively after market corrections.  8)

 

To paraphrase Mr. Munger, BRK’s success lies in their abilities (his and Mr. Buffett’s) to constantly shift capital from failing businesses to thriving businesses. And I tend to believe it is true. Mr. Schumpeter’s “creative destruction” is becoming more and more relevant in today’s hyper-competitive world, and the best way to deal with this reality is to embrace and to apply Mr. Munger’s lesson.

 

This is actually what Munger has been doing with DJCO for some time now.

[Palantir]

what if Warren passes but Munger lives another 10 years?

 

Then we should probably all buy DJCO aggressively after market corrections.  8)

 

To paraphrase Mr. Munger, BRK’s success lies in their abilities (his and Mr. Buffett’s) to constantly shift capital from failing businesses to thriving businesses. And I tend to believe it is true. Mr. Schumpeter’s “creative destruction” is becoming more and more relevant in today’s hyper-competitive world, and the best way to deal with this reality is to embrace and to apply Mr. Munger’s lesson.

 

This is actually what Munger has been doing with DJCO for some time now.

 

What is Munger doing with DJCO? I'm curious to hear your opinion of its future prospects. I'm a shareholder, who really bought it as more of a cash cow + portfolio basis.

[giofranchi]

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

 

tombgrt,

you are right and I always like your posts and find something interesting!

But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative!

 

My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK?

There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps…

But then again, I might be completely wrong… just food for thought!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

 

As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves?

 

giofranchi

[twacowfca]

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

 

tombgrt,

you are right and I always like your posts and find something interesting!

But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative!

 

My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK?

There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps…

But then again, I might be completely wrong… just food for thought!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

 

As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves?

 

giofranchi

 

 

Thank you for reminding us about how important it is to have a great CEO.  There is a limit to success however that constrains most companies: the returns of their industry.  Thus JNJ's returns are constrained by the molecular limitations drug companies are facing when they try to develop new drugs, although their nonprescription  business has somewhat better prospects. 

 

BRK is different.  It's one of the few companies that can go anywhere to pick up a good business in a good industry or a piece of a good business through the public markets.  Their culture permits and encourages this.  Therefore, having a good energetic younger CEO who understands how BRK does it could lead to increasing success for BRK.

 

Never the less, BRK's size does limit potential returns perhaps to  about 30% to 40% above the returns of mega cap companies in general.

 

Time will tell.

[rmitz]

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

 

tombgrt,

you are right and I always like your posts and find something interesting!

But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative!

 

My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK?

There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps…

But then again, I might be completely wrong… just food for thought!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

 

As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves?

 

giofranchi

 

The key will be having a CEO, that when they feel they cannot beat the market even by a point or two over the long term, will start to return capital to shareholders.  I don't really count growth much at all in terms of berkshire; I look at it as assets with a stream of income.  Eventually that income will start being returned, and it will still be a very safe investment.

[Palantir]

To paraphrase Mr. Munger, BRK’s success lies in their abilities (his and Mr. Buffett’s) to constantly shift capital from failing businesses to thriving businesses. And I tend to believe it is true. Mr. Schumpeter’s “creative destruction” is becoming more and more relevant in today’s hyper-competitive world, and the best way to deal with this reality is to embrace and to apply Mr. Munger’s lesson.

I see those outstanding managers you referred to as a part (maybe the most important part!) of each thriving business Mr. Buffett acquired. But neither Jain, nor Abel, nor Nicely, nor Weschler have ever applied Mr. Munger’s lesson. At least, not to such a complex organization as BRK is today. Each one of them knows extremely well his own business… but what about the remaining 74 businesses of the BRK family? Can you be sure whoever succeeds Mr. Buffett will be able to take the right decisions in shifting capital among 75 different businesses? And among all the other acquisitions that will come in the future? It will be a collection of businesses studied and put together, during the course of a lifetime, by an extraordinarily gifted individual… his successor’s task won’t be an easy one!

 

 

In my opinion capital allocation is the easiest part of the business, and I feel there are many people in Berkshire and outside Berkshire who can take that role. I don't feel Mr Munger is correct - IMO Berkshire's core strengths are in its operating businesses and the fact that its huge float allows them to invest with free leverage. Those things will not change with WEB's absence.

 

[giofranchi]

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

 

tombgrt,

you are right and I always like your posts and find something interesting!

But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative!

 

My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK?

There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps…

But then again, I might be completely wrong… just food for thought!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

 

As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves?

 

giofranchi

 

 

Thank you for reminding us about how important it is to have a great CEO.  There is a limit to success however that constrains most companies: the returns of their industry.  Thus JNJ's returns are constrained by the molecular limitations drug companies are facing when they try to develop new drugs, although their nonprescription  business has somewhat better prospects. 

 

BRK is different.  It's one of the few companies that can go anywhere to pick up a good business in a good industry or a piece of a good business through the public markets.  Their culture permits and encourages this.  Therefore, having a good energetic younger CEO who understands how BRK does it could lead to increasing success for BRK.

 

Never the less, BRK's size does limit potential returns perhaps to  about 30% to 40% above the returns of mega cap companies in general.

 

Time will tell.

 

twacowfca,

you know very well that JNJ has 3 divisions: pharmaceuticals, devices, and consumer products. Devices are as large as pharmaceuticals, while consumer products are just a little bit smaller. JNJ is a collection of high quality businesses that encompasses the whole healthcare sector. And the healthcare sector is among the industries with the highest growth prospects for the future.

 

I really like JNJ. It is just that I don’t like to invest in a company that is not managed by its founder/owner… This shrinks my investment universe incredibly, and I am well aware of it! Maybe, it is just a flaw of mine. But I don’t trade, I invest. And anyone can talk about moats, competitive advantages, winning strategies, etc., and have different ideas, and different opinions. Let me give you an example that I find illuminating:

 

When I read “Competition Demystified” by Prof. Bruce Greenwald, I found a comparison between MSFT competitive advantages and AAPL’s. Of course, AAPL was “doomed to failure”, while MSFT was going to keep outperforming… Right?! I guess the only problem with that analysis was that Prof. Greenwald didn’t consider the fact Mr. Gates was leaving, while Mr. Jobs was coming back…! The rest, as they say, is history.

 

When you invest, you are partnering with someone for the long run. If you make sure that the partners you choose are great achievers, you will do very fine. Otherwise… you’d much better trade!

 

giofranchi

[philassor]

Buffett has statistically 5-7 years more to guide the ship; the ship has another 5-7 years on autopilot. So without any new talent you still have up to 15 years of outperformance. I suggest we resuming this debate in 15 years.  ;)

[twacowfca]

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

 

tombgrt,

you are right and I always like your posts and find something interesting!

But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative!

 

My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK?

There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps…

But then again, I might be completely wrong… just food for thought!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

 

As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves?

 

giofranchi

 

 

Thank you for reminding us about how important it is to have a great CEO.  There is a limit to success however that constrains most companies: the returns of their industry.  Thus JNJ's returns are constrained by the molecular limitations drug companies are facing when they try to develop new drugs, although their nonprescription  business has somewhat better prospects. 

 

BRK is different.  It's one of the few companies that can go anywhere to pick up a good business in a good industry or a piece of a good business through the public markets.  Their culture permits and encourages this.  Therefore, having a good energetic younger CEO who understands how BRK does it could lead to increasing success for BRK.

 

Never the less, BRK's size does limit potential returns perhaps to  about 30% to 40% above the returns of mega cap companies in general.

 

Time will tell.

 

twacowfca,

you know very well that JNJ has 3 divisions: pharmaceuticals, devices, and consumer products. Devices are as large as pharmaceuticals, while consumer products are just a little bit smaller. JNJ is a collection of high quality businesses that encompasses the whole healthcare sector. And the healthcare sector is among the industries with the highest growth prospects for the future.

 

I really like JNJ. It is just that I don’t like to invest in a company that is not managed by its founder/owner… This shrinks my investment universe incredibly, and I am well aware of it! Maybe, it is just a flaw of mine. But I don’t trade, I invest. And anyone can talk about moats, competitive advantages, winning strategies, etc., and have different ideas, and different opinions. Let me give you an example that I find illuminating:

 

When I read “Competition Demystified” by Prof. Bruce Greenwald, I found a comparison between MSFT competitive advantages and AAPL’s. Of course, AAPL was “doomed to failure”, while MSFT was going to keep outperforming… Right?! I guess the only problem with that analysis was that Prof. Greenwald didn’t consider the fact Mr. Gates was leaving, while Mr. Jobs was coming back…! The rest, as they say, is history.

 

When you invest, you are partnering with someone for the long run. If you make sure that the partners you choose are great achievers, you will do very fine. Otherwise… you’d much better trade!

 

giofranchi

 

 

Forever is a long time.  I think BRK has the potential to keep on doing what they have  been doing for a long time.  The world is their oyster, not merely one industry.  Were it not so, being a megacap would severely limit their opportunities.

 

You've got a guy there who has been in the position that Brindle was in before he was tapped to run Lancashire.  He has done most of the basic stuff that Warren did before BRK got so big. And, he did those things very very well. 

 

Our biggest hit hasn't been Lancashire.  It was USG when it was in Bankruptcy.  We were passive investors, although we wound up being involved in their reorganization.  This gave us a Birdseye view of another company in a similar fix, W.R.Grace.  Their situation was much more difficult than USG's.  It took much longer to resolve satisfactorily for all parties than USG's Cpt 11.

 

Guess who the main guy was who pulled that off: Ted Weschler.  He wants so much to be a part of BRK that he has actually paid to join up.  A few million for two lunches with Warren, and then mid double digit millions in a haircut he took to liquidate most of his portfolio at an inopportune time before joining BRK.  That is high motivation that goes way beyond being a typical corporate executive.

[giofranchi]

While BRK is huge, many businesses have plenty of growth potential left. It's not like you are buying a $250b+ (+- intrinsic value) company with a few divisions in one general sector.

 

tombgrt,

you are right and I always like your posts and find something interesting!

But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative!

 

My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK?

There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps…

But then again, I might be completely wrong… just food for thought!

 

@ Gio: Outperformance of the business in the future is one thing. You are leaving out another important factor for good investor returns: the price you are paying! Return on our investment is what should matter, not the degree of business outperformance. Current share price of BRK has put little value on future growth, if any.

 

As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves?

 

giofranchi

 

 

Thank you for reminding us about how important it is to have a great CEO.  There is a limit to success however that constrains most companies: the returns of their industry.  Thus JNJ's returns are constrained by the molecular limitations drug companies are facing when they try to develop new drugs, although their nonprescription  business has somewhat better prospects. 

 

BRK is different.  It's one of the few companies that can go anywhere to pick up a good business in a good industry or a piece of a good business through the public markets.  Their culture permits and encourages this.  Therefore, having a good energetic younger CEO who understands how BRK does it could lead to increasing success for BRK.

 

Never the less, BRK's size does limit potential returns perhaps to  about 30% to 40% above the returns of mega cap companies in general.

 

Time will tell.

 

twacowfca,

you know very well that JNJ has 3 divisions: pharmaceuticals, devices, and consumer products. Devices are as large as pharmaceuticals, while consumer products are just a little bit smaller. JNJ is a collection of high quality businesses that encompasses the whole healthcare sector. And the healthcare sector is among the industries with the highest growth prospects for the future.

 

I really like JNJ. It is just that I don’t like to invest in a company that is not managed by its founder/owner… This shrinks my investment universe incredibly, and I am well aware of it! Maybe, it is just a flaw of mine. But I don’t trade, I invest. And anyone can talk about moats, competitive advantages, winning strategies, etc., and have different ideas, and different opinions. Let me give you an example that I find illuminating:

 

When I read “Competition Demystified” by Prof. Bruce Greenwald, I found a comparison between MSFT competitive advantages and AAPL’s. Of course, AAPL was “doomed to failure”, while MSFT was going to keep outperforming… Right?! I guess the only problem with that analysis was that Prof. Greenwald didn’t consider the fact Mr. Gates was leaving, while Mr. Jobs was coming back…! The rest, as they say, is history.

 

When you invest, you are partnering with someone for the long run. If you make sure that the partners you choose are great achievers, you will do very fine. Otherwise… you’d much better trade!

 

giofranchi

 

 

Forever is a long time.  I think BRK has the potential to keep on doing what they have  been doing for a long time.  The world is their oyster, not merely one industry.  Were it not so, being a megacap would severely limit their opportunities.

 

You've got a guy there who has been in the position that Brindle was in before he was tapped to run Lancashire.  He has done most of the basic stuff that Warren did before BRK got so big. And, he did those things very very well. 

 

Our biggest hit hasn't been Lancashire.  It was USG when it was in Bankruptcy.  We were passive investors, although we wound up being involved in their reorganization.  This gave us a Birdseye view of another company in a similar fix, W.R.Grace.  Their situation was much more difficult than USG's.  It took much longer to resolve satisfactorily for all parties than USG's Cpt 11.

 

Guess who the main guy was who pulled that off: Ted Weschler.  He wants so much to be a part of BRK that he has actually paid to join up.  A few million for two lunches with Warren, and then mid double digit millions in a haircut he took to liquidate most of his portfolio at an inopportune time before joining BRK.  That is high motivation that goes way beyond being a typical corporate executive.

 

twacowfca,

as usual, you have convinced me! :)

Thank you for all the valuable information you provided about BRK’s future leadership: Mr. Ted Weschler certainly is a manger anyone would wish to partner with!

 

I have a question, just curious: you said your biggest hit has not been LRE, but USG. Was it so just in percentage terms, or in absolute terms too? I mean, did you have the confidence to keep as large a portion of your portfolio in USG, as you did in LRE?

 

giofranchi

 

[twacowfca]

It was larger in proportion in one sense, but about the same in another sense.  In retrospect, it was much too large because there were too many moving parts to the situation.  I wouldn't have touched USG with a ten foot pole if Warren and Marty hadn't been involved and pulling together, a most  unusual situation Cpt11 when Equity and creditors are typically at each others throats.  :)

 

The key known variables were:

 

    1) USG was a gem that was minting money during the housing boom.  Warren owned a lot of it along with other steady investors like Knauf.

 

    2) The CEO and Chairman of USG, Bill Foote, was highly ethical and followed Warren's lead.  The CEOs and BODs of W. R.

          Grace and Owens Corning were also determined to fight the bogus claims and not give up their

        whole companies as previous asbestos defendants had done.

 

    3) Marty Whitman controlled the Unsecured Creditors Committee, and he was determined to be paid in full

        without shafting Warren.

 

    4) USG's asbestos liability was real although almost all of the claims were bogus and could not be

        verified.  However, all the legitimate liability was confined to one subsidiary.  The other subsidiaries

        were worth then about six times what we paid at the low point in Cpt 11.

 

Despite these strengths, there was a black swan weakness that was unknown at the time of the original investment.  The district judge handling their case and others as a special situation to relieve the overwhelmed bankruptcy courts was unethically close to the plaintiffs with the bogus claims.

A committee of the US Court of Appeals voted to remove him from the case, and he resigned from the bench before that ruling took effect.  The removal of a US District Judge from a case is almost unheard of.  :)

 

 

[giofranchi]

It was larger in proportion in one sense, but about the same in another sense.  In retrospect, it was much too large because there were too many moving parts to the situation.  I wouldn't have touched USG with a ten foot pole if Warren and Marty hadn't been involved and pulling together, a most  unusual situation Cpt11 when Equity and creditors are typically at each others throats.  :)

 

The key known variables were:

 

    1) USG was a gem that was minting money during the housing boom.  Warren owned a lot of it along with other steady investors like Knauf.

 

    2) The CEO and Chairman of USG, Bill Foote, was highly ethical and followed Warren's lead.  The CEOs and BODs of W. R.

          Grace and Owens Corning were also determined to fight the bogus claims and not give up their

        whole companies as previous asbestos defendants had done.

 

    3) Marty Whitman controlled the Unsecured Creditors Committee, and he was determined to be paid in full

        without shafting Warren.

 

    4) USG's asbestos liability was real although almost all of the claims were bogus and could not be

        verified.  However, all the legitimate liability was confined to one subsidiary.  The other subsidiaries

        were worth then about six times what we paid at the low point in Cpt 11.

 

Despite these strengths, there was a black swan weakness that was unknown at the time of the original investment.  The district judge handling their case and others as a special situation to relieve the overwhelmed bankruptcy courts was unethically close to the plaintiffs with the bogus claims.

A committee of the US Court of Appeals voted to remove him from the case, and he resigned from the bench before that ruling took effect.  The removal of a US District Judge from a case is almost unheard of.  :)

 

 

Thank you!

I am very cautious to bet big on any idea of another investor… whoever the other investor is… it is one thing to invest in FFH, it is completely a different thing to invest in RIM, just because Mr. Watsa did it… I don't like it and I don't do it. I hope you agree with me!

Mr. Martin Whitman is no exception: I remember I read in “Confidence Game” that Mr. Whitman held a large stake in MBIA and he had this to comment about Mr. Ackman: “He is a young man, very good at advertising himself, but doesn’t understand insurance!”

Really?!? ???

 

giofranchi

 

[twacowfca]

It was larger in proportion in one sense, but about the same in another sense.  In retrospect, it was much too large because there were too many moving parts to the situation.  I wouldn't have touched USG with a ten foot pole if Warren and Marty hadn't been involved and pulling together, a most  unusual situation Cpt11 when Equity and creditors are typically at each others throats.  :)

 

The key known variables were:

 

    1) USG was a gem that was minting money during the housing boom.  Warren owned a lot of it along with other steady investors like Knauf.

 

    2) The CEO and Chairman of USG, Bill Foote, was highly ethical and followed Warren's lead.  The CEOs and BODs of W. R.

          Grace and Owens Corning were also determined to fight the bogus claims and not give up their

        whole companies as previous asbestos defendants had done.

 

    3) Marty Whitman controlled the Unsecured Creditors Committee, and he was determined to be paid in full

        without shafting Warren.  He didn't mind waiting as the interest on USG's good yielding debt accumulated, another remarkable circumstance as most creditors in Cpt 11 want to get paid ASAP.

 

    4) USG's asbestos liability was real although almost all of the claims were bogus and could not be

        verified.  However, all the legitimate liability was confined to one subsidiary.  The other subsidiaries

        were worth then about six times what we paid at the low point in Cpt 11.

 

Despite these strengths, there was a black swan weakness that was unknown at the time of the original investment.  The district judge handling their case and others as a special situation to relieve the overwhelmed bankruptcy courts was unethically close to the plaintiffs with the bogus claims.

A committee of the US Court of Appeals voted to remove him from the case, and he resigned from the bench before that ruling took effect.  The removal of a US District Judge from a case is almost unheard of.  :)

 

 

Thank you!

I am very cautious to bet big on any idea of another investor… whoever the other investor is… it is one thing to invest in FFH, it is completely a different thing to invest in RIM, just because Mr. Watsa did it… I don't like it and I don't do it. I hope you agree with me!

Mr. Martin Whitman is no exception: I remember I read in “Confidence Game” that Mr. Whitman held a large stake in MBIA and he had this to comment about Mr. Ackman: “He is a young man, very good at advertising himself, but doesn’t understand insurance!”

Really?!? ???

 

giofranchi

 

 

Warren is in a class all by himself in investing.  Virtually all of Warren's major investments in publicly traded companies have worked out very well when he made the investment decision, not always when he allowed someone else to make the decision.  When a sizeable investment has gotten in trouble, Warren has gone to great lengths to do everything possible to retrieve the investment, for example Sal. Brothers, Geico.

 

Marty, Bill, Mason and other value investors bailed out of USG stock, and Marty bought USG's debt because he knew it would be safe if he got most of it so that he could control the Unsecured Creditors Committee.  Even so, the good will and mutual respect between Marty and Warren was key to a successful outcome for both debt and equity. 

 

By the way, Marty didn't make out all that badly.  He bought USG's debt at 50 cents on the dollar.  He got paid 100 cents on the dollar plus five years of accumulated interest.  :)

[giofranchi]

Warren is in a class all by himself in investing. 

 

I agree 100%!

Thank you!

 

giofranchi

[shalab]

> it is completely a different thing to invest in RIM, just because Mr. Watsa did it

 

Probably this was done by some other folks in HWIC with Prem's approval. It is not clear to me how much Prem is involved in the day to day operations at FRFHF. Sanjeev mentioned that leadership succession is taken care of at FRFHF. Prem is still the CEO and his family owns a good chunk of FRFHF.