Tuesday, October 2, 2018

Berkshire 2018 Meeting Highlights - Part II

From the Berkshire Hathaway (BRKa) shareholder meeting earlier this year:

Warren Buffett: "...I have here a New York Times of March 12th, 1942. I'm a little behind on my reading. (Laughter)

And if you go back to that time, that — it was about, what? Just about three months since we got involved in a war which we were losing at that point.

The newspaper headlines were filled with bad news from the Pacific...I'd like you to imagine that at that time you had invested $10,000. And you put that money in an index fund — we didn't have index funds then — but you, in effect, bought the S&P 500...Let's say you'd taken that $10,000 and you'd listened to the prophets of doom and gloom around you, and you'll get that constantly throughout your life. And instead, you'd used the $10,000 to buy gold.

Now for your $10,000 you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants, and new inventions came along, you would go down every year in your — look in your safe deposit box — and you'd have your 300 ounces of gold.

And you could look at it, and you could fondle it, and you could — I mean, whatever you wanted to do with it. (Laughter)

But it didn't produce anything. It was never going to produce anything...if you decided to go with a nonproductive asset — gold — instead of a productive asset, which actually was earning more money and reinvesting and paying dividends and maybe purchasing stock — whatever it might be — you would now have over 100 times the value of what you would have had with a nonproductive asset.

In other words, for every dollar you had made in American business, you'd have less than a penny by — of gain — by buying in this store of value, which people tell you to run to every time you get scared by the headlines or something of the sort."

Later in the meeting, Warren Buffett and Charlie Munger had this to say about long-term bonds relative to productive assets:

Warren Buffett: "...the one thing we know is we think that long-term bonds are a terrible investment, and we — at current rates or anything close to current rates...it's almost ridiculous when you think about it. Because here the Federal Reserve Board is telling you we want 2 percent a year inflation. And the very long bond is not much more than 3 percent. And of course, if you're an individual, then you pay tax on it. You're going to have some income taxes to pay.

And let's say it brings your after-tax return down to 2 1/2 percent. So the Federal Reserve is telling you that they're going to do whatever's in their power to make sure that you don't get more than a half a percent a year of inflation-adjusted income...I think I would stick with productive businesses, or productive — certain other productive assets — by far.

But what the bond market does in the next year, you know — you’ve got trillions of dollars in the hands of people that are trying to guess which maturity would be the best to own and all that sort of thing. And we do not bring anything to that game that would allow us to think that we’ve got an edge.

Charlie?"

Charlie Munger: "Well, it really wasn't fair for our monetary authorities to reduce the savings rates, paid mostly to our old people with savings accounts, as much as they did. But they probably had to do it to fight the Great Recession, appropriately.

But it clearly wasn't fair. And the conditions were weird. In my whole lifetime, it's only happened once that interest rates went down so low and stayed low for a long time.

And it was quite unfair to a lot of people. And it benefited the people in this room enormously because it drove asset prices up, including the price of Berkshire Hathaway stock. So we're all a bunch of undeserving people — (laughter) — and I hope that we continue to be so."
(Laughter)

Some might have a difficult time internalizing the fact that owning a piece of a public company should be viewed as similar to the ownership of productive assets that generally aren't traded publicly (e.g. 100% private ownership of a restaurant, small factory, or farm). The second by second quotations during market hours, at least in part, have a tendency to distract the partial owner from the bigger picture.

It shouldn't but often does.

So they end up buying/selling too much.

What should be advantage -- the ability to conveniently deploy and free up capital -- becomes disadvantage.

Getting beyond this is just one small step -- but an important one.

There are practical differences and considerations, of course. Naturally, owning a very small part of a business means you can't much influence the direction of the company (whether excess capital should be distributed or allocated, new market opportunities, location considerations, competitive threats, technology shifts, etc.). So a quality board and management team will usually matter enormously. 

Yet, otherwise, Buffett has on prior occasions made the point that a stock ownership of a publicly-traded company should be thought of the same way as the sole ownership of something like a rental property or a business.

How much cash (compared to understood alternatives) that a productive asset likely produces over the very long haul relative to the cash to be invested -- whether or not publicly traded, whether or not owned outright -- is what ultimately matters.

No such consideration is necessary for the nonproductive asset.

It produces nothing and never will.

Adam

Long position in BRKb established at much lower than recent market prices

Related post:
Buffett: Berkshire 2018 Meeting Highlights - Part I
---
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, August 16, 2018

Berkshire Hathaway 2nd Quarter 2018 13F-HR

The Berkshire Hathaway (BRKa2nd Quarter 13F-HR was released this past Tuesday. 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 1st 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)
US Bancorp (USB)
Bank of NY Mellon (BK)
Delta Air Lines (DAL)
Goldman Sachs (GS)
Southwest (LUV)
General Motors (GM)
Teva (TEVA)
Liberty Global (LBTYA)

Reduced Positions
Wells Fargo (WFC)
Phillips 66 (PSX)
Charter (CHTR)
United Continental (UAL)
American Airlines (AAL)

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

Sold Positions
Monsanto (Company acquired/no longer traded on NYSE)
Verisk (VRSK)

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) = $ 46.6 bil.
2. Wells Fargo (WFC) = $ 25.1 bil.
3. Kraft Heinz (KHC) = $ 20.5 bil.
4. Bank of America (BAC) = $ 19.1 bil.
5. Coca-Cola (KO) = $ 17.5 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. (In each case compared to average cost basis.)

* All values shown are based upon the last trading day of the 2nd 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.
---
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.

Tuesday, August 7, 2018

Berkshire 2018 Meeting Highlights - Part I

The following question was asked by Jack Ciesielski -- an accounting expert and Berkshire investor -- during  Berkshire Hathaway's (BRKa) most recent shareholder meeting:

"Mr. Buffett, in this year's shareholder letter you have harsh words for the new accounting rule that requires companies to use market value accounting for their investment holdings. 

'For analytical purposes,' you said, 'Berkshire’s bottom-line will be useless.' 

I'd like to argue with you about that. Shouldn't a company’s earnings report cite everything that happened to, and within, a company during an accounting period?"

The response...

Warren Buffett: "Well...we've got $170 billion of partly-owned companies, which we intend to own for decades, and which we expect to become worth more money over time, and where we reflect the market value in our balance sheet, does it make sense to, every quarter, mark those up and down through the income account, when at the same time we own businesses that have become worth far more money...take GEICO...we bought half the company for $50 million, roughly — do we want to be marking that up every quarter to the value — and having it run through the income account?

That becomes an appraisal process. There's nothing wrong with doing that, in terms of evaluation. But in terms of — and you can call it gain in net asset value or loss in net asset value — that's what a closed-end investment fund, or an open-investment fund would do.

But to run that through an income account — if I looked at our 60 or 70 businesses...and every quarter we marked those to market, we would have, obviously, a great many, in certain cases, where over time we’d have them at 10 times what we paid, but how quarter-by-quarter we should mark those up and run it through the income account, where 99 percent of investors probably look at net income as being meaningful, in terms of what has been produced from operations during the year, I think would be — well, I can say it would be enormously deceptive.

I mean, in the first quarter of this year — you saw the figures earlier — where we had the best what I would call operating earnings in our history, and our securities went — were down six billion, or whatever it was, to keep running that through the income account every day you would say that we might have made on Friday, we probably made 2 1/2 billion dollars. Well, if you have investors and commentators and analysts and everybody else working off those net income numbers and trying to project earnings for quarters, and earnings for future years, to the penny, I think you're doing a great disservice by running those through the income account.

I think it's fine to have marketable securities on the balance sheet — the information available as to their market value — but we have businesses there — if we — we never would do it — but if we were to sell half, we’ll say, of the BNSF railroad, we would receive more than we carried — carried for them — we would turn — we could turn it into a marketable security and it would look like we made a ton of money overnight. Or if we were to appraise it, you know, appraise it every three months and write it up and down, A, it could lead to all kinds of manipulation, but B, and it would just lead to the average — to any investor— being totally confused.

I don't want to receive data in that manner and therefore I don't want to send it out in that manner.

Charlie?"

CHARLIE MUNGER: "Well, to me it's obvious that the change in valuation should be noted, and it is and always has been — it goes right into the net worth figures.

So the questioner doesn't understand his own profession. (Laughter and applause)

I’m not supposed to talk that way but it slips out once in a while." (Laughter)

Here's a prior post covering what Buffett had to say in the shareholder letter about the consequences of this new accounting rule.

As a direct result of the rule Berkshire's most recent earnings, as one might expect, produced headlines like:

Berkshire Hathaway posts surge in profits
- Warren Buffett’s Berkshire Hathaway profit soars in second quarter

These articles do attempt to explain what's behind such a substantial increase in quarterly earnings. Still, the new rule has real potential for misunderstanding.

To invest well one needs to understand accounting and the rules do necessarily change over time.

Yet that doesn't mean changes -- even if well-intended -- should make it more difficult for the investor to draw meaningful conclusions. That  doesn't mean those who otherwise are rather familiar with Generally Accepted Accounting Principles (GAAP) should need to keep up with changes that don't seem to add much value or, worse yet, create confusion.

The investing process is already difficult enough without such confusion.

Berkshire's operating earnings did indeed improve but much of it comes down to the new accounting rule -- a rule that's just as certain the produce future headlines like "massive decline in profits" the next time, inevitably, the market (or a specific stock in the portfolio) happens to drop dramatically.

Buffett explained the latest results this way:

"In 2018, due to a change in Generally Accepted Accounting Principles (“GAAP”), we are now required to include the changes in unrealized gains/losses of our equity security investments as a component of investment gains/losses in our earnings statements. In the table above, investment gains/losses in 2018 include a gain of approximately $4.5 billion in the second quarter and a loss of approximately $1.7 billion in the first six months of 2018 due to changes during the second quarter of 2018 and changes during the first six months of 2018 in the unrealized gains/losses of equity security investments held at June 30, 2018. In 2017 and in prior years, while changes in unrealized gains/losses were reflected in our shareholders’ equity, they were not included in our earnings statements. Accordingly, the following statement which has been included in each of Berkshire’s earnings releases for many years along with some additional comments (additional comments underlined) is even more important when analyzing Berkshire’s periodic results. The amount of investment gains/losses in any given quarter is usually meaningless and delivers figures for net earnings per share that can be misleading to investors who have little or no knowledge of accounting rules."

Note that Buffett is clarifying the numbers -- primarily by isolating short-term fluctuations "in unrealized gains/losses of our equity security investments" from the operating earnings -- so investors understand that the headline net earnings, due to the new rule, are far greater than what he considers the more meaningful but much lower Berkshire operating earnings. In other words, if in a future quarter he emphasizes that operating earnings are actually higher than the net earnings number it won't be because -- and unfortunately, this is too often the case -- he's trying to paint a rosier than reality picture.

History more than suggests that such behavior would be, to say the very least, unusual for Berkshire.

The goal here simply seems to be trying to communicate a number that's as meaningful as possible for investors.

Accounting is very useful but has its limits.

"...you have to know accounting. It's the language of practical business life. It was a very useful thing to deliver to civilization...But you have to know enough about it to understand its limitations—because although accounting is the starting place, it's only a crude approximation. And it's not very hard to understand its limitations." - Charlie Munger at USC Business School in 1994

Confusion, at best, seems the most likely outcome that this new rule is going to produce.

Some of the limitations of accounting are inherent.

Others are not.

Adam

Long position in BRKb established at much lower than recent market prices

Related post:
Buffett: When a Non-Random Rule & Random Fluctuations "Swamp the Truly Important"
---
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.

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.
---
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 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 Positions
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.
---
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.