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Author: knighttof3 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 211764  
Subject: Buffett premium Date: 2/23/2013 9:47 PM
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So... if Buffett can hit home runs like the Heinz acquisition (and according to most here, GE, BAC, GS, ...); do we believe that Berkshire will keep getting the same kind of deals after he is gone?
If they won't, does that lower the IV of Berkshire when he is gone?
i.e. IV of BRK =
probability of WEB in charge * IV considering BRK getting favorable deals + (1 - prob WEB in charge) * IV considering BRK as just another conglomerate?
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Author: shaun1776 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199041 of 211764
Subject: Re: Buffett premium Date: 2/23/2013 10:48 PM
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P(CEO=WEB, t=now) = 1

I would bet that BRK will be able to get special deals after WEB because the capability will still be there and people will still call for help.

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Author: downisland Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199042 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 5:19 AM
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Buffett is surely passing on all his wisdom and secrets to others. He is very open about his reasoning in his investment decisions. There seems to be Buffett’s mysterious ability to see what is in plain sight, the ability to "see" the opportunity. You also need the conviction, to believe in what you saw, the ability to commit the resources, the steadiness to stay with the decision through ridicule, all these things with an innate sense of optimism and pragmatism. There will never be another Buffett he is a man of his times but there will be other investing “geniuses”. Whether or not they end up at Berkshire remains to be seen. There is a Buffett premium, the stock will take a hit when he dies, but he has set Berkshire up pretty well to survive and thrive after his demise.

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Author: WuLong Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199043 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 7:08 AM
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does that lower the IV of Berkshire when he is gone?
When you calculate IV, what rate of return do you use? Have you increased it because of WEB?
I gotta tell you that at the current market valuation I have a hard time seeing a "Buffett premium".

Will deals continue? I think the idea of keeping one's powder dry, building up cash and deploying it at opportune moments, elephant hunting, being greedy when others are fearful, and circle of competence are fairly well ingrained. I don't anticipate a lot of change.
I may alter that opinion if I ever see the word "synergy", though.

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Author: karensie Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199044 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 7:29 AM
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"Buffett's Heinz Deal Could Mean Food Industry Shakeup"

"The deal, and the ripples it creates in the sector, was the buzz of the consumer industry's annual get-together in Florida this week, sponsored by the Consumer Analyst Group of New York."

http://www.cnbc.com/id/100486746

Tim

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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: 199045 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 7:30 AM
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Berkshire's intrinsic value is lower without Warren Buffett because the special deals only he can enter into will no longer be available (among other reasons). However, there has not been a Buffett premium in the stock for many years so we are paying nothing for his skills today. To determine the incremental IV attributable to Warren Buffett's remaining years at Berkshire is both impossible and morbid. Such an estimate would require discounting incremental cash flows available from Buffett's skills but not from his successor. To do this you would need some estimate of that additional value, the ability to time those cash flows, an idea of how many more years he has as CEO, and an appropriate discount rate. I prefer to value Berkshire not assuming any Buffett premium. The estimate might be on the low side but it is an academic point at anywhere near current valuations.

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Author: shaun1776 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199051 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 12:06 PM
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"the special deals only he can enter into will no longer be available"

My doubts about this:

Has anyone besides Buffett ever done such wonderful deals? My guess is yes. We know Ajit Jain does amazing deals. I bet Ted Weschler or Todd Combs could make such deals.

As to availability, all that is required is someone with a need and people at BRK able to do the deals. The deals will be available, I'm sure.

I know Buffett is a genius but that doesn't mean the next act is nothing interesting. I'm heavily invested in BRK and, based on current information, I don't see changing that once Buffett is retired.

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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: 199052 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 2:49 PM
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I know Buffett is a genius but that doesn't mean the next act is nothing interesting.

I didn't suggest that. However, it will be less "interesting" with the next CEO. I don't see how it could be otherwise. But remember, we are not paying anything extra today in terms of a Buffett Premium so this is largely an academic/theoretical debate.

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Author: murdockvdk One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199053 of 211764
Subject: Re: Buffett premium Date: 2/24/2013 4:36 PM
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I have a feeling that the next CEO will be approached all the time. I just hope they are able to continue the tradition of the abominable no man (Charlie). Doing little in the deal department and only acting on the fat pitch will probably be very hard for a new CEO to do.

Tom

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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: 199058 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 9:28 AM
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I have a feeling that the next CEO will be approached all the time.

Of course the next CEO will be approached all the time. I'm sure the supply of pitch books will only increase over time. That's obvious given Berkshire's size and capability to do deals.

But that is not the question. The issue is whether Warren Buffett has the capability to make deals that his successor will not be able to make. And the answer to that seems obvious to me. There are two major categories of deals that historically have been made by Buffett that will be much harder for his successor to emulate: (1) Deals of the "stamp of approval" variety in which Berkshire gets very favorable terms in exchange for Buffett's implicit or explicit approval of management and its strategy. These deals have been common since the financial crisis. (2) Deals where the sellers care more about the business than maximizing the proceeds from the sale because of Buffett's reputation to "hold forever" and allow existing management to continue operating the business without micromanagement from headquarters (although capital allocation always has been up to Buffett after acquisitions).

In terms of relative importance to Berkshire's intrinsic value, the first "stamp of approval" category is arguably more important because there are fewer deals that "move the needle" in the second category given Berkshire's current size. It is possible that the next CEO will also have a strong reputation but his stamp of approval is not going to be worth anything remotely close to Buffett's stamp of approval, at least not for a very long time.

The question that started this thread was regarding the Buffett "premium". The answer to this question is that Berkshire's intrinsic value will indeed be lower when Warren Buffett is no longer CEO. However, as long as Berkshire's market value remains far below an estimate of intrinsic value and as long as that estimate of intrinsic value does not bake in any "Buffett Premium", this is really a theoretical exercise. I think it makes much more sense to calculate IV without explicitly factoring in the special skills of Warren Buffett and treating any incremental value created over (hopefully) many more years to come as an added bonus.

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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199059 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 9:50 AM
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Berkshire's intrinsic value will indeed be lower when Warren Buffett is no longer CEO. However, as long as Berkshire's market value remains far below an estimate of intrinsic value and as long as that estimate of intrinsic value does not bake in any "Buffett Premium", this is really a theoretical exercise.


What seems so obvious to you and to me, and to so many other people, i.e. that Buffett's presence adds significantly to Berkshire's intrinsic value, must surely be present in Berkshire's market value too, so it seems odd that you keep saying that there is no Buffett premium. How would you know this?

Consider that Berkshire has two value components: Buffett's ongoing presence and ability to make great decisions and deals, using his good reputation, and the rest of Berkshire, the company that would be left after Buffett leaves the scene. Say for the sake of the argument that you and I agree that the latter is worth $300 billion, and the former is worth, say, $25 billion, giving a total of $325 billion. The current market cap is $250 billion. You can not logically infer from these values that the market gives Buffett's presence no value. It may be that the market also thinks Buffett is worth $25 billion, but believes that the rest of the company is only worth $225 billion.

Regards, DTM

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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: 199060 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 9:54 AM
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What seems so obvious to you and to me, and to so many other people, i.e. that Buffett's presence adds significantly to Berkshire's intrinsic value, must surely be present in Berkshire's market value too, so it seems odd that you keep saying that there is no Buffett premium. How would you know this?

I keep saying this because any way that I look at Berkshire's intrinsic value shows that it is far higher than market value and I'm careful to NOT embed any assumptions regarding Warren Buffett's unique abilities, skills, and reputation in my estimate.

Whether the rest of my assumptions are accurate or not is another question entirely.

And from a purely subjective standpoint, I do not get the impression that investors are paying more for Buffett's presence. If anything, the negative psychology associated with the fact that he won't be around forever and turns 83 in a few months could be depressing the market price. But I have no way of evaluating investor psychology, only intrinsic value.

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Author: Charliedealraker One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199061 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 10:07 AM
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There is no Buffett premium in Berkshire's stock price today.

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Author: WuLong Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199063 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 10:54 AM
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I'd like to make two points.

First, in response to DTM:
What seems so obvious to you and to me, and to so many other people, i.e. that Buffett's presence adds significantly to Berkshire's intrinsic value, must surely be present in Berkshire's market value too, so it seems odd that you keep saying that there is no Buffett premium. How would you know this?
Each person calculates IV for themselves based on their own assumptions. If you calculate IV and assume better than normal returns because of WEB, then you have a Buffett Premium. You should know what that is.
As RW, notes, if you do not include a Buffett Premium, and you find that the Mr Market still offers you a price lower than IV, then either you have made an incorrect assumption elsewhere or the market is offering you an opportunity.

Second, in response to RW:
There are two major categories of deals that historically have been made by Buffett that will be much harder for his successor to emulate: (1) Deals of the "stamp of approval" variety...
(2) Deals where the sellers care more about ... Buffett's reputation to "hold forever" ...

History does not repeat, but it does rhyme. Who did the big "reputation" deals prior to Buffett? J P Morgan (1837-1913). How did things work out after his death? It might be worthwhile to review House of Morgan. In fact, I think I will.
http://www.amazon.com/House-Morgan-American-Banking-Dynasty/...

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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199064 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 11:12 AM
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Each person calculates IV for themselves based on their own assumptions. If you calculate IV and assume better than normal returns because of WEB, then you have a Buffett Premium. You should know what that is.
As RW, notes, if you do not include a Buffett Premium, and you find that the Mr Market still offers you a price lower than IV, then either you have made an incorrect assumption elsewhere or the market is offering you an opportunity.



wu,

I don't dispute that there is a market opportunity, which is why 31% of my portfolio is in Berkshire. And we are probably not arguing about anything substantial. I am just saying that I think Buffett is valuable, RW thinks so too, and I suspect the general market feels the same way, so it seems silly to say that there is no Buffett premium in the current price. I think what RW means is that, even if we gave no value to Buffett's presence, the company would still be worth substantially more than it currently trades at, so that is an added margin of safety, and I agree with this.

So I suppose in a sense you could say that, when you buy Berkshire, you are not paying for a Buffett premium, you get Buffett for free. But I think this is a sloppy way of speaking. You in fact likely are paying a premium for Buffett, you are just getting a very good deal on the rest, so the total overall transaction is still favourable.

If and when Buffett leaves the scene, we will get some idea of what this premium is, but people buying today thinking there is no premium might be in for a nasty surprise when that day comes. They would be better served to expect a drop, as the Buffett premium disappears, but to know that even without Buffett, the company is already undervalued at present market prices, and any substantial drop might be a buying opportunity.

Regards, DTM

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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: 199068 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 12:23 PM
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So I suppose in a sense you could say that, when you buy Berkshire, you are not paying for a Buffett premium, you get Buffett for free. But I think this is a sloppy way of speaking. You in fact likely are paying a premium for Buffett, you are just getting a very good deal on the rest, so the total overall transaction is still favourable.

I don't think it makes much sense to look at things that way. It is impossible to make any estimate of the value the market is placing on Warren Buffett's presence. Is it $10 billion, $20 billion, $50 billion? Pick a number out of a hat ... there is no objective way to make this estimate.

All we CAN do is make an estimate of the value of Berkshire and be careful to not embed any assumptions that rely on Buffett's unique abilities or reputation. If the estimate of intrinsic value is sufficiently higher than market value, it is unimportant to speculate on the value the market attaches to Buffett's presence since a margin of safety exists.

Although estimates of Buffett value in the eyes of the market are necessarily subjective and speculative, I do not believe that the market is attaching any premium to his presence. More likely, the market is discounting Berkshire because of the "uncertainty" associated with succession. The market could be placing a much LOWER value of Berkshire's long term prospects because market participants overestimate the degree to which Buffett is needed for the ongoing value of Berkshire's businesses to persist.

I believe a stock market reaction similar to what took place with Apple after Jobs died is more likely than a persistent drop in Berkshire's quote when Buffett is no longer there. Also, the degree of a drop will depend on how much of a surprise it is and there is no way to know how that plays out.

This is all too speculative (and morbid) of a topic to warrant much attention and it is probably a mistake to discuss it at all. If Berkshire was trading at $225K, it would be a more interesting discussion.

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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199070 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 3:08 PM
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It is impossible to make any estimate of the value the market is placing on Warren Buffett's presence. Is it $10 billion, $20 billion, $50 billion? Pick a number out of a hat ... there is no objective way to make this estimate.


I disagree. Investing is about picking a number that is reasonable, and it is also about assessing how precise that number is. For instance, the number may not be $100 billion, but I think it is highly unlikely that it is zero. My guess would be $20-40 billion. But that is for intrinsic value. It is harder to say how much of a premium the market is assigning for this feature of Berkshire. If you choose not to play this game, fine, but if you say it is impossible to make "any estimate" then it is wrong for you to say that the market is putting it at exactly $0:

I do not believe that the market is attaching any premium to his presence.

And then you say something different: that it is actually negative:

More likely, the market is discounting Berkshire because of the "uncertainty" associated with succession. The market could be placing a much LOWER value of Berkshire's long term prospects because market participants overestimate the degree to which Buffett is needed for the ongoing value of Berkshire's businesses to persist.

I believe a stock market reaction similar to what took place with Apple after Jobs died is more likely than a persistent drop in Berkshire's quote when Buffett is no longer there. Also, the degree of a drop will depend on how much of a surprise it is and there is no way to know how that plays out.


This is getting confusing. In one post, you have said that the market premium is unknowable, that it is negative (a Buffett discount), and that it is positive but transitory. I only agree with the latter. I think if Buffett disappears, the market will express very clearly that that premium was positive, with a sharp drop in market prices. If they drop more than about 10%, I will probably buy more shares; in the longer term, prices are likely to rebound nicely as the market realizes how valuable Berkshire's assets are. But someone thinking there is no premium and expecting prices to hold up will likely be disappointed.

Regards, DTM

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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: 199071 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 3:16 PM
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I think if Buffett disappears, the market will express very clearly that that premium was positive, with a sharp drop in market prices. If they drop more than about 10%, I will probably buy more shares; in the longer term, prices are likely to rebound nicely as the market realizes how valuable Berkshire's assets are.

The market's reaction to Warren Buffett's retirement or death is unknowable until that even occurs and will depend on the timing and circumstances surrounding this event which is also unknowable. Yes, AT THE TIME of the event, we will know precisely the value the market places on Buffett's presence by the difference in Berkshire's market capitalization from the time before the news is known until immediately after the news breaks. However, we cannot know what this reaction will be in advance. At least I don't know how to predict it.

This is getting confusing. In one post, you have said that the market premium is unknowable, that it is negative (a Buffett discount), and that it is positive but transitory. I only agree with the latter.

It gets confusing when one attempts to place precision on something that cannot be calculated or known. I have NO IDEA what the market is thinking and made it clear in my posts that I was MERELY SPECULATING on all of that.

This is a pointless discussion in any case and it is confusing to me as well because even if we could "figure it out", which we can't, it adds zero value to our understanding of Berkshire and provides zero opportunity to benefit based on this "knowledge" through the stock market.

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Author: karensie Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199088 of 211764
Subject: Re: Buffett premium Date: 2/25/2013 7:15 PM
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"Buffett, The Reinvented Warrior, Soldiers On"

"Berkshire holds too much cash, some $40 billion that needs to be put to work. Buffett knows this and will get it done. And, then, he can choose early retirement because his work is done. No successor is needed to oversee properties like the Burlington Northern. They go on like “Ole Man River” with custodial managers in charge."

http://www.forbes.com/sites/martinsosnoff/2013/02/25/buffet-...

Tim

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Author: downisland Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 199094 of 211764
Subject: Re: Buffett premium Date: 2/26/2013 5:53 AM
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Wow Tim, nice article about Warren Buffett's recent accomplishments. So with all these deals, Buffett has been carefully building us a beautiful corporate bond ladder, 5%, 7%, 9%. He must see inflation coming. Anyway, it's like he is balancing his portfolio. Berkshire will have nice steady income coming in from various stable sources.
Did I say Buffett was a genius and we get his services for free? God Bless him.
How much did Apple's stock drop when Jobs died? The same thing will probably happen with Berkshire; a drop and then possibly a ramp up.

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