Tag: Buffett

Berkshire’s growth in bvps slowed down in 1984 to 13.6% vs. previously over 20% compounding growth.

Buffett loves the idea of stock repurchases for his portfolio companies. He could then sell some shares, but he liked to retain the % of ownership so that his proportion of any dividend income won’t drop.

Buffett viewed this kind of transactions as a synthetic “dividend” and wanted to be taxed as dividend. Although from accounting perspective this would be treated as “sales of stock”, those “transactions were
dividends for IRS purposes”.

Buffett loved newspapers – “the economics of a dominant newspaper are excellent”. And he considered some local newspaper as locally “dominant”.

Buffett bought “risky” bonds, and viewed them as businesses that can generate cash – 16.3% after tax yield! They also acknowledged that “ceiling on upside potential is an important minus”.

Again, Buffett talked about the weakness of capital-heavy business w/ competition – reinvestment shall be hurt by inflation (e.g. if high inflation, new store opening will cost more), and thus previous profits is not representing the future. Those earnings are “restricted”, as the business needs to invest to maintain its economic position.

This limits a company’s dividend policy.

Another common problem is reinvesting in “economically unattractive, even disastrous” adventures.

No wonder Buffett liked to invest and receive dividends: “the effective Federal income tax rate on dividends is 6.9% versus 28% on capital gains”.

Buffett also discussed the “goodwill”, and amortization as an expense. He thinks amortization costs doesn’t change the quality of the businesses being acquired, which is true.

He also seemed to be arguing that paying high p/b is good, as additional investments would result in more economic gains. This is true, as long as the business would continued to be valued at a similar p/b.

He also indicated the unwillingness to sell a business – “regardless of price,
we have no interest at all in selling any good businesses that Berkshire owns, and are 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.”

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.

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?

• ability to increase prices without fear of losing market share of volume
• can scale up without large incremental capex

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”.

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

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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.