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No. of Recommendations: 9
Oh goodness,

WEB called Dexter Shoes and now GenRe mistakes...

Everybody makes mistakes, CEOS like Bezos, Jobs, Musk, absolutely everyone makes mistakes.

As long as you can work through them and then have the company thrive enough not to die, then that is the saving grace.

Jan



Absolutely.

But that's really got nothing to do with this thread. No one--on either side of this debate--was condemning Buffett for making a mistake. Rather, an investment manager made a very cogent (though, obviously, not inarguable) case that rather than being a mistake, the General Re acquisition was a masterful success.
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No. of Recommendations: 26
This guy has a masterful understanding of Berkshire (and investing in general), and a beautiful ability to communicate it in a way that is understandable. Kind of like Buffett. If his letters were put into a book, I'd happily pay to read them; that they are free on the internet is a gift.

All of the complicated matters of Berkshire, though, can be summed up in this:

"If average annual return on equity falls to 8% for the next decade instead of our 10% projection, and if the multiple to earnings contracts from 13.5x to 13x, you will earn a respectable 7.5% per year [worst case]...That’s earning the return on equity minus the multiple contraction over a decade’s time. This is our worst-case assumption and exceeds a conservative estimate for returns in the broad stock market."


Can't say that about many investments in today's market.
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No. of Recommendations: 5
Berkshire’s Performance vs. the S&P 500: Annual Returns + Growth Rates Forward and Backward
Columns:
1 Year
2 Book Value per Share Growth
3 BV CAGR back from 2018
4 CAGR from 1965
5 Market Value per Share Growth
6 FMV CAGR back from 2018
7 FMV CAGR from 1965
8 S&P Market Value per Share Growth
9 SPY CAGR back from 2018
10 SPYCAGR from 1965

1
Year BV/shGr BV%from18-%from65 FMV-Gr MV%from18-%fr65 SPY-Gr SPY%from18-%from65

1965 23.8% 18.8% 23.8% 49.5% 20.6% 49.5% 10.0% 9.7% 10.0%
1966 20.3% 18.7% 22.0% -3.4% 20.1% 20.2% -11.7% 9.7% -1.4%
1967 11.0% 18.7% 18.2% 13.3% 20.6% 17.8% 30.9% 10.2% 8.3%
1968 19.0% 18.8% 18.4% 77.8% 20.8% 30.6% 11.0% 9.8% 9.0%
1969 16.2% 18.8% 18.0% 19.4% 19.8% 28.3% -8.4% 9.8% 5.3%
1970 12.0% 18.9% 17.0% -4.6% 19.8% 22.1% 3.9% 10.2% 5.0%
1971 16.4% 19.0% 16.9% 80.5% 20.4% 29.1% 14.6% 10.3% 6.4%
1972 21.7% 19.1% 17.5% 8.1% 19.4% 26.3% 18.9% 10.2% 7.8%
1973 4.7% 19.0% 16.0% -2.5% 19.6% 22.7% -14.8% 10.0% 5.1%
1974 5.5% 19.4% 14.9% -48.7% 20.2% 12.5% -26.4% 10.7% 1.4%
1975 21.9% 19.7% 15.5% 2.5% 22.5% 11.5% 37.2% 11.7% 4.2%
1976 59.3% 19.6% 18.6% 129.3% 23.0% 18.4% 23.6% 11.2% 5.7%
1977 31.9% 18.8% 19.6% 46.8% 21.2% 20.4% -7.4% 10.9% 4.6%
1978 24.0% 18.5% 19.9% 14.5% 20.7% 20.0% 6.4% 11.4% 4.8%
1979 35.7% 18.4% 20.9% 102.5% 20.8% 24.2% 18.2% 11.5% 5.6%
1980 19.3% 18.0% 20.8% 32.8% 19.2% 24.7% 32.3% 11.3% 7.1%
1981 31.4% 18.0% 21.4% 31.8% 18.9% 25.1% -5.0% 10.8% 6.4%
1982 40.0% 17.6% 22.4% 38.4% 18.6% 25.8% 21.4% 11.3% 7.1%
1983 32.3% 17.0% 22.9% 69.0% 18.1% 27.8% 22.4% 11.0% 7.9%
1984 13.6% 16.6% 22.4% -2.7% 16.9% 26.1% 6.1% 10.7% 7.8%
1985 48.2% 16.7% 23.5% 93.7% 17.5% 28.7% 31.6% 10.8% 8.8%
1986 26.1% 15.9% 23.6% 14.2% 15.7% 28.0% 18.6% 10.3% 9.3%
1987 19.5% 15.6% 23.5% 4.6% 15.8% 26.9% 5.1% 10.0% 9.1%
1988 20.1% 15.4% 23.3% 59.3% 16.1% 28.1% 16.6% 10.2% 9.4%
1989 44.4% 15.3% 24.1% 84.6% 14.9% 30.0% 31.7% 10.0% 10.2%
1990 7.4% 14.4% 23.4% -23.1% 13.1% 27.4% -3.1% 9.3% 9.6%
1991 39.6% 14.7% 24.0% 35.6% 14.6% 27.7% 30.5% 9.8% 10.4%
1992 20.3% 13.8% 23.8% 29.8% 13.9% 27.7% 7.6% 9.1% 10.3%
1993 14.3% 13.6% 23.5% 38.9% 13.4% 28.1% 10.1% 9.1% 10.3%
1994 13.9% 13.6% 23.2% 25.0% 12.4% 28.0% 1.3% 9.1% 9.9%
1995 43.1% 13.5% 23.8% 57.4% 11.9% 28.9% 37.6% 9.4% 10.7%
1996 31.8% 12.4% 24.0% 6.2% 10.3% 28.1% 23.0% 8.3% 11.1%
1997 34.1% 11.6% 24.3% 34.9% 10.5% 28.3% 33.4% 7.7% 11.7%
1998 48.3% 10.6% 24.9% 52.2% 9.4% 28.9% 28.6% 6.6% 12.2%
------------------------------------------------------------------------------
1999 0.5% 9.0% 24.2% -19.9% 7.7% 27.2% 21.0% 5.6% 12.4%
2000 6.5% 9.5% 23.6% 26.6% 9.3% 27.2% -9.1% 4.9% 11.8%
2001 -6.2% 9.7% 22.7% 6.5% 8.5% 26.6% -11.9% 5.7% 11.0%
2002 10.0% 10.7% 22.4% -3.8% 8.6% 25.7% -22.1% 6.8% 10.0%
2003 21.0% 10.7% 22.3% 15.8% 9.4% 25.4% 28.7% 9.0% 10.5%
2004 10.5% 10.1% 22.0% 4.3% 9.0% 24.8% 10.9% 7.8% 10.5%
2005 6.4% 10.0% 21.6% 0.8% 9.3% 24.2% 4.9% 7.6% 10.3%
2006 18.4% 10.3% 21.5% 24.1% 10.0% 24.2% 15.8% 7.8% 10.5%
2007 11.0% 9.7% 21.3% 28.7% 8.9% 24.3% 5.5% 7.1% 10.3%
2008 -9.6% 9.5% 20.5% -31.8% 7.3% 22.6% -37.0% 7.3% 8.9%
2009 19.8% 11.7% 20.5% 2.7% 12.2% 22.1% 26.5% 13.1% 9.3%
2010 13.0% 10.8% 20.3% 21.4% 13.3% 22.1% 15.1% 11.7% 9.4%
2011 4.6% 10.5% 19.9% -4.7% 12.4% 21.4% 2.1% 11.3% 9.3%
2012 14.4% 11.4% 19.8% 16.8% 15.1% 21.4% 16.0% 12.7% 9.4%
2013 18.2% 10.9% 19.8% 32.7% 14.8% 21.6% 32.4% 12.2% 9.8%
2014 8.3% 9.5% 19.5% 27.0% 11.5% 21.7% 13.7% 8.5% 9.9%
2015 6.4% 9.8% 19.3% -12.5% 7.9% 20.9% 1.4% 7.2% 9.7%
2016 10.7% 10.9% 19.1% 23.4% 15.7% 20.9% 12.0% 9.3% 9.8%
2017 23.0% 11.1% 19.2% 21.9% 12.0% 21.0% 21.8% 7.9% 10.0%
2018* 0.3% 0.3% 18.8% 2.99% 3.0% 20.6% -4.39% -4.4% 9.7%
*2018 SAI estimated change in BVPS; CAGR calculations are SAI internal
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No. of Recommendations: 5
It's posts like this that keep me coming back to this board.

I'll never think of GenRe the same way again.
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No. of Recommendations: 10
I clicked too soon before providing the following comments about the foregoing table from Semper:
-----------------
"Let’s conclude this section with a recasting of the familiar first page of Berkshire’s Chairman’s letter updated each year. We show the three familiar columns that reflect change in book value per-share, change in stock price, and S&P 500 total return, all presented annually since 1965. We then supplement two extra columns for each original measure. For each metric, we add a compound annual growth rate for each year beginning in 1965, progressing forward, and a compound growth rate working backward. The backward working figures simply measure the one-year return, two-year average returns, three-year average returns and so forth using December 31, 2018 as the final year in each series.

The pivot is delineated with the solid line under 1998, right after the General Re acquisition closed. That was the moment the record changed, or the day the music died, as the case may be. To that pivotal point, since 1965 book value per share had compounded at 24.9% while the stock advanced by 28.9%. By contrast the S&P earned 12.2% annually. Returns for all three series since then would gradually grind downward (it takes a lot to move a 30-year average). 1998 was the best it would get.

Working backward, you can see the 20-year record with book value having compounded at 9.0% and the stock at 7.6% since 1998. Both beat the 5.6% posted by the S&P by a nice margin, but are a far cry from the 24.9% and 28.9% annual returns enjoyed up to the pivot. Had the pivot not taken place, and Berkshire remained leveraged to Coca-Cola, investments in marketable securities and insurance, the 20-year record to year-end 2018 would have been only modestly better than the 5.5% return its stocks posted (better due to the leverage derived from insurance investing).

Thanks to the pivot, Berkshire’s shareholders are at least 3% to the good for the last two decades, which over two decades is a lot. It’s the difference between today’s $349 billion in shareholder’s equity and the $107 billion that 1997’s book value would have grown to at 6% per year.

General Re was an extraordinary move. Calling it a mistake is absurd. Whether the brass at Berkshire will acknowledge the pivot as genius or as luck is for the brass to know. I know what we believe."
[END Semper]
============
My personal investments in Berkshire at various dates over the years since 1999 have outperformed SPY about 3%, as well; some 11.3% BRK.B versus 8.4% SPY.

Commoncents33 summed it up nicely, I agree. Investing in Berkshire when it is not overvalued should bring shareholders returns similar to its own return on equity, e.g., if it makes 10% return on equity, we should make 10% too, etc. Also, with some $100B+ float-free leverage (OPM), holding onto such 'excess' cash shouldn't be a pressing concern.

Of course, the key is what comes next. How will Berkshire deploy it's vast resources (what is it now $100M per day coming into Omaha)?. Well, if history is any guide, and based upon Warren and Charlie table-thumping comments, I'll be sticking around too. Berkshire by design is an anchor, a SWAN stock.

Especially in the debt-laden economic climate we find ourselves in ("too much money chasing too few deals" per Howard Marks), I'm playing defense. Berkshire places nicely in my portfolio, playing defensive end. Built to last and prepared to step up to the plate when the time comes others can't.
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No. of Recommendations: 0
Going to buy some today. P/BV of 1.348 as of now.
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No. of Recommendations: 0
Pretty good summary of 2018.
"Berkshire enjoyed a tremendous (well, "tremendous" is over-stated, as would be "wonderful") advance in earning power and intrinsic value, masked by the stock going nowhere (well, it didn't "go nowhere". It was all over the place from $280K to $330K.) during the year, by an obvious large decline in the stock portfolio, and because of financial statements that are now thoroughly incomprehensible to most readers. Previously they were simply incomprehensible. The business is reaping huge benefits from the 2017 tax code change. (duh heck with that, vote for socialists!)
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No. of Recommendations: 0
Good point:
"Most seem to have forgotten how expensive the New Nifty 50 were in 1998 ... Given that Berkshire’s stock portfolio had compounded at a mid-20% rate for more than two decades, and then abruptly subsequently compounded at 5.5% for the next 20 years, immediately after Berkshire spent its shares to buy General Re and shrink its exposure to its own overvalued portfolio, we’d call the pivot genius, a masterstroke. Management won’t acknowledge it"
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No. of Recommendations: 0
Going to buy some today.

I've got a bid in, too. Looks good.
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No. of Recommendations: 12
It's posts like this that keep me coming back to this board. I'll never think of GenRe the same way again...

JohnCleven
, I started not to respond to this... well, because that kind'a reminds me what Cream's Jack Bruce said, "you don't want to be a tribute band to yourself... that would be awful". [@ 5:50 minute mark here https://www.youtube.com/watch?v=zJ-L9NgpgtA&t=6s]

But here's the truth, the rest of the story. Sometime in 1997-98 my brother introduced me to Berkshire, who had been following it for perhaps a decade. But he hadn't bought any shares because of its high price, the so-called Buffett premium for his stock-picking skills.

As Semper Augustus so eloquently pointed out, that all began to change with its Gen Re' acquisition. Thereafter, we both tip-toed into a few BRK.B shares on 12/29/1999. I remember it as if it were yesterday.

Believe it or not, generally, my 'little' brother deciphered Berkshire's Gen Re' purchase similarly. He too marveled at how Buffett was able to 'trade its nosebleed-priced' BRK stock into a bond portfolio, tax-free. But he also pounded the table, then, how it would transform Berkshire away from stock-picking opening up streams of cash-flow to be redeployed in "deals" at cheaper prices, when Mr. Market came back down to earth. Quite prescient.

So this tribute is a shout out to my brother for seeing this transformation, then, what struck me Semper Augustus analyzed so well, now in hindsight.
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No. of Recommendations: 13
I'm not so sure Semper Augustus (SA) understands things better than Buffett himself. In fact, the fact that SA sees things differently than Buffett gives me pause in thinking they understand Berkshire as well as they claim to.

Buffett might be self-interested enough to not gloat about "taking advantage" of General RE but I don't think he would go out of his way to lie about it being a "terrible mistake". For example, Buffett was happy to say that the BRK shares given for the railroad were shares well used because he got as much as he gave. Why wouldn't he do the same if that was the case for GenRe??

I think I will take Buffett's word for it and at face value. 2016 gave him plenty of time to understand the results of his GenRe purchase.


It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses).


terrible mistake.
whopping 21.8%.
error.
give far more than they received.


Why in the world would he go out of his way to lie to his partners and shareholders about something he did not have to address at all? So that he can screw future business sellers too? I sure hope not.
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No. of Recommendations: 3
I agree.
I think Semper August are very strong on the analysis of Berkshire intrinsic value where they crunch the numbers and go into detail. Particularly good was the 2016 effort including a perfect-storm analysis for Berkshire.

I find them less persuasive when they start creating narratives and particularly when they go into macro 15 year predictions and the like. I suppose every active fund manager has to have a convincing story about why placing money with them is better than an index and it is a competitive world but it is a bit odd for a Berkshire analyst since Buffett and Munger avoid this kind of stuff like the plague.

So I personally go straight to the numbers on Berkshire in their analysis - the rest is interesting but it isn't a foretelling of the inevitable.
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No. of Recommendations: 3
Well, given the dramatic posts as to the General Re decison I must add than twice, not just once, I have been to the Berkshire annual meetings (I have been to 20) where I specifically stood up and asked about both the acquision and the outcome.

Both times, in 1988-1989 (I can't remember) and in the 2000-and-teens period (can't remember that either) Munger's response to my querry was far more positive. Both times he's responded (my synopsis) that the float use ("would make it work" in 1998-1999) has made it all work well for Berkshire.

Buffett says repeatedly that things he bought at 3 times earnings where he had control of all the cash earnings (33% cash returns) that eventually went out of business were terrible decisons. Of course they weren't terrible decisions. Same with US Air; it was a terrible decision where Berkshire made several times their money.
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No. of Recommendations: 3
terrible mistake.... whopping 21.8% error... gave far more than they received.

I agree with bankersfate. It was a huge mistake to acquire a commodity insurance business using BRK stock, compounded by any lack of due diligence.

As pointed out in prior discussions along this line (by others -not me) the greater mistake was to not buy back the BRK stock over time after the event. So the error has compounded.
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No. of Recommendations: 2
What interested me in Semper's Gen Re' narrative was it similarly fit my brother's thoughts back then, which convinced us to finally begin parking money with Berkshire late 1999. Shortly thereafter the dichotomy between the BRK.B's bargain!price came at the height of the NASDAQ in March-2000.

Oh. Like many others I'd expect, we were littering money along the tech-bubbling internet highway then too. We just didn't know it was headed for road kill, yet.

Who can say whether or how much Berkshire benefited the way Semper framed it. Opportunity costs. What if Buffett had sold a chunk of its overvalued portfolio for say 5-times cost and paid 80% x 40% capital gains taxes. Berkshire would've had some 70% dollars left to reinvest. Or not, status-quo.

There's no way to speculate what Buffett would've done (absent Gen Re'). But, the fact that he seemingly has nothing but high-praise for Berkshire's insurance grove nowadays, isn't it just a little bit hard to believe Gen Re' is still a terrific mistake?

I agree. Berkshire stock at its then pre-tax value may've been too big a chunk to pay for Gen Re' in of itself, like Buffett says (no lie). But, that's not the whole story... Semper argues. (Which I must agree with, lest a fight with my brother:)
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No. of Recommendations: 20
.... isn't it just a little bit hard to believe Gen Re' is still a terrific mistake?

As long as those shares remain outstanding, it is a mistake.

As for Gen Re today, the mistakes in their reserves have been paid and the ethical misjudgments with AIG are long behind us. Buffett has praised it in recent years, but as soon as Ajit was given responsibility he told them their expenses were too high and they must be brought under control or changes would be made. Buffett likes to praise, not criticize. Ajit didn't intend for his memo to become public.

I suspect Ajit has all that corrected by now. So my view is that Gen Re is now a respectable commodity reinsurance company.

The basic problem is that commodity reinsurance is not a good business unless one has some competitive advantage that sets themselves apart from other suppliers. Buffett taught that to us decades ago. And, aside from the Berkshire reputation for paying, it isn't clear that Gen Re distinguishes themselves in what is a difficult market. The float hasn't grown significantly since it was acquired two decades ago and BRK would not ever had been short of cash and float without Gen Re for this period. Intense competition from both US and offshore suppliers continues.

So we remain with excess BRK shares in the market for a low growth commodity reinsurance business that has cost us billions in the past. That is why it was a terrible mistake. As Buffett states - we gave more than we got.

I'm not clear why people don't believe him.
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No. of Recommendations: 26
That is why it was a terrible mistake. As Buffett states - we gave more than we got.

I'm not clear why people don't believe him.


I agree with you that we gave more than we got, but I also agree with Semper that we are *vastly* better off having done the deal.

Imagine you're on the way to the hospital and you get a flat. But you don't have a tire iron.
A guy comes by and you buy his for $500.
Did you give up more than you received? Sure.
But are you vastly better off anyway? Without a doubt.
You really needed it, and fairly soon.

Maybe another person might have come by and offered you another solution, soon enough, at a lower price. But maybe not.

Berkshire was leveraged long a huge pile of overvalued equities and desperately neede a way out without too much tax.

Jim
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No. of Recommendations: 1
Berkshire was leveraged long a huge pile of overvalued equities and desperately neede a way out without too much tax.

Jim


I can't seem to find the quote, but I thought Buffett once compared the Gen Re purchase to the purchase of NICO in 1967. Saying something like it will be just as important as NICO after 50 years or so.
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No. of Recommendations: 14
Berkshire was leveraged long a huge pile of overvalued equities and desperately needed a way out without too much tax.

He had an easy out if he was "desperate" other than Gen Re. He could simply have issued shares to the public and bought bonds.

I don't think Buffett was desperate. If you read the negotiations, in late 1997 he would not make an offer to Gen Re because he could not offer them a premium. His equities were overvalued then. Then, through some "coincidence or lucky break" the share price of BRK suddenly jumped from the the mid $50 thousand level to $70 thousand. Lo and behold, Wall Street found a way for Buffett to be able to offer a buyout premium, and the price even got above $80 thousand - all with no real change in the base Berkshire businesses. I don't believe Buffett was complicit in any of this, but I do suspect the Gen Re bankers may have been. In any case, Buffett could now buy the insurance company he had long wanted to buy - not realizing it was no longer the quality company he believed it to be.

So we booked a lot of worthless goodwill, still on the books, lost a few billion in fixing the reserves, a few hundred million more in getting rid of the derivatives, endured the AIG scandal, and spent years fixing Gen Re. All of which could have been avoided if the objective was to re-balance the Berkshire portfolio. A simple public offering would have permitted that.

The Gen Re shareholders did not hold on to the overvalued BRK shares. BRK rapidly sold down to the mid $50 thousands after the close in late December before rebounding to $70k by year end. That didn't last and it went back down by 2000 to more normal levels.

The re-balancing argument sounds brilliant but doesn't hold up to close scrutiny. Buffett wanted Gen Re and saw an opportunity to kill two birds with one act. He made a mistake in buying Gen Re with stock, as he's now stated. And we own a commodity business that has improved, but not grown, in two decades.
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No. of Recommendations: 3
I agree with texirish. In retrospect GenRe purchase was a big mistake as Buffett said. I believe Charlie said Warren should have quit Coke board and sold the stock at a P/E > 50 in 96-98 time frame. Yes Berkshire would have paid the tax but certainly would have come out ahead without having to deal with all the troubles at GenRe & BRK stock dilution.
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No. of Recommendations: 0
Well said texirish.....

I attended the special GenRe meeting in Omaha.

I wanted to learn more about what was going on, but really learned nothing at all by going. Nearly every question about GenRe went over my head.

There were some angry DQ attendees, who asked good questions, IIRC.

Wish you could have explained it all way back then.

That being said, the deal would have passed anyway.

UGH.

Sincerely,

jan

:^)
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No. of Recommendations: 8
Thanks to all for a very interesting discussion on the Gen Re purchase.

I think it highlights some "limitations" of WEB. I put quotes around it, because with each negative there are corresponding positives.

For example, he couldn't sell Coke or the other companies trading at premium multiples because he believed them to be "forever holdings". He had said as much, and acts as such. To him, it would be like closing down a division and letting go a lot of people. He hates the idea, so he was constrained in the late 90s.

As for him doing a secondary offering of shares because valuation was high, are you kidding me? Does that sound like Warren? He is going to take advantage of ignorant investors buying his overvalued stock?

This is a man who ethically struggled with buy backs for 10 years (and seemingly still does today if you watch his actions) for fear of being perceived as taking advantage of people.

There is no way he would issue shares to the public if he felt the shares were very overvalued. It would be against everything he believes in to do that.

So I think his options were indeed few, precisely because of his own constraints around the situation.

I think the truth lies somewhere in the middle. Gen Re turned out OK. It enabled a lot of other things, but it came at a high cost as well. Not the best deal, nor the worst.

Rob
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No. of Recommendations: 16
I agree with texirish. In retrospect GenRe purchase was a big mistake as Buffett said

Hmm, I'll continue to hold my more nuanced (aka contradictory) two part view.
The *price* was a mistake. These things happen...estimating the value of something is an error prone process.
Maybe we forewent 10 billion.

But the decision to do the deal, and the ultimate effect of having done it, were masterstrokes.
Other ways of accomplishing the same thing were possible, sure.
But in reality few existed given real world constraints and no 20:20 hindsight.

It's better to (accidentally/with hindsight) overpay for something you need than not to buy it.


Alternate universes are hard to evaluate. They are numberless.
But given the two narrow choices of reality and simply not having done the deal,
there is no question that Berksire shares are very much more valuable today having done the deal.


Jim
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No. of Recommendations: 4
there is no question that Berksire shares are very much more valuable today having done the deal

It is highly unlikely that GenRe purchase increased the per share IV of Berkshire. Buffett pointed out after 9/11 that GenRe would have gone bankrupt if it were not for Berkshire backing because GenRe provided the terrorism related business coverage premium-free. GenRe had massive underwriting losses for several years after the acquisition. Plus Buffett & Munger had to work very hard to get out of the derivative contracts GenRe had on books. First they tried to sell the whole derivative business. Surprise, surprise.. there were no takers. Fortunately for Berkshire they were able unwind the contracts one by one when the market conditions were somewhat stable. Even so, Berkshire lost hundred of millions of dollars unwinding those GenRe contracts.
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No. of Recommendations: 1
The whole GenRe discussion on this thread is weird. It seems like some of the posters are unable to accept Buffett's explanation that it was a mistake.
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It’s the 2019 effect. Everything is strange.
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For example, he couldn't sell Coke or the other companies trading at premium multiples because he believed them to be "forever holdings". He had said as much, and acts as such. To him, it would be like closing down a division and letting go a lot of people. He hates the idea, so he was constrained in the late 90s.

Not true. See "Owner-Related Business Principles" section, item #11 on pages 20-21 in 2017 Annual Report:

To clean up some confusion voiced in 2016, we emphasize that the comments here refer to businesses we control, not to marketable securities.

Translation: Berkshire does not sell wholly owned businesses, but marketable securities can be sold at anytime.
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No. of Recommendations: 2
there is no question that Berksire shares are very much more valuable today having done the deal.

I hold there is considerable question. Gen Re would have to be worth some $60 billion today to represent its share of Berkshire's value. It isn't.

And there are no steps taken after acquiring GRN that could not have been taken without the deal.

Jim, you puzzle me on this one.
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No. of Recommendations: 4
I'm not so sure Semper Augustus (SA) understands things better than Buffett himself. In fact, the fact that SA sees things differently than Buffett gives me pause in thinking they understand Berkshire as well as they claim to.

Buffett might be self-interested enough to not gloat about "taking advantage" of General RE but I don't think he would go out of his way to lie about it being a "terrible mistake". For example, Buffett was happy to say that the BRK shares given for the railroad were shares well used because he got as much as he gave. Why wouldn't he do the same if that was the case for GenRe??

I think I will take Buffett's word for it and at face value. 2016 gave him plenty of time to understand the results of his GenRe purchase.



Well, given that SA gives a very detailed rationale for his argument about the General Re matter, rather than arguing about which person you feel more inclined to trust, why not address the specific arguments made? For instance, though it is a fact that Berkshire traded 21.8% of its shares, it is pretty clear though shares (more precisely, the value of the equities that made up most of Berkshire's value) were wildly overvalued. That matters quite a bit, no? Sure, maybe they could have used those over-priced shares to buy some other business that was superior...but that's pure conjecture. And if they had simply done nothing? Would Berkshire be better off? Before answering that, there are many other specific points SA made that one would have to argue against.

If we're always just going to blindly assume Buffett knows everything and always says in a clear and un-disputable way precisely what he means, there's not much point for this board.
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No. of Recommendations: 4
And, aside from the Berkshire reputation for paying, it isn't clear that Gen Re distinguishes themselves in what is a difficult market.


In reinsurance, you're buying promises. When one company is head and shoulders above any other company in being sure to keep that promise way into the future, that's the main issue, I'd say. Maybe not for everyone; some short-term-minded CEO's may not sweat it too much if any failed promises are likely to land on his successors shoulders. But for those that want to be certain of the promise, there is only one choice.
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No. of Recommendations: 2
"The whole GenRe discussion on this thread is weird. It seems like some of the posters are unable to accept Buffett's explanation that it was a mistake."

And it is also weird that those who can't let go of the GenRe "mistake" mandate are unable to grasp that Buffett constantly calls past successes "mistakes" as part of his humble presentation. Given that it seems perfectly clear that we must accept Buffett's precise words and not Munger's responses on this topic, well then someone should simply go to the front of the line next year and ask Buffett precisely what his view of the General Re acquision is now...many years later.

Then of course, the same querry should be answered by Munger anyway, he gives some interesting responses.

My view is that it was not the terrible mistake presented here, that running past over valued eqities by gaining some float to do other deals is worth paying for. How well did Berkshire do with General Re's float? In my view that's the answer to the debate.
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No. of Recommendations: 2
And it is also weird that those who can't let go of the GenRe "mistake" mandate are unable to grasp that Buffett constantly calls past successes "mistakes" as part of his humble presentation.

By this logic, do you also assume that Dexter Shoes was also a success despite the fact that Buffett repeatedly called it a huge mistake?
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No. of Recommendations: 1
Nice slam MungerFollower. Oh...by the way my response of it would be determined by how well they did with the float? That was precisely Munger's words at the annual meeting.

What the heck does Dexter have to do with it anyway?
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No. of Recommendations: 1
By this logic, do you also assume that Dexter Shoes was also a success despite the fact that Buffett repeatedly called it a huge mistake?

No I do not.

But Mr. Buffett's purchase of that textile mill was a terrible mistake too, even though its market-cap was less than the book value of the company. He recovered brilliantly from that mistake too.
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No. of Recommendations: 1
What the heck does Dexter have to do with it anyway?

Well we were talking about an acquisition that Buffett said was a mistake, and you think it was a success. GenRe & Dexter were both mistakes in Buffett's mind. I was using Dexter as an example to refute your statement about "failures" in Buffett's mind really being successes.

BTW you can't just look at GenRe float & what Berkshire did with it while ignoring business performance of GenRe and the massive dilution (272K A shares) of BRK stock that was used to pay for it.
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No. of Recommendations: 2
Oh goodness,

WEB called Dexter Shoes and now GenRe mistakes...

Everybody makes mistakes, CEOS like Bezos, Jobs, Musk, absolutely everyone makes mistakes.

As long as you can work through them and then have the company thrive enough not to die, then that is the saving grace.

Jan
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No. of Recommendations: 1
And it is also weird that those who can't let go of the GenRe "mistake" mandate are unable to grasp that Buffett constantly calls past successes "mistakes" as part of his humble presentation.

By this logic, do you also assume that Dexter Shoes was also a success despite the fact that Buffett repeatedly called it a huge mistake?



No. That precisely illustrates the point. We don't have a sophisticated investor laying out in great detail a proposal as to why Dexter Shoes was really a great success. If we did, then it would make more sense to analyze the argument--assuming the relevant issues were knowable by us mere mortals--rather than just take it on blind faith that some comment Buffett made in the past perfectly and completely explains the matter.
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No. of Recommendations: 9
Oh goodness,

WEB called Dexter Shoes and now GenRe mistakes...

Everybody makes mistakes, CEOS like Bezos, Jobs, Musk, absolutely everyone makes mistakes.

As long as you can work through them and then have the company thrive enough not to die, then that is the saving grace.

Jan



Absolutely.

But that's really got nothing to do with this thread. No one--on either side of this debate--was condemning Buffett for making a mistake. Rather, an investment manager made a very cogent (though, obviously, not inarguable) case that rather than being a mistake, the General Re acquisition was a masterful success.
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No. of Recommendations: 4
No one--on either side of this debate--was condemning Buffett for making a mistake. Rather, an investment manager made a very cogent (though, obviously, not inarguable) case that rather than being a mistake, the General Re acquisition was a masterful success.

Well stated commencents33.

I think it was the "masterful success" argument that triggered the debate.

Have a rec on me.
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No. of Recommendations: 15
Jim said: “But given the two narrow choices of reality and simply not having done the deal,
there is no question that Berksire shares are very much more valuable today having done the deal. ”

Texirish says: “I hold there is considerable question. Gen Re would have to be worth some $60 billion today to represent its share of Berkshire's value. It isn't. And there are no steps taken after acquiring GRN that could not have been taken without the deal. Jim, you puzzle me on this one.”
------------
One blogger’s opinion:
“Buffett sold Gen Re’s portfolio... giving him about $85,000/share or $22B to invest. The liabilities proved to be inaccurately valued perhaps adding $2-$3B to the cost of the deal.

As far as the theoretical option of simply doing a secondary offering and selling 267,750 shares at $80,000 per share, forget about it. Berkshire was selling for 2.7 times a book value of less than $30,000, and a lot of that book value was simply publicly traded large cap stocks. The historical stock prices for Berkshire prior to the merger were:

Quarter: Hi Lo
9/30/1987 $48,300 $41,300
12/31/1987 $47,200 $42,500
3/31/1998 $69,500 $45,700
6/30/1998 $84,000 $65,800

So you can see that the stock had not sold for over $50k per A share until 1998 and the $84,000 would prove to be a rich valuation. Regardless of his brilliance, giving Buffett $80k/share to invest $40k/share would be a tough sell.”
------------
[I have no idea.]
But, I do think the school’s still out whether measuring what Gen Re’ is now worth in of itself accounts for the value it brought Berkshire over the years. And, correct me if I’m wrong, but I do not believe Buffett ever said acquiring Gen Re’ was a mistake per se’. Warren did not anticipate Gen Re’ was under paid (and under reserved) to cover terrorism risks (but so was BH-Re).

Warren could also not foresee the housing crash, and the low interest rate world ongoing, in violation of the ‘laws of economics’. But what may’ve prompted Warren to wait until 2016 to say issuing Berkshire stock for Gen Re’ was a mistake could’ve been related to today’s reinsurance glut (supply in excess of demand), some 18 years later in retrospect…

Read his entire 2016 comment (ending with the colonoscopy quip), below. Then prompted perhaps as much as anything from the absence of gravity, (higher interest rate opportunity costs to bring valuations back down to earth), it seems what Buffett learned is to never again issue Berkshire’s stock (an undervalued conglomerate) to acquire companies. Rather, using cash to buy Mid-American in 2000 launched the present strategy (ever since). (Gen Re’ tripled Berkshire’s float-leveraged cash.) The tire iron Buffett desperately needed as it were, what Jim posited.

$Float (in millions) from the Chairman’s letters:
Year BH-Re Gen-Re
------ -------------- --------------
1999 $4,305 $15,166
2000 $6,285 $15,525
2001 $11,262 $19,310
2002 $13,396 $22,207
2003 $13,948 $23,654

Underwriting profit|$Float
2004 417|$15,278 3|$23,120
2005 -1069|$16,233 -334|$22,920
2006 1658|$16,680 526|$22,827
2007 1427|$23,692 555|$23,009 [BH-Re float surpasses Gen-Re]
-------------------------------------------
2008 1324|$24,211 342|$21,074 [Gen-Re float growth stalls]
2009 349|$26,223 477|$21,014
2010 176|$30,370 452|$20,049
2011 -714|$33,728 144|$19,714
2012 304|$34,821 355|$20,128
2013 1,294|$37,231 283|$20,013
2014 606|$42,454 277|$19,280
2015 421|$44,108 132|$18,560
2016 822|$45,081 190|$17,699

So, is the dilution Buffett talked about in the 2016 letter from issuing ‘our’ shares to acquire Gen Re’ attributed to the reduction in float at Gen Re’ (beginning 2008-2009) because of the soft reinsurance market since the housing crash (and not necessarily the initial years of the Gen Re-fix we more likely remember, the pain)?

1999: Even though a reinsurer may have a tightly focused and rational compensation system, it cannot count on every year coming up roses. Reinsurance is a highly volatile business, and neither General Re nor Ajit’s operation is immune to bad pricing behavior in the industry. But General Re has the distribution, the underwriting skills, the culture, and — with Berkshire’s backing — the financial clout to become the world’s most profitable reinsurance company. Getting there will take time, energy and discipline, but we have no doubt that Ron Ferguson and his crew can make it happen." http://www.berkshirehathaway.com/letters/final1999pdf.pdf#pa...

One blogger’s viewpoint:
“I have emphasized distribution—but it is quite clear that Buffett listed distribution first because that was his reason for buying. He thought Ajit was a brilliant underwriter. But he couldn't seem to bring in the business like the grandest old house (Gen Re). He thought if he tacked Berkshire's financial [strength] to Gen Re's distribution he would come up trumps... So he purchased the old house. For its distribution.” [END]

So, how much if any (that distribution/synergy) opened doors for Ajit at BH-Re, Buffett won’t say. While still complimenting Gen Re’ three years straight (below), was Buffett (in 2016) simply trying to discourage competition (excess supply equals bad business) saying Gen-Re was an overpriced mistake?

We’ll never know. But what I do know is it certainly without any doubt transformed Berkshire into a SWAN stock, one I could find value in and pull the trigger on, (finally, beginning in 1999).
------------
Ps: Select comments from Buffett’s letters (including praise for Gen Re’):

General Re, our international reinsurer, is by far our largest source of “home-grown” float – $23 billion at yearend. This operation is now a huge asset for Berkshire. Our ownership, however, had a shaky start. For decades, General Re was the Tiffany of reinsurers, admired by all for its underwriting skills and discipline. This reputation, unfortunately, outlived its factual underpinnings, a flaw that I completely missed when I made the decision in 1998 to merge with General Re. The General Re of 1998 was not operated as the General Re of 1968 or 1978.
http://www.berkshirehathaway.com/letters/2007ltr.pdf#page=9

It’s unlikely that our float will grow much – if at all – from its current level. That’s mainly because we already have an outsized amount relative to our premium volume. Were there to be a decline in float, I will add, it would almost certainly be very gradual and therefore impose no unusual demand for funds on us…

We have another insurance powerhouse in General Re, managed by Tad Montross… General Re’s huge float has been better than cost-free under his leadership, and we expect that, on average, it will continue to be. In the first few years after we acquired it, General Re was a major headache. Now it’s a treasure.
http://www.berkshirehathaway.com/letters/2011ltr.pdf#page=8

[Buffett repeatedly penned this 2013-2015]:
It can be remembered that soon after we purchased General Re,
the company was beset by problems that caused commentators –
and me as well, briefly – to believe I had made a huge mistake.
That day is long gone. General Re is now a gem.

http://www.berkshirehathaway.com/letters/2013ltr.pdf#page=8
http://www.berkshirehathaway.com/letters/2014ltr.pdf#page=9
http://www.berkshirehathaway.com/letters/2015ltr.pdf#page=11...

[Next year Buffett takes the shine off the Gen Re gem with a reminder how undervalued Berkshire stock almost always is, relatively?]

Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock – a boatload of stock – to buy General Reinsurance in late 1998. After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses).

Early in 2000, I atoned for that folly by buying 76% (since grown to 90%) of MidAmerican Energy, a brilliantly-managed utility business that has delivered us many large opportunities to make profitable and socially-useful investments. The MidAmerican cash purchase – I was learning – firmly launched us on our present course of (1) continuing to build our insurance operation; (2) energetically acquiring large and diversified non-insurance businesses and (3) largely making our deals from internally-generated cash. (Today, I would rather prep for a colonoscopy than issue Berkshire shares.)

. . . We have another reinsurance powerhouse in General Re, managed until recently by Tad Montross. After 39 years at General Re, Tad retired in 2016. Tad was a class act in every way and we owe him a ton of thanks. Kara Raiguel, who has worked with Ajit for 16 years, is now CEO of General Re.

http://www.berkshirehathaway.com/letters/2016ltr.pdf#page=9

[Unlike years prior, beginning in 2017—float for each insurance ‘division’ was not disclosed, only totals]:

Prior to 2017, Berkshire had recorded 14 consecutive years of underwriting profits, which totaled $28.3 billion pre-tax. I have regularly told you that I expect Berkshire to attain an underwriting profit in a majority of years, but also to experience losses from time to time. My warning became fact in 2017, as we lost $3.2 billion pre-tax from underwriting…

Berkshire has been a leader in long-tail business for many years. In particular, we have specialized in jumbo reinsurance policies that leave us assuming long-tail losses already incurred by other p/c insurers. As a result of our emphasizing that sort of business, Berkshire’s growth in float has been extraordinary. We are now the country’s second largest p/c company measured by premium volume and its leader, by far, in float. Here’s the record: (in $ millions)

Year Premiums Float
1970 $39 $39
1980 $185 $237
1990 $582 $1632
2000 $19,343 $27,871
2010 $30,749 $65,832
2017 $60,597 $114,500

http://www.berkshirehathaway.com/letters/2017ltr.pdf#page=6

2018 (just float) $122,732

I believe Berkshire’s intrinsic value can be approximated by summing the values of our four asset-laden groves and then subtracting an appropriate amount for taxes eventually payable on the sale of marketable securities. . .

The interest cost on all of our debt has been deducted as an expense in calculating the earnings at Berkshire’s non-insurance businesses. Beyond that, much of our ownership of the first four groves is financed by funds generated from Berkshire’s fifth grove – a collection of exceptional insurance companies. We call those funds “float,” a source of financing that we expect to be cost-free – or maybe even better than that – over time. We will explain the characteristics of float later in this letter.

Finally, a point of key and lasting importance: Berkshire’s value is maximized by our having assembled the five groves into a single entity. This arrangement allows us to seamlessly and objectively allocate major amounts of capital, eliminate enterprise risk, avoid insularity, fund assets at exceptionally low cost, occasionally take advantage of tax efficiencies, and minimize overhead. At Berkshire, the whole is greater – considerably greater – than the sum of the parts.
. . .
Our property/casualty (“P/C”) insurance business – our fifth grove – has been the engine propelling Berkshire’s growth since 1967, the year we acquired National Indemnity and its sister company, National Fire & Marine, for $8.6 million. Today, National Indemnity is the largest property/casualty company in the world as measured by net worth.
. . .
Moreover, our P/C companies have an excellent underwriting record. Berkshire has now operated at an underwriting profit for 15 of the past 16 years, the exception being 2017, when our pre-tax loss was $3.2 billion. For the entire 16-year span, our pre-tax gain totaled $27 billion, of which $2 billion was recorded in 2018.
. . .

As I have often done before, I will emphasize that this happy outcome is far from a sure thing: Mistakes in assessing insurance risks can be huge and can take many years to surface. (Think asbestos.) A major catastrophe that will dwarf hurricanes Katrina and Michael will occur – perhaps tomorrow, perhaps many decades from now. “The Big One” may come from a traditional source, such as a hurricane or earthquake, or it may be a total surprise involving, say, a cyber attack having disastrous consequences beyond anything insurers now contemplate. When such a megacatastrophe strikes, we will get our share of the losses and they will be big – very big. Unlike many other insurers, however, we will be looking to add business the next day.
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No. of Recommendations: 5
Current market value of 272,000 A shares is $83B (possibly growing @ roughly 9% per annum going forward).

2015 annual report separately showed that GenRe had a float of $18.6B. This actually was a decline from $19.3B in 2014. Let us assume that float stayed constant from 2015 onwards.

Per 2017 annual report, GenRe had total revenues of $6.65B. I estimate that GenRe's underwriting achieved at best breakeven results since its acquisition. Let us assign a generous current value to GenRe operations = float + 1x revenue = $25.3B.

I am sure I am ignoring some opportunity costs generated by GenRe float that Buffett took advantage of. But I am also ignoring massive losses early on & other problems at GenRe (for example management distraction, AIG deal, derivative losses etc.).

But anyway one looks at it, Berkshire shareholders would have been better off if GenRe was never acquired for that much stock.
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No. of Recommendations: 14
Current market value of 272,000 A shares is $83B (possibly growing @ roughly 9% per annum going forward).


Gen Re was acquired in 1988 for $22b worth of Berkshire shares. The fact that those shares, 21 years later, are worth $83b does not by any means mean that Gen Re and the money it has spun off since then has to be worth $83b. Buffett has had ample opportunity to repurchase those shares in the meantime, but has preferred to make other big acquisitions (Lubrizol, BNSF, MidAmerican, etc.)

So you might say that using fully priced Berkshire shares in 1998 made it possible to do these other acquisitions with cash, the cash not used to buy Gen Re.

Share dilution is a legitimate concern, but the problem is not issuing shares when they are fully priced (1998), it is NOT retiring them when they are more moderately priced (most years from 2000 to today.)

Dtb
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No. of Recommendations: 2
Instead of calling the GenRe deal a success (I never came close to calling it anything) or failure, I simply made note of what Charlie Munger said twice. Dismiss it completely if you want, I don't because the man proved with the stamp business what looks to be a total disaster by the purchase numbers, etc. is often a home run. Why are we not thinking beyond the tiny little one variable box? When...on the insurance numbers is often more important than how much.

Munger should be asked in detail about GenRe.
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No. of Recommendations: 0
Were you holding BRKA before they bought a $500 tire iron in 1998? How far from the hospital do you think they were before buying the tire iron? If you were holding, and thought they needed a $500 tire iron to survive, why were you holding?

PP
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