Saturday, June 30, 2018

Jeff Bezos on High Standards

From the most recent Amazon (AMZN) shareholder letter:

"High standards are contagious. Bring a new person onto a high standards team, and they'll quickly adapt. The opposite is also true. If low standards prevail, those too will quickly spread...I believe high standards are domain specific, and that you have to learn high standards separately in every arena of interest. When I started Amazon, I had high standards on inventing, on customer care, and (thankfully) on hiring. But I didn't have high standards on operational process: how to keep fixed problems fixed, how to eliminate defects at the root, how to inspect processes, and much more. I had to learn and develop high standards on all of that (my colleagues were my tutors).

Understanding this point is important because it keeps you humble. You can consider yourself a person of high standards in general and still have debilitating blind spots. There can be whole arenas of endeavor where you may not even know that your standards are low or non-existent, and certainly not world class. It's critical to be open to that likelihood."

A similar thing seems relevant to the world of investing.

I think it's fair to say that some seem more than willing to offer their views on just about every investment in every industry. Well, those willing to opine on most anything in the universe appear unaware of what Jeff Bezos is saying above. Such behavior, when on display, usually warrants a healthy dose of skepticism. The opinionator may use all the right terminology, have a solid understanding of the macro factors, and may even know quite a bit about lots of businesses across many industries.

At least enough to sound impressive.

Yet it doesn't necessarily follow that they'll sufficiently understand those businesses well enough to justify putting capital at risk. If someone, for example, were capable of evaluating the prospects of a particular technology business, it does not automatically mean they'll also understand how to capably judge the prospects of a steel producer.

Necessarily, there'll be different competitive dynamics, different industry-specific opportunities and challenges, and the things to consider and understand in depth just goes on and on.

Behaving otherwise lacks the kind of wise humility that Jeff Bezos refers to in his letter.

Low levels of humility can prove more than somewhat correlated with low returns (or worse). In fact, when combined with early investing success overconfidence may lead to increasingly spectacular and costly failures. In other words, for the overconfident investor, the longer a series of early wins happens to be likely means bigger more expensive mistakes at a later time.*

Hubris and investing don't mix.

The reality is that even very talented individuals often have "debilitating blind spots".

High levels of competence and prior accomplishment, however impressive, do not automatically provide an exemption.

Worse yet, there's a tendency to think blind spots are someone else's problem.

In fact, there's some evidence this may especially be applicable to highly capable individuals.

Those who think they have somehow developed some kind of blind spot immunity run the risk of being (or becoming) a latent or blatant liability.

That such a liability hasn't explicitly revealed itself just yet doesn't prove its nonexistence.

Adam

No position in AMZN

* It's worth noting here, as an aside, that the relationship between risk and reward is frequently misunderstood. The risk/reward relationship is vastly more confounding than the prevailing view -- that there inevitably must be a positive correlation between the two -- would suggest.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Wednesday, May 16, 2018

Berkshire Hathaway 1st Quarter 2018 13F-HR

The Berkshire Hathaway (BRKa1st Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 4th Quarter 13F-HR.)

There was both some buying and selling during the quarter. Here's a quick summary of the changes:*

Added to Existing Positions**
Apple (AAPL): 74.2 mil. shares bought (45% incr.); stake=$ 40.2 bil.
US Bancorp (USB): 3.8 mil. shares (4% incr.); stake=$ 4.6 bil.
Bank of NY Mellon (BK): 1.4 mil. shares (2% incr.); stake=$ 3.2 bil.
Delta Air Lines (DAL): 489,000 shares (< 1% incr.); stake=$ 2.9 bil.
Monsanto (MON): 7.3 mil. shares (62% incr.); stake=$ 2.2 bil.

I generally include above only those positions that were worth at least $ 1 billion at the end of the 1st quarter.

Berkshire also roughly doubled its stake in Teva (TEVA) but it remains a relatively small position (i.e. below $ 1 billion).

In a portfolio this size a position that's less than $ 1 billion doesn't really move the needle much.

Reduced Positions
Wells Fargo (WFC): 1.7 mil. shares sold (<1% decr.); stake=$ 23.9 bil.
Phillips 66 (PSX): 35.0 mil. shares (43% decr.); stake=$ 4.4 bil.
Charter (CHTR): 267,000 shares (3% decr.); stake=$ 2.6 bil.
United Continental (UAL): 506,000 shares (2% decr.); stake=$ 1.9 bil.

Berkshire had previously announced they may need to sell some of their Wells Fargo shares from time to time to keep the ownership stake below 10%.

Other small positions that were to an extent reduced further in size this past quarter include Liberty Global (LBTYA), Sanofi (SNY), and Verisk (VRSK).

Sold Position
IBM (IBM)
Graham Holdings (GHC)

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential.

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Also, Todd Combs and Ted Weschler are responsible for part of the Berkshire equity portfolio. So some of the changes -- especially those involving smaller positions -- will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire's portfolio of equity securities remains mostly made up of financial, consumer, and technology stocks (mostly Apple).

1. Apple (AAPL) = $ 40.2 bil.
2. Wells Fargo (WFC) = $ 23.9 bil.
3. Bank of America (BAC) = $ 20.4 bil.
4. Kraft Heinz (KHC) = $ 20.3 bil.
5. Coca-Cola (KO) = $ 17.4 bil.

As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire also owns equity securities listed on exchanges outside the U.S., plus fixed maturity securities, cash and cash equivalents, and other investments.

The portfolio excludes all the operating businesses that Berkshire owns outright with ~ 377,000 employees (26 at headquarters) according to the latest available annual report.

Here are some examples of Berkshire's non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candies, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, Berkshire Hathaway Automotive, Oriental Trading Company, Precision Castparts, and Duracell.
(Among others.)

In addition to the above businesses and investment portfolio, Berkshire's large insurance operation (BH Reinsurance, General Re, GEICO etc.) has historically been rather profitable while providing plenty of "float" for their investments.

Page A-1, near the end of the annual report, has a complete listing of Berkshire's businesses.

Adam

Long positions in BRKb, AAPL, USB, WFC, BAC, and KO established at much lower than recent market prices. Also, long position in IBM established slightly above recent market prices. (In each case compared to average cost basis.)

* All values shown are based upon the last trading day of the 1st quarter.
** Berkshire Hathaway's holdings of ADRs are included in the 13F. What is not included are shares listed on exchanges outside the United States. The status of those shares, if a large enough position, are updated in the annual letter. So the only way any of the stocks listed on exchanges outside the U.S. will show up in the 13F is if Berkshire buys the ADR. Also, certain equity holdings are reported separately -- in some cases contributing to a mismatch between what's reported in the annual letter and the end of year 13F -- while investments in things like preferred shares and warrants, when applicable, are not included.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Monday, April 23, 2018

Warren Buffett: When a Non-Random Rule & Random Fluctuations "Swamp the Truly Important"

From Buffett's latest Berkshire Hathaway (BRKa) shareholder letter:

"...I would prefer to turn immediately to discussing Berkshire's operations. But...I must first tell you about a new accounting rule – a generally accepted accounting principle (GAAP) – that in future quarterly and annual reports will severely distort Berkshire's net income figures and very often mislead commentators and investors.

The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire's 'bottom-line' will be useless.

The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.

That's largely because we sell securities when that seems the intelligent thing to do, not because we are trying to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when our portfolio, overall, performed poorly (or the converse)."


Upon reading this it immediately reminded me of something Charlie Munger once said at a Wesco shareholder meeting:

"Anyone with an engineering frame of mind will look at [accounting standards] and want to throw up in the aisle. And go ahead if you want to. It will be a memorable moment for all of us."

Charlie's been pretty tough on the accounting profession in the past.

Here's a few additional examples.

Adam

Long position in BRKb established at much lower than recently prevailing market prices. No position iKHC.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Monday, March 26, 2018

Equity "Coupons"

What Warren Buffett had to say about bonds and stocks in an interview on CNBC late last month:

"...if you buy a 30-year government bond, it has a whole bunch of coupons attached...And the coupon says 3%, or whatever it may say. And you know that's what you're going to get between now and 30 years from now. And then they're going to give you the money back. What is a stock? A stock is the same sort of thing. It has a bunch of coupons. It's just they haven't printed the numbers on them yet. And it's your job as an investor to print those numbers on it. If those numbers say 10% and most American businesses earn over 10% on tangible equity. If they say 10%, that bond is worth a hell of a lot more money than a bond that says 3% on it. But if that government bond goes to 10%, it changes the value of this equity bond that, in effect, you're buying...when you buy an interest in...anything, you are buying something that, over time, is going to return cash to you...And those are the coupons. And it's...your job as an investor to decide what you think those coupons will be because that's what you're buying. And you're buying the discounted value. And the higher the yardstick goes, and the yardstick is government bonds, the less attractive these...look. That's just fundamental economics. So in 1982 or '83, when the long government bond got to 15%, a company that was earning 15% on equity was worth no more than book value under those circumstances because you could buy a 30-year strip of bonds and guarantee yourself for 15% a year. And a business that earned 12%, it was a sub-par business then. But a business that earns 12% when the government bond is 3% is one hell of a business now. And that's why they sell for very fancy prices."

An emphasis on stock prices -- how they'll change over short or even more extended time horizons -- is best thought of as speculation (if not pure gambling). There's nothing inherently wrong with speculation, of course, it just has less in common with investing than some seem to think.

If, instead, the emphasis is on what the "coupons" will look like long-term it's possible, if not easy, for a present valuation, within a narrow enough range, to be estimated. From there prevailing market prices can be compared to estimated value. Sensible investment decisions can then be made.
(Based upon, best case, inescapably imperfect but meaningful assumptions.)

Two or more informed investors will rarely agree, at least not in a precise way, on the intrinsic value of an investment. It's not about being right; it's about being right enough within an acceptable range.

Judging what the equity "coupons" are likely to be over a long time frame is challenging enough. Predicting interest rates is, if not impossible, nearly so. The discount paid to a conservative estimate of value can, only up to a point, protect the investor from errors, unknowns, and the unknowable.

Margin of safety always comes into play; deciding what it should be is necessarily investment specific.

Stretch assumptions and investing well just aren't compatible.

Adam

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Thursday, February 15, 2018

Berkshire Hathaway 4th Quarter 2017 13F-HR

The Berkshire Hathaway (BRKa4th Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 3rd Quarter 13F-HR.)

There was both some buying and selling during the quarter. Here's a quick summary of the changes:*

Added to Existing Positions**
Apple (AAPL): 31.2 mil. shares bought (23% incr.); stake = $ 28.0 bil.
US Bancorp (USB): 2.0 mil. shares (2% incr.); stake = $ 4.7 bil.
Bank of New York Mellon (BK): 10.6 mil. shares (21% incr.); stake = $ 3.3 bil.
Monsanto (MON): 2.8 mil. shares (31% incr.); stake = $ 1.4 bil.

New Position
Teva (TEVA): 18.9 mil. shares; stake = $ 357.7 mil.

Reduced Positions
Wells Fargo (WFC): 6.0 mil. shares sold (1% decr.); stake = $ 27.8 bil.
American Airlines (AAL): 1.0 mil. shares (2% decr.); stake = $ 2.4 bil.
General Motors (GM): 10.0 mil. shares (16% decr.); stake = $ 2.0 bil.
IBM (IBM): 35.0 mil. shares (94% decr.); stake = $ 314.2 mil.
Sanofi (SNY): 27.4 thous. shares (<1% decr.); stake = $ 166.8 mil.

Berkshire had previously announced they may need to sell some of their Wells Fargo shares from time to time to keep the ownership stake below 10%.

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential.

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Also, Todd Combs and Ted Weschler are responsible for part of the Berkshire equity portfolio. So some of the changes -- especially those involving smaller positions -- will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire's portfolio of equity securities remains mostly made up of financial, consumer, and technology stocks (primarily Apple).

1. Apple (AAPL) = $ 28.0 bil.
2. Wells Fargo (WFC) = $ 27.8 bil.
3. Kraft Heinz (KHC) = $ 25.3 bil.
4. Bank of America (BAC) = $ 20.0 bil.
5. Coca-Cola (KO) = $ 18.4 bil.

As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire also owns equity securities listed on exchanges outside the U.S., plus fixed maturity securities, cash and cash equivalents, and other investments.

The portfolio excludes all the operating businesses that Berkshire owns outright with ~ 367,000 employees (25 at headquarters) according to the latest available annual report.

Here are some examples of Berkshire's non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candies, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, Berkshire Hathaway Automotive, Oriental Trading Company, Precision Castparts, and Duracell.
(Among others.)

In addition to the above businesses and investment portfolio, Berkshire's large insurance operation (BH Reinsurance, General Re, GEICO etc.) has historically been rather profitable while providing plenty of "float" for their investments.

See page 116 of the annual report for a more complete listing of Berkshire's businesses.

Adam

Long positions in BRKb, AAPL, USB, WFC, BAC, and KO established at much lower than recent market prices. Also, long position in IBM established near recent market prices. (In each case compared to average cost basis.)

* All values shown are based upon the last trading day of the 4th quarter.
** Berkshire Hathaway's holdings of ADRs are included in the 13F. What is not included are shares listed on exchanges outside the United States. The status of those shares, if a large enough position, are updated in the annual letter. So the only way any of the stocks listed on exchanges outside the U.S. will show up in the 13F is if Berkshire buys the ADR. Also, certain equity holdings are reported separately -- in some cases contributing to a mismatch between what's reported in the annual letter and the end of year 13F -- while investments in things like preferred shares and warrants, when applicable, are not included.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.