tag:blogger.com,1999:blog-5389144729834496735.post8357969296198529326..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: the missing manual: Berkshire Hathaway / Warren BuffettUnknownnoreply@blogger.comBlogger33125tag:blogger.com,1999:blog-5389144729834496735.post-20402549793339664622015-05-21T21:26:58.175-04:002015-05-21T21:26:58.175-04:00There's nothing wrong with those asset classes...There's nothing wrong with those asset classes; it was just a personal preference, that's all. BAM has done really well in this area, so I was sort of wrong on that front. I sort of looked at it as owning a bunch of alternative assets, but it's much more than that due to the leverage they get from asset management and higher than underlying asset returns due to turning the portfolio over. Those are the things I underestimated about BAM. <br /><br />So don't worry; it's just my own "I'd rather buy MKL that buys stocks and operating businesses than BAM that buys commercial buildings, power plants, bridges and forestry" etc... <br /><br />And yes, as far as I'm concerned, I think BAM is a high quality operation. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-62924733104566307112015-05-21T12:00:34.170-04:002015-05-21T12:00:34.170-04:00I can see commercial real estate being a concern, ...I can see commercial real estate being a concern, vacancy and cyclicality seems like constant issues, especially as potential tenants are undergoing great industry transition (banking). Though BAM are good with execution and pricing. BAM stated many times that they do manage their vacancy quite well, and most of their rent have upside ... which means there's downside protection?<br /><br />Anything about infrastructure that you don't like. Potential return not enough? Too much other risk? From what I gather, it's suppose to be necessary and predictable. I think you said once that as more funds get into infrastructure - and there certainly seems to be that way - things get more dicey.<br /><br />If BAM was a significant (or oversized) position for me, I would be more wary of the same things, commercial RE, infrastructure, etc., but as my portfolio is constructed, I'm thinking of BAM as good company with less correlated diversification. <br /><br />I also don't feel like management is shady, they seem to be fairly forthcoming. Is their structure really that convoluted? Seems more straightforward especially now that most of the sub companies are public, and for the most part they seem to be trying to make it more and more simple. On the business side, they tell what their plans are and more or less execute on that. I heard Markel feels the same way - as expressed by their BAM position and business relationship.villainxnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-74239582869666780002015-05-20T20:23:13.147-04:002015-05-20T20:23:13.147-04:00I think people take Buffett's comments too lit...I think people take Buffett's comments too literally. Remember, a lot of "Moms & Pops" out there listen to his comments.<br /><br />Most people would do better by buying & holding "good" companies. That doesn't mean trading, investing in cigar butts, etc isn't a good idea if you're willing to work at it. The chances are slim that an average person would be willing to put in the work though.<br /><br />Most people would do better investing in an index fund as opposed to a mutual fund or hedge fund. That doesn't mean some funds aren't worth the money. The chances are slim that the average person picks the right fund though.<br /><br />Etc. etc.<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-46734948290435636062015-05-20T13:50:51.854-04:002015-05-20T13:50:51.854-04:00I like BAM and think it's great. 12-15% long ...I like BAM and think it's great. 12-15% long term is probably doable, but it will get harder as they get bigger, as usual with anything like this. The only reason why I don't own it is that I have never been a big fan of commercial real estate. By the way, what they did to the World Financial Center in downtown NYC is amazing. I haven't seen it recently, but was there when the food court opened and it is really great. I am not surprised they filled Merrill's space right away. <br /><br />What I missed, I guess, is the additional boost they are getting from asset management (fee/carried interest) which I knew about, but guess I underestimated, plus they keep turning over the portfolio; get out of mature, stable assets and get into higher return assets. <br /><br />Again, the only reason I don't own it has nothing to do with Flatt or BAM, but just that I wasn't that interested in commercial real estate, infrastructure etc... <br /><br />But BAM has shown that BAM itself can earn returns higher than what would be expected in a typical commercial real estate or infrastructure business. <br /><br />Maybe I need to make a post about BAM... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-25226772198753650792015-05-20T10:07:03.856-04:002015-05-20T10:07:03.856-04:00This dovetails well with Cable Cowboy/John Malone....This dovetails well with Cable Cowboy/John Malone. I think SIRF (or other critics of BAM's structure and accounting emphasis) would go even more bonkers with TCI/Liberty maneuvers, emphasis on cash-flow, and voting stocks. Plus Malone does a bunch of questionable insider deals. I wouldn't want to minimize any concerns investors might have, but part of it is management enriching themselves disproportionately and can management be trusted. I think there's usually an issue with management, but Greenblatt in Stock Market Genius stated many times that he actually likes it when management if given options to better align interest.<br /><br />I'm interested in your take on BAM too (whenever you feel to getting around to it). I had some from a long time for a mysterious reason (I think cause I like that BAM was into renewable energy back when I cared about social investing). BAM seems like a good case study for a lot of the different things you usually look into: Outsider-ish capital allocator, spinning off various parts of business (kind of), good long term track record, kinda straightforward businesses (most of which has long term contracts) and they seem to constantly transforming themselves into a more ideal version of whatever it is they want to be.<br /><br />Maybe I've fallen into the cult of personality but I really admire the execution and ability of Bruce Flatt. A big part of my continual investing in BAM is due to him. Is 12-15% long term total return ambitious or modest for BAM? I also remember during one of BAM's investor day, a shareholder complained about the dividend, and not long after BAM resumed increases in dividends. <br />villainxnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-69758517794002135222015-05-19T14:46:24.176-04:002015-05-19T14:46:24.176-04:00Thanks for the link. Good point on thinking about ...Thanks for the link. Good point on thinking about fund flows and different type of investors and investment vehicles. All appreciated.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-63691040608090239552015-05-19T13:21:38.591-04:002015-05-19T13:21:38.591-04:00Hi, here it is: http://sirf-online.org/2013/03/11...Hi, here it is: http://sirf-online.org/2013/03/11/paper-world-of-brookfield-asset-management/<br /><br />I looked at it and don't think there is much there. I don't think the author understands the nature of the business all that much. <br /><br />Also, as for interest rates, the stock market and BAM, you are right, but I looked at the relationship between the stock market and interest rates in the post after this one and there is quite a cushion (even though short term market impact from taper tantrum like shocks will happen). <br /><br />But I'm not sure what the cushion is for hard assets. <br /><br />Also, a lot of the funds flowing into BAM's funds, I think, are a lot more fixed income alternatives than the capital flowing into stocks; infrastructure and real estate funds are closer to fixed income. So if rates rise and capital flows back to bonds, it may very well flow out of these funds more than from the stock market. <br /><br />But I don't really know. It's just something to think about. BAM seems to be very well managed so that may not be an issue longer term. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-17350807992037902642015-05-19T12:56:55.614-04:002015-05-19T12:56:55.614-04:00Thanks for the downside cautioning. Yes, if inflat...Thanks for the downside cautioning. Yes, if inflation sets in and interest rates move up, not only do BAM's assets get re-marked down due to higher discounting, but also I believe the whole equity market will get re-rated down. In spite of the fact that the Shiller PE is 50-60% higher than its historical average, I think the main reason why most people (including Buffet) are not calling this market outrageously over valued is because of the extremely low interest rates, which make future earnings stream worth much more to the present and hence higher market multiple. So in my mind, the worry about BAM's asset getting re-marked down with rising rates is not so different from the worry about the same valuation impact on the entire equity market. Not that that makes me worry less, not at all. Can you link in the investigative report on BAM? Would be very interested in reading it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-68328117642110963242015-05-19T08:58:27.352-04:002015-05-19T08:58:27.352-04:00One more thing about the hedge fund - not only did...One more thing about the hedge fund - not only did Buffet not take a management fee, the partnership agreement called for him to absorb all losses, even beyond his capital account!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-57777340257537500012015-05-18T22:43:20.203-04:002015-05-18T22:43:20.203-04:00Yes, there is much to like here. But be careful a...Yes, there is much to like here. But be careful about the inflation part. It's true 'real' assets are good inflation hedges, but at the same time, a lot of the gains BAM has been booking come from lower interest rates leading to lower discount rates and higher valuations. If we get a lot of inflation, discount rates, cap rates and terminal cap rates may start moving back up. <br /><br />I remember they had a slide not too long ago showing their cap rates versus interest rates, and the cap rates have not come down as much as interest rates so there is somewhat of a cushion. But I would not assume that they won't go back up at least some... <br /><br />Oh, and there was an investigative report on BAM a couple of years ago... I just reread it and I don't see anything that I would worry about except a small real estate transaction, but it's so small it's hardly material. That doesn't mean it's OK, of course. But I don't think it's indicative or a warning about BAM in any way... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-78354051189512475592015-05-18T22:34:59.969-04:002015-05-18T22:34:59.969-04:00So it appears similar to Berkshire, this is again ...So it appears similar to Berkshire, this is again a 2-column valuation exercise: the investment business + the fee bearing business. I'm quite green in this type of analysis. But after your simple explanation, going back to read their presentation now made a lot more sense. If their fee bearing business indeed grows as they are projecting in the slides, say, 15+% per year for the next 5 years, 20x multiple could be sensible. The question is how much margin of safety there is in paying that type of multiple. What I like about BAM is four folded: 1. they deal with real assets, so there is an inherent hedge against inflation; 2. they have built a worldwide platform with large scale for capital allocation and sourcing investments; 3. The CEO Bruce Flatt and its partners collectively own a very significant portion of the company, more than 20%, I believe. 4. These guys are savvy and disciplined value investors. The large platform allows them to deploy capital as the opportunities arise.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-77346254616623934872015-05-18T14:39:00.236-04:002015-05-18T14:39:00.236-04:00Hi, Yahoo looks a little off. It might be that th...Hi, Yahoo looks a little off. It might be that they forgot to adjust for the 3/2 split that just happened; that would explain the divergence perfectly. <br /><br />As for valuing BAM, I would start with BPS plus whatever the asset management business is worth. Most of their assets are held through the listed entities which are consolidated on BAM's books. Interestingly, they mark those assets (the underlying assets, not the listed stocks) to fair value quarterly. They used to report in the quarterly reports what they thought the assets were worth which was convenient, but now they are actually marking their assets to fair value. That's not a problem because the assumptions are listed in the reports; discount rate, cap rates, terminal value etc... So you can look at that to see if it's reasonable or not. <br /><br />So you have balance sheet value right there. And then they get management fees and carried interest on what their clients own. BAM values that business at $10 billion or so, so that adds another $15/share, I think. So fair value is $35/share or something like that (I am being really rough here...). <br /><br />But their GP valuation (value of asset management) uses a 20x multiple on fee related earnings and a 10x multiple on carried interest. That may be high or low depending on what you think of these businesses. Listed private equity firms seem to trade these days at 10x earnings, so the above might be a little high. But you can make adjustements yourself. <br /><br />This information is in their presentations at the investor relations website. Balance sheet stuff, of course, is in their annual report. I know there is 1Q2015 info out already, but I just did the above with the 2014 annual report. <br /><br />Either way, BAM is a great company. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-65205674511797117822015-05-18T13:47:44.510-04:002015-05-18T13:47:44.510-04:00Thanks for the quick brief reply, and also nice to...Thanks for the quick brief reply, and also nice to know you did dabble into BAM in the past, although not on your current list of coverage. I'm mostly looking for the proper way of looking at BAM's valuation. For instance, what anchor to use, price to earnings, price to cash flow, price to book value, price to NAV? In fact, due to my limitations with accounting and BAM's consolidated financial statements, I'm not even sure what its true book value is, after deducting what it doesn't own in the controlling interests. Right now, yahoo says it's trading at 1.2 P/B, while data from GuruFocus indicates it's 1.8. That's far apart! So the situation for me is, not only do I not know what anchor to use, but also not knowing the very value of that anchor (if the chosen anchor is book value). I'm in fact leaning towards using P/B or P/NAV, given its nature of business. From its CEO letters from the past, BAM seems at times to have favored cash flow or what they call FFO (funds from operations). Again, look forward to reading whatever you would put out on this one.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-66356389306164141112015-05-18T09:54:00.720-04:002015-05-18T09:54:00.720-04:00Hi,
Thanks for the comment. Yes, BAM is a great ...Hi, <br />Thanks for the comment. Yes, BAM is a great company. I've owned it in the past and sort of follow it; not so much now as I used to. But it is a well-run company. I just wasn't all that interested in real estate and infrastructure stuff, but these guys make more than the usual real estate/infrastructure type returns due to their structure; earning fees on outside capital etc. <br /><br />This company certainly fits into the profile of companies I write about here and it's sort of been on my to-do list. I might post something about it some day... I will take a closer look soon. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-63674295293190312072015-05-16T23:09:49.051-04:002015-05-16T23:09:49.051-04:00Really enjoyed your very balanced analysis and I a...Really enjoyed your very balanced analysis and I actually agree with most of what you have said about Buffet. Me too have been very bothered about the biased views widely spread in the press, some of them extremely annoying. One sometimes wonders how people could be so blind, illogical, or biased (either intentionally or unintentionally). In fact, why don't you put this one up for publication on any one of WSJ, NYTimes, or whatever else you see fit. The intention is not to invite trouble or controversy for yourself, but simply for the good of the public. The general public on these issues are either extremely uninformed or biased, in my opinion. Anyway, that aside, I have been reading your blog for the past year and have really learned a lot. So here is a big thank you! I really think yours is one of the best, if not already THE best of all blogs on investment. On a different note, I wonder if you have ever looked at Brookfield Asset Management (BAM). Lou Simpson recently built a sizable position. BAM is led by Bruce Flatt. He has a long and very successful record with BAM, returning more than 15% a year for the last 20 years. Would you care about doing a piece on BAM and comment on its business model, future growth prospects, and current valuation level? BAM has a few segments and have had a few equity offerings in the recent past. I find it a bit hard to get my hands around its reported financials and look at its valuation, seemingly much harder to value than a Berkshire, Markel, or a Wells Fargo. Any comments would be highly appreciated.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-35225039859224156322015-05-15T15:37:57.015-04:002015-05-15T15:37:57.015-04:00Thanks kk! It is not the journalists on reddit who...Thanks kk! It is not the journalists on reddit who did the bad excerpt cut of the forbes article, it is me ! I am sorry. My bad cut was not made intentionally (as I wrote I agree "BRK is right keeping the loans on their book." ! ). Regarding if the practices are widespread, I don't know for sure neither ! As Munger would say, incentives precede the company's culture. Mr. Buffett, the other day, on CNBC detailed the amount of fines given by the regulators to Clayton finance company on different states and it was fairly small. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-10565020950121962682015-05-15T14:13:23.715-04:002015-05-15T14:13:23.715-04:00No, I read them in Japanese, actually. But you ca...No, I read them in Japanese, actually. But you can probably find a lot about the subject googling "working poor in Japan". kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-71661508106320194492015-05-15T13:42:30.211-04:002015-05-15T13:42:30.211-04:00Do you have a link to those books about Japan you ...Do you have a link to those books about Japan you referred to? I'd be interested in reading them. Deep Valuehttp://www.valueiswhatyouget.comnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-84701872365570035822015-05-14T19:56:26.059-04:002015-05-14T19:56:26.059-04:00That's true; one thing about poorer people is ...That's true; one thing about poorer people is that they really don't have a good grasp on the concept of money. They think whatever money they don't have, just borrow etc.<br /><br />I am still looking for a critical mass of complaints to prove that this is systemic. As I said above, I really don't see a lot of complaints at BBB, even at Vanderbilt Mortgage etc. Sure, BBB may be phony (rigged). I looked at other places, Consumer affairs, ripoff report and others but I just don't see the huge amount of complaints you would expect if what the articles say were standard operating procedure. <br /><br />Also, as I said above, someone quoted a Forbes article saying managers are paid partly on loan origination but then didn't say that the managers income is affected by bad loans etc... <br /><br />So even if Clayton gives the poor exactly what it wants, it's not in their interest to intentionally originate loans they know will go bad (store managers will be penalized and Clayton would lose money; some article said that even at best, loan recovery would only be 50%). <br /><br />But anyway, as Munger said, it's hard to be in this business either way. <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-68090175162190663062015-05-14T19:55:45.309-04:002015-05-14T19:55:45.309-04:00One other thing with 3G - It is obvious to most an...One other thing with 3G - It is obvious to most anyone who has worked at a large corporation that most seem to be tremendously overstaffed. The real issue is not the layoffs in and of themselves (as clearly, huge % of most workers are not contributing anything even at supposedly "well run" corporations, from an insiders point of view) but that there is basically nothing else in the economy for these people to do. There is no alternative job. That is the real problem. Many, many people are just hanging on to a decent "middle" class life, and when the are "axed" they start to fall and in all likelihood can't get up again, because the economy does not need them or millions of others. Naturally the agent of change that points this out is resented - its a serious problem. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-55764388525945794632015-05-14T19:46:00.643-04:002015-05-14T19:46:00.643-04:00With regards to Clayton homes, here is a very sad ...With regards to Clayton homes, here is a very sad fact. If you give poor people exactly what you want, you end up burying them. Poor people (regardless of what that article said) are on average dumber than the rest of us, significantly so. They are short sighted and not able to compute long term costs and benefits accurately. They want stuff "now" and don't like to save for stuff. It is proven that the kid who can't wait a few minutes for 2 cookies vs. 1 has a worse life than the kid that can wait, etc. I am certain that Clayton Homes gives their market (poor people) just what it wants... and that is exactly why it buries them. The basic issue has likely been true for 1000's of years. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-29952294209133651022015-05-14T18:03:42.636-04:002015-05-14T18:03:42.636-04:00Oops, actually the 172 figure at the BBB might be ...Oops, actually the 172 figure at the BBB might be a national figure. It says Eastern Tennessee, but there was a complaint from NC, so maybe BBB just categorizes by domicile of the company. Vanderbilt Mortgage had 39 closed complaints. I don't know what this stuff means, but these numbers seem awfully small to me. With such nasty practices as described in these articles, wouldn't these numbers be much higher? Wouldn't there be way more lawsuits and other indications of systemic problems? <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-92165964066060421092015-05-14T17:43:58.820-04:002015-05-14T17:43:58.820-04:00OK, so I went through all of the links above and I...OK, so I went through all of the links above and I still don't find anything too alarming. The complaints at the consumer affairs websites number under 200 each. Clayton sells 30,000 homes per year, so that's really small. Also, like I said, the BBB complaints 172 in 3 years, even if just one region. <br /><br />And then in the reddit section, there was an excerpt from a Forbes article (old article) that shows that Clayton store managers are paid on making loans too, but it conveniently left out an important sentence. Here is what they excerpted: <br />Forbes article 2002:<br /><br />Clayton wants his employees to think about what happens to the home after the initial sale. "We knew that we had to build solid homes because we would be financing them for 30 years," he says. Clayton Homes' retail managers are paid a tiny base salary ($19,000 a year), but they get 40% to 50% of the profits of their stores. The manager also gets a cut of the mortgage payments (as much as $30,000 a month) on homes financed at his branch. <br /><br />And then they left out this next, I think crucial, sentence: A sour loan cuts into the manager's income.<br /><br />A SOUR LOAN CUTS INTO THE MANAGER'S INCOME. That's kind of important to point out when someone claims that the manager is motivated to act poorly. <br /><br />Anyway, I though there would be more material here to make a post out of it, but so far there isn't enough; maybe I will if I see more things I can respond to over time.<br /><br />Also, Buffett admitting that defaults are more than the 3% he claimed at the annual meeting is just a matter of definition. When talking about bad loans, we usually talk about charge-off rates per year, how many percent of loans are past due (at the moment) etc, so it's not an issue at all. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-18711390186531842482015-05-14T12:17:09.438-04:002015-05-14T12:17:09.438-04:00The "why don't just pay higher taxes then...The "why don't just pay higher taxes then" criticism of Buffett makes no sense to me.<br /><br />I like to play games, and sometimes the rules are unfair. I might say "look, the blue pieces are worth 2 points and that's completely imbalanced, they should only be worth 1 point!", but do you really expect that I'm going to count only 1 point for the blue pieces while everyone else counts 2?Parker Bohnnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-41529568318319515612015-05-14T10:23:42.201-04:002015-05-14T10:23:42.201-04:00I thought the questions at the BRK meeting this ye...I thought the questions at the BRK meeting this year were exceptionally terrible - the worst in my 5 years of going. The questions reflected a lot of ignorance of Buffett and Berkshire. However, Warren & Charlie are exceptionally good at giving great (thoughtful and entertaining) answers to bad questions. However, Warren and Charlie adequately dodged the question on Ted & Todd - I really wish Warren or Charlie would give a thoughtful answer to the investment perspective and qualities of Ted and Todd and how their circle of competence are different.<br /><br />People who criticize the 3G partnerships seem to forget that BRK has 25 (or so) people at HQ for a company with a market cap of $350B. A big difference in 3G and Warren is that Warren never had to downsize because never up-sized.<br /><br />My last brief comment is that I agree with Loeb and I also did not get the vibe that Loeb was firing missiles, just pointing out some inconsistencies. I am a huge Buffett fan, huge, but I agree with D-Loeb and I think he was just trying to help us Buffett-obsessors to step back and face reality a bit about him. However, we all have to live with inconsistency in our lives. We can try to remedy that, but that's one of the great and frustrating things about life. itsmesrhttps://www.blogger.com/profile/01079383974385109518noreply@blogger.com