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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 211764  
Subject: How I've done investing in Berkshire Date: 11/5/2012 7:48 AM
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Not sure if anybody is interested, but here's a retrospective.

I build the bulk of my position in Berkshire during August and September 2001, 11.2 years ago.
The "most recent quarterly book value per share" has grown 10.0% per year since then.
SPY total return without taxes has grown 5.0%/year, exactly half.
Had I actually bought SPY I'd have managed about 4.4% because of 30% tax on dividends.

The price of Berkshire, alas, has grown at only 6.5%/year
because of the valuation compression: price/book has shrunk from 1.67x to 1.17x.
At least that process appears to be over—3.5% a year drag is, well, a drag.
About 91% of the time since the buckback authorization the market price
has been above 1.13 times the most recent known quarterly book value,
so that seems to be the new "squishy floor" most of the time.
(that's about $126250 right now—downside seems pretty limited).

Here are the figures in inflation-adjusted terms:
BRK Book +7.4%/year
BRK Price +4.0%/year
S&P index +0.7%/year
SPY total return +2.5%/year
SPY total return after dividend tax +2.0%/year

My actual returns have been a few percent better because of buying on dips and
selling on strength, as well as collecting option premiums in recent years.
It works, though I have to admit it's a lot of work.

Returns have definitely been less than I had hoped when I allocated the capital.
But of course the starting date was mildly overvalued and the ending
date is substantially undervalued so there should be a compensating
period of rebound price outperformance coming at some point.
If price/book were what it was when I bought, the price would be $186700 now.
If you count the modest number of out-of-the-money call options I've
bought as "high quality lottery tickets", my share count is bigger now
than it has ever been, though not in terms of capital allocated.

The good news is that time is the friend of the good company.
For those who like B shares, a number to stick in your head: fair value is probably
rising 80 cents a month on trend and will manage at least that indefinitely.
Since the period of multiple compression is over, the price should manage at least that too.
That's 11% of today's price, though it will shrink as a percentage as
the price and value rise. Maybe a buck a month in 6 or 7 years?

Jim
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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195492 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 8:03 AM
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thanks jim good post. I know most of you dont care, because buffett and munger say it isn't material, but they are wrong, again. Since the 2006 foundation letters the FLOAT in the Bs has gone from 700 million shs or so to 1.1 billion shares. supply and demand matter even in brkville bro, trust me !! Foundation sales continue to add about 25 million shs or so to the float yearly. It takes over 2 BILLION in new net buying to absorb those sales , yearly. If not for the split and authorized buyback press release gimmick brkb would be trading at bookish, end of story. Have a grand day.

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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: 195495 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 9:09 AM
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If price/book were what it was when I bought, the price would be $186700 now.

For the shares I currently own, purchased from February 2000 to September 2006, Berkshire would have to trade at about $171,500 for my actual returns to equal the rise in book value over the time of my ownership. So that would be a P/B of around 1.53 which is also close to the 13 year average and right at a conservative price implied by the two column method.

I track book value and market value growth for each open position. Annualized book value growth has ranged from 8.8% to 10.8%. Annualized market value growth has ranged from 5% to 9.4%. Only one of my open positions - the one perfectly timed on March 9, 2000 at a P/B of 1.1 - has a lower P/B than today's P/B ratio of 1.17.

What has been a headwind for returns will become a tailwind sooner or later but obviously these results are disappointing.

One silver lining is that even if book value growth remains about the same at 8-10% over the next decade and P/B remains constant, returns going forward will approximate BV growth. A contraction of P/B similar to what we have seen over the past several years is very unlikely. I know that some Berkshire shareholders point to Loews and say that we could trade at a persistent discount to book but there is simply no comparison between the quality of the underlying businesses at Loews and Berkshire - not even close.

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195498 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 9:30 AM
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<< What has been a headwind for returns will become a tailwind sooner or later but obviously these results are disappointing.
>>

with all due respect, thats VERY wrong, but good luck with it, unless buffett changes his thinking, which takes time, lots of time and patience, trust me.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195517 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 10:39 AM
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One silver lining is that even if book value growth remains about the same at 8-10%
over the next decade and P/B remains constant, returns going forward will approximate BV growth.


Not only that, but it should be relatively smooth.
Except for the occasionally extraordinary movement, there is really only
upside variation in the valuation multiple from here.
We're only about 2% above the squishy floor now and that floor will mostly ratchet upwards.

Obviously the price will tank for a while on the next market crash,
and book itself may have the occasional temporary dip, but I don't
imagine it will spend large amounts of time below 1.13x.

(couldn't resist, bought 2014 calls on today's little nonsensical dip.
Not overpaying too badly for the time premium, breakeven is lower than the market price last Monday)

Jim

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Author: VUCommodore Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195527 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 1:18 PM
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Jim --

I sold (to close) some $75 2014 calls today, maybe I sold to you!

I am taking the leverage out of my portfolio ahead of the election. I try to stay in the shares themselves most of the time, but let myself get levered up a bit for the last year or so. I will probably regret the trade, but had to make a risk-management decision to lock in the gains. If you bought my calls, I sincerly hope you get to exercise them considerably higher than $89.

VUC

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Author: EVBigMacMeal One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195531 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 3:32 PM
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Jim,

As Oscar Wilde said -

"One can be a Berkshire shareholder for years sometimes without much of a return at all, and then suddenly all the return comes crowding into one single hour."

We have hit IV before and will again. As you know.

Regards
EVM

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195534 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 4:18 PM
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We have hit IV before and will again. As you know.

Well, yes, but only because I have the Battlestar Galactica boxed set of DVDs.

Jim

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Author: Mozzman Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195536 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/5/2012 7:58 PM
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only because I have the Battlestar Galactica boxed set of DVDs.

Thats a great set. I hear you get a free 6 with the collector's edition.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195544 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 1:43 AM
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Returns have definitely been less than I had hoped when I allocated the capital.
But of course the starting date was mildly overvalued and the ending
date is substantially undervalued so there should be a compensating
period of rebound price outperformance coming at some point


I have read a couple of your posts on Berkshire's valuation over the years, and I can't recall you ever putting a value on the "Buffet premium".
Obviously, Berkshire with Buffet is worth more than Berkshire without Buffet.
Since Buffet has a finite lifespan, he needs to be depreciated over time.
Does the multiple compression between 2001 and 2012 perhaps simply represent a the slow depreciation of the Buffet premium?

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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: 195545 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 5:46 AM
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The good news is that time is the friend of the good company.


Not to pick nits, but Buffett's quote is that time is the friend of the wonderful company.

I guess the question is whether or not a roughly 10% annual increase in intrinsic value (while retaining all earnings) is good for you, compared to what you could reasonably expect otherwise.

For the "average" investor over the years you discuss, the answer is yes. I suspect for you in particular, the answer would be no. Antoher way of saying that is, why use the S/P 500 as your measure or standard of opportunity cost, if you historically beat the index.

You do historically beat it, do you not?

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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: 195546 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 5:56 AM
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I have read a couple of your posts on Berkshire's valuation over the years, and I can't recall you ever putting a value on the "Buffet premium".
Obviously, Berkshire with Buffet is worth more than Berkshire without Buffet.
Since Buffet has a finite lifespan, he needs to be depreciated over time.
Does the multiple compression between 2001 and 2012 perhaps simply represent a the slow depreciation of the Buffet premium?



It seems like you may be mixing two separate and unrelated concepts here.

You are correct in saying that the odds are overwhelming that Berkshire without Buffett is somewhat less valuable than Berkshire with him (the amount could be argued forever).

And you are correct in saying that since he has a finite span at Berkshire, some "slow depreciation" makes sense. Absolutely, although figuring the pace of depreciation is quite tricky...even more so when you don't know the starting value.

Where this seems to go off the track is the implied assumption that there was any "premium" on the valuation of Berkshire in 2001...that is, that in 2001 Berkshire sold at a valuation higher than the mere sum of its businesses warranted.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195547 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 6:04 AM
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Where this seems to go off the track is the implied assumption that there was any "premium" on the valuation of Berkshire in 2001...that is, that in 2001 Berkshire sold at a valuation higher than the mere sum of its businesses warranted.

Why do you think the market would ignore Buffet's value?

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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: 195548 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 7:23 AM
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Why do you think the market would ignore Buffet's value?

The "Buffett is old, drinks too much cherry Coke, and won't be around much longer" concern has been around since I first seriously studied Buffett's career after reading Lowenstein's biography in 1995. The concern has definitely been there since his health scare in 2000. I doubt many people in 1995 or 2000 thought Buffett would be around in 2012 ... Or at least not actively managing Berkshire. Instead he has gotten better over time with no hint of decline (a weird call in to CNBC is just normal octogenarian billionaire eccentric behavior, nothing more!).

There has arguably been a Buffett premium at times since 2000 but it is not clear that periods of overvaluation were specific to Buffett at all. Most stocks have periods of over and undervaluation including Berkshire. It isn't useful to spend too much time psychoanalyzing Mr Market.

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195549 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 7:26 AM
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<< Obviously, Berkshire with Buffet is worth more than Berkshire without Buffet.>>

lol, i guess without buffett brk would sell at a discount to book and an even bigger discount to IV. amazing, brk trades with a buffett DISCOUNT, get real and live with the facts.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195551 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 7:32 AM
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There has arguably been a Buffett premium at times since 2000 but it is not clear that periods of overvaluation were specific to Buffett at all. Most stocks have periods of over and undervaluation including Berkshire. It isn't useful to spend too much time psychoanalyzing Mr Market.


Berkshire Hathaway is the company it is because of Mr. Buffet.
Ignoring that fact when valuing the company just because it's difficult to factor in means you get a result that is precisely wrong.

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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: 195552 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 7:56 AM
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What do you propose that would capture Warren Buffett's incremental value to Berkshire?

You could look at actuarial tables and assume a certain "excess" return on capital achievable only but Buffett for x number of years, then discount this back to present value. But other than being ghoulish, the estimate is certain to be wrong and it isn't even necessary to understand that Berkshire is undervalued today. We can quibble over the Buffett premium if and when the P/B gets up to 1.7-1.8 or higher. Until then I don't see the point.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195554 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 8:11 AM
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You could look at actuarial tables and assume a certain "excess" return on capital achievable only but Buffett for x number of years, then discount this back to present value.

A better approach in my view would be to focus on capital deployment.
Find out what the ROE of Buffet's investment is in the past vs. what one would expect for whoever's taking his place.
I guess it's a bit complicated.

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195555 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 8:19 AM
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now that brk is sitting on 40 billion plus cash money what's his next move ? Pay a premium for a company selling at multi year highs ? Lets get real.

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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: 195557 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 8:34 AM
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rationalwalk:
There has arguably been a Buffett premium at times since 2000 but it is not clear that periods of overvaluation were specific to Buffett at all. Most stocks have periods of over and undervaluation including Berkshire. It isn't useful to spend too much time psychoanalyzing Mr Market.
==========
advocatus:
Berkshire Hathaway is the company it is because of Mr. Buffet.
Ignoring that fact when valuing the company just because it's difficult to factor in means you get a result that is precisely wrong.



We won't be able to agree about this Buffett premium business if we don't make the distinction between value and price.

Most of us would agree that the ongoing presence of Mr Buffett adds value to Berkshire, since he is a great allocator of capital, motivator of CEOs, and obtains opportunities that others would never get. Still on the value side, Buffett also has some negative features - his refusal to buy back his own shares, his refusal to hedge, his perhaps somewhat excessive prudence, his reluctance to abandon failing businesses (Netjets?) and his attraction to stodgy things like shoemakers and newspapers.

Then there's the price side: how much of Berkshire's share price does Mr Market assign based on Mr Buffett's presence? We may find this out, if he disappears suddenly, and I suspect that we would find out that there is not much of a price premium, maybe because Mr Market is just as aware of the negative features mentioned above, or maybe because he is in a temporary rational phase where he attributes only a small value to the future contributions of an 82 year old.

But price is not value. In the above 2 quotes, rationalwalk is talking about market (price) premium, saying there doesn't seem to be one at the moment, since the charge of a meal at the Berkshire smorgasborg seems to correspond closely to the price of each of the foods on offer; and advocatus is talking about value premium, saying there has to be one, since any buffet is what it is because of who made the food.

Regards, DTM

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195558 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 8:42 AM
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But price is not value. In the above 2 quotes, rationalwalk is talking about market (price) premium, saying there doesn't seem to be one at the moment, since the charge of a meal at the Berkshire smorgasborg seems to correspond closely to the price of each of the foods on offer; and advocatus is talking about value premium, saying there has to be one, since any buffet is what it is because of who made the food.


If there is a value premium, there will also be a price premium.
It may be too high, or too low, or this late in Buffet's career it may be very slight and may even turn negative at some point, but it will be there.

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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: 195559 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 8:57 AM
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If there is a value premium, there will also be a price premium.
It may be too high, or too low, or this late in Buffet's career it may be very slight and may even turn negative at some point, but it will be there.


We agree that Buffett is valuable, so there is a value premium, but does that mean there has to be a price premium? I would say no, since value and price do not go hand in hand, at least not in the short term. Restaurant owners are not always prepared to pay more for a great chef, even if he adds value to the buffet.

By saying that the price premium can be negative at some point, you seem to be acknowledging this point. In the long run, we agree that if there is a value premium, it will show up in a price premium - this is the principle behind value investing.

Regards, DTM

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195564 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 9:18 AM
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because of the valuation compression: price/book has shrunk from 1.67x to 1.17x.
At least that process appears to be over—
...
One silver lining is that even if book value growth remains about the
same at 8-10% over the next decade and P/B remains constant, returns
going forward will approximate BV growth. A contraction of P/B similar to
what we have seen over the past several years is very unlikely.


As I'm rather slow on the uptake, it only recently dawned on me that
this has already been going on for some time.
After the buyback authorization, allow a few weeks for the new normal to set in.
Since the beginning of November last year, most recently known book/share
up 15%, stock price up 15%, valuation multiple of book value unchanged.

Thus the recent rally is likely to be more permanent gain than usual,
less of a random wandering than most other market moves.

Jim

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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: 195565 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 9:19 AM
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Still on the value side, Buffett also has some negative features - his refusal to buy back his own shares, his refusal to hedge, his perhaps somewhat excessive prudence, his reluctance to abandon failing businesses (Netjets?) and his attraction to stodgy things like shoemakers and newspapers.

Even his reluctance to abandon sub-par businesses like NetJets arguably creates value on a net basis by maintaining Berkshire's reputation as a "permanent home" for businesses that are acquired. Berkshire has and will continue to pay less than other acquirers when buying from business owners who place value on the permanent nature of the transaction. R.C. Willey is one example where the value was clearly quantified (see "The R.C. Willey story for details).

And the reluctance to abandon a sub-par business is not absolute. If a business is constantly consuming capital with no hopes of being profitable then all bets are off. I think Munger said as much at the last annual meeting by stating that he and Warren are not "masochists".

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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: 195567 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 9:36 AM
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<< Obviously, Berkshire with Buffet is worth more than Berkshire without Buffet.>>

lol, i guess without buffett brk would sell at a discount to book and an even bigger discount to IV. amazing, brk trades with a buffett DISCOUNT, get real and live with the facts.



price is what you pay. Value (I.e, worth) is what you get.

Berkshire has more value with Buffett, regardless of whether the market recognizes it.

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Author: hclasvegas Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195568 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 9:42 AM
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<< price is what you pay. Value (I.e, worth) is what you get.

Berkshire has more value with Buffett, regardless of whether the market recognizes it. >>

mornin, great, try writing a check , sending your kid to college, or buying a house based on your brk IV !! Thank you BNI deal or he may never have split the stock which lead to the index add forced buying in the stock and thank you buyback press release gimmick or brkb would be trading at book, end of story. real world 101.

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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: 195571 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 12:15 PM
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Instead he has gotten better over time with no hint of decline (a weird call in to CNBC is just normal octogenarian billionaire eccentric behavior, nothing more!).

My suspicion is that at times, his genius side overwhelms his "great communicator" side. When I watch his CNBC interviews, occasionally I've to connect the dots in what he is saying. Given the age, culture, language, upbringing and obviously IQ differences between us, it's no small feat. He is a deep guy and his accumulated experience and accurate judgment must be hard to convey in short sound bites despite his ability to be pithy. (Which is also why you cannot confuse his folksy sayings with gospel truths, only he knows when and how exactly they apply to each situation and he seems to think that everyone else does as well.)

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Author: razorfangius Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195574 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 3:57 PM
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Graham School of Fishing: Find a lake with fish in it. Take hand grenade, remove pin, throw over side. Wait for dead fish to float to top. Collect. And if you want to eat you better learn, no fish for you from Grandpa Graham.

Buffett School of Fishing: Hone the finest spear. Get vial of curare and carefully apply. Go at dawn to the mighty river and wade out to the big rock close to the waterfall. Don't slip. Wait for the rising sun to dapple the water just so, and hurl spear. Remember to correct trajectory for diffraction. If it's all too difficult just wait and Uncle Warren will bag a fish for you.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195576 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 4:32 PM
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Graham School of Fishing:
Buffett School of Fishing:


Hmmm, interesting.
I'm not sure this captures all the relevant nuances, but let's go with it.
Phrased that way there are two valid approaches:

Try what Mr Graham does, it will work fine.
Hire Mr Buffett to do what Mr Buffett does, on your behalf.

I might phrase it this way:
Graham school of fishing:
Spend no more than a prudent amount on your fishing boat and equipment.
Place 4" net in stream. It will catch all fish bigger than that, many
of which will be tasty, the rotten ones won't matter in the long run.
You won't get all the best fish, but you'll do fine overall.
Write a book explaining that anybody can do this. ("teach a man to fish...")

Buffett school of fishing:
Sit on the shore in the shade.
Find a few long-lived fish that are within a foot of shore, very healthy, growing, and easy to catch;
it takes exquisite discerning power to spot the good ones and patience to wait for them to come to shore.
Catch them, take care of them, wait till they're big. Let some of them breed. Repeat.
The skills are rare and valuable, but give away your services for free
to anybody who wants them while you feel like doing it.
After that, all they get is a ton of rapidly growing and breeding fish. Tant pis.

Possible corollary of this viewpoint:
Hire Mr Buffett for now, at some point in future switch to a more Grahamish approach you implement yourself.

Jim

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195577 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 5:02 PM
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I have read a couple of your posts on Berkshire's valuation over the years, and I can't recall you ever putting a value on the "Buffet premium".
Obviously, Berkshire with Buffet is worth more than Berkshire without Buffet.
Since Buffet has a finite lifespan, he needs to be depreciated over time.
Does the multiple compression between 2001 and 2012 perhaps simply represent a the slow depreciation of the Buffet premium?


It would make no sense to place any value on Mr Buffett's future decisions.
Assuming he leaves tomorrow, the firm is still undervalued.
One need only assume that the company won't suddenly turn into a firm
which is an unusually poor allocator of capital, oh, Sony.

Since it's undervalued, there is no Buffett premium. There hasn't been one in quite a few years.
The 2007 price spike seemed to arise purely out of random market
dynamics, not any enthusiasm for the estimable Mr B.
The last time there was a true Buffett premium was probably around 1998.

So no, I don't see it as a gradual erosion of the Buffett premium.
I think of it simply as the random wanderings of the valuation machine.
Sometimes things are slightly expensive, as when I bought, and
sometimes they are darned cheap, as now.
Trying to reverse engineer the reasons for the wandering is probably not fruitful.

Looked at this way, it's an optimistic outlook.
Valuation will continue to wander around, and will probably be high
again some day in future, or at least sensible.
The presence or absence of Mr Buffett is probably not nearly as big a factor.
In fact, given the near universal view that there will be a huge
sell-off when Mr Buffett leaves the firm, it might not happen at all.
Mr Market rarely misses an opportunity to frustrate a consensus.

Personally, if anything I think we're living through a Buffett discount.
i.e., the undervaluation is mostly random but perhaps in part because of his continued presence.
Why?
The consensus of a price fall when he departs is so strong that there are
likely people avoiding the firm between now and then for that reason only.
An transient artificially low demand causes a transient artificially low price.

Jim

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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: 195578 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 5:22 PM
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One need only assume that the company won't suddenly turn into a firm
which is an unusually poor allocator of capital, oh, Sony.


The working assumption among those avoiding Berkshire due to Buffett's age seems to be that it will all turn into pumpkins and mice when he departs. Of course, between now and then, Berkshire's intrinsic value could possibly double or triple. But this "concern" is simply too great with a CEO who is 82 years old.

I don't think most investors have any idea how Berkshire is run and how independent the operating companies actually are. The operating companies owned by Berkshire at the time of Buffett's departure will not fall apart.

Intelligent deployment of the mountains of cash flowing into Omaha will be the main problem. The next CEO must be someone who is immune to all comparisons with Buffett. He needs to have an ego (I doubt any good CEO has no ego) but cannot allow comparisons with Buffett to define his success or failure. That means paying out cash to shareholders if nothing intelligent can be done with the cash. Being able to understand that many of the deals presented to Buffett won't be presented to his successor (and not taking offense at that fact). Not trying to "push it" when it comes to acquisitions just to get headlines, articles in Fortune, etc. Etc...

I would hate to see the next CEO view paying dividends as a failure of any kind (although if the dividend tax triples, intelligent buybacks would be better).

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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: 195579 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 5:27 PM
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Buffett school of fishing:
...
Catch them, take care of them, wait till they're big. Let some of them breed. Repeat.


Yes yes. Now when can we actually EAT some fish?

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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: 195580 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 6:25 PM
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Now when can we actually EAT some fish?

Someone ate their fish yesterday when they sold me some shares at 1.15x book.

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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: 195581 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/6/2012 7:35 PM
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I get it. These are trading sardines, not eating</> sardines.

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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195600 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/7/2012 10:35 AM
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I get it. These are trading sardines, not eating sardines.

Mainly they're "waiting" sardines.
If you're hungry now, you need something else.
This fisherman is for those who will be hungry only in a few years' time!

Jim

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Author: bankersfate Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 195629 of 211764
Subject: Re: How I've done investing in Berkshire Date: 11/8/2012 9:43 AM
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The 2007 price spike seemed to arise purely out of random market
dynamics, not any enthusiasm for the estimable Mr B.
The last time there was a true Buffett premium was probably around 1998.


Not that it is material but I think the price spike was because people thought Buffett would tear it up in that environment. I thought he would buy up lots and lots of cheap compounding machines.

I thought he had the opportunity to load up on a handful of solid mid-cap companies that he can't normally buy and between them all he could have put some serious money into play. Maybe BNI was the more strategic purchase for the very long haul. Maybe he feels very few public companies are worth owning.

Selfishly, I was hoping to see some new names in his portfolio to help me add some companies to my universe of "pre-approved by Buffett" list.

Appreciate your posts.

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