tag:blogger.com,1999:blog-5389144729834496735.post743779453110245909..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: Buffett Letter 2012Unknownnoreply@blogger.comBlogger17125tag:blogger.com,1999:blog-5389144729834496735.post-3774878938117958812013-03-26T22:55:16.582-04:002013-03-26T22:55:16.582-04:00youre not valuing the insurance business here. I k...youre not valuing the insurance business here. I know a lot of it is in the float which is invested but the goodwill of the insurance business is on the books for something like $15bn and buffett has said this significantly understates what they would pay to acquire an insurance business of similar float quality. You either need to add insurance earnings to the operating earnings or otherwise account for it...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-59773279707772884722013-03-08T09:37:13.853-05:002013-03-08T09:37:13.853-05:00Hi,
Most of the discussion above about investmen...Hi, <br /><br />Most of the discussion above about investments per share is about the insurance ops and not all of BRK. I wrote about that in previous posts (search tags for BRK).<br /><br />If you look at the insurance business based on BV, then we are doing the same thing. <br /><br />As for investment banks, I don't know that I can say anything in particular. I think it's hard for people to get comfortable with the financial statements of investment banks and banks in general and there is not much I can say to help. <br /><br />I worked in the business and feel like I have a sense of the culture and people at the various firms. That's really more important than what you see in the GAAP financials. <br /><br />You have to really rely on how the firm has done over time, what kind of culture they have, what kind of businesses they are in, how they have done in good times and especially bad times etc. <br /><br />My view on Goldman Sachs, for example, or JP Morgan is based on years of following them while I was in the business, hearing from people that work there or worked there, people who worked directly with Dimon etc... All of this stuff accumulated over the years and this gives me the comfort level with these companies. <br /><br />If I didn't have that background and information, I don't know that reading the financial statements in detail would make me comfortable. <br /><br />It's a good, tough question. <br /><br />I deal with this when I read about foreign companies or small companies. Sometimes the metrics are great and the valuation is great too, but if I can't get a sense of what kind of business it is from a customer's view point, or what kind of people work there or some other information like that, I generally can't really get comfortable. <br /><br />In that case, no amount of historical ROE, EBIT/EV or whatever is going to make me comfortable so... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-39920358845862019262013-03-08T09:21:22.616-05:002013-03-08T09:21:22.616-05:00I get what you are saying and for the most part ag...I get what you are saying and for the most part agree. That's why I said it's one data point. The other one is the ROE. In the above example, I think that Company is probably worth at least book value given the fact pattern, but not because of the assets.<br /><br />Anyways since we are being specific to BRK in this post, the way I try to deconstruct BRK is look at it as where is the equity allocated and what is the ROE of each segment. And then figure out what will the combined ROE look like.<br /><br />Also, instead of looking at investments per share, I value the insurance ops on a BV approach. I then look at the earnings per share as well. I get a high book multiple on insurance and a minimum multiple of 10 pretax on the OpCos. The utilities and railroads should be given a higher multiple because they produce cash predictable cash flows and utilities are somewhat uncorrelated to the economy. So anyway you slice it, BRK is worth above 1.5 BV in my eyes and probably closer to 2 BV.<br /><br /><br />Also, separate from this discussion, I notice you have discussed Investment Banks. I don't look too much at IBs but am intrigued by the LUK JEF merger. Any insights on how to look at an IBs balance sheet? I feel pretty lost, any primers you could point me to would be very helpful.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-53053090506653611582013-03-08T00:39:11.998-05:002013-03-08T00:39:11.998-05:00Nice Blog keep sharing more information about furn...Nice Blog keep sharing more information about furniture.<br /><a href="http://www.furniturenation.com" rel="nofollow"> leather furniture fort worth</a>Anonymoushttps://www.blogger.com/profile/12316225748503898012noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-61949988042317056942013-03-07T19:37:19.657-05:002013-03-07T19:37:19.657-05:00Yes, that's true in many cases. Things should...Yes, that's true in many cases. Things should just be valued at market. <br /><br />But in some cases, where the liquidation/monetization is not in the cards, then things may be different. <br /><br />Much of the investment portfolio at BRK is not distributable as it is there to support the insurance business. Buffett couldn't just spin off or sell the investments and distribute cash (without liquidating the insurance business). <br /><br />For example, let's say there is an insurance company that breaks even on underwriting every year. Let's say they have 2.5x investment leverage, meaning they have $2.50 in investments per $1.00 in shareholders equity. And furthermore, let's say that they only invest in fixed income investments (like most other insurance companies). <br /><br />With an after tax yield these days of 2%, this insurance company can only earn 5% ROE. Is this insurance company worth book value? <br /><br />Most financials are valued using a 10% cost of capital or return hurdle. If a company can't earn 10% ROE, then it trades below book value, and if it can do better, then it trades above it. <br /><br />Buffett has said the same thing about banks recently. He said companies with ROA below 1% trades for below tangible book and if it can earn above 1% ROA, then it trades above tangible book. So his view is similar. <br /><br />In the above case, where the insurance company has 2.5x leverage and only earns 2% after tax on an all fixed income portfolio, equity investors may only value this company at 50% of book value. 50% of book value would be only worth 20% of investments. <br /><br />So in that case, the bonds the insurance company holds is worth only 20% of face value. <br /><br />Does that make any sense? <br /><br />That's the way I (and many others) look at this. <br /><br />Thanks for reading and commenting! <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-71154735535181112742013-03-07T19:25:13.146-05:002013-03-07T19:25:13.146-05:00You should value things based upon MTM b/c you cou...You should value things based upon MTM b/c you could just sell at the market and distribute the cash. Therefore I think its fine to take the investments at market and maybe the multiple might be low given the huge proportion of earnings coming from railroads and utilities. The MTM/break up value is one data point. The other I would use is what type of ROE can the business make (I think a teens return). So a 1.5 to 2 P/B sounds OK to me.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-55283931587259689042013-03-07T07:23:48.005-05:002013-03-07T07:23:48.005-05:00We don't disagree on any fundamental level - i...We don't disagree on any fundamental level - it is more a matter of words. I fully agree that growth needs to be incorporated into IV, as you said. <br /><br />I guess the concept of IV loses a lot of meaning to me when you or Buffett talks about IVs growing at different rates. Clearly BRK in 1963 was a superior investment (at $30/share) to a crappy company trading at half its cash value (that stayed that way). Does this mean that buying something for 2x IV can be superior to buying something for 0.5x IV? You may say yes. Buffett might even say yes. I just think that the concept of IV has lost a lot of its meaning when it is used this way.<br /><br />I have found it useful to force myself to think about what I expect the business's intrinsic return to an owner who buys at a certain price. Anyway, this is what I was trying to get at with my original question. How much will a purchaser of BRK at today's price earn over the long term? <br /><br />Well, sorry for beating a dead horse. I'll sign off now. Thank you again for the discussion and the blog. I very much enjoy reading your thoughts.<br /><br />Best,<br />Tom L<br /><br />Tom Lnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-51292589603246066222013-03-07T07:12:24.310-05:002013-03-07T07:12:24.310-05:00Good memory (or good find)! Either way, thanks fo...Good memory (or good find)! Either way, thanks for posting. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-34866574040128961502013-03-06T23:48:26.749-05:002013-03-06T23:48:26.749-05:00"Despite our poor showing last year, Charlie ..."Despite our poor showing last year, Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect that the gain in Berkshire’s intrinsic value over the next decade will modestly exceed the gain from owning the S&P. We can’t guarantee that, of course. But we are willing to back our conviction with our own money. To repeat a fact you’ve heard before, well over 99% of my net worth resides in Berkshire. Neither my wife nor I have ever sold a share of Berkshire and — unless our checks stop clearing — we have no intention of doing so. Please note that I spoke of hoping to beat the S&P “modestly.” For Berkshire, truly large superiorities over that index are a thing of the past. They existed then because we could buy both businesses and stocks at far more attractive prices than we can now, and also because we then had a much smaller capital base, a situation that allowed us to consider a much wider range of investment opportunities than are available to us today."<br /><br />From the '99 letterAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-47970436592937984342013-03-06T22:52:18.429-05:002013-03-06T22:52:18.429-05:00Hi,
You are exactly right in what you are saying....Hi,<br /><br />You are exactly right in what you are saying. But it's not either or. It really depends on the situation. Growth investors don't care too much about valuation because they think the company will outgrow any 'valuation' problem, just like BRK did. <br /><br />But this doesn't mean the concept of IV is wrong. For many companies, this concept is very important. <br /><br />For example, someone published an interesting paper a while back. They looked at valuation of stocks and growth forecasts. Analysts projected earnings out into the long term for many companies and the study tracked it. They also looked at the valuations of the companies at the initial period. <br /><br />One strategy was to buy the stocks with strong growth projections and the other strategy was to buy the cheap stocks. <br /><br />Guess who won? The cheap stock strategy won. Why? Because it turned out that the analyst projections were wrong. Analysts couldn't predict the future so paying high prices for companies with high expected growth rates didn't work out too well. <br /><br />However, playing low prices meant that some of those companies actually grew alot. <br /><br />So in that sense, valuation matters. When you pay low prices, good things tend to happen. Tweedy Browne and many others have published studies that show that low p/e, low p/b strategies actually work over time. <br /><br />Things like BRK are really the exceptions, I think. If you can find something like BRK in front of 50 years of 20% growth, that's amazing. But the odds of that happening is very low.<br /><br />As for the IV of BRK in 1963, I agree with the below post that you can come up with a CAPM fair value because you know the inputs. But I don't know what value there is in finding that out.<br /><br />Buffett talks alot about IV, but he also says that value and growth investing is joined at the hip. Buffett's point is that he doesn't usually want to pay up for growth. He wants to pay a reasonable price and then get the growth for free.<br /><br />Anyway, there is nothing wrong with what you are thinking. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-40223743363512161652013-03-06T21:36:13.488-05:002013-03-06T21:36:13.488-05:00You are correct that not many companies grow at 20...You are correct that not many companies grow at 20% per year for 50 years, but again that speaks to my point. I think the focus should be on intrinsic returns and identifying companies that could provide those kind of returns based on today's price. <br /><br />To me, the concept of intrinsic value loses meaning if we talk as though IV can grow at different rates. Clearly Buffett talks this way, so you are in good company. I think that a more accurate description of how Buffett thinks is in terms of intrinsic returns, not intrinsic values. But, you are clearly free to laugh at me - because Buffett talks in terms of intrinsic value. I'll grant you that phrasing things in terms of IV makes more sense when one is looking at a static balance sheet value, like Ben Graham did. I just think that IV loses meaning for companies that will have a lot of growth at high ROEs.<br /><br />"Why would a discount matter that much?" I'd say that discounts don't mean much. To me, intrinsic returns matter - after all, that is what I will earn over the long-term. <br /><br />I don't mean to be argumentative. Just trying to think independently - so I appreciate any response that rips my point of view apart. <br /><br />But, I'll repeat my question. What was the IV of BRK in 1963? If we say that IV was between $12 and $1200, then I'd reply that IV seems like a strange concept. That would imply that as the future unfolds, the past intrinsic value becomes more uncertain. However, the intrinsic return of BRK at 1963 prices becomes more certain as time goes on (about 20% annually).<br /><br />Tom L<br /><br />Tom Lnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-73452264675980873942013-03-06T17:02:22.346-05:002013-03-06T17:02:22.346-05:00I would say...
- if you knew with 100% certainty ...I would say...<br /><br />- if you knew with 100% certainty that it would be worth $150,000 today, you discount back at a 50-year risk-free rate. You'd have a risk-free arbitrage if you could borrow at less then the BRK return rate, and you knew for certain what that return would be. (barring Corzine/MF Global type risk)<br /><br />- If you thought it had a beta of 1, you would discount it at the then-prevailing risk-free rate plus the equity risk premium.<br /><br />- Suppose you thought it had a huge beta, that would give it a risk premium that would take it to 20% required return. Then the value would be... exactly the then-prevailing price.<br /><br />Basically, in order to answer this question, you have to ask yourself what the a priori distribution of expected returns looked like at that time, in other words, how much actual risk was taken to achieve that return.streeteyehttp://www.linkfest.comnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-84210957415917806632013-03-06T11:21:28.582-05:002013-03-06T11:21:28.582-05:00That's an interesting question. I guess if yo...That's an interesting question. I guess if you knew that BRK would earn 20%/year for 50 years, and you use 10% discount rate, then you are correct. <br /><br />And you are right that the question for long term owners is more about what the growth rate in intrinsic value is going to be rather than price. <br /><br />But BRK is a big exception. How many companies grow 20%/year for 50 years? <br /><br />You could've paid 100x IV in BRK and made money (but not much more than the S&P), but that won't be the case for BRK going forward or for most other companies. <br /><br />But then this goes against what we are trained; look for things that are trading at less than they are worth etc... If you are a long term investor, why would a discount matter that much?<br /><br />These are all good questions. I think the answer depends a whole lot on each case. <br /><br />For me, I tend to like to buy cheap and get out at fair, rinse-repeat. Unless there is something that can grow for a long time like BRK. <br /><br />Thanks for the discussion. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-1164158998474747102013-03-06T10:48:34.121-05:002013-03-06T10:48:34.121-05:00Hi kk,
Thanks for the response. I fully understa...Hi kk,<br /><br />Thanks for the response. I fully understand your math - in fact, it helps to illustrate the issue that I was trying (unsuccessfully) to point out. Let me try again by asking a question that looks backwards instead of forward.<br /><br />What was the intrinsic value of a share Berkshire Hathaway 50 years ago in 1963? (No need for a specific number, a range will do.)<br /><br />In theory this should be an easy question to answer today, because we know how the 50 years since 1963 have played out. However, I personally don't know how to answer the question. I could say that BRK's intrinsic value is roughly $150,000/share today and then discount back to 1963. However, then the question becomes what interest rate to use? I don't know how to answer that. If I use a 10% interest rate, I'd conclude that a share of BRK was worth $1277 in 1963, a factor of 100x greater than its actual price.<br /><br />My point is if we were living in 1963, the right question to ask was NOT: What is the intrinsic value of BRK? The right question to ask was: What intrinsic return do I expect BRK to earn going forward? Today, we know the answer to the intrinsic return question is roughly 20% annualized. <br /><br />I'm just trying to start a discussion. Thanks for your engagement.<br /><br />Tom L <br /><br /><br /><br /><br /><br />Tom Lnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-36174913533084346642013-03-06T08:49:32.349-05:002013-03-06T08:49:32.349-05:00Hi,
That's sort of an easier question than w...Hi, <br /><br />That's sort of an easier question than what BRK is actually worth right now. Over time, a stock will reflect the growth in intrinsic value and Buffett said that BRK will grow IV at a pace beating the S&P 500 index by a small margin. So that's what BRK holders will earn over time. <br /><br />But what about current stock price versus IV? BRK is now around 1.3x book, let's say. If fair value is 2.0x book, then over 50 years, if BRK trades at 2x book by then, it will add 0.9%/year to performance. If IV is 1.7x book, then the price getting up there over 50 years would add 0.5%/year to total return. If IV is just 1x book, then it will take away 0.5%/year from returns. <br /><br />So the longer you hold something, the less price matters. (This may be a hint why Buffett has been willing to pay up for good businesses over the years, like KO and the more recent acquisitions. If you hold it for so long, the growth in business will far exceed the gain from a price-to-IV adjustment). <br /><br />So ironically, even though I can't tell you what BRK is worth today, it's safe to say that BRK holders will beat the S&P by a small margin over time. <br /><br />Thanks for reading and commenting. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-48376845680062564242013-03-06T08:23:44.292-05:002013-03-06T08:23:44.292-05:00Great commentary. I agree fully that the float is...Great commentary. I agree fully that the float is not as valuable as equity capital, because Berkshire must keep much of the float invested in low returning, safe bonds or cash. This seems to be glossy over in most analysis.<br /><br />But, I have a question that might make a good follow on post. What do you think the intrinsic return of Berkshire going forward will be at its current valuation? (Said another way, if you held Berkshire for 50 years, what % return would you expect to have earned at the end of those 50 years?)<br /><br />Thanks again for the great blog.<br /><br />Tom L.Tom Lnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-35106206278918434472013-03-05T23:43:26.529-05:002013-03-05T23:43:26.529-05:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.com