I think it's fair to say that it's never been easier to minimize frictional costs when it comes to investing in stocks.
Transaction costs these days are, at many brokerages, reasonable or better for stocks and ETFs.
Many fine low cost fund alternatives exist.
Yet what should be plain advantage is often converted into a curse.
In this CNBC appearance back in October, Warren Buffett said that "if you are buying a business to own...the idea of what the market does on any given day, it's just meaningless. What you really have to look at is where you expect the business to be 5 or 10 or 20 years from now."
That's how most will think about businesses that aren't traded daily but, because stocks are quoted so frequently, behavior is changed for the worse.
"...you can look at stock prices minute by minute. And that should be an advantage but many people turn it into a disadvantage."
Buffett wrote something similar earlier this year:
"Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations and accompanying commentators delivering an implied message of 'Don't just sit there, do something.' For these investors, liquidity is transformed from the unqualified benefit it should be to a curse." - From the 2013 Berkshire Hathaway (BRKa) Shareholder Letter
Low frictional costs and the convenience of buying and selling creates a temptation to try and be in and out of certain things at just the right time. What then usually happens is -- as a result of this behavior -- not only is the low frictional cost advantage lost or reduced, unnecessary mistakes get made. Making judgments about how price compares to value is far from easy, but it can be done. Mistakes occur when attempts at timing is added to the equation. Stocks move unexpectedly. Timing when to buy or sell, if not impossible, is difficult to do reliably well. Nor is it necessary. What matters far more is a reasonable appraisal of business value combined with patience and price discipline. Get that right and, in the long run, good things are more likely to happen.
Attempts at timing are more likely to subtract or, at a minimum, distract from what really counts.
So that means the relationship between price and value -- along with opportunity costs -- should primarily dictate action; timing should not.
Part of the problem is that some behave as if the mistakes will only be made by the other participants. Morgan Housel explains this tendency -- what's known as the bias blind spot -- the following way:
"People love reading about flaws people fall for when handling money. But few of them admit, or even realize, that they're reading about themselves."
He adds: "We're blind to our blindness."
Some think they can be in the right stock (or stock fund) at just the right time. What happens instead is they end up just compounding mistakes and incurring unnecessary costs when much less activity would have yielded a vastly better outcome.
Liquidity is much overrated. It can be an advantage, of course, but only up to a point.
"A modest amount of liquidity will service the true needs of a civilization. A large amount of liquidity will bring out the worst in human nature." - Charlie Munger at the 2008 Wesco Financial Shareholder Meeting
The risk that a stock or fund that's been bought might drop substantially gets most of the consideration. Loss aversion contributes greatly to this. Yet the risk that what can be bought sensibly today may at some point not be available at attractive prices -- though not in a predictable manner as far as timing goes -- deserves at least equal attention.
"Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of 'experts,' or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it." - From the 2012 Berkshire Hathaway (BRKa) Shareholder Letter
Those who try to "dance in and out" aren't giving due consideration to the risk of not participating sufficiently. They think they'll be in and out at the right times. Somehow, they'll consistently avoid the downside while capturing the upside. Easier said. If the share price of a lousy business drops that, of course, can be a real problem. On the other hand, for those who feel comfortable judging prospects and value, if the share price of a sound business temporarily drops that's far from a problem for the long-term investor.
More from Buffett's CNBC appearance back in October:
"I don't know how to tell what the markets going to do. I do know how to pick out reasonable businesses to own over a long period of time. And a lot of people do, incidentally."
It's, in fact, an opportunity when prices fall.
"The stocks I was buying yesterday I hope go down today. Put it that way. And I hope they go down next week, and I hope they go down the week after. Nothing is going wrong with the companies."
Effectively judging business economics is paramount when buying an individual stock. For some, that's where a good fund might be more suitable.
Many stocks, these days, have become quite expensive or, at least, not cheap. Though there are always individual exceptions, the time to buy with a substantial margin of safety, at least for now, has mostly passed.
Stocks may continue rising, of course, but those gains increasingly will be driven by speculation instead of increases to intrinsic value. When stocks will become broadly undervalued again, and what the cause will be, is always uncertain. Those who still think bull markets are such a wonderful thing might want to keep these things in mind.
Bull markets make it more difficult to accumulate meaningful positions.
Managing risk and reward just becomes more challenging.
Liquidity should be an advantage. Well, at least it should be for those who tend to buy pieces of sound businesses with the idea that gains will come primarily via long-term intrinsic value increases. Returns should mostly driven by the compounded effect of what the businesses produce -- free cash flow generated at high returns on capital -- for owners over the long haul. Too often, instead, the focus is profiting from near-term price action; the focus is on speculative bets on where prices are going.
So, as a result, what ought to be beneficial liquidity morphs into a curse.
Broadly speaking, outcomes likely improve when there's greater emphasis on what businesses -- whether owned as individual stocks or through a fund -- can produce over a very long time.*
To me, there should be much less emphasis on the wonders of liquidity.
As always, what's sensible to buy at one price becomes less so as prices increase.
So buying at least reasonably well (i.e. a nice discount to conservatively estimated value) in the first place naturally matters a great deal.
Investment results ought to be mostly about long-term increases to per share intrinsic value.
They shouldn't be dependent on selling at speculative prices.
Adam
Long position in BRKb established at much lower than recent market prices
* This naturally also applies to owning a business outright for those inclined and able to do so.
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.
Friday, November 28, 2014
Friday, November 21, 2014
Mr. Market
Roughly 15 years ago, Warren Buffett was asked to speak at Sun Valley not long before the tech bubble burst.*
Here's how an article on CNBC described the reaction:
"Many of the people in the room had amassed vast paper profits from stocks shooting ever higher in the Internet boom. Buffett wasn't playing that game, and some of the younger people in the audience thought he was stuck in the past, unable to understand that this time it would be 'different.'"
His message to the audience was rather straightforward:
"There was no new paradigm..."
Despite his long-term investing track record, many chose to discount or ignore what Buffett was saying back in 1999. There was, in a similar way, a fair amount of skepticism toward his favorable views of stocks during the financial crisis and even more recently (in both cases the market overall was substantially lower than it is now).
It's not that Buffett gets the timing right. In fact, Buffett doesn't try to guess where prices are going or to get the timing right.
"...we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future." - From the 1986 Berkshire Hathaway (BRKa) Shareholder Letter
Predicting, in a reliable manner, where prices will be going is close to impossible and mostly a waste of energy.
Fortunately, being a successful long-term investor doesn't require brilliant timing.
"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.
But I think it is very easy to see what is likely to happen over the long term." - Warren Buffett in Fortune, December 2001
Trying to guess where prices are going in the coming weeks, months, or even over several years ends up best case being a distraction and, more likely, is just a plain foolish thing to do. Investing is (or should be) about how price compares to intrinsic value and how that value is likely to change over a longer time horizon. The emphasis is long-term effects instead of some unusual acuity for jumping in and out at just the right time.
Attempting to time things is a great way to make unnecessary mistakes and incur unnecessary frictional costs. The emphasis on what market prices might do next can end up being a big contributor to unsatisfactory investment outcomes (or worse).
In 1999, it was all about the upside. At the time there was lots of enthusiastic buying of stocks that offered incredibly high risk of permanent capital loss. For too many, those losses indeed became very real and very permanent.
Errors of commission.
In 2008, when the world was a real economic mess -- with compelling and scary headlines everywhere -- buying seemed dangerous and the enthusiasm for stocks all but disappeared. At that time many stocks were unusually undervalued. The risk of permanent capital loss -- especially for those with a long-term investment time horizon -- was rather low. Those missed gains were also very real and very permanent.
Errors of omission.
With the benefit of hindsight, these outcomes may seem obvious, but being correct and decisive in real time while keeping emotions in check just isn't the easiest thing to do.
Errors of commission might be more plain to see but that doesn't mean errors of omission don't matter a whole bunch.
They certainly do.
These days, many stocks have become rather, at the very least, not at all cheap. The risk of permanent loss -- or, at least, subpar returns considering the risks -- is now much higher and getting worse as the rally continues. Margin of safety is, in many cases, way too low for incremental purchases as far as I'm concerned.
Unfortunately, some will make of mistake of getting interested in stocks now after having mostly missed the chance to buy when prices were attractive.
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
Prices may continue to go up, of course. What's already not cheap goes on to become plainly expensive.
There's no way to know this beforehand.
There's also no need to know it.
"Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game." - From the 1987 Berkshire Letter
For those with a long investing time horizon, if prices do continue to rise in the near-term or intermediate-term, it's not a good thing at all.
To me, while there are naturally always individual exceptions, the chance to buy part of a good business at a really substantial discount is, at least until the next bear market or substantial market correction, mostly in the rear-view mirror.
Investing well inevitably involves lots of waiting for a good opportunity to present itself; it inevitably involves lots of preparation. Ultimately, it requires sound business judgment and price discipline. So energy should be spent trying to better understand existing or potential investments. In combination, this makes it possible to act decisively while others -- those caught up in the emotions of the moment and less prepared -- simply cannot.
In the end, how the business performs is what mostly matters while price action does not.
"...Charlie [Munger] and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it." - From the 1987 Berkshire Letter
These days, while most things are far from cheap, it is still nothing like 1999. Back then valuations became completely nonsensical for way too many assets. That doesn't mean right now is a wonderful time to be buying stocks.
Far from it.
Those who think results over the next five years are likely to be as attractive as the past five years are likely to be disappointed. Put another way, the only way for stocks to produce similar results is if prices run far ahead of increases to per share intrinsic value.
That can happen, of course, but I certainly hope it does not. Bubbles do real damage. Some of it subtle; some of it not.
In fact, a good chunk of the returns these past five years have been, in many cases, driven by a closing of the discount to value gap. It's not that per share intrinsic value didn't increase somewhat. For good businesses they did and will continue to do so. It just that the increases were far less than the returns would imply.
In the very long run, as long as the purchase price was reasonable in the first place, what matters is whether a business can increase per share intrinsic value at attractive rate. The bonus returns in recent years resulted from the big discounts to value that existed for a time.
The crisis created those big discounts and, for the most part, they are now gone. So price has caught up -- and in some instances no doubt now has even exceeded -- per share intrinsic value.
So total return expectations -- even for very high quality businesses -- should be more modest going forward (at least until the market goes meaningfully south again).
Otherwise, allow the market to serve.
Adam
Long position in BRKb established at much lower than recent market prices
* The 1999 Sun Valley speech by Buffett that I mentioned above was covered in Chapter 2 of 'The Snowball'. It was also covered in a 1999 Fortune article where he said the following: "Investors in stocks these days are expecting far too much, and I'm going to explain why. That will inevitably set me to talking about the general stock market, a subject I'm usually unwilling to discuss."
---
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.
Here's how an article on CNBC described the reaction:
"Many of the people in the room had amassed vast paper profits from stocks shooting ever higher in the Internet boom. Buffett wasn't playing that game, and some of the younger people in the audience thought he was stuck in the past, unable to understand that this time it would be 'different.'"
His message to the audience was rather straightforward:
"There was no new paradigm..."
Despite his long-term investing track record, many chose to discount or ignore what Buffett was saying back in 1999. There was, in a similar way, a fair amount of skepticism toward his favorable views of stocks during the financial crisis and even more recently (in both cases the market overall was substantially lower than it is now).
It's not that Buffett gets the timing right. In fact, Buffett doesn't try to guess where prices are going or to get the timing right.
"...we have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future." - From the 1986 Berkshire Hathaway (BRKa) Shareholder Letter
Predicting, in a reliable manner, where prices will be going is close to impossible and mostly a waste of energy.
Fortunately, being a successful long-term investor doesn't require brilliant timing.
"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.
But I think it is very easy to see what is likely to happen over the long term." - Warren Buffett in Fortune, December 2001
Trying to guess where prices are going in the coming weeks, months, or even over several years ends up best case being a distraction and, more likely, is just a plain foolish thing to do. Investing is (or should be) about how price compares to intrinsic value and how that value is likely to change over a longer time horizon. The emphasis is long-term effects instead of some unusual acuity for jumping in and out at just the right time.
Attempting to time things is a great way to make unnecessary mistakes and incur unnecessary frictional costs. The emphasis on what market prices might do next can end up being a big contributor to unsatisfactory investment outcomes (or worse).
In 1999, it was all about the upside. At the time there was lots of enthusiastic buying of stocks that offered incredibly high risk of permanent capital loss. For too many, those losses indeed became very real and very permanent.
Errors of commission.
In 2008, when the world was a real economic mess -- with compelling and scary headlines everywhere -- buying seemed dangerous and the enthusiasm for stocks all but disappeared. At that time many stocks were unusually undervalued. The risk of permanent capital loss -- especially for those with a long-term investment time horizon -- was rather low. Those missed gains were also very real and very permanent.
Errors of omission.
With the benefit of hindsight, these outcomes may seem obvious, but being correct and decisive in real time while keeping emotions in check just isn't the easiest thing to do.
Errors of commission might be more plain to see but that doesn't mean errors of omission don't matter a whole bunch.
They certainly do.
These days, many stocks have become rather, at the very least, not at all cheap. The risk of permanent loss -- or, at least, subpar returns considering the risks -- is now much higher and getting worse as the rally continues. Margin of safety is, in many cases, way too low for incremental purchases as far as I'm concerned.
Unfortunately, some will make of mistake of getting interested in stocks now after having mostly missed the chance to buy when prices were attractive.
"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett
There's no way to know this beforehand.
There's also no need to know it.
"Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game." - From the 1987 Berkshire Letter
For those with a long investing time horizon, if prices do continue to rise in the near-term or intermediate-term, it's not a good thing at all.
To me, while there are naturally always individual exceptions, the chance to buy part of a good business at a really substantial discount is, at least until the next bear market or substantial market correction, mostly in the rear-view mirror.
Investing well inevitably involves lots of waiting for a good opportunity to present itself; it inevitably involves lots of preparation. Ultimately, it requires sound business judgment and price discipline. So energy should be spent trying to better understand existing or potential investments. In combination, this makes it possible to act decisively while others -- those caught up in the emotions of the moment and less prepared -- simply cannot.
In the end, how the business performs is what mostly matters while price action does not.
"...Charlie [Munger] and I let our marketable equities tell us by their operating results - not by their daily, or even yearly, price quotations - whether our investments are successful. The market may ignore business success for a while, but eventually will confirm it." - From the 1987 Berkshire Letter
These days, while most things are far from cheap, it is still nothing like 1999. Back then valuations became completely nonsensical for way too many assets. That doesn't mean right now is a wonderful time to be buying stocks.
Far from it.
Those who think results over the next five years are likely to be as attractive as the past five years are likely to be disappointed. Put another way, the only way for stocks to produce similar results is if prices run far ahead of increases to per share intrinsic value.
That can happen, of course, but I certainly hope it does not. Bubbles do real damage. Some of it subtle; some of it not.
In fact, a good chunk of the returns these past five years have been, in many cases, driven by a closing of the discount to value gap. It's not that per share intrinsic value didn't increase somewhat. For good businesses they did and will continue to do so. It just that the increases were far less than the returns would imply.
In the very long run, as long as the purchase price was reasonable in the first place, what matters is whether a business can increase per share intrinsic value at attractive rate. The bonus returns in recent years resulted from the big discounts to value that existed for a time.
The crisis created those big discounts and, for the most part, they are now gone. So price has caught up -- and in some instances no doubt now has even exceeded -- per share intrinsic value.
So total return expectations -- even for very high quality businesses -- should be more modest going forward (at least until the market goes meaningfully south again).
Otherwise, allow the market to serve.
Adam
Long position in BRKb established at much lower than recent market prices
* The 1999 Sun Valley speech by Buffett that I mentioned above was covered in Chapter 2 of 'The Snowball'. It was also covered in a 1999 Fortune article where he said the following: "Investors in stocks these days are expecting far too much, and I'm going to explain why. That will inevitably set me to talking about the general stock market, a subject I'm usually unwilling to discuss."
---
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, November 17, 2014
Berkshire Hathaway 3rd Quarter 2014 13F-HR
The Berkshire Hathaway (BRKa) 3rd Quarter 13F-HR was released on Friday. 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 2nd Quarter 13F-HR.)
There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*
New Positions
Liberty Media (LMCK): 8.0 million shares worth $ 376 million**
Express Scripts (ESRX): 449 thousand shares worth $ 31.7 million
Added to Existing Positions
IBM (IBM): 304 thousand shares worth $ 57.7 million, total stake $ 13.4 billion
Wal-Mart (WMT): 1.59 million shares worth $ 121 million, total stake $ 4.62 billion
DirecTV (DTV): 6.53 million shares worth $ 565 million, total stake $ 2.60 billion
General Motors (GM): 7.04 million shares worth $ 225 million, total stake $ 1.28 billion
Charter (CHTR): 2.64 million shares worth $ 400 million, total stake $ 749 million
Suncor (SU): 2.02 million shares worth $ 73.0 million, total stake $ 668 million
Viacom (VIAB): 101 thousand shares worth $ 7.77 million, total stake $ 593 million
Precision Castparts (PCP): 206 thousand shares worth $ 48.7 million, total stake $ 493 million
Visa (V): 347 thousand shares worth $ 73.9 million, total stake $ 458 million
Liberty Global (LBTYA): 534 thousand shares worth $ 22.7 million, total stake $ 442 million
Mastercard (MA): 665 thousand shares worth $ 49.2 million, total stake $ 349 million
Not all of the activity has been disclosed. In the 3rd quarter of 2014, apparently some activity was kept confidential. Berkshire's latest filing says: "Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission."
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.
Reduced Positions
Bank of New York Mellon (BK): 1.28 million shares worth $ 49.4 million, total stake $ 905 million
Phillips 66 (PSX): 293 thousand shares worth $ 23.9 million, total stake $ 504 million
National Oilwell Varco (NOV): 920 thousand shares worth $ 70.0 million, total stake $ 486 million
ConocoPhillips (COP): 883 thousand shares worth $ 67.6 million, total stake $ 36.1 million
Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio. These days, any changes involving smaller positions will generally be the work of the two portfolio managers.
(Though some of the holdings they're responsible for have become more substantial over time.)
Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer and, to a lesser extent, technology stocks (mostly IBM).
1. Wells Fargo (WFC) = $ 24.0 billion
2. Coca-Cola (KO) = $ 17.1 billion
3. IBM (IBM) = $ 13.4 billion
4. American Express (AXP) = $ 13.3 billion
5. Wal-Mart (WMT) = $ 4.62 billion
As of the end of the quarter, Berkshire's Wal-Mart position was only somewhat larger than its Procter & Gamble (PG) position. Well, that's going to change with Berkshire recently agreeing to acquire Duracell from P&G in exchange for Berkshire's ownership stake in the consumer goods company.
(P&G will also contribute some cash.)
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 owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***
According to their latest filing, the combined portfolio value (equities, cash, bonds, and other investments) is ~ $ 240 billion including the investment in Heinz.
(Heinz is separately on the books for just under $ 12 billion, but that book value is likely to diverge greatly from economic value over time.)
The portfolio, of course, excludes all the operating businesses that Berkshire owns outright with, according to the latest letter, a bit more than 330,000 employees combined.
Here are some examples of the 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, Oriental Trading Company, as well as 50% of Heinz.
(Among others.)
In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.
See page 111 of the annual report for a full list of Berkshire's businesses.
Adam
Long positions in BRKb, WFC, KO, AXP, USB, WMT, PG, DTV, COP, and PSX established at much lower than recent market prices. Also, small long position in IBM established at slightly higher than recent market prices.
* All values shown are based upon the last trading day of the 3rd quarter.
** Resulting from Liberty Media's stock split.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares 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-HR is if Berkshire happens to buy the ADR. Investments in things like the preferred shares (and, where applicable, related warrants) are also not included in the 13F-HR. The same is true for the Heinz common shares (i.e. not just the Heinz preferred shares).
---
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.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 2nd Quarter 13F-HR.)
There was plenty of buying and selling during the quarter. Here's a quick summary of the changes:*
New Positions
Liberty Media (LMCK): 8.0 million shares worth $ 376 million**
Express Scripts (ESRX): 449 thousand shares worth $ 31.7 million
Added to Existing Positions
IBM (IBM): 304 thousand shares worth $ 57.7 million, total stake $ 13.4 billion
Wal-Mart (WMT): 1.59 million shares worth $ 121 million, total stake $ 4.62 billion
DirecTV (DTV): 6.53 million shares worth $ 565 million, total stake $ 2.60 billion
General Motors (GM): 7.04 million shares worth $ 225 million, total stake $ 1.28 billion
Charter (CHTR): 2.64 million shares worth $ 400 million, total stake $ 749 million
Suncor (SU): 2.02 million shares worth $ 73.0 million, total stake $ 668 million
Viacom (VIAB): 101 thousand shares worth $ 7.77 million, total stake $ 593 million
Precision Castparts (PCP): 206 thousand shares worth $ 48.7 million, total stake $ 493 million
Visa (V): 347 thousand shares worth $ 73.9 million, total stake $ 458 million
Liberty Global (LBTYA): 534 thousand shares worth $ 22.7 million, total stake $ 442 million
Mastercard (MA): 665 thousand shares worth $ 49.2 million, total stake $ 349 million
Not all of the activity has been disclosed. In the 3rd quarter of 2014, apparently some activity was kept confidential. Berkshire's latest filing says: "Confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission."
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.
Bank of New York Mellon (BK): 1.28 million shares worth $ 49.4 million, total stake $ 905 million
Phillips 66 (PSX): 293 thousand shares worth $ 23.9 million, total stake $ 504 million
National Oilwell Varco (NOV): 920 thousand shares worth $ 70.0 million, total stake $ 486 million
ConocoPhillips (COP): 883 thousand shares worth $ 67.6 million, total stake $ 36.1 million
Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio. These days, any changes involving smaller positions will generally be the work of the two portfolio managers.
(Though some of the holdings they're responsible for have become more substantial over time.)
Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer and, to a lesser extent, technology stocks (mostly IBM).
1. Wells Fargo (WFC) = $ 24.0 billion
2. Coca-Cola (KO) = $ 17.1 billion
3. IBM (IBM) = $ 13.4 billion
4. American Express (AXP) = $ 13.3 billion
5. Wal-Mart (WMT) = $ 4.62 billion
As of the end of the quarter, Berkshire's Wal-Mart position was only somewhat larger than its Procter & Gamble (PG) position. Well, that's going to change with Berkshire recently agreeing to acquire Duracell from P&G in exchange for Berkshire's ownership stake in the consumer goods company.
(P&G will also contribute some cash.)
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 owns equity securities listed on exchanges outside the U.S., plus cash and cash equivalents, fixed income, and other investments.***
According to their latest filing, the combined portfolio value (equities, cash, bonds, and other investments) is ~ $ 240 billion including the investment in Heinz.
(Heinz is separately on the books for just under $ 12 billion, but that book value is likely to diverge greatly from economic value over time.)
Here are some examples of the 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, Oriental Trading Company, as well as 50% of Heinz.
(Among others.)
In addition, the insurance businesses (BH Reinsurance, General Re, GEICO etc.) owned by Berkshire have naturally provided plenty of "float" for their investments over time and continue to do so.
See page 111 of the annual report for a full list of Berkshire's businesses.
Adam
Long positions in BRKb, WFC, KO, AXP, USB, WMT, PG, DTV, COP, and PSX established at much lower than recent market prices. Also, small long position in IBM established at slightly higher than recent market prices.
* All values shown are based upon the last trading day of the 3rd quarter.
** Resulting from Liberty Media's stock split.
*** Berkshire Hathaway's holdings of ADRs are included in the 13F-HR. What is not included are the shares listed on exchanges outside the United States. The status of those shares 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-HR is if Berkshire happens to buy the ADR. Investments in things like the preferred shares (and, where applicable, related warrants) are also not included in the 13F-HR. The same is true for the Heinz common shares (i.e. not just the Heinz preferred shares).
---
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.
Friday, November 14, 2014
Berkshire Agrees To Acquire Duracell
Procter & Gamble (PG) is in the process of shedding brands to simplify its business and focus more on its core products.
Well, consistent with that objective, Berkshire Hathaway (BRKa) yesterday agreed to acquire Duracell from the company. Berkshire will acquire Duracell, in part, by exchanging the P&G shares that Berkshire currently owns for the battery business.
P&G will also contribute some cash.
According to P&G's filing:
Berkshire's stock ownership is currently valued at approximately $4.7 billion. P&G said it expects to contribute approximately $1.8 billion in cash to the Duracell Company in the pre-transaction recapitalization.
P&G said the transaction maximizes the after-tax value of the Duracell business and is tax efficient for P&G. The value received for Duracell in the exchange is approximately 7-times fiscal year 2014 adjusted EBITDA. This equates to a cash sale valued at approximately 9-times adjusted EBITDA.
Essentially, Buffett is paying 7-times this EBITDA for Duracell but, for P&G, this is equivalent to selling the company for 9-times EBITDA to a cash buyer. So, based upon the numbers available, Berkshire is paying net $ 2.9 billion ($ 4.7 billion - $ 1.8 billion) for a bit more than $ 400 million in EBITDA.
Well, if that's the case, then pre-tax operating earnings of $ 250-300 million or so doesn't seem like a stretch.
As it stands, the cost basis of Berkshire's current stake in P&G is $ 336 million.*
Simply put, that $ 336 million initial investment has resulted in current annual operating earnings that's not much less than the initial amount paid for the shares.
(If the current earning power remains at all durable, that's certainly quite an earnings yield compared to the original investment.)
Plus $ 1.8 billion in cash.
Plus the very nice and growing stream of dividends that P&G has paid to Berkshire over the years.
(Some of those dividends no doubt have helped fund other investments during that time.)
All accomplished very efficiently as far as taxes go.
Berkshire's ownership of P&G's stock began in 2005 but is directly related to a much earlier investment in Gillette. Initially, Berkshire invested $ 600 million in Gillette convertible preferred shares back in 1989. That original investment became shares of Gillette common stock in 1991. Then Berkshire became a shareholder of P&G in 2005 when P&G purchased Gillette.
In the recent past, Berkshire has done some similar deals that involved the exchange of stock to acquire business assets in a tax efficient manner.
Adam
Long positions in BRKb and PG established at much lower than recent market prices
* Before selling some shares both during and after the financial crisis, Berkshire previously had a higher cost basis in P&G. In fact, as recently as 2007, Berkshire's cost basis was as high as ~ $ 1 billion.
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.
Well, consistent with that objective, Berkshire Hathaway (BRKa) yesterday agreed to acquire Duracell from the company. Berkshire will acquire Duracell, in part, by exchanging the P&G shares that Berkshire currently owns for the battery business.
P&G will also contribute some cash.
According to P&G's filing:
Berkshire's stock ownership is currently valued at approximately $4.7 billion. P&G said it expects to contribute approximately $1.8 billion in cash to the Duracell Company in the pre-transaction recapitalization.
P&G said the transaction maximizes the after-tax value of the Duracell business and is tax efficient for P&G. The value received for Duracell in the exchange is approximately 7-times fiscal year 2014 adjusted EBITDA. This equates to a cash sale valued at approximately 9-times adjusted EBITDA.
Essentially, Buffett is paying 7-times this EBITDA for Duracell but, for P&G, this is equivalent to selling the company for 9-times EBITDA to a cash buyer. So, based upon the numbers available, Berkshire is paying net $ 2.9 billion ($ 4.7 billion - $ 1.8 billion) for a bit more than $ 400 million in EBITDA.
Well, if that's the case, then pre-tax operating earnings of $ 250-300 million or so doesn't seem like a stretch.
As it stands, the cost basis of Berkshire's current stake in P&G is $ 336 million.*
(If the current earning power remains at all durable, that's certainly quite an earnings yield compared to the original investment.)
Plus the very nice and growing stream of dividends that P&G has paid to Berkshire over the years.
(Some of those dividends no doubt have helped fund other investments during that time.)
All accomplished very efficiently as far as taxes go.
Berkshire's ownership of P&G's stock began in 2005 but is directly related to a much earlier investment in Gillette. Initially, Berkshire invested $ 600 million in Gillette convertible preferred shares back in 1989. That original investment became shares of Gillette common stock in 1991. Then Berkshire became a shareholder of P&G in 2005 when P&G purchased Gillette.
In the recent past, Berkshire has done some similar deals that involved the exchange of stock to acquire business assets in a tax efficient manner.
Adam
Long positions in BRKb and PG established at much lower than recent market prices
* Before selling some shares both during and after the financial crisis, Berkshire previously had a higher cost basis in P&G. In fact, as recently as 2007, Berkshire's cost basis was as high as ~ $ 1 billion.
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.
Friday, November 7, 2014
The Seventh Best Idea
From this Warren Buffett speech at the University of Florida:
"If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don't diversify personally."
Clearly, this view on diversification is far from conventional. Charlie Munger -- and this is not exactly a surprise -- once said something rather similar in a speech to the Foundation Financial Officers Group:*
"I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken."
Identifying what, over the long run, will end up being six wonderful businesses to own then waiting patiently until the shares can be bought at attractive prices may not be impossible to do, but it is easier said than done. Unwarranted confidence in a concentrated portfolio is, at the very least, simply a recipe for big and expensive mistakes.
Many will find they do need to have broader diversification or that they are better off in an index fund. That's, of course, necessarily unique for each investor. Some of this will come down to one's own realistically assessed capabilities, but much else comes down to temperament and other psychological factors.
Beyond the requisite skills and background, patience followed by decisiveness when the opportunity presents itself is needed. Here's Munger's take from the 2004 Wesco shareholder meeting:
"It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor."
and
"Success means being very patient, but aggressive when it's time."
Now, the fact is that Buffett's current equity portfolio has far more than six stocks in it. This would appear at odds with Buffett says above, but the top 5 or 6 stocks continue to make up a substantial proportion of the portfolio.
Among the reasons for the large number of stocks in the current portfolio, is that many of the smaller positions are the work of his two investment managers, Todd Combs and Ted Weschler.
Then there's just the sheer scale of what Buffett has to manage these days compared to earlier times.**
Some commentators, when asked, seem willing to opine on just about any equity investment alternative. Well, maybe someone can actually understand such a wide variety of businesses and industries with sufficient depth, just consider me just a little bit skeptical of this. I mean, who can properly understand nearly everything in the equity investment universe? Focus is needed. Otherwise, brilliant outcomes in terms of risk and reward just don't seem likely.
Lots of breadth might mean too little depth. In other words, knowing just enough to be dangerous about many different stocks. Eventually, this way of operating seems almost certain to take an investor far outside their own necessarily unique circle of competence. That's a great way to get spread too thin and make unnecessary mistakes.
"To kill an error is as good a service as, and sometimes even better than, the establishing of a new truth or fact." - Charles Darwin
"...Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error." - Charlie Munger in Stanford Lawyer
My own favorite stocks may or may not prove to be great long-term investments but, to me, essentially none of them are selling at attractive enough prices to buy these days. As usual, the buying needed to happen in a decisive manner when it felt most uncomfortable. That, of course, was during the financial crisis and, well, even as recently as a few years ago. Some very good assets were properly cheap three to five years ago even if wild near-term price action -- especially during the height of the crisis -- had to be tolerated.***
(What appeared rather cheap often temporarily became cheaper. This was the case even among the very highest quality businesses.)
Will stocks rise or fall from here? No idea. I never try to figure out such things. The focus, instead, is on how price compares to estimated intrinsic value. It's never about trying to guess how stock prices might fluctuate. That sort of thing is a total waste of energy.
In any case, at least for now, the balance of risk and reward has changed dramatically for the worse. Prices would need to meaningfully fall -- or, alternatively, per share intrinsic values would need to increase over time without much change in price -- for the balance of risk and reward to improve.
When stocks do not sell at a plain discount to a conservative estimate of value, it's time to be patient. It's time to keep chipping away at the ongoing process of understanding what I own -- and what I might someday like to own -- in a better way. It's time to make sure I'm prepared to act decisively if/when they become cheap again.
This doesn't necessarily mean all my favorite investments are overvalued.
This doesn't necessarily mean I'll be selling; attempting to frequently buy and sell is a recipe for unnecessary mistakes and frictional costs.
This does mean, at the very least, that the margin of safety is currently insufficient for me to be willing to make incremental purchases.
Adam
Related posts:
Portfolio Theory & Diversification
Buffett on Diversification
Munger & Buffett on Diversification - Part II
Munger & Buffett on Diversification
* Here are some additional examples of Munger's view of diversification:
"We believe almost all good investments will involve relatively low diversification." - From the 2004 Wesco meeting
"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification." - From an interview in Kiplinger's
** Some other reasons it can be challenging to have a concentrated portfolio include the fact that a best idea may not be available at a attractive enough market price, insufficient funds are available when the market price is right, and, well, pure indecision (i.e. an error of omission).
*** The key thing was recognizing when the drop in price was far greater than the reduction in per share intrinsic value. Well, at least what intrinsic value would look like in a more normalized environment. It's worth noting that the very good businesses can actually increase their per share intrinsic value during a crisis (even if near-term market price action would temporarily seem to indicate otherwise).
---
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.
"If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don't diversify personally."
Clearly, this view on diversification is far from conventional. Charlie Munger -- and this is not exactly a surprise -- once said something rather similar in a speech to the Foundation Financial Officers Group:*
"I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken."
Identifying what, over the long run, will end up being six wonderful businesses to own then waiting patiently until the shares can be bought at attractive prices may not be impossible to do, but it is easier said than done. Unwarranted confidence in a concentrated portfolio is, at the very least, simply a recipe for big and expensive mistakes.
Many will find they do need to have broader diversification or that they are better off in an index fund. That's, of course, necessarily unique for each investor. Some of this will come down to one's own realistically assessed capabilities, but much else comes down to temperament and other psychological factors.
Beyond the requisite skills and background, patience followed by decisiveness when the opportunity presents itself is needed. Here's Munger's take from the 2004 Wesco shareholder meeting:
"It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor."
and
"Success means being very patient, but aggressive when it's time."
Now, the fact is that Buffett's current equity portfolio has far more than six stocks in it. This would appear at odds with Buffett says above, but the top 5 or 6 stocks continue to make up a substantial proportion of the portfolio.
Among the reasons for the large number of stocks in the current portfolio, is that many of the smaller positions are the work of his two investment managers, Todd Combs and Ted Weschler.
Then there's just the sheer scale of what Buffett has to manage these days compared to earlier times.**
Some commentators, when asked, seem willing to opine on just about any equity investment alternative. Well, maybe someone can actually understand such a wide variety of businesses and industries with sufficient depth, just consider me just a little bit skeptical of this. I mean, who can properly understand nearly everything in the equity investment universe? Focus is needed. Otherwise, brilliant outcomes in terms of risk and reward just don't seem likely.
Lots of breadth might mean too little depth. In other words, knowing just enough to be dangerous about many different stocks. Eventually, this way of operating seems almost certain to take an investor far outside their own necessarily unique circle of competence. That's a great way to get spread too thin and make unnecessary mistakes.
"To kill an error is as good a service as, and sometimes even better than, the establishing of a new truth or fact." - Charles Darwin
"...Warren and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error." - Charlie Munger in Stanford Lawyer
My own favorite stocks may or may not prove to be great long-term investments but, to me, essentially none of them are selling at attractive enough prices to buy these days. As usual, the buying needed to happen in a decisive manner when it felt most uncomfortable. That, of course, was during the financial crisis and, well, even as recently as a few years ago. Some very good assets were properly cheap three to five years ago even if wild near-term price action -- especially during the height of the crisis -- had to be tolerated.***
(What appeared rather cheap often temporarily became cheaper. This was the case even among the very highest quality businesses.)
Will stocks rise or fall from here? No idea. I never try to figure out such things. The focus, instead, is on how price compares to estimated intrinsic value. It's never about trying to guess how stock prices might fluctuate. That sort of thing is a total waste of energy.
In any case, at least for now, the balance of risk and reward has changed dramatically for the worse. Prices would need to meaningfully fall -- or, alternatively, per share intrinsic values would need to increase over time without much change in price -- for the balance of risk and reward to improve.
When stocks do not sell at a plain discount to a conservative estimate of value, it's time to be patient. It's time to keep chipping away at the ongoing process of understanding what I own -- and what I might someday like to own -- in a better way. It's time to make sure I'm prepared to act decisively if/when they become cheap again.
This doesn't necessarily mean all my favorite investments are overvalued.
This doesn't necessarily mean I'll be selling; attempting to frequently buy and sell is a recipe for unnecessary mistakes and frictional costs.
This does mean, at the very least, that the margin of safety is currently insufficient for me to be willing to make incremental purchases.
Adam
Related posts:
Portfolio Theory & Diversification
Buffett on Diversification
Munger & Buffett on Diversification - Part II
Munger & Buffett on Diversification
* Here are some additional examples of Munger's view of diversification:
"We believe almost all good investments will involve relatively low diversification." - From the 2004 Wesco meeting
"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification." - From an interview in Kiplinger's
** Some other reasons it can be challenging to have a concentrated portfolio include the fact that a best idea may not be available at a attractive enough market price, insufficient funds are available when the market price is right, and, well, pure indecision (i.e. an error of omission).
*** The key thing was recognizing when the drop in price was far greater than the reduction in per share intrinsic value. Well, at least what intrinsic value would look like in a more normalized environment. It's worth noting that the very good businesses can actually increase their per share intrinsic value during a crisis (even if near-term market price action would temporarily seem to indicate otherwise).
---
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.
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