Wednesday, November 15, 2017

Berkshire Hathaway 3rd Quarter 2017 13F-HR

The Berkshire Hathaway (BRKa3rd Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 2nd Quarter 13F-HR.)

There was both some buying and selling during the quarter. Here's a quick summary of the changes:*

Added to Existing Positions
Apple (AAPL): 3.9 mil. shares bought (3% incr.); stake = $ 20.7 bil.
Monsanto (MON): 832 thous. shares (10% incr.); stake = $ 1.1 bil.

I generally include above only those positions that were worth at least $ 1 billion at the end of the 3rd quarter. In a portfolio this size -- more than $ 310 billion (equities, fixed income, cash, and other investments including Kraft Heinz: KHC at fair value) according to the latest available filing with roughly half made up of common stocks** -- a position that's less than $ 1 billion doesn't really move the needle much.

Synchrony Financial (SYF) is the only positions added to worth less than $ 1 billion.

New Position
Bank of America (BAC): 679 mil. shares; stake = $ 17.2 bil.

The new position in BofA common stock is the direct result of warrants that were exercised by Berkshire in August of this year. It's now one of Berkshire's top five equity holdings.

From the latest Berkshire 10-Q:

In 2011, we acquired 50,000 shares of 6% Non-Cumulative Perpetual Preferred Stock of Bank of America Corporation (“BAC”) with a liquidation value of $100,000 per share (“BAC Preferred”) and warrants to purchase up to 700,000,000 shares of common stock of BAC (“BAC Warrants”) at $7.142857 per share (up to $5 billion in the aggregate). On August 24, 2017, we exercised all of our BAC Warrants and acquired 700,000,000 shares of BAC common stock. We also surrendered substantially all of our BAC Preferred as payment of the $5 billion cost to exercise the BAC Warrants and acquire the BAC common stock.

The 679 million shares of BofA common stock held by Berkshire at the end of the 3rd quarter ended up being somewhat less than the 700 million shares acquired on August 24th.

Reduced Positions
Wells Fargo (WFC): 3.8 mil. shares sold (<1% decr.); stake = $ 25.6 bil.
IBM (IBM): 17.1 mil. shares (31% decr.); stake = $ 5.4 bil.
Charter (CHTR): 954 thous. shares (10% decr.); stake = $ 3.1 bil.

Berkshire had previously announced they will need to sell some of their Wells Fargo shares to keep the ownership stake below 10%.

No other positions valued at more than $ 1 billion were partially sold off during the quarter.

Sold Positions
WABCO (WBC)

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential.

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Also, Todd Combs and Ted Weschler are responsible for part of the Berkshire equity portfolio. So some of the changes -- especially those involving smaller positions -- will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire's portfolio of equity securities remains mostly made up of financial, consumer, and technology stocks (primarily IBM and Apple).

1. Wells Fargo (WFC) = $ 25.6 bil.
2. Kraft Heinz (KHC) = $ 25.3 bil.
3. Apple (AAPL) = $ 20.7 bil.
4. Coca-Cola (KO) = $ 18.0 bil.
5. Bank of America (BAC) = $ 17.2 bil.

As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire also owns equity securities listed on exchanges outside the U.S., plus fixed maturity securities, cash and cash equivalents, and other investments.

The portfolio excludes all the operating businesses that Berkshire owns outright with ~ 367,000 employees (25 being at headquarters) according to the latest available annual report.

Here are some examples of Berkshire's non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candies, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, Berkshire Hathaway Automotive, Oriental Trading Company, Precision Castparts, and Duracell.
(Among others.)

In addition to the above businesses and investment portfolio, Berkshire's large insurance operation (BH Reinsurance, General Re, GEICO etc.) has historically been rather profitable while providing plenty of "float" for their investments.

See page 116 of the annual report for a more complete listing of Berkshire's businesses.

Adam

Long positions in BRKb, WFC, AAPL, KO, and BAC established at much lower than recent market prices. Also, long position in IBM established somewhat above recent market prices. (In each case compared to average cost basis.)

* All values shown are based upon the last trading day of the 3rd quarter.
** Berkshire Hathaway's holdings of ADRs are included in the 13F. What is not included are shares listed on exchanges outside the United States. The status of those shares, if a large enough position, are updated in the annual letter. So the only way any of the stocks listed on exchanges outside the U.S. will show up in the 13F is if Berkshire buys the ADR. Investments in things like preferred shares are also not included in the 13F.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tuesday, October 31, 2017

Destroying Bad Ideas

Back in 2010, Warren Buffett said that the biggest mistake he ever made had cost $ 200 billion. The mistake he was referring to was the initial purchase of Berkshire Hathaway (BRKa) more than 50 years ago.

"Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now... This is $200 billion.... Because the genius here thought he could run a textile business."

One thing to keep in mind is that the cost of that mistake keeps getting bigger. It was a $ 200 billion mistake in 2010 when Berkshire was less than half its current value. As Berkshire increases in value the compounded cost of that mistake grows along with it.

The non-gift that keeps on not giving.

Now imagine if Buffett didn't learn from such an outcome. What if his original ways of thinking about business and investing over time didn't change much? In other words, instead of learning from this misjudgment, he continued to try and prove that he was 'right all along' -- to himself and to others -- about the textile business. If the fact that textiles, as a business, would prove to be terrible over time seems obvious now, well, lots of things appear to be obvious after the fact.

The mistake itself can't be undone, of course, but the flawed thinking that led to such a mistake can certainly be discarded and replaced with something better.

A willingness to destroy the bad ideas -- even those previously thought to be brilliant -- is necessary in order to make room for fresh ways of thinking. Unfortunately, too often energy is expended doing just the opposite. The desire to have been 'right all along' prevents the better ideas from dislodging the inferior ones.

It's about developing, over time, the right kind mental habits. It requires enough smarts and self-confidence tempered by humility. It means that even what seem like the most genius ways of thinking need to be reevaluated from time to time. It's basically learning to enjoy being wrong about something without doing irreparable damage to the psyche.

A couple of questions come to mind:

What cherished ideas being held onto today -- in business and beyond -- should be jettisoned in favor of better ones?

What ideas might come along down the road that'll deserve a similar fate?

When new evidence comes along that challenges an existing model, it's probably time to change the model. Yet some, instead, prefer to creatively convince themselves that the contravening evidence actually fits the existing model.

It's certainly easier to just ignore when something comes along that conflicts with a long held, assumed to be correct, way of looking at the world.

It's also a great way to feel at ease about being less right.

Better to get in the habit of challenging assumptions -- and the models that are built upon those assumptions -- early and often.

Expect new information to come along now and again that will demand an altered worldview.

By all means discount that new information if feeling better via the illusion of being right takes priority over veracity.

Adam

Long position in BRKb established at much lower than recent market prices

Related posts:
Investing Blunders
Buffett's $ 200 Billion Blunder

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Friday, September 29, 2017

Buffett on American Business

From the Berkshire Hathaway (BRKashareholder letter released earlier this year:

"Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America's economic dynamism. One word sums up our country's achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776."

And later Warren Buffett writes that...

"American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: 'We spend a lot of time looking for systemic risk; in truth, however, it tends to find us.'

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."

So, essentially, those with a long investing horizon who view favorably the equity markets hitting new highs have it backwards.

Buying stocks when they sell near their full intrinsic per-share value -- or, worse yet, above a conservative estimate of that value -- simply increase their risk of loss and reduce forward returns.

"We hear it all the time: 'Riskier investments produce higher returns' and 'If you want to make more money, take more risk.'

Both of these formulations are terrible. In brief, if riskier investments could be counted on to produce higher returns, they wouldn't be riskier." - Howard Marks in his memo: Risk Revisited

"If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is." - Warren Buffett in The Superinvestors of Graham-and-Doddsville

Prevailing wisdom may suggest otherwise but, at least for investors, risk and reward need not be positively correlated.

Frequently misunderstood and underutilized.

American businesses, in the long run, will likely do just fine and their long-term owners have a relatively uncomplicated way to tilt the relation between risk and reward in their favor.

Those who, by and large, are investing with eye toward many years down the road should be hoping that stocks get cheap again.

Adam

Long position in BRKb established at much lower than recent market prices

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Tuesday, August 15, 2017

Berkshire Hathaway 2nd Quarter 2017 13F-HR

The Berkshire Hathaway (BRKa2nd Quarter 13F-HR was released yesterday. Below is a summary of the changes that were made to the Berkshire equity portfolio during that quarter.
(For a convenient comparison, here's a post from last quarter that summarizes Berkshire's 1st Quarter 13F-HR.)

There was both some buying and selling during the quarter. Here's a quick summary of the changes:*

Added to Existing Positions
Apple (AAPL): 835 thous. shares bought (<1% incr.); stake = $ 18.8 bil.
Bank of New York (BK): 17.2 mil. shares (52% incr.); stake = $ 2.6 bil.
General Motors (GM): 10.0 mil. shares (20% incr.); stake = $ 2.1 bil.
Lib. SiriusXM (LSXMK): 8.8 mil. shares (39% incr.); stake = $ 1.3 bil.

I generally include above only those positions that were worth at least $ 1 billion at the end of the 2nd quarter. In a portfolio this size -- ~$ 307 billion (equities, fixed income, cash, and other investments including Kraft Heinz: KHC at fair value) according to the latest available filing with roughly half made up of common stocks** -- a position that's less than $ 1 billion doesn't really move the needle much.

Liberty SiriusXM (LSXMA) is the only positions added to worth less than $ 1 billion.

New Positions
STORE Capital (STOR): 18.6 mil. shares; stake = $ 418 mil.
Synchrony Financial (SYF): 17.5 mil. shares; stake = $ 521 mil.

Berkshire's latest 13F-HR filing did not indicate any activity was kept confidential.

Occasionally, the SEC allows Berkshire to keep certain moves in the portfolio confidential. The permission is granted by the SEC when a case can be made that the disclosure may cause buyers to drive up the price before Berkshire makes its additional purchases.

Reduced Positions
Wells Fargo (WFC): 11.7 mil. shares sold (2% decr.); stake = $ 25.9 bil.
IBM (IBM): 10.5 mil. shares (16% decr.); stake = $ 8.3 bil.
Delta Airlines (DAL): 1.9 mil. shares (3% decr.); stake = $ 2.9 bil.
American Airlines (AAL): 2.3 mil. shares (4% decr.); stake = $ 2.4 bil.
United Airlines (UAL): 740 thous. shares (2% decr.); stake = $ 2.1 bil.

Warren Buffett previously said that Berkshire had been selling its IBM shares during the 1st and 2nd quarter.

Berkshire also had previously announced they will need to sell some of their Wells Fargo shares to keep the ownership stake below 10%.

No other positions valued at more than $ 1 billion were partially sold off during the quarter. Reduced position worth less than $ 1 billion included Sirius XM (SIRI) and WABCO Holdings (WBC).

Sold Positions
General Electric (GE)

Todd Combs and Ted Weschler are responsible for an increasingly large number of the moves in the Berkshire equity portfolio. These days, any changes involving smaller positions will generally be the work of the two portfolio managers.

Top Five Holdings
After the changes, Berkshire Hathaway's portfolio of equity securities remains mostly made up of financial, consumer, and technology stocks (primarily IBM and Apple).

1. Kraft Heinz (KHC) = $ 27.9 bil.
2. Wells Fargo (WFC) = $ 25.9 bil.
3. Apple (AAPL) = $ 18.8 bil.
4. Coca-Cola (KO) = $ 17.9 bil.
5. American Express (AXP) = $ 12.8 bil.

As is almost always the case it's a very concentrated portfolio. The top five often represent 60-70 percent and, at times, even more of the equity portfolio. In addition, Berkshire also owns equity securities listed on exchanges outside the U.S., plus fixed maturity securities, cash and cash equivalents, and other investments.

The portfolio excludes all the operating businesses that Berkshire owns outright with ~ 367,000 employees (25 being at headquarters) according to the latest available annual report.

Here are some examples of Berkshire's non-insurance businesses:

MidAmerican Energy, Burlington Northern Santa Fe, McLane Company, The Marmon Group, Shaw Industries, Benjamin Moore, Johns Manville, Acme Building, MiTek, Fruit of the Loom, Russell Athletic Apparel, NetJets, Nebraska Furniture Mart, See's Candies, Dairy Queen, The Pampered Chef, Business Wire, Iscar, Lubrizol, Berkshire Hathaway Automotive, Oriental Trading Company, Precision Castparts, and Duracell.
(Among others.)

In addition to the above businesses and investment portfolio, Berkshire's large insurance operation (BH Reinsurance, General Re, GEICO etc.) has historically been rather profitable while providing plenty of "float" for their investments.

See page 116 of the annual report for a more complete listing of Berkshire's businesses.

Adam

Long positions in BRKb, WFC, AAPL, KO, and AXP established at much lower than recent market prices. Also, long position in IBM established somewhat above recent market prices. (In each case compared to average cost basis.)

* All values shown are based upon the last trading day of the 2nd quarter.
** Berkshire Hathaway's holdings of ADRs are included in the 13F. What is not included are shares listed on exchanges outside the United States. The status of those shares, if a large enough position, are updated in the annual letter. So the only way any of the stocks listed on exchanges outside the U.S. will show up in the 13F is if Berkshire buys the ADR. Investments in things like preferred shares (and valuable warrants, where applicable, as explained in the recent letters) are also not included in the 13F.
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This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.

Monday, July 31, 2017

Investing Blunders

Warren Buffett once said the following about his decision to purchase Berkshire Hathaway (BRKa) back in 1964:

"I had now committed a major amount of money to a terrible business. And Berkshire Hathaway became the base for everything pretty much that I've done since. So in 1967, when a good insurance company came along, I bought it for Berkshire Hathaway. I really should— should have bought it for a new entity.

Because Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now...This is $200 billion. You can— you can figure that... Because the genius here thought he could run a textile business."

Buffett's $ 200 Billion Blunder

Berkshire's textile operations were shut down in 1985.

The above is from an interview with Becky Quick of CNBC that happened back in 2010. This past May she sat down for an interview with Warren Buffett, Charlie Munger, and Bill Gates. During the latter part of this interview she asked what they thought were the "worst trades" they've made in the past. Buffett, understandably considering the scale of the error, brought up Berkshire again.

QUICK: "...Warren has talked about his worst trades in the past. And Warren, I believe you said it was Berkshire Hathaway itself that was your worst trade."

BUFFETT: "Yeah, but I have plenty of other competitors...there are three companies [that] came together for Berkshire, actually. Diversified Retailing and Blue Chip Stamps were two others. And the base companies of both of the other two totally failed, disappeared. So we're three for three in terms of our building blocks. And we thought they were okay at the time, didn't we, Charlie?"

MUNGER: "Well, we bought them so cheaply, that we could return more money than we paid. And then we took the money and bought these other companies. So it wasn't as though we lost big chunks of money. It's just that it was such a dumb way to do business. Scrambling around with those unfashionable dying businesses, Textile Mills in New England. The power costs in the south...were 60% lower than they were in New England... What kind of an idiot would go into textiles in New England?"

BUFFETT: "The guy on your right."

MUNGER: "Yeah."

Later Charlie Munger said the following when asked a similar question:

MUNGER: "I made a tech company investment. And we damn near went broke and we hovered on the edge of a precipice for about three or four years. And it was agony. And it was a lot of money to me at the time. Now, we scrambled out of it with a pretty good profit. But it wasn't the world's smartest investment. And it took a lot of intelligent scrambling to rectify the situation. And I'm not looking to repeat the dumb decisions that got me there."

BUFFETT: "We'll find new ones."

QUICK: "Yeah."

MUNGER: "Yeah, we will."

I'd quibble with the terminology "worst trades" since neither Buffett or Munger really engage in trading activities or, at least, have not done so for a very long time.

Those who invest know -- or, one way or another, likely will come to know -- that mistakes are nearly inevitable. The question is how costly they are allowed to become and whether what's learned along the way is effectively put to use.

Some expend an awful lot of energy trying to prove to the world, and convincing themselves, that they're right. The process (of convincing) itself can serve to reinforce and solidify ideas -- whether flawed or otherwise -- possibly leading to a calcified world view that's increasingly less willing consider alternatives.

"The first principle is that you must not fool yourself -- and you are the easiest person to fool." - Richard Feynman

Sometimes -- or, possibly, often -- it'd have been better redirecting that effort towards the exploration of whether a particularly favored idea deserves such a status.

"To kill an error is as good a service as, and sometimes even better than, the establishing of a new truth or fact." - Charles Darwin

Ideas, even those most favored (especially those most favored?), should be viewed more skeptically and challenged relentlessly. Easier said.

"If others examined themselves attentively, as I do, they would find themselves, as I do, full of inanity and nonsense. Get rid of it I cannot without getting rid of myself. We are all steeped in it, one as much as another; but those who are aware of it are a little better off -- though I don't know." - Michel de Montaigne

Some healthy doubt can be a very useful thing.

An attitude that, to me, has a good chance of being applicable beyond the world of investing.

Though I don't know.

Adam

Long position in BRKb established at much lower than recent market prices

Related post:
Buffett's $ 200 Billion Blunder

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
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