“An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds.”
Buffett didn’t like derivatives –
By focusing on experience, insurance companies received no premium on terrorism risks.
“Predicting rain doesn’t count; building arks does.”
If a company is focused on “winning” market share too much and loses sight on profits, there will be problems.
Buffett recognized several previous mistakes – those happened in General Re, and some in investments like Dexter (shoes).
If talents are born randomly, each year he or she could be anyone that is born anywhere in the world.
Even if China has 1/6 of global population, its newborn is less than that. In 2024, 132mn babies were born. In 2023, China has 9mn newborns.
That makes ~7% of global new born, less than half of the 17% population weight.
Buffett made a joke on “clicks-and-bricks”. This phrase was popular back then? And this is just like O2O in the 2010s in China I guess.
Berkshire would “never issue a policy that lacked a cap”.
No fear of near-term result decline – declines “spur sellers and temper the enthusiasm of purchasers who might otherwise compete”.
Market condition changed – junk bonds market dried up, making fewer LBOs.
When an owner cares about whom he sells to, the business usually associates with better qualities.
“Market commentators and investment managers who glibly refer to “growth” and “value” styles as contrasting approaches to investment are displaying their ignorance, not their sophistication.”
What’s good for next q earnings may not be economic operating maneuvers.
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As the go-go period ended in China, it’s no longer the era of the fastest runner.
Surprisingly, good culture now matters in China.
1/ Culture matters to employees.
Trip.com founder & CEO James Liang advocates for “hybrid” work mode – employees can choose to have two days WFH during a week.
2/ Culture matters to customers.
PDL (Pangdonglai) is very popular and has a growing influence in China as a retailer – an industry that most people ignore nowadays. PDL is famous for its “customer service, quality and integrity“; the at PDL work 7-hour days, have weekends off, get a string of perks and are entitled to 30-40 days of annual leave.
For a similar DTC price ($400 for 4 x 2.5mg listed by Eli Lilly), Meituan now offers it at ~2580 rmb, or ~$350.
I remember the old days when I feel a natural bond with strangers if we own the same consumer product.
A “good” brand that I like can be associated with a group of people that I am likely to feel comfortable to mingle with.
This happened to Apple products during my college time, and later translated to Apple Watch and AirPod.
This happened to Allbirds shoes during my California time, where I could chat with strangers who are wearing Allbirds in local Starbuck shops.
Over times, when that brand is too mass market, that mojo gets lost – not all people you met using iPhone meet your expectations, thus you no longer use it as an indicator of this person’s characteristics.
When using iPhone simply can’t tell you that much about this person, it becomes more of a utility. You probably need other consumer goods to show who you are.
A common fallacy, especially in the past, is to find a US asset in the similar industry and use it as a reference for valuation.
Why this is less useful, especially in rmb assets?
To put it simply,
asset value = earnings power (e.g. EPS) x multiple (e.g. P/E)
Then we look at these two components:
1/ Industry dynamics can be vastly different.
Demand side can be very different – e.g. work from home has never been a thing in China vs. only ~24% of workers don’t WFH in 2022 in the US.
Supply sides can also be very different in terms of entry barriers, the level of competition etc.
There are just too many different things, thus the projection based on a US company’s past is usually not a good reference.
2/ valuation can be vastly different.
Partially, difference in multiple is reflecting terminal growth, etc., therefore it’s similar to the first point, which is about fundamentals.
Additionally, If you think about bond prices – US treasury yield vs. China gov bond yield, they are on two diverging roads.
What’s good though? Assets in China can produce less correlated return vs. US assets, therefore providing additional benefits to a portfolio.
The “best source of new customers is the happy ones we already have” & the “best source of new business is word-of-mouth recommendations”.
At Berkshire, repurchases are not for stemming a decline in Berkshire’s price. Instead, it represents an attractive use of the company’s money.
Buffett didn’t like those repurchases that simply pump up stock prices.