BRK-B, Value Fund?

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ChinchillaWhiplash
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BRK-B, Value Fund?

Post by ChinchillaWhiplash »

Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
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Re: BRK-B, Value Fund?

Post by 123 »

We held some BRK Berkshire for years and sold it in the interest of account simplification (TIRA). While we held it we treated it as similar to either Total Stock Market or S&P 500, we didn't consider it as a value fund. Yes they do look for "opportunities" but in the grand scheme of things it's mostly large cap stocks I believe.
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Re: BRK-B, Value Fund?

Post by Jack FFR1846 »

I hold it and consider it large cap growth.
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Re: BRK-B, Value Fund?

Post by MotoTrojan »

Jack FFR1846 wrote: Sat Oct 10, 2020 4:41 pm I hold it and consider it large cap growth.
It’s P/B would make this seem like an odd choice.
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Re: BRK-B, Value Fund?

Post by TheLaughingCow »

I would consider holding BRK to be less safe than holding a value fund. A single liability could balloon and kill the company. That won't happen to a value fund.
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Re: BRK-B, Value Fund?

Post by invest2bfree »

ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
Berkshire is a conglomerate and there was a time when they were in vogue.

Currently it suffers a conglomerate discount and if Buffet retires then discount is going to be pronounced. Eventually they might have to spinoff\sell their relevant pieces.
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Re: BRK-B, Value Fund?

Post by 000 »

BRK is probably the last individual stock I would buy.
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Re: BRK-B, Value Fund?

Post by Always passive »

000 wrote: Sat Oct 10, 2020 9:46 pm BRK is probably the last individual stock I would buy.
why?
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Re: BRK-B, Value Fund?

Post by Johm221122 »

ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
I see it as an unnecessary risk. You can't get past returns and Berkshire Hathaway has no special ability to out perform the market.
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Re: BRK-B, Value Fund?

Post by tiburblium »

Jack FFR1846 wrote: Sat Oct 10, 2020 4:41 pm I hold it and consider it large cap growth.
Why? It’s one of the largest contintutents in most large cap value funds
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Re: BRK-B, Value Fund?

Post by Valuethinker »

ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
Not really.

For one thing , 20% of the implied valuation of BH is now in its holding in Apple - a large cap growth stock.

Buffett's approach to Value is starkly different from the mechanical quant low PE- low P/B - low p/ CF approach. His approach is not "cheap stocks" but "buy good businesses at cheap prices" ie companies with a "moat" around their returns.

Thus utilities. Railroads ( a kind of utility). Airlines it looked like he was seeing a stabilisation around "hub" monopolies, but he has now sold out - Covid-19 reflecting perhaps a permanent diminution in their long term value? And he sold out of Goldman Sachs, which also surprised me -- as they have had the closest thing to franchise value in investment banking. G3 partners/ Heinz/ Kraft -- branded consumer staples. GEICO of course, which has given him a cheaper source of leverage than anyone else has.

But conversely, he has eschewed investing in tobacco - an industry with long term problems but a cash flow machine for investors in the short term. Pharmaceuticals - too complex to figure out the product cycles, high risks associated with new product development, political risk, etc. Technology generally - brutally short product cycles, technology risk - -except IBM which has been a poor investment.

That's very different than almost any other value fund you can buy.

What happens when Buffett dies? Well it's likely that his fund managers will not be able to duplicate his success-- too much money to manage, and the "spark" is far rarer than all the books on investment would have you believe.

Eventually I believe they will demerge into a group of businesses that are less conglomerate-like.

Counterargument is that there's a unique capital synergy between the insurance part, say, and the railroad side. One borrows cheaply, the other invests for a somewhat predictable return. But I think in the absence of Buffett, it's going to be hard to maintain that credibility with investors.

So you have to figure out what your tax position would be as/ when BH breaks itself up?
Best example I can think of was Canadian Pacific - which was a conglomerate than included railways, coal, hotels and a host of other businesses. It (Canadian taxes) created something of a nightmare in terms of working out book cost, and the breakup triggered taxable events. US tax position may be different.
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Re: BRK-B, Value Fund?

Post by Always passive »

Valuethinker wrote: Sun Oct 11, 2020 5:09 am
ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
Not really.

For one thing , 20% of the implied valuation of BH is now in its holding in Apple - a large cap growth stock.

Buffett's approach to Value is starkly different from the mechanical quant low PE- low P/B - low p/ CF approach. His approach is not "cheap stocks" but "buy good businesses at cheap prices" ie companies with a "moat" around their returns.

Thus utilities. Railroads ( a kind of utility). Airlines it looked like he was seeing a stabilisation around "hub" monopolies, but he has now sold out - Covid-19 reflecting perhaps a permanent diminution in their long term value? And he sold out of Goldman Sachs, which also surprised me -- as they have had the closest thing to franchise value in investment banking. G3 partners/ Heinz/ Kraft -- branded consumer staples. GEICO of course, which has given him a cheaper source of leverage than anyone else has.

But conversely, he has eschewed investing in tobacco - an industry with long term problems but a cash flow machine for investors in the short term. Pharmaceuticals - too complex to figure out the product cycles, high risks associated with new product development, political risk, etc. Technology generally - brutally short product cycles, technology risk - -except IBM which has been a poor investment.

That's very different than almost any other value fund you can buy.

What happens when Buffett dies? Well it's likely that his fund managers will not be able to duplicate his success-- too much money to manage, and the "spark" is far rarer than all the books on investment would have you believe.

Eventually I believe they will demerge into a group of businesses that are less conglomerate-like.

Counterargument is that there's a unique capital synergy between the insurance part, say, and the railroad side. One borrows cheaply, the other invests for a somewhat predictable return. But I think in the absence of Buffett, it's going to be hard to maintain that credibility with investors.

So you have to figure out what your tax position would be as/ when BH breaks itself up?
Best example I can think of was Canadian Pacific - which was a conglomerate than included railways, coal, hotels and a host of other businesses. It (Canadian taxes) created something of a nightmare in terms of working out book cost, and the breakup triggered taxable events. US tax position may be different.
Good points. I have held BRK for a long time, likely in my IRA (do not hold enough bonds, so I have room ); thus I could easily sell it. Maybe I have some feelings for Buffett that prevents me to do what maybe the right thing to do now!
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Re: BRK-B, Value Fund?

Post by PicassoSparks »

This paper argues that Berkshire is best understood as a multi-factor fund.
https://www.factorresearch.com/research ... f-all-time
A factor exposure of Berkshire Hathaway reveals structural factor tilts
Long Value, Size, Quality, and Low Volatility factors and short Growth and Dividend Yield
Warren Buffet generated little alpha, but is highly skilled at harvesting factor returns
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Re: BRK-B, Value Fund?

Post by LFS1234 »

Valuethinker wrote: Sun Oct 11, 2020 5:09 am
Eventually I believe they will demerge into a group of businesses that are less conglomerate-like.

So you have to figure out what your tax position would be as/when BH breaks itself up?
I think the break-up scenario is extremely unlikely due to Berkshire's shareholder base.

BRK shareholders are a self-selected group of people who want capital appreciation in real terms with safety in mind, and who do not need or want taxable dividends from their BRK shares. In 2014, BRK shareholders voted by a 97-to-3 margin against a shareholder proposal for the company to pay dividends. Furthermore, voting rights are heavily concentrated in A-shares, which currently trade for over $320,000 each. A-shares can be converted to B-shares, but not vice versa. So the voting power will remain concentrated with wealthy people who do not need or want dividends. For the record, the 2014 B-share voters voted against dividends with the same 97-3 margin that the A-share voters did. Long-term investors do not have to be wealthy to understand the attraction of having some portion of their portfolios in this type of stock; especially if they have sufficient other income to live on and if they live in jurisdictions with high income taxes.

Due to its size, any longterm market outperformance by BRK would be likely to be small - perhaps an annual percentage point or so. Similarly, any longterm underperformance would be likely to be small. The shareholder-level tax advantage of not having to deal with unwanted dividends would make up for some underperformance. BRK is a cash cow, and is in a position to buy back its own shares if/when these are significantly undervalued and if/when it can find no better investment opportunities.

Berkshire has published an "owner's manual" for its shareholders, easily findable on-line. This is a worthwhile read for anyone considering an investment in the company.
I think in the absence of Buffett, it's going to be hard to maintain that credibility with investors.

It's likely that his fund managers will not be able to duplicate his success-- too much money to manage, and the "spark" is far rarer than all the books on investment would have you believe.
BRK does not need to impress those who see the financial world primarily in terms of Greek letters, nor does it need to impress day traders or fast-buck artists. BRK only needs to maintain credibility with the type of investors it already has, and there will always be a constituency with a traditional albeit apparently old-fashioned, accounting-based grasp of investing. I see no reason to believe that Buffett's successors would lose this constituency any time soon.

There was a CNBC interview in 2014 with one of BRK's "new" investment managers, in which he mentioned that 99% of investment opportunities could be dismissed within five minutes. Anything getting past the initial quick filters can require another 500 - 1000 hours of analysis. This type of work is exciting to a very small number of people, some of whom work for BRK.

Regarding the OP's question, about 15% of my net worth is in BRK stock, which I hold in taxable accounts. I am comfortable with that level. If it goes to zero (very unlikely) it won't be a catastrophe, but I view it as being much more likely to generate approximately market returns or somewhat above market returns without generating unwanted tax liabilities (from being subject to a taxable takeovers or from paying dividends). I would much rather hold that 15% in BRK than holding it in fixed income instruments of any kind.
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Re: BRK-B, Value Fund?

Post by YRT70 »

PicassoSparks wrote: Sun Oct 11, 2020 6:12 am This paper argues that Berkshire is best understood as a multi-factor fund.
https://www.factorresearch.com/research ... f-all-time
A factor exposure of Berkshire Hathaway reveals structural factor tilts
Long Value, Size, Quality, and Low Volatility factors and short Growth and Dividend Yield
Warren Buffet generated little alpha, but is highly skilled at harvesting factor returns
Thanks. That was interesting.
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Re: BRK-B, Value Fund?

Post by 3funder »

I suppose.
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Re: BRK-B, Value Fund?

Post by tibbitts »

ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
For a very long time it was argued that GE was effectively a mutual fund due to its industry diversification. You probably know how that ended.
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Re: BRK-B, Value Fund?

Post by Always passive »

tibbitts wrote: Sun Oct 11, 2020 12:44 pm
ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
For a very long time it was argued that GE was effectively a mutual fund due to its industry diversification. You probably know how that ended.
Although I own BKRB I do agree, you rely on one individual, the CEO. When Buffett goes, who knows! No diversification.
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Re: BRK-B, Value Fund?

Post by arcticpineapplecorp. »

last 10 years below total stock in blue, value index in orange and brk.b in green. last 10 years you'd have done best in total stock market, better (than brk.b) in a value index. you decide.

Image

source:
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D
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Re: BRK-B, Value Fund?

Post by 000 »

Always passive wrote: Sun Oct 11, 2020 12:55 am
000 wrote: Sat Oct 10, 2020 9:46 pm BRK is probably the last individual stock I would buy.
why?
In my opinion, BRK management seems more interested in their own whims and fancies than shareholder interest.
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Re: BRK-B, Value Fund?

Post by aristotelian »

TheLaughingCow wrote: Sat Oct 10, 2020 5:36 pm I would consider holding BRK to be less safe than holding a value fund. A single liability could balloon and kill the company. That won't happen to a value fund.
Berkshire has more cash on hand than debt so I do not think that is literally true.
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Re: BRK-B, Value Fund?

Post by laughlinlvr »

There's always the intangible benefit of having the printed annual report displayed on one's coffee table.
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Re: BRK-B, Value Fund?

Post by tibbitts »

laughlinlvr wrote: Mon Oct 12, 2020 11:20 am There's always the intangible benefit of having the printed annual report displayed on one's coffee table.
Why is that a benefit, since you'll be the only person who ever sees it? To me it would be one more thing to have to clean off the table. Well in my case the kitchen table, since I don't have a coffee table.
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Re: BRK-B, Value Fund?

Post by Valuethinker »

000 wrote: Sun Oct 11, 2020 5:10 pm
Always passive wrote: Sun Oct 11, 2020 12:55 am
000 wrote: Sat Oct 10, 2020 9:46 pm BRK is probably the last individual stock I would buy.
why?
In my opinion, BRK management seems more interested in their own whims and fancies than shareholder interest.
Don't confuse Warren Buffett's folksy manner and talk with his brain.

Even now, that is probably the sharpest mind in investing. No one has beaten his long term record, he really is the outlier.

What he says is largely distraction from what he does. If you go back and read his letters, there's a picture there of his approach to investing, corporate governance etc. What he says in BH meetings? I don't believe that is transcripted (I could be wrong) but in any case a lot of it is pure smoke and mirrors.
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Re: BRK-B, Value Fund?

Post by Valuethinker »

aristotelian wrote: Mon Oct 12, 2020 7:17 am
TheLaughingCow wrote: Sat Oct 10, 2020 5:36 pm I would consider holding BRK to be less safe than holding a value fund. A single liability could balloon and kill the company. That won't happen to a value fund.
Berkshire has more cash on hand than debt so I do not think that is literally true.
No the problem is the contingent insurance liabilities. Those weren't on the balance sheet of any number of bust insurers, either.

When he bought one insurer, he noted that there were derivatives contracts that could potentially bust the business, in certain extreme circumstances.
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Re: BRK-B, Value Fund?

Post by Valuethinker »

LFS1234 wrote: Sun Oct 11, 2020 10:49 am
Valuethinker wrote: Sun Oct 11, 2020 5:09 am
Eventually I believe they will demerge into a group of businesses that are less conglomerate-like.

So you have to figure out what your tax position would be as/when BH breaks itself up?
I think the break-up scenario is extremely unlikely due to Berkshire's shareholder base.

BRK shareholders are a self-selected group of people who want capital appreciation in real terms with safety in mind, and who do not need or want taxable dividends from their BRK shares. In 2014, BRK shareholders voted by a 97-to-3 margin against a shareholder proposal for the company to pay dividends. Furthermore, voting rights are heavily concentrated in A-shares, which currently trade for over $320,000 each. A-shares can be converted to B-shares, but not vice versa. So the voting power will remain concentrated with wealthy people who do not need or want dividends. For the record, the 2014 B-share voters voted against dividends with the same 97-3 margin that the A-share voters did. Long-term investors do not have to be wealthy to understand the attraction of having some portion of their portfolios in this type of stock; especially if they have sufficient other income to live on and if they live in jurisdictions with high income taxes.

Due to its size, any longterm market outperformance by BRK would be likely to be small - perhaps an annual percentage point or so. Similarly, any longterm underperformance would be likely to be small. The shareholder-level tax advantage of not having to deal with unwanted dividends would make up for some underperformance. BRK is a cash cow, and is in a position to buy back its own shares if/when these are significantly undervalued and if/when it can find no better investment opportunities.

Berkshire has published an "owner's manual" for its shareholders, easily findable on-line. This is a worthwhile read for anyone considering an investment in the company.
I think in the absence of Buffett, it's going to be hard to maintain that credibility with investors.

It's likely that his fund managers will not be able to duplicate his success-- too much money to manage, and the "spark" is far rarer than all the books on investment would have you believe.
BRK does not need to impress those who see the financial world primarily in terms of Greek letters, nor does it need to impress day traders or fast-buck artists. BRK only needs to maintain credibility with the type of investors it already has, and there will always be a constituency with a traditional albeit apparently old-fashioned, accounting-based grasp of investing. I see no reason to believe that Buffett's successors would lose this constituency any time soon.

There was a CNBC interview in 2014 with one of BRK's "new" investment managers, in which he mentioned that 99% of investment opportunities could be dismissed within five minutes. Anything getting past the initial quick filters can require another 500 - 1000 hours of analysis. This type of work is exciting to a very small number of people, some of whom work for BRK.

Regarding the OP's question, about 15% of my net worth is in BRK stock, which I hold in taxable accounts. I am comfortable with that level. If it goes to zero (very unlikely) it won't be a catastrophe, but I view it as being much more likely to generate approximately market returns or somewhat above market returns without generating unwanted tax liabilities (from being subject to a taxable takeovers or from paying dividends). I would much rather hold that 15% in BRK than holding it in fixed income instruments of any kind.
I am thinking about the post Buffett world.

There will be a conglomerate discount, and it's likely his managers will underperform. Because everybody who is not Buffett underperforms, in the long run.

The usual recipe is to break things up, spin out businesses which are unrelated to the core, etc.

Shrug. There may be conglomerate synergies - historically that's been about cheap funding via the insurance companies. In which case maybe it is to benefit of shareholders to stay together.

I agree there will be inertia about doing anything. But the history of conglomerates is that they eventually break up, because the market values the sum of the parts greater than the whole. Even in a situation where Buffett's head office is as small as it is i.e. even when there are not obvious synergies from disassociating the constituent businesses (eliminating cumbersome HQs that lean over divisional management shareholders, etc).
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Re: BRK-B, Value Fund?

Post by dharrythomas »

Valuethinker wrote: Mon Oct 12, 2020 11:57 am
LFS1234 wrote: Sun Oct 11, 2020 10:49 am
Valuethinker wrote: Sun Oct 11, 2020 5:09 am
Eventually I believe they will demerge into a group of businesses that are less conglomerate-like.

So you have to figure out what your tax position would be as/when BH breaks itself up?
I think the break-up scenario is extremely unlikely due to Berkshire's shareholder base.

BRK shareholders are a self-selected group of people who want capital appreciation in real terms with safety in mind, and who do not need or want taxable dividends from their BRK shares. In 2014, BRK shareholders voted by a 97-to-3 margin against a shareholder proposal for the company to pay dividends. Furthermore, voting rights are heavily concentrated in A-shares, which currently trade for over $320,000 each. A-shares can be converted to B-shares, but not vice versa. So the voting power will remain concentrated with wealthy people who do not need or want dividends. For the record, the 2014 B-share voters voted against dividends with the same 97-3 margin that the A-share voters did. Long-term investors do not have to be wealthy to understand the attraction of having some portion of their portfolios in this type of stock; especially if they have sufficient other income to live on and if they live in jurisdictions with high income taxes.

Due to its size, any longterm market outperformance by BRK would be likely to be small - perhaps an annual percentage point or so. Similarly, any longterm underperformance would be likely to be small. The shareholder-level tax advantage of not having to deal with unwanted dividends would make up for some underperformance. BRK is a cash cow, and is in a position to buy back its own shares if/when these are significantly undervalued and if/when it can find no better investment opportunities.

Berkshire has published an "owner's manual" for its shareholders, easily findable on-line. This is a worthwhile read for anyone considering an investment in the company.
I think in the absence of Buffett, it's going to be hard to maintain that credibility with investors.

It's likely that his fund managers will not be able to duplicate his success-- too much money to manage, and the "spark" is far rarer than all the books on investment would have you believe.
BRK does not need to impress those who see the financial world primarily in terms of Greek letters, nor does it need to impress day traders or fast-buck artists. BRK only needs to maintain credibility with the type of investors it already has, and there will always be a constituency with a traditional albeit apparently old-fashioned, accounting-based grasp of investing. I see no reason to believe that Buffett's successors would lose this constituency any time soon.

There was a CNBC interview in 2014 with one of BRK's "new" investment managers, in which he mentioned that 99% of investment opportunities could be dismissed within five minutes. Anything getting past the initial quick filters can require another 500 - 1000 hours of analysis. This type of work is exciting to a very small number of people, some of whom work for BRK.

Regarding the OP's question, about 15% of my net worth is in BRK stock, which I hold in taxable accounts. I am comfortable with that level. If it goes to zero (very unlikely) it won't be a catastrophe, but I view it as being much more likely to generate approximately market returns or somewhat above market returns without generating unwanted tax liabilities (from being subject to a taxable takeovers or from paying dividends). I would much rather hold that 15% in BRK than holding it in fixed income instruments of any kind.
I am thinking about the post Buffett world.

There will be a conglomerate discount, and it's likely his managers will underperform. Because everybody who is not Buffett underperforms, in the long run.

The usual recipe is to break things up, spin out businesses which are unrelated to the core, etc.

Shrug. There may be conglomerate synergies - historically that's been about cheap funding via the insurance companies. In which case maybe it is to benefit of shareholders to stay together.

I agree there will be inertia about doing anything. But the history of conglomerates is that they eventually break up, because the market values the sum of the parts greater than the whole. Even in a situation where Buffett's head office is as small as it is i.e. even when there are not obvious synergies from disassociating the constituent businesses (eliminating cumbersome HQs that lean over divisional management shareholders, etc).
Valuethinker’s analysis and prediction is probably closest. It mirrors the history of other conglomerates described in “”The Outsiders”.

BRK’s shareholder base has been and will continue to change. Buffet and Munger hold too much stock to make longer term predictions. Buffett is converting his stock to B shares and giving the bulk to the Gates Foundation. The Gates Foundation will sell it. As the A holders who Buffett made rich die at least some of that will be converted and sold. Between activist shareholders and institutional stockholders, there will be a great deal of pressure on a management that will have neither the reputation nor the controlling stock position to ignore the pressure.

Don’t know what it will look like, but my bet would be that BRK will be very different by 2035— Of course, that would be a winning bet on almost everything.
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Re: BRK-B, Value Fund?

Post by LFS1234 »

Valuethinker wrote: Mon Oct 12, 2020 11:57 am
I am thinking about the post Buffett world.

There will be a conglomerate discount, and it's likely his managers will underperform. Because everybody who is not Buffett underperforms, in the long run.

The usual recipe is to break things up, spin out businesses which are unrelated to the core, etc.

Shrug. There may be conglomerate synergies - historically that's been about cheap funding via the insurance companies. In which case maybe it is to benefit of shareholders to stay together.

I agree there will be inertia about doing anything. But the history of conglomerates is that they eventually break up, because the market values the sum of the parts greater than the whole. Even in a situation where Buffett's head office is as small as it is i.e. even when there are not obvious synergies from disassociating the constituent businesses (eliminating cumbersome HQs that lean over divisional management shareholders, etc).
The history of conglomerates is cyclical. At times they are popular. At other times they are unpopular, and they get split up into pieces.

What counts in the long term for any business is the rate of compounding of intrinsic value. Where the advantages of economies of scale exceed the disadvantages of increasing corporate bureaucracy, size is good. Where the opposite is the case, smaller is better.

In Business Principle #11 of the earlier-mentioned "Owner's Manual", Buffett writes:

"You should be fully aware of one attitude Charlie (Munger) and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses".

There will be considerable resistance to divesting assets.

Even if it were desirable, breaking up the company would be impractical. Who would be able to pay a premium for BNSF, for example? Synergies are unavailable, because antitrust would prohibit combining this asset with a similar one. If there are synergies to be had with anyone, BRK probably has the ability to buy the other entities. The opposite is much less likely to be the case.

There is a lot of value to being able to move pre-tax cash from the business units that generate a lot of it, to the business units that can use a lot of it wisely. Breaking the company up would destroy this ability. There is no vast bureaucracy to get rid of. The CEO is not overpaid. Of course some business units will reach the end of their life cycles, but others will have expansion opportunities ahead.

In the very long term, you may be right. Very few companies have lasted many hundreds of years; some of the oldest are sake companies and beer companies. A few trading firms have been around for centuries. Periodic debt crises kill a lot of companies. Berkshire is very careful with leverage.

If there is a persistent conglomerate discount, the shareholders aren't damaged. If you buy at 20% off intrinsic value and two decades later sell at that same 20% discount to intrinsic value, and the company is not a dividend-payer, then you do just as well as if there was no discount involved. If the company is a dividend-payer, you do better if you buy and sell at the same discount.
dharrythomas wrote: Mon Oct 12, 2020 1:14 pm
BRK’s shareholder base has been and will continue to change. Buffet and Munger hold too much stock to make longer term predictions. Buffett is converting his stock to B shares and giving the bulk to the Gates Foundation. The Gates Foundation will sell it. As the A holders who Buffett made rich die at least some of that will be converted and sold. Between activist shareholders and institutional stockholders, there will be a great deal of pressure on a management that will have neither the reputation nor the controlling stock position to ignore the pressure.
BRK's shareholder base will continue to change as old shareholders die off and new ones arrive, but the new ones will be seeking the same characteristics that the previous set has sought. Of course, the unusually high early rates of growth are no longer possible, but market or market-plus returns certainly are.

What pressure do you expect from activists and institutions? They would have to have a better plan, which also would have to be implementable. There are lots of targets out there which are better in terms of possible value creation, current undervaluation, current vulnerability, and convenient size. The RJR Nabisco LBO of 1988 was considered impossibly large to pull off; that was a $24.5 billion deal ($53 billion in today's money). The market value of BRK is almost ten times that.

I don't see a takeover/breakup risk in the next 20 years, at least not one that could result in taxable spinoffs. Tax-free spinoffs, maybe, but quite unlikely in my view.
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Re: BRK-B, Value Fund?

Post by dharrythomas »

LFS1234 wrote: Tue Oct 13, 2020 11:37 am
Valuethinker wrote: Mon Oct 12, 2020 11:57 am
I am thinking about the post Buffett world.

There will be a conglomerate discount, and it's likely his managers will underperform. Because everybody who is not Buffett underperforms, in the long run.

The usual recipe is to break things up, spin out businesses which are unrelated to the core, etc.

Shrug. There may be conglomerate synergies - historically that's been about cheap funding via the insurance companies. In which case maybe it is to benefit of shareholders to stay together.

I agree there will be inertia about doing anything. But the history of conglomerates is that they eventually break up, because the market values the sum of the parts greater than the whole. Even in a situation where Buffett's head office is as small as it is i.e. even when there are not obvious synergies from disassociating the constituent businesses (eliminating cumbersome HQs that lean over divisional management shareholders, etc).
The history of conglomerates is cyclical. At times they are popular. At other times they are unpopular, and they get split up into pieces.

What counts in the long term for any business is the rate of compounding of intrinsic value. Where the advantages of economies of scale exceed the disadvantages of increasing corporate bureaucracy, size is good. Where the opposite is the case, smaller is better.

In Business Principle #11 of the earlier-mentioned "Owner's Manual", Buffett writes:

"You should be fully aware of one attitude Charlie (Munger) and I share that hurts our financial performance: Regardless of price, we have no interest at all in selling any good businesses that Berkshire owns. We are also very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. We hope not to repeat the capital-allocation mistakes that led us into such sub-par businesses".

There will be considerable resistance to divesting assets.

Even if it were desirable, breaking up the company would be impractical. Who would be able to pay a premium for BNSF, for example? Synergies are unavailable, because antitrust would prohibit combining this asset with a similar one. If there are synergies to be had with anyone, BRK probably has the ability to buy the other entities. The opposite is much less likely to be the case.

There is a lot of value to being able to move pre-tax cash from the business units that generate a lot of it, to the business units that can use a lot of it wisely. Breaking the company up would destroy this ability. There is no vast bureaucracy to get rid of. The CEO is not overpaid. Of course some business units will reach the end of their life cycles, but others will have expansion opportunities ahead.

In the very long term, you may be right. Very few companies have lasted many hundreds of years; some of the oldest are sake companies and beer companies. A few trading firms have been around for centuries. Periodic debt crises kill a lot of companies. Berkshire is very careful with leverage.

If there is a persistent conglomerate discount, the shareholders aren't damaged. If you buy at 20% off intrinsic value and two decades later sell at that same 20% discount to intrinsic value, and the company is not a dividend-payer, then you do just as well as if there was no discount involved. If the company is a dividend-payer, you do better if you buy and sell at the same discount.
dharrythomas wrote: Mon Oct 12, 2020 1:14 pm
BRK’s shareholder base has been and will continue to change. Buffet and Munger hold too much stock to make longer term predictions. Buffett is converting his stock to B shares and giving the bulk to the Gates Foundation. The Gates Foundation will sell it. As the A holders who Buffett made rich die at least some of that will be converted and sold. Between activist shareholders and institutional stockholders, there will be a great deal of pressure on a management that will have neither the reputation nor the controlling stock position to ignore the pressure.
BRK's shareholder base will continue to change as old shareholders die off and new ones arrive, but the new ones will be seeking the same characteristics that the previous set has sought. Of course, the unusually high early rates of growth are no longer possible, but market or market-plus returns certainly are.

What pressure do you expect from activists and institutions? They would have to have a better plan, which also would have to be implementable. There are lots of targets out there which are better in terms of possible value creation, current undervaluation, current vulnerability, and convenient size. The RJR Nabisco LBO of 1988 was considered impossibly large to pull off; that was a $24.5 billion deal ($53 billion in today's money). The market value of BRK is almost ten times that.

I don't see a takeover/breakup risk in the next 20 years, at least not one that could result in taxable spinoffs. Tax-free spinoffs, maybe, but quite unlikely in my view.

The history of conglomerates is that they are taken apart under new management shortly after the founder is gone. Over time, the Gates Foundation will liquidate the Buffett stake. I don’t pretend to know what will happen, and with better than 1/3of the stock in play, neither should anyone else.

My crystal ball doesn’t go out 20 years, my big bet is on ever accelerating change. Ever accelerating non continuous change leads me to recommend broad diversification. I won’t hit a home run, but I’m unlikely to strike out.
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Re: BRK-B, Value Fund?

Post by Valueinvestor2 »

ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
By definition, bogleheads don’t believe you can beat the market. Yet warren has beat the market even when he had to play the game with an unfair disadvantage (too much money).

Most BH will chalk this up to luck or a statistical anomaly.

BRB.B will undoubtedly beat the market over the next 10 years. And, wait for it bogleheads, there are 0 fees.

Why will BH outperform the market? 1) bc markets are at extreme values today 2) brkb is relatively cheap on a book value basis 3) brkb has 100b cash to deploy when it hits the fan in the next 1-2 years due to normal business cycles.
000
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Re: BRK-B, Value Fund?

Post by 000 »

Valueinvestor2 wrote: Fri Oct 16, 2020 6:29 pm BRB.B will undoubtedly beat the market over the next 10 years. And, wait for it bogleheads, there are 0 fees.

Why will BH outperform the market? 1) bc markets are at extreme values today 2) brkb is relatively cheap on a book value basis 3) brkb has 100b cash to deploy when it hits the fan in the next 1-2 years due to normal business cycles.
Possible, but I agree with comments upthread - BRK is very likely to be split up when Buffett dies.
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Re: BRK-B, Value Fund?

Post by tibbitts »

Valueinvestor2 wrote: Fri Oct 16, 2020 6:29 pm
ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
By definition, bogleheads don’t believe you can beat the market. Yet warren has beat the market even when he had to play the game with an unfair disadvantage (too much money).

Most BH will chalk this up to luck or a statistical anomaly.

BRB.B will undoubtedly beat the market over the next 10 years. And, wait for it bogleheads, there are 0 fees.

Why will BH outperform the market? 1) bc markets are at extreme values today 2) brkb is relatively cheap on a book value basis 3) brkb has 100b cash to deploy when it hits the fan in the next 1-2 years due to normal business cycles.
So, it's the nature/structure of Berkshire that will cause it to beat the market over 10 years? Surely you don't expect WB to be personally involved with Berkshire in a significant way for 10 more years? How long would Berkshire have to underperform for, with or without WB, before you declared that the magic was gone?
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Re: BRK-B, Value Fund

Post by PicassoSparks »

When Steve Jobs died, many predicted the end of Apple. They did not think that the company could continue to succeed without the genius founder at the helm. Apple’s ability to produce new design hit after new design hit seemed impossible and risky even when he was alive, let alone after his loss.
Since then, the company’s stock has grown 10x.

There are many reasons for this. One of them is the investment that Jobs and his team made in internal education and culture maintenance. There’s literally an Apple University designed to teach people the approach that Apple takes to business and product design. I think that people overestimated how important Jobs was to the company and mistook the constructed myth for the truth.

Many fear the future of Berkshire without Buffett at the helm. The loss of the genius founder seems to mean the end of the company’s success. How could it go on without its Oracle? But Buffett and Munger have devoted significant ink to explaining, in public, their succession plans and how they intend to see the company run going after they die. Berkshire has always been a learning organization. Munger has devoted considerable time to writing about how and why people make so many poor decisions. It’s possible that they’ve failed to instill that knowledge in their team. But I think people are overestimating how important Buffett is to the company and mistaking the myth for the truth.
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Re: BRK-B, Value Fund?

Post by flaccidsteele »

Interesting posts. If one has enough Bs in tax-deferred accounts to convert into As, should they?
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: BRK-B, Value Fund?

Post by LFS1234 »

flaccidsteele wrote: Fri Oct 16, 2020 8:58 pm Interesting posts. If one has enough Bs in tax-deferred accounts to convert into As, should they?
Conversion is possible from A to B only, not the other way around. (Although you could sell Bs and buy As, of course)
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Re: BRK-B, Value Fund

Post by tibbitts »

PicassoSparks wrote: Fri Oct 16, 2020 8:47 pm When Steve Jobs died, many predicted the end of Apple. They did not think that the company could continue to succeed without the genius founder at the helm. Apple’s ability to produce new design hit after new design hit seemed impossible and risky even when he was alive, let alone after his loss.
Since then, the company’s stock has grown 10x.

There are many reasons for this. One of them is the investment that Jobs and his team made in internal education and culture maintenance. There’s literally an Apple University designed to teach people the approach that Apple takes to business and product design. I think that people overestimated how important Jobs was to the company and mistook the constructed myth for the truth.
When Steve Jobs left (for the first time), the end of Apple would have very nearly been an accurate prediction. What happened to the "internal education and culture maintenance" then?
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Re: BRK-B, Value Fund?

Post by flaccidsteele »

LFS1234 wrote: Fri Oct 16, 2020 9:11 pm
flaccidsteele wrote: Fri Oct 16, 2020 8:58 pm Interesting posts. If one has enough Bs in tax-deferred accounts to convert into As, should they?
Conversion is possible from A to B only, not the other way around. (Although you could sell Bs and buy As, of course)
Is there any benefit to sell Bs to buy As?
The US market always recovers. It’s never different this time. Retired in my 40s. Investing is a simple game of rinse and repeat
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Re: BRK-B, Value Fund?

Post by PicassoSparks »

tibbitts wrote: Fri Oct 16, 2020 9:26 pm When Steve Jobs left (for the first time), the end of Apple would have very nearly been an accurate prediction. What happened to the "internal education and culture maintenance" then?
They didn’t have it.

Apple University was set up as part of Jobs’ second tenure. It was part of the succession planning that came with both the massive success of the company and his terminal illness. There was no succession planning when the young CEO was ousted the first time.

If Jobs had never come back to Apple, who knows what would have happened. Maybe someone else with the kind of wisdom and skills he brought to the table would have stepped up. Maybe not. Probably not. In all likelihood, the company would have been sold off or gone bankrupt. It nearly went bankrupt when he returned. Bringing him back was an act of desperation and luck. It’s also a matter of luck that Jobs was struck with an illness that gave warning and time for succession planning.

If you’re unable to distinguish between the circumstances of his first departure and his second…
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Re: BRK-B, Value Fund?

Post by LFS1234 »

flaccidsteele wrote: Fri Oct 16, 2020 10:18 pm
LFS1234 wrote: Fri Oct 16, 2020 9:11 pm
flaccidsteele wrote: Fri Oct 16, 2020 8:58 pm Interesting posts. If one has enough Bs in tax-deferred accounts to convert into As, should they?
Conversion is possible from A to B only, not the other way around. (Although you could sell Bs and buy As, of course)
Is there any benefit to sell Bs to buy As?
Probably not.

If you have As and decide that you want to lighten up a bit but not $300K worth, then you'd have to get an A converted to Bs prior to the sale. You'd have to contact your broker for this. I'm not sure how long it would take, but it surely would take longer than simply pressing "sell" for a certain number of B shares. Psychologically, it could be that it would be more difficult to sell As than Bs for this reason. (That might also be a good thing.)

Here is a one-page memo written by Buffett comparing the A and B shares:

https://berkshirehathaway.com/compab.pdf
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Re: BRK-B, Value Fund?

Post by Valueinvestor2 »

LFS1234 wrote: Sat Oct 17, 2020 11:50 am
flaccidsteele wrote: Fri Oct 16, 2020 10:18 pm
LFS1234 wrote: Fri Oct 16, 2020 9:11 pm
flaccidsteele wrote: Fri Oct 16, 2020 8:58 pm Interesting posts. If one has enough Bs in tax-deferred accounts to convert into As, should they?
Conversion is possible from A to B only, not the other way around. (Although you could sell Bs and buy As, of course)
Is there any benefit to sell Bs to buy As?
Probably not.

If you have As and decide that you want to lighten up a bit but not $300K worth, then you'd have to get an A converted to Bs prior to the sale. You'd have to contact your broker for this. I'm not sure how long it would take, but it surely would take longer than simply pressing "sell" for a certain number of B shares. Psychologically, it could be that it would be more difficult to sell As than Bs for this reason. (That might also be a good thing.)

Here is a one-page memo written by Buffett comparing the A and B shares:

https://berkshirehathaway.com/compab.pdf
No benefit to my knowledge. Warren gives a very lengthy discussion in 2000/2001 (I can’t remember which year but around this time) at the annual meeting on the rationale for offering b shares and other details. I suggest you watch this video to hear from warren himself.
Valueinvestor2
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Re: BRK-B, Value Fund?

Post by Valueinvestor2 »

tibbitts wrote: Fri Oct 16, 2020 7:15 pm
Valueinvestor2 wrote: Fri Oct 16, 2020 6:29 pm
ChinchillaWhiplash wrote: Sat Oct 10, 2020 2:47 pm Would holding the conglomerate BRK-A or B (Berkshire Hathaway) be comparable to holding an actively managed value fund? Just curious as to how most see this individual stock in their portfolio.
By definition, bogleheads don’t believe you can beat the market. Yet warren has beat the market even when he had to play the game with an unfair disadvantage (too much money).

Most BH will chalk this up to luck or a statistical anomaly.

BRB.B will undoubtedly beat the market over the next 10 years. And, wait for it bogleheads, there are 0 fees.

Why will BH outperform the market? 1) bc markets are at extreme values today 2) brkb is relatively cheap on a book value basis 3) brkb has 100b cash to deploy when it hits the fan in the next 1-2 years due to normal business cycles.
So, it's the nature/structure of Berkshire that will cause it to beat the market over 10 years? Surely you don't expect WB to be personally involved with Berkshire in a significant way for 10 more years? How long would Berkshire have to underperform for, with or without WB, before you declared that the magic was gone?
It’s a combination of 1) the structure in place 2) the current us markets being way overvalued that will lead to brk outperforming.

With that said it won’t be more than a few percentage points above market. Reason is brk is just too big. So they have some inherent advantages with their structure but a huge disadvantage of only being able to select a very tiny portion of the market. If trying to outperform the market I wouldn’t buy brk but would prefer them to s and p especially if I had to hit buy today.
LFS1234
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Re: BRK-B, Value Fund?

Post by LFS1234 »

Valuethinker wrote: Mon Oct 12, 2020 11:52 am What (Buffett) says is largely distraction from what he does. If you go back and read his letters, there's a picture there of his approach to investing, corporate governance etc. What he says in BH meetings? I don't believe that is transcripted (I could be wrong) ....
FYI: CNBC has made available recordings of all BRK annual meetings since 1994, as well as transcripts of those meetings, as well as other materials.

https://buffett.cnbc.com/warren-buffett-archive/

(It wouldn't surprise me if there are significant transcription errors in the transcripts.)
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