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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212356  
Subject: Berkshire vs S&P 500 Date: 12/11/2012 11:05 AM
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Warren Buffett's "scorecard", printed at the front of each annual report, shows Berkshire's change in book value per share compared to the total return of the S&P 500. Since 1965, Berkshire's book value per share growth has trailed the S&P 500 total return for only eight years (1967, 1975, 1980, 1999, 2003, 2004, 2009, and 2010). Of course, half of those eight years have come since the turn of the century and five of the eight since 1990, but it should be noted that in cumulative terms Berkshire has continued to leave the S&P 500 in the dust since 2000.

It appears likely that Berkshire will end the year with book value per share in the neighborhood of $112K-$113K which would represent a 12-13% increase over book value at the end of 2011. But this could very well be lower than the S&P 500 total return unless we get a year-end bear market due to fiscal cliff or other concerns. The "scorecard" would likely show a 3-4 point deficit vs. the S&P 500 if the year ended today.

This is of no major relevance when it comes to intrinsic value but expect the media to harp on a "sixth year of under performance over the past fourteen years". Or more likely the focus will be on the "third year of under performance in the past four years".

I suspect such articles will appear after the annual report is released with little attention paid to Berkshire's cumulative advantage over the S&P 500 over reasonable lengths of time and no analysis given to Berkshire's valuation relative to book value.

In other words, more "Buffett has lost his touch" articles should be on tap for late February/early March 2013. With the "1.1x book value" level likely to be in the $123K-$125K range based on year-end book value, we could be in for some interesting times that will test Buffett's willingness to repurchase shares in large quantities.

If we theoretically assume that Berkshire can repurchase 40,000 shares at $125K over the course of 2013, that would represent a $5 billion repurchase program and would reduce share count by 2.4%. If we conservatively assume that intrinsic value is 1.4x year-end book of $112.5K, IV would be $157,500 meaning that we get $32,500 of value for each share repurchased. $32,500 x 40,000 = $1.3 billion of value created by repurchasing 40,000 shares at $125K during 2013.

$1.3 billion may seem like peanuts for Berkshire but it represents around a month of typical normalized after-tax income. So this theoretical repurchase would be like having a 13th month of value generation next year.

Ironically, a repurchase at 1.1x book would be dilutive to book value (any repurchase above 1x book would be) so the preferred metric of performance would be slightly depressed vs. the S&P 500 next year even as intrinsic value per share is rising due to intelligent buybacks. The scorecard has always been an understated measure anyway since IV growth has exceeded BV growth since 1965, and by a large margin since IV was probably equal to BV at best in 1965 and today far exceeds BV.

Anyway, these are just some random thoughts on Berkshire's impending "underperformance" for 2012 and hoping for repurchases in 2013 as a result of a crop of "Buffett is over the hill" reporting next spring...
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Author: bearmarketbully One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196727 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 12:54 PM
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Stock price has been lame, book value growth has been lame, succession is looming, Gates is selling by the truckload day after day, the chairman refuses to pay more than 1.1x book. Stop trying to rationalize that this is a solid investment when it continues to get whooped by just about everything.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196728 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 1:01 PM
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Stock price has been lame, book value growth has been lame, succession is looming, Gates is selling by the truckload day after day, the chairman refuses to pay more than 1.1x book. Stop trying to rationalize that this is a solid investment when it continues to get whooped by just about everything.

That's a great preview of what the media consensus will be if Berkshire "fails to beat the S&P 500 for three of the last four years". Which was my point.

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Author: bearmarketbully One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196738 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 3:10 PM
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Look, I'll be the first one to tell you Berkshire WAS one of the greatest investment stories of all time. As someone pointed out, I erred on the optimistic side about 11 years ago as to what I thought a fair valuation for the business was. You and others are making the same mistake today in thinking it is a dramatically undervalued investment. It could produce 8% to 10% per year but I wouldn't bank on anything higher than that.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196739 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 3:22 PM
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You and others are making the same mistake today in thinking it is a dramatically undervalued investment. It could produce 8% to 10% per year but I wouldn't bank on anything higher than that.

If you are referring to growth in per share book value, I agree with the 8-10% estimate. And that's not bad for a company as large as Berkshire. Where I disagree is with your characterization of Berkshire not being undervalued today. To me it is a very safe 75 cent dollar. If valuation normalizes over the next 3-5 years and we get 8-10% per year in book value per share growth, that is close to a double over five years, or 15% annualized.

If I'm wrong, the shares should still beat the S&P 500 just tracking BV/share growth assuming no contraction in P/B from here. If I'm correct, I double my money in five years. I don't know of that many ways to safely shoot for 15% annualized with my downside being protected against permanent loss of capital. Sure, there are investments that will do better. Many of my investments have done far better than Berkshire over the past few years (thank goodness for that). I won't hesitate to sell Berkshire even at today's valuation if I find something materially better in terms of prospective returns and risk of permanent loss of capital. But the bar is very high.

The fact that I was wrong to not sell in late 2007 (along with many others) is in the past and other than learning an important lesson regarding sell discipline, I will not let the dissapointment of the past five years of history influence what I do from here.

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Author: kelbon Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196747 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 5:21 PM
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I like the idea of giving Buffett as much ammunition as possible in his remaining time with Berkshire. I'm willing to forego immediate benefits of a repurchase at 1.17x book to give him the flexibility to keep piling up the cash. We are probably down to the single digits in terms if the years Buffett will remain as CEO (although maybe not as Chairman). It makes sense to give him some flexibility.

&…

Anyway, these are just some random thoughts on Berkshire's impending "underperformance" for 2012 and hoping for repurchases in 2013 as a result of a crop of "Buffett is over the hill" reporting next spring...

rationalwalk,

Admittedly, I'm cherry picking —from two different threads no less, but the subject in each case is buybacks. You do seem to be contradicting yourself. My guess is that you are, however, on the fence.

You are hoping for repurchases, but, you would like Buffett to have the flexibility to keep piling up cash? Me too. As I've written before it's not an either/or situation, Buffett can pile up cash and repurchase a meaningful amount of Bershire shares. The two things are not mutually exclusive.

I don't think a reasonable argument can be made that stock buybacks at 1.17 x is a bad idea and buybacks at 1.1 x is a great idea; there's just not enough air between the two figures to make that case.

I"m with you as per your second statement. If that's what it takes for meaningful buybacks bring on a (temporary, please) share price contraction in the spring.

kelbon

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196748 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 5:32 PM
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Admittedly, I'm cherry picking —from two different threads no less, but the subject in each case is buybacks. You do seem to be contradicting yourself. My guess is that you are, however, on the fence.

If depends what the alternatives are.

I like the idea of repurchases even at prices substantially higher than 1.1x book value IF the main alternative is to purchase common stock such as DaVita. I don't mean to keep picking on DaVita. But it is not cheap by any measure I can see. And even if it is cheap by some measure that I can't see, is it cheaper than Berkshire at 1.17x book value? With the same or lower level of risk? Very doubtful.

But when I write about leaving Buffett with ammunition, that's exactly what I mean: cold hard cash on the balance sheet waiting for some opportunistic deal that could be better than Berkshire at 1.17x book value. I'm not talking about DaVita. I'm talking about a cheap elephant. We never know when something might come along that requires $30 billion in cash. It could be during the next market rout. If Buffett wants to hold that optionality, by all means I'm more than OK with him doing so. I'm willing to pay the price of zero returns on cash to have the optionality of Buffett doing something BIG in the next several years if that's his rationale for holding the cash.

Ultimately, it is Buffett's call and by setting an explicit P/B ratio he is effectively making repurchases very unlikely (but not impossible) because market participants view that level as a "floor".

I don't think there is a contradiction between being OK with Buffett holding tons of cash and being less than OK with accumulating what looks like pricy common stock in other companies rather than dirt cheap common stock of a company we all know very well.

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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196750 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/11/2012 5:45 PM
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As I've written before it's not an either/or situation, Buffett can pile up cash and repurchase a meaningful amount of Bershire shares. The two things are not mutually exclusive.

I also agree with this statement given the cash generation at Berkshire. There are practical considerations regarding how much could be repurchased at a reasonable valuation, especially once word gets out.

So Berkshire could pile up cash, put in place a meaningful repurchase program, and keep adding to the Combs and Weschler in house "hedge funds". All of this could be done.

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Author: commoncents33 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 196842 of 212356
Subject: Re: Berkshire vs S&P 500 Date: 12/12/2012 1:54 PM
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Ironically, a repurchase at 1.1x book would be dilutive to book value (any repurchase above 1x book would be)


All the more reason for Buffett to get over this feeling like he has to hold his "partners" hands in relation to this buyback stuff.

I wish he would just say, "I plan to buy back shares whenever that seems to be the best way to allocate capital at the moment. I advise you all to carefully consider your determination of Berkshire's value before you sell them...as I would advise for any move you do financially. I know you partners are not idiots, so I'm go to stop treating you as such. Moreover, I am going to stop penalizing loyal (i.e., "staying") shareholders by only buying back stock with ridiculous preconditions".

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