Bloomberg TV had a good story earlier this week. Summary: None of the biggest German banks earned its cost of capital over the past 3 years.
Banks in Europe are a completely different matter than banks in America.
1 Like
Thanks to Verner for a great thread. I have been thinking about investing in Berkshire and recently did so. I have also invested in Spiltan Global Investment Bolag, in which Berkshire naturally holds one of its largest investments.
During my summer vacation, I had time to watch various things on YouTube. I watched a lot of Buffett. He said in one interview that he could achieve 50% annual returns with smaller sums. The video explained quite well why he doesn’t do that. These investments are like farts in the Sahara compared to Berkshire’s operations. While Buffett would make 50% returns, Berkshire makes many times that in cash.
I can tell you one thing Buffett is excellent at: he knows how to relate magnitudes in an understandable way. He understands that it’s not worth tinkering with a few hundred million when there’s 122 billion in cash. In one video, he talked about how many bottles of Coca-Cola are sold daily. He calculated how much an increase of 1 cent in price would yield and what that means annually.
Similarly, he has now bought Bank of America. He surely knows how many transactions the company makes and what a 1-cent price increase means for them. He also knows what a 25-basis-point increase in interest rates means for the bank’s income. He has an idea of where we are in the cycle; he believes interest rates will be higher within 5-10 years, and he knows roughly what that value is.
I think the division will go exactly as Ultra Long said. I watched company meetings on YouTube, and it struck me that Buffett comments on things he knows himself. If it’s not his expertise, he gives the floor to the person responsible for that matter. He wants the people who are best at something to do it.
Investment success may not have been the same as before, but that’s partly because there haven’t been good opportunities (read: collapses). It was mentioned that during the financial crisis, good strategic moves were made. Berkshire differentiates itself from the index especially during weaker economic conditions. Its excellent businesses generate money in tougher times, and Buffett pulls out his elephant gun for capital allocation during panic.
I see Berkshire as an investment case in that it’s a good, safe, “almost index-like investment,” and its businesses remain excellent even after Buffett’s passing. The company continues to generate strong cash flow and can, if desired, pay growing dividends for decades. The biggest fear is that future management will mess around too much and squander the businesses. If they are content with managing the cash flow, generating some return from it, and distributing part of it as a growing dividend, then the company is certainly a good investment case. This is where Buffett’s vision is seen. He bought Burlington Santa Fe. The company had cash; he probably won’t get 20% annual returns from the company, but the company generates cash flow and profit. That’s better than letting it sit in an account. If desired, the company can be sold or restructured, selling off trains, so to speak. But Buffett knows it’s a good business that slowly brings in money, which he then invests elsewhere. When the time is right, he invests more.
17 Likes
Well commented. I’ve been following the share price development myself (the interim report just came out) and looking for a point to buy a long-term position for my portfolio, in preparation for the upcoming recession. Of course, this will also go down, so one must be prepared to buy by scaling in little by little. A reliable dividend payer even in bad times, with a huge cash reserve, enabling the purchase of new targets at a low valuation.
2 Likes
I sold my entire Berkshire holding a couple of days ago. It had grown to be the largest investment in my portfolio.
I bought a big chunk in 2016, and it rose well until early 2018, but then for the last 1.5 years, it’s been fluctuating around the $200 USD plus or minus $20 level.
I already see its massive size as a problem. Clearly, deals are not being found because Buffett specifically wants to buy the entire company, and there simply aren’t enough sufficiently large companies available in the way he wants (i.e., the owner calls him to say they want to sell) and at the price he wants.
A diamond company in itself, but it’s starting to become a prisoner of its own size. This was the second time I held it for a few years. The first time was after the financial crisis.
No doubt there will be a third time.
I trust Buffett enough that I have copied investment ideas from him. Like Apple, which is now the second heaviest stock in my portfolio. I’m also looking at Goldman Sachs “with that eye,” because Buffett has trusted that stock for a long time.
3 Likes
Reliable dividend payer? As I understand it, BRK (Berkshire Hathaway) specifically does not pay dividends, but rather reinvests the money? This is one point why it is an interesting investment; the owner does not pay unnecessary taxes (numerous other reasons why it’s interesting). Otherwise, I would also be on the buying side if and when a recession hits and markets correct. I won’t buy at these levels yet; Buffett himself doesn’t seem to be buying his own shares at these prices either? I think I just read that somewhere…
4 Likes
As I understand it, Buffett buys back his own Berkshire stock when the P/B is at most 1.2 =-).
Berkshire’s reports contain the criteria; that one is old 
“For several years, Berkshire had a common stock repurchase program, which permitted Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. On July 17, 2018, Berkshire’s Board of Directors authorized an amendment to the program, permitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, Vice Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. The program continues to allow share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the program.”
So, they can buy at any price they deem value-creating for shareholders, as long as at least 20 billion remains in the “cash.”
Berkshire does not pay dividends, at least not yet.
4 Likes
They will probably never pay a direct dividend, it’s not tax-efficient, a massive share buyback might be possible. In Q2, they bought their own shares at an average price of $202 per BRK-B share. The cash reserves are probably already in the order of $120 billion. BRK shares will take off once that money is put to work.
1 Like
Hey, thanks for the correction! After writing the message, I did wonder if the P/B ratio of 1.2 criteria still applied to share buybacks. I should check the facts a bit more carefully before publishing anything, but luckily, I added ‘as far as I understand’ to my message.
4 Likes
Haha, that was good protection! 
And it’s not that serious anyway
5 Likes
Good correction, in the context of BRK, it means buybacks, but it’s the same thing. For the owner, this only translates into an increase in share value, and indeed, taxation cannot reduce the benefits. I am, in fact, generally in favor of buybacks. It’s much easier to follow the share price development, because I make all my decisions (entry/exit) based on technical analysis (TA).
If you’re not familiar with a stock, you have to look for reasons online why the price has sometimes dropped sharply (Fiskars is an example of this). There can be so many different reasons for a drop.
Of course, in the context of BRK, instead of buybacks, there could be a larger acquisition, but these have almost always increased the share’s value.
1 Like
I recall Buffet saying, “as long as he believes he can achieve superior returns, he has no intention of paying a dividend.”
1 Like
I think I started the dividend discussion, and as a long-term investor, I was already thinking about the time when the master has finished his earthly journey. Then the company will still have good businesses that generate cash flow. Buffett himself has said that at some point in the future, Berkshire will no longer be able to find reasonable acquisitions for its cash reserves. At that point, it will be time to distribute to shareholders.
3 Likes
INSID
Berkshire Hathaway (Warren Buffett) discloses updated portfolio positions in 13F filing: Increased BAC AMZN USB holdings, lowered CHTR
Increased positions in: BAC (to ~927.25 mln shares from ~896.17 mln shares), AMZN (to ~0.54 mln from ~0.48 mln), USB (to ~132.46 mln from ~129.31 mln)
Maintained positions in: WFC (~409.8 mln shares), KO (~400 mln shares), KHC (~325.63 mln shares), AAPL (~249.59 mln shares), AXP (~151.61 mln shares), BK (~80.94 mln shares), GM (~72.27 mln shares), DAL (~70.91 mln shares)
Decreased positions in: CHTR (to ~5.43 mln shares from ~5.71 mln shares)
5 Likes
Also interesting 13F Filing News from the week: Bill Ackman has taken a position in BRK. Bill Ackman understands that he doesn’t understand everything. But luckily, he knows a guy who does.
https://www.reuters.com/article/us-berkshire-investment-pershing-square/ackman-bets-on-idol-warren-buffetts-berkshire-hathaway-idUSKCN1V424W
1 Like
My first post on this forum, here we go!
A quick comment at this point - is it possible that a large cash position explains Berkshire’s “poor” performance quite well? In a bull market, a cash pile of over $100 billion doesn’t yield anywhere near the stock market’s returns (interest rates are low). Previously, the cash position wasn’t this large; now Buffett has had difficulty finding “elephant-sized” acquisition targets, as private equity markets are overheating. If I’ve understood correctly, Buffett currently finds stocks more attractive than buying entire companies, but owning entire companies has certain advantages (e.g., capital allocation between companies) and Buffett wants to grow Berkshire into an even larger conglomerate.
6 Likes
That seems to be the case; a lot of cash, invested at most in Short Term US Bonds. BRK.B shares are certainly a sensible buy around the $200 mark. If it goes below 200, Buffett will buy his own shares, so it certainly won’t stay there for long.
In the Occidental deal, Buffett’s patience was rewarded with a $10 billion loan, from which BRK is paid 8% interest. Along the way, Buffett has lent to Goldman Sachs, among others, at 10% interest.
https://www.investopedia.com/the-art-of-the-deal-by-virtuoso-warren-buffett-4686091
2 Likes
Yeah, Buffett has made some pretty good deals. One of my “favorites” was the Bank of America loan – $5 billion at 6% interest with an option on top. Buffett got 6% interest for years, and in the end, when he exercised the option, he still made a $12 billion profit. That was a reasonably good deal; I remember watching it happen from the sidelines.
Regarding the future, when Buffett steps down from leadership, the company’s situation will change. Initially, the company will roll on its own momentum, but the successors will have to make big decisions in the future without Buffett’s help. The insurance side and wholly-owned businesses will largely continue as before, but the allocation of capital between businesses and investment activities will take on the character of their new operators. Buffett’s portfolio managers (Ted and Todd, who each manage a $13 billion portfolio) invest somewhat differently than Buffett. If/when they take over large asset masses, new investments will be made according to their views. If you have followed these two, they have bought, for example, a kidney patient care company (DaVita), Amazon, Precision Castparts (which Buffett later bought entirely), Ingersoll-Rand, etc., etc. And they have also been more active in trading than Buffett; companies have come and gone. The entire portfolio is $172 billion + $122 billion in cash; when cash is moved to the markets, the portfolio inevitably changes (they can no longer invest the money in the same proportions because in many banks, the 10% ownership limits will be met).
In summary, Buffett’s departure from the company will not change anything immediately, but in the longer run, the company’s investment activities and capital allocation will change. The company’s own businesses will probably continue pretty much as before, as they are quite independent even now.
2 Likes
JP Morgan Chase: To reach a 10% ownership, another $25-30 billion is needed to be close to a 10% ownership. This is probably what will keep Buffett alive for many more years. So clearly a missing piece from BRK’s portfolio.
What do you think about one of Buffett’s major investments, the food company The Kraft Heinz? Buffett owns 26.7% of the company, a stake worth $8.8 billion. Buffett’s partner, 3G Capital, owns 20.1% of the company.
The investment has been unsuccessful, as the company had to make significant write-downs, cut its dividend, and its stock price has fallen sharply in recent years. The biggest problem is the increased negotiating power of retailers (like Amazon, Walmart, etc.) and their preference for private label brands, which has left KH’s smaller brands struggling. Buffett himself noted that Heinz was a good buy, but that he paid too much for Kraft (see video below).
I’ve started thinking about this company a bit more closely and I’m wondering if I should really consider buying it. I don’t believe that Buffett and 3G will stand idly by while the company is in trouble. It’s entirely possible that there could be some arrangement where Buffett buys Heinz entirely for himself (he would have plenty of money for such an operation) and leaves Kraft as an independent publicly traded company. Or, perhaps, he and 3G could take the entire KH private, break it up, and sell it off in pieces. I suspect that Kraft and Heinz as separate companies would be more valuable than together.
Currently, Kraft Heinz (at a share price of $26.95) is worth approximately $33 billion, with an estimated dividend yield of 6%, a forward P/E of 10.3, and a P/B of 0.6. The company has (perhaps too much for my taste) $32 billion in debt.
In the video below, Buffett himself talks about the topic for eight minutes:
4 Likes