Sunday, November 4, 2018

Has Buffett Lost It?!

Wow.  Apple (AAPL) was a $28 billion position at the end of 2017, with 167 million shares, but now BRK owns 252 million shares as of the August 13-F (November will be out soon), for a position size of  $47 billion then and $52 billion now (as of 11/4/2018).

That sounds crazy as it's the largest position ever, and it's a 'tech' company. OK, maybe it's a consumer products company and not a tech company. Either way, wow, that's a big bet, exceeding 10% of the market cap of BRK.  Well, for focused investors, 10% is not such a big deal, and even 25% of the equity portfolio may not be that crazy as AAPL isn't some obscure micro-cap, or over-leveraged industrial cyclical or anything like that.

But, I am not the biggest fan of AAPL, so it is interesting. Coming right off his IBM miss, I guess many shareholders would be a little surprised.

Of course, I don't recommend it, but this is an easy position to hedge against; you can just short AAPL shares against whatever BRK owns.

Here is the 13-F from August; I only show positions of more than $10 billion here:

You can get the whole sorted table here.
(oops, the above link shows an error for some reason. You can click 'website' below and then just go to the 13-F section and click BRK).

I know a lot of stuff on the website is broken. When I have time, I will fix it and maybe add some stuff to it. When Google finance/Yahoo finance dropped their financial data API's, a lot of things broke and it got to the point where I would have to pay for data to update stuff, and I don't want to do that. I recently noticed that a form of the Yahoo Finance API is back up, so I will be able to update some stuff, but I will have to rewrite a lot of the code, so I am in no rush to do it at the moment (I have a lot of work I need to do for others etc...  this stuff goes to the back of the queue, unfortunately).

The bull and bear argument has been the same for years, so I don't want to get into it again here, but I feel like AAPL has sort of been chasing the crowd lately rather than leading it or disrupting it like they used to during the Jobs years. But again, this would get the AAPL fans all fired up and angry, so maybe I'll leave it at that. I'll just say that moving up to higher end products to make up for declining growth momentum reminds me of retailers/restaurants that hid declining traffic/unit volumes by moving up-market or raising prices. It works for a while until people finally say, no mas, and will no longer pay high prices. Sort of reminds me of J. Crew, P&G etc.

The Markets
The markets have been going nuts too. Well, I don't mean to imply that Buffett has gone nuts, really. AAPL has a strong brand name/franchise, high returns on capital, decent margins, too-strong balance sheet, repurchases a lot of shares etc. So a lot of the boxes are checked in this case. Can't blame someone for buying a company like that.

The markets can be down hundreds of points overnight, but then be up hundreds by the close (if not an hour after the open), and vice versa. It has always been meaningless to stare at the market during the day (and futures overnight), but it seems even more so these days. I guess bots can be part of it. Risk parity is probably also a part of it. Leveraged ETF's. In any case, it's important to remember that we shouldn't be responding to markets. You should never be selling anything when the market is down 800 points. That's just obvious. If anything, if you have something to buy, you should be buying. But if you sit there and stare at the markets or otherwise follow it too closely, all sorts of bad thoughts can go through your mind. If it is too upsetting or scary, just turn off the TV, or don't look at the market for a while. It's like the weather in Amsterdam; if you don't like it, just wait. It will change. (Did I get that right?)

Interest Rates
I hear all the time that interest rates are going up so the market must go down, but all of my work in previous bubble posts were based on the baseline assumption that the 'normalized', sustainable long term interest rate is probably around 4.0%. Using a lot of historical data, I showed that if the long term rate averages 4% over the next 10 years, the market could easily average a P/E ratio of 25x over that time frame. This is not a prediction, of course. It's just an observation based on history: if it's not different this time, and if interest rates average 4% over the next 10 years, then, based on history, a 25x P/E would be completely normal.

Yes, this is basically the Fed model, which has been a subject of debate if not completely discredited by some. One debate is that the relationship between P/Es and interest rates held only for a brief period in time and not for the whole 100+ years of recent history, but my feeling is that since interest rates were regulated for much of the early 20th century, it's hard to say if there is any meaning in the lack of correlation going too far back in history. The other argument is that P/E or E/P is 'real' whereas bond yields are not. But this argument only strengthens the above argument. A low E/P is even more attractive than a low bond yield as the E will increase with inflation whereas the bond yield will not.  And comparing earnings yields to the TIPS yield (which would take care of the real versus nominal problem) would just be silly as the TIPS yield 10 years out is 1.2%, suggesting a P/E multiple of 83x

So, watching the market throw conniptions because interest rates went above 3.0% didn't worry me at all. I thought, OK, well, whatever. All else equal, higher rates may equal lower equity prices, so people dump stocks when rates go up. But as I've said in my bubble posts, I don't see the rubber band stretched at all, so the market is not in need of a violent correction. Of course, if we are on our way to 6-8% long term rates, then that's a different story.

When markets go crazy like this, people tend to ask me about hedging. Well, first of all, hedging is something to do before the market goes down, not after. It's interesting that people start to want to hedge after the market starts to go down and volatility goes up (hedging costs go up).

I've spent a lot of time in the derivatives business, and a lot of it is about hedging. There are a lot of good and valid hedges; interest rates, FX, commodity prices etc. But when it comes to the stock market, a lot of hedging is baloney. Some large institutions may use futures to synthetically adjust their asset allocation (sometimes cheaper than selling stocks, paying taxes and buying something else).

But when it comes to just directional hedging of the stock market, I think more money has been lost trying to do that over the years than any money actually lost in the stock market. I know for sure that if you try to hedge a stock portfolio with futures, options or swaps, it's going to cost you. If you need to hedge your portfolio using any of these, most of the time, you are just better off lightening up your position and forget about hedging. If you feel like you need to hedge your portfolio with put options, you probably just own too much.

If you hedge all the time, it's going to be very costly. I'm not going to do it, but just go look at some put option quotes on the S&P 500 index, for example. And imaging rolling that over every three months, or every year. It is not cheap at all. And if you think you can time it and put on hedges only during risky times, well, that usually doesn't work out either. Some very good investors thought the market was expensive a few years ago and hedged their portfolios and it was a disaster. Even the smartest can't time their hedges.

If you look at how wealth is built up over the years, most of the time, it's been created by people who hold very good assets for very, very long periods of time. Nobody gets rich by being very good hedgers of their portfolios. OK, there are some hedge fund managers who have done it over the years, but that's pretty rare. Most other people, if you look at the richest people list, just own good assets and don't try to get in and out according to how they feel about the market or the economy.

In a sense, people like Buffett and Bill Gates are kind of lucky in that they can't get in and out of their positions anyway, even if they wanted to. Imagine Gates calling Goldman Sachs, "I want to put on a zero-cost collar on Microsoft because I don't like where we are going in this economy!". Nope. Won't happen. I know hedging CEO holdings used to be a big business for derivatives desks a while back; maybe it still is. But if you look at the guys who create tremendous wealth, most of the time, they just own and hold onto great assets for long periods of time.

Real estate wealth is built the same way (but they get leverage, and their buildings are not marked to market so they never get margin-called; that's a huge advantage versus leverage in the stock market). They can't just buy and sell futures, options or swaps against their holdings. And they can't trade their buildings short-term either.

As I've said before, the stock market suffers a sort of "curse of liquidity". Since you can just liquidate your entire portfolio by pushing one button on your iPhone (OK, well, maybe not some rich people, but many of us can...), it is easy for us to do stupid things. And you can see how much you are losing every second of the day on your iPhone. You can't do that with real estate; there is no way to tell exactly what it is worth until you put it on the market and get some bids. In other words, there is no manic-depressive Mr. Market knocking on your door every micro-second in real estate (unlike stocks) tempting you into doing stupid things. So 1. there is no stupid-behavior-inducing signals (crashing prices) and 2. there is no way to act immediately on impulse in the real estate market. Most people would do better in the market if they treated their equity portfolio like their home.

What a total disaster GE is. I've always admired GE and it was one of those companies that I really wanted to like and wanted to own, but it never quite worked for me. First of all, Jeff Immelt must be the worst CEO of all time. OK, there are CEOs that bankrupted companies, committed fraud etc. So in that sense, maybe he's not the worst. But as a non-criminal, blue-chip CEO, he's got to be one of the all-time worst. And it's not just about the stock price; the businesses are just horrible. It looks like he stood up and got hit with a left hook, ducked to avoid the next shot only to get a big upper-cut to his chin. Whatever he did seemed just wrong.

I remember when Buffett was talking about CEOs, and this was around the time that Irene Rosenfeld sold the frozen pizza business for cheap and overpaid for Cadbury. He was talking about how many CEOs are great operators but many have issues with capital allocation. We all thought he was talking about Rosenfeld, but it didn't occur to me that he was probably also talking about Immelt.

He often said how wonderful Immelt was as a CEO but never actually bought GE stock (or in any size that I can recall; it was never a top holding), and I always wondered about that. In hindsight, well, he was probably also talking about Immelt.

GE is really tempting now at under $10, and the CEO is a really good one, but I'm not sure how GE gets out of this. Frankly, I haven't taken a close look at this in a while; maybe I will. If I find anything interesting, I will probably make a post here. But I just don't like (and never liked) the businesses these guys are in. It's mind-boggling how Immelt just seemed to run the other way than the world was moving.

Has Buffett Lost His Mind?!
OK, so back to Buffett. Has he lost it? Is he buying more AAPL shares? Does he need intervention? Should he undergo some tests to make sure he is OK?

I have no idea. I'm sure he is fine, and all accounts (from the annual meeting etc., and is interviews on TV) seem to indicate he is fine.

I guess AAPL is so big because it's the first time in a long time that he really got to like something and it was large enough so that he can actually buy a ton of it. Remember, he was capped at 10% on Wells Fargo due to bank regulations.

I own BRK, and I don't really like AAPL, but I'm not going to hedge out the AAPL piece.

We'll see.


  1. Hello, great to see you post again. What do you think the recent buyback, and especially the ~1.4x P/B yardstick they are using now? 1.1x to 1.2x then 1.4x. 1.4x seems at fair value given the slower growth but I cannot recall the stock stays over 1.5x for long in recent years.

    1. I think repurchases is good. It is just getting harder to deploy so much cash, so repurchases make a lot of sense. It can certainly keep the amount that needs to be deployed manageable. But $1 bn is not much in the big picture...

      As for valuations, I think I guessed years ago in one of my valuation posts that BRK will probably trade at 1.4x, but since then I haven't put a whole lot of thought to valuation. Maybe that will be a future post if I think more about it again...

  2. The equity risk premium looks good indeed. I ignore the CAPE because the internet has changed the game. Startup companies with a great idea can now go global much more quickly. Faster growth warrants higher multiples. But what about the flattening yield curve? It has never been wrong in predicting a recession.

    1. Well, my philosophy is to not time the markets, so it wouldn't really make sense to do anything because we expect a recession etc. A lot of conventional fund managers do that; they rotate out of cyclicals and get into defensives, increase cash positions etc. when they expect a recession. And they usually underperform.

      There are many problems with trying to respond to a flattening yield curve. First is, we really don't know if and when a recession will come. The yield curve may have a good track record, but you still never really know for sure. Plus, you never know the timing of it, and then, most importantly, you don't know how the market will respond to it. It will probably go down in a recession, but when and by how much? What if the Fed freaks out and starts cutting rates and starts QE again?

      And then let's say you got it all right, you lighten up or hedge, a recession comes and then the market tanks. Good for you. Then you have another decision to make: when do you get back in? Very few people got into the market in early 2009. I know people who got out in 1991 and never got back in. same with 2002.

      So as you can see, you need to make a LOT of decisions correctly in order for you to be able to respond to a coming recession and make it worth your while. The odds of someone making all the above calls right is very small.

      So that's what I think about the flattening yield curve. All we should be thinking about is, do we own good businesses at reasonable prices? Will they survive a recession, or take advantage of one and get bigger? If yes, then just sit back and let the smart companies we own sweat out the recession. Good companies will come out the other end much stronger, and sometimes much bigger...

  3. Great post. I was also wondering since 2017, why he is buying AAPL. Since Jobs passing, the only "new product" that is credited to Cook is the iWatch. Everything else is just a better version of the original innovation, iPhone, App store, etc...
    What are your thoughts on Facebook?

    1. I don't know about FB. I love it personally as it allows me to keep in touch with people I haven't met in decades (and find them too). So in that sense, it is amazing. But a lot of people I know are just dropping out completely. I don't know how 'sticky' FB is. As long as I can keep in touch with my friends, I honestly don't care what the platform is. I have no 'sunk cost', really, or investment in FB even though I have years of posts, photos etc... I have copies of all that stuff anyway.

      People talk about network effect and, for Apple, eco-system, but I don't know how sticky Apple's ecosystem really is. As an example, a lot of people used iTunes for music. People thought it was sticky because it's a hassle to move all that stuff to another platform. And then Spotify comes out. Well, no need to move anything anywhere... Guess what? Despite having 2000 or 3000 CD's ripped into iTunes, I don't use it at all now, lol... I mostly listen to music on Spotify, and that's it.

      So the world, to me, is moving not just away from devices (device specific) and networks (well, network effect is still important), but in terms of ecosystem, I think functionality is going to be more important than any 'ecosystem'. Netflix and Spotify are great examples. People don't care that Netflix is not an Apple product or device specific. In fact, it is great because it is NOT device specific. Cable had boxes in everyones' living room. That was an advantage, but now, who needs a box? I realized I was paying $12/box for 2 cable boxes so dumped both of them and don't have any cable boxes in my house. (well, I knew they were charging that for years... it's not like I just realized it, lol...) Who needs that with Roku, Fire stick and all that other stuff (for $30).

      So you can move away from devices, from 'systems', if someone provides me with the service I want, then it doesn't matter. And the world will become increasingly like that, I think. So 'ecosystem' to me is going to feel more like the old closed AOL system soon. I don't think Buffett really understands that as he doesn't even use an iPhone as far I recall...

      OK, this is getting way too long for a comment... maybe I will turn this into a post...

      Having said that, I am no tech industry analyst so this is just my personal view as a user...

    2. Oops, that was pretty sloppily written... Maybe I should just say the world is moving towards a sort of seamless functionality. You provide me with a service that I want that I can use and access from any device any time, anywhere, you have my business (spotify, netflix, amazon etc.).

      Microsoft hit a wall because their windows was dependent on the wintel PC. But they are now growing as they become less tied down to the desktop...

      As the world moves that way, a lot of people feel (even apple fans) that AAPL sucks on the software front...

      Uh oh... Now I'm gonna get tar and feathered by the Apple fans, lol... I understand the bull argument too. I don't feel all that strongly about it either way, actually...

    3. Great post and thanks for taking the time. Your thoughts on AAPL echo my own, partly from having a position in NOK back when it owned 35% of the worldwide smart phone market.

      When it comes to FB, its interesting to go through the CNBC Buffett archive and search under newspapers and tv franchises. I think FB has a wider moat at this point in time than any of the newpapers or network affiliates had when they made those comments....and its worldwide with 2.3B users. Recently the Boston Globe was buying sponsored ads on FB to show me they endorsed the a democrat in my congressional district. Think about the diminished power of the Globe ( which Buffett owned at one time) and the advertising power of FB to reach eyeballs compared to yesteryear. All for a very reasonable multiple market at this point when the growth in Revenue is considered. Users can stagnate or decline and the monetization of FB through rising ad prices, Instagram, Whats APP and Messenger are just beginning.

    4. It has only been 2 months since your post, and AAPL has dropped 30% from its high of ~$220. Although I am not a believe in Short term price fluctuation indicating anything long term, but I think you hit the nail on the head about your surprise on his investment in AAPL. I see two issues with AAPL. 1. They can not just keep on increasing the Price they charge for an iphone because there are viable comparable phones in specs (or even specs that surpass iphone's current spec). 2. No real innovation or "new" product since Jobs passing. SJ used to say: "Oh, one more thing" during his kickoff events. There is really nothing resembling that from Tim Cook in the last 4 or 5 years, except maybe the iWatch. who knows, that might have been in the works when Jobs was still CEO.

    5. Yeah, there was a clear runway/growth plan post-Jobs, and it was basically just sell more around the world, especially China, and then increase variety of phones and move up the price point. Once those play out, there is going to be a problem. Sort of reminds me of YUM brands. They had so much runway in China that I think they just got lazy and let everything else fall apart (US business etc.). AAPL is not really like that as they are great operators, but I think it will be a similar story. Once China plays out (like it looks like happening now), then where is the growth gonna come from?

      Moving up the price points works for a while when volume growth stops, but at some point, people go "no mas" and refuse to play, which also seems to be playing out.

      And maybe what is most dangerous is that when they move up the price curve too much, as they say in Innovators Dilemma, it increases the pricing umbrella to allow lower cost alternatives to come in and take share.

      So on many levels, I would be afraid to own AAPL.

      But then again, Buffett is rich and I am not, so whatever, lol...

    6. In terms of China, I don't think Apple will have much growth there going forward; you have to see the China market as two segments(unlike the US): the premium segment of the market is saturated (1st line cities like Beijing, Shanghai, etc...) and the 2nd/3rd line cities, where most of the growth is coming from (low range of the price spectrum, markets that OPPO and Viva and Huawei are concentrating on). This market is huge. People in those markets do not need face scanning or premium specs phones, so iphone is out due to high price. I am sure Apple mgmt is aware of this, and they might on purpose neglect this segment of the market. We will see in the next year or two if this strategy works.

  4. Thanks for the post. I think its time for Buffett to do a major tender of say 75 bn stock. Don´t see any other way they can buy back stock in any meaningful way. Future buybacks will just continue to push the price up so it becomes self defeating. Even if they announce a tender at say 250 it is still a better deal spreading that over the next 3 yrs where the avg purchase price will almost certainly be higher.

  5. Just wanted to drop by to say thanks for the informative content. Great insight written with clarity, absolutely one of my favorite blogs. Glad I stumbled upon it doing research on BAM.

  6. I was at the Grant's Conference last month and Francine McKenna had interesting things to say about BKR.

    Now this is from 2011, but still holds she says:

    1. Thanks for that. I appreciate various viewpoints. It's a very interesting way to present BRK, but obviously someone who doesn't really understand BRK all that well.

      First of all, minimal supervision from HQ seems irresponsible, complacent or whatever, but this is very misleading. First of all, the insurance companies are highly regulated and are no doubt audited frequently by insurance regulators. They also make a lot of filings outside of the SEC requirements.

      Second, Buffett says he doesn't micromanage or whatever, but that doesn't mean he is not watching. He himself said that he gets sales reports every day or every week and he looks at it very carefully. Also, he gets all the cash from the subs, so he is much more aware of what's going on at the various subs than he lets on. If something funky is happening, he would know long before any outside accountant can figure it out. (Having worked at an investment bank for years, I have very low faith in accountants, lol... they understand very little and depend on what they are told by their clients; us. Which is the root cause of many problems in the past 20-30 years or more).

      Finally, the BRK board of directors is a board I would trust more than any other board I can think of. They may be Buffett's friends, but I would rather have them than some clueless people who don't understand BRK and don't understand business in general, but is on a board because they want that easy cash for a couple of meetings per year.

      BRK always scores low in governance issues, and it is laughable why they score low. I don't want to get into it here, my comments are already way too long, lol... maybe it should be a fresh post.

      BRK is a company that doesn't fit the usual corporate model so can't be evaluated like a normal business. Look at GE with all their controls, compliance etc. It was a disaster. They probably had more governance boxes checked than BRK. But more than auditors and extensive bureacracy, I would rather have Buffett keep watch over my assets, lol...

      But yes, if you don't trust Buffett and other senior management at BRK, then obviously it's not a company you want to own. But then why would you own a stock in a company where you don't trust the CEO but you think the bod or auditors can make them better? That makes no sense to me.

      Anyway, thanks for dropping by.

    2. Talking about Boards and governance, I never understood the corporate system. How can a bunch of experts who are "responsible to shareholders" watch the ship and its crew, while not being involved in the day to day business aspect of it at all. I doubt they know more than 5 or 10 people in the whole company. This relates directly to a lot of companies like GE, Lehman, Wash Mutual, Enron, etc...
      After all hell breaks loose, shareholders are questioning why the Board people hasn't been watching when the CEO and his subordinates is driving the business into the ground. Where is the oversight, where is the risk management...Shoot, I don't think these Board members are SHerlock Holmes. Their jobs is to attend meetings, votes on stuff, and collect their $$. This is a flawed system. Private companies makes much more sense, in my opinion.

    3. The system has it's flaws, but seems to work overall. I think private equity/activism is part of that process. As much as we don't like some (or a lot, or all, depending on where you stand) of what they do, it is the final step in the free market correcting these problem companies.

      Private companies are fine despite Theranos-like blowups, because they are usually owned by very few people (usually a single family?), or by large institutions (Uber and other unicorns).

      But yes, there are a lot of things that could be fixed with the current system for publicly listed companies, but I don't really know too much about it.

  7. Well, he does have his bridge buddy Bill to help him out on tech-related names these days and I'm pretty sure he once opined about how he missed MSFT despite it staring him in the face. Also have to think the AAPL market cap can absorb a lot of BRK cash.


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