In 1982, Buffet seemed to have lower confidence then before.
From a growing competition (supply >> demand) in insurance operations, to the lack of attractive acquisition targets, Berkshire relied more on “economic benefits” from equity investment under 20% ownership, including those from GEICO.
GEICO + Washington Post contributed around half of non-controlled market value gains.
Reading Enron’s story from The Smartest Guys In The Room
It seems that one particular problem from Enron’s business model can be found elsewhere easily – developers focus a lot on up-front calculations (present value of all the expected future cash flow from a project), getting deals done, and moving on the next one.
In the process, banks lend money based on the similar calculations before real projects finish and generating cash flows, employees of developers get paid based on the formula linked with similar calculations, etc…
Things are good when they are good. But when “unexpected” things happen, this business model can be troublesome.
Similar dilemmas can be found in property, solar, etc..
Buffett discussed the “managerial kiss” in corporate acquisitions. Often times, managers are too confident in their skills in improving the economic value after acquisitions, thus inflating the premiums companies pay for acquisitions.
What kind of companies are good in inflationary environment?
The bond yield in 1981 sounds “horrible” – “long-term taxable bond yields exceeded16% and long-term tax-exempts 14%”. Buffett discussed the difficulties for businesses to outperform such passive return.
Buffett explained the three accounting methods of equity ownership.
He also discussed the impact of inflation again. Indeed, to be insulated, “business earnings consistently must increase in proportion to the increase in the price level without any need for the business to add to capital.”
Buffett like the GEICO buy. And he makes a point on “turnaround” – actually GEICO didn’t need a turnaround. GEICO was great and only needed to take a break it seemed.
The victims of high inflation were bond holders, which including insurers. Buffett discussed
And one astonishing fact, when Berkshire issued bonds, it was 12.75% for $60mn!!
Buffett started to worry and talk about inflation.
Even compounded 20% return could mean nothing in purchasing power if inflation is 14%, as the other 6% is for tax.
After-tax purchasing power is a more useful measurement.
High inflation also means investing in long-term bonds was making losses.
Buffet was complaining about the gov and dollar – ” We have severe doubts as to whether a very long-term fixed-interest bond, denominated in dollars, remains an appropriate business contract in a world where the value of dollars seems
almost certain to shrink by the day.”
The sarcasm!
On the operation side, Berkshire needed to divest the bank as required by law.
And for textile – Buffett didn’t have confidence this time – ” ‘turnarounds’ seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price”.
In Oct, monthly property sales was ~800bn rmb, down 1% yoy.
In terms of sqm sold, that was ~76.5mn sqm, down 2% yoy.
If looking at residential property only, those two comparisons were at +1% and -1% yoy.
Year to date comparison would still look bad – residential property sales is down 22% (Jan – Oct) in rmb, and down 16% (Jan – Oct) in sqm.
End of Sep policy support and stock market rally helped the property market.
However, more recently, it seems that the frenzy has faded.
Despite that Oct yoy comparison looks flattish, don’t forget that when comparing with 2021 (Jan-Oct), property sales has dropped 50% in rmb terms!
One thing we can avoid is that we age.
Just like assets have depreciation life cycle – e.g. computers are 5 years, we human beings are depreciating as time goes by.
If a person can only do a thing at age of 50 similar to what he or she can do at age of 30, the “depreciation” would be of significance.
However, one thing is different – we can improve on ourselves.
Buffett’s knowledge and investment skills is probably improving over the years. Thus the “carrying value” is probably increasing for a very long period of time for Buffett, even though depreciation also grows.
Other occupations like lawyers and doctors seem to be benefiting from “aging”.
Sometimes, there are external shocks that we can’t prepare on our own, especially if we continue on a repetitive daily life.
We need to actively access our carrying value from time to time, and be an honest “auditor” for ourselves. Then, we need to come up with plans as a “manager” for ourselves.
One interesting comment is about market price.
Buffett likes weak market, as he would continuous be a net buyer in the market, it’s important to have comfortable entry prices.
Buffet also likes concentrated holdings, vs buying shares of many different companies.
Plan to read through Buffett’s annual letters.
Taking notes
Buffett commented on businesses / industry.
He was in textile. Looking backward, it’s a hard industry that should avoid. Buffett defended that they got excellent management team and were a large employer while employees were accommodating (flexible pay?).
He wrote a lot on insurance, which seems growing extremely well.
He invested in banking (Illinois National Bank). Buffett spoke highly of the person / manager and the track record.
Buffett also wrote on investment philosophy.
He likes ROE. His rationale is that growth in EPS could be partially due to growth in equity.
He also talks about long-term holding vs. short-term gains. But he may as well sound a bit like bragging as he also got short-term gains.
He likes very good managers, so he focuses on “managerial economic performance”, which is better reflected in ROE.
His experience was that buying shares is cheaper than taking private of a business. And he could keep the existing managers on board. In fact, “we can obtain a better management result through non-control than control”, which I think is crucial to Buffett’s long-term success.
A digression – insurance businesses’ success relies on good managers, which also makes sense.
China Oct CPI is out, core CPI excl. food and energy, there was 0% increase month over month, and only 0.2% increase year over year.
Almost all kinds of food price dropped MoM, with pork dipping 3.7% MoM (+14.2% yoy).
Including food and energy, Oct CPI dropped 0.3% MoM and increased 0.3% YoY.
In Sep, the core CPI YoY increase was at 0.1% while MoM is -0.1%.
Thoughts?
a) Powell would love US CPI / PCE look more like China’s… not exactly the same, otherwise that might indicate a problem with demand..
b) The end of Sep & early Oct China’s stock market rally didn’t move the needle / has limited impact so dar. Day to day consumption still looks weak.
c) Rental price dropping 0.1% MoM and 0.3% YoY.