Time Again For Value Investing Through Berkshire Hathaway [View article]
Thanks Kevin. "Look-through earnings" is a concept Buffett introduced years ago in his shareholder letters. Because of GAAP account, Berkshire does not report its shares of undistributed earnings in its vast equity holdings. Nevertheless, even if they are not reported, the are still a part of Berkshire's economic earnings and as such they should be included in any estimate of Berkshire's intrinsic value. They are also explained in Berkshire's Owner's Manual: http://bit.ly/HCYUQv.
Here's Buffett:
"Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable. This is precisely the choice that often faces us since entire businesses (whose earnings will be fully reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.
We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that our investees have made has not benefitted us as shareholders, but overall we have garnered far more than a dollar of value for each dollar they have retained. We consequently regard look-through earnings as realistically portraying our yearly gain from operations."
Time Again For Value Investing Through Berkshire Hathaway [View article]
Kevin, thank you for the detailed write-up. For those interested, I estimate Berkshire's normal after-tax earning power, including look-through earnings from its large equity holdings, to be $18 billion. Details here: http://bit.ly/HAHV5N.
Thanks for the analysis of Google. I am long the stock. I would be careful with this approach to not fall into false precision. I tend to think of intrinsic value as a range of values. Consider that the majority of the value is in the terminal value calculation which is far into the future.
Google has a strong moat owing to strong network effects in its search and advertising business. It also has a worldwide network of data centers that operate at a third the cost it would take competitors to replicate (if they had the capital).
The castle is well protected and Google is working hard to deepen the moat. Consider Android: Google gives it away and it already has several hundred million users. This protects the on-ramp to Google money machine: AdSense/AdWords.
Page is now in charge. He is very smart and still very dirven. They have a lot of lines in the water and a very fast-moving, creative culture given their size. At $500, you are getting a free or very low cost option on all their incubating projects.
Finally, they are on the right side of multiple huge secular waves: the conitnued adoption of the Internet around the globe, the migration of a large part of advertising dollars online, and the rise of mobile. Cisco expects mobile traffic to increase 26-fold between 2010 and 2015. Google will benefit.
Charlie Munger on Google's Moat - It's Huge... Probably the Widest He's Ever Seen [View article]
Mad Bomber - for a small subset of search - where your network can answer a question better than a search engine - Facebook is a threat. Facebook does not directly address the majority of search queries. If Facebook adds Bing as its search engine it could take share.
josew - In developed markets, the pie has been carved up. Google grows in these markets because the total number of searches (the size of the market) is increasing and the revenue per search is increasing.
Citigroup: Offering an Attractive Risk-Reward Opportunity [View article]
daddyw, thanks for the WSJ article on GTS. It is very informative. GTS is an under-appreciated asset that has minimal to no credit risk. The global platform/footprint gives it a nice moat. Think Visa and Mastercard, but with more sophisticated capabilities.
Here is Francesco Vanni d'Archirafi, CEO Citi Global Transactions at the February, 2011 Morgan Stanley Financials Conference, presenting on GTS.
Whichever Way the Market Goes, Berkshire Shareholders Win [View article]
Alan, that is a good question. Although it is only my opinion, I believe Buffett may be reluctant to do this because he views shareholders as real partners. As such, he does not want to take advantage of them by purchasing their shares when they are undervalued.
Whichever Way the Market Goes, Berkshire Shareholders Win [View article]
Alan, Buffett invested over $46 billion during the downturn in 2008 according to an analysis done by hedge fund value investor Whitney Tilson of T2 Partners. Here is Tilson's breakdown (see page 11). www.scribd.com/doc/465...
Also, Buffett typically likes to have good amount of cash on hand at all times to provide liquidity and a margin of safety. He will never take the cash down to zero.
Whichever Way the Market Goes, Berkshire Shareholders Win [View article]
I do not know if it will drop. I think you should buy it/hold it based on your calculation of its value. My point in the article is that if it does drop in price, shareholders will likely be rewarded in the long-term as it will allow Buffett to deploy capital at attractive prices.
Coca-Cola Offers Good Risk-Adjusted Returns [View article]
RappleG, I agree that there may be better entry points in the future. Having said that, KO is almost certainly trading below intrinsic value at these levels, has lots of growth ahead, is well positioned as an inflation hedge, and provides a hedge against the dollar given that a large part of its sales are overseas.
KO rarely gets cheap given its obvious superior economics. It provides a level of certainty that few other businesses have. When to enter and how to size a position are part of the art of investing.
James Montier on Inverting Discounted Cash Flows [View article]
rcray - good point that EPS does not equal cash. Since the examples were for illustrative purposes, in order to keep it simple, I assumed EPS equals free cash.
Stephan - I think free cash should be used for a DCF and that the company should be given credit for the cash on its balance sheet. Using a no-growth terminal value is simply a way to be conservative.
The Ability to Reinvest Capital: Investments That Generate Wealth [View article]
One characteristic of these types of companies is their ability to compound book value per share at a high rate over a long period of time. I am currently in the process of building my watch list, which I publish on my blog, in which I plan to add and track companies that have done this.
Follow Warren Buffett's New Investment Gurus Into DirectTV [View article]
Time Again For Value Investing Through Berkshire Hathaway [View article]
Time Again For Value Investing Through Berkshire Hathaway [View article]
Here's Buffett:
"Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable. This is precisely the choice that often faces us since entire businesses (whose earnings will be fully reportable) frequently sell for double the pro-rata price of small portions (whose earnings will be largely unreportable). In aggregate and over time, we expect the unreported earnings to be fully reflected in our intrinsic business value through capital gains.
We have found over time that the undistributed earnings of our investees, in aggregate, have been fully as beneficial to Berkshire as if they had been distributed to us (and therefore had been included in the earnings we officially report). This pleasant result has occurred because most of our investees are engaged in truly outstanding businesses that can often employ incremental capital to great advantage, either by putting it to work in their businesses or by repurchasing their shares. Obviously, every capital decision that our investees have made has not benefitted us as shareholders, but overall we have garnered far more than a dollar of value for each dollar they have retained. We consequently regard look-through earnings as realistically portraying our yearly gain from operations."
Time Again For Value Investing Through Berkshire Hathaway [View article]
Google Has 45% Upside Potential [View article]
I like to also focus on Google's moat. See gregspeicher.com/?p=2570 and gregspeicher.com/?p=2840.
Google a Great Buy at $500 [View article]
The castle is well protected and Google is working hard to deepen the moat. Consider Android: Google gives it away and it already has several hundred million users. This protects the on-ramp to Google money machine: AdSense/AdWords.
Page is now in charge. He is very smart and still very dirven. They have a lot of lines in the water and a very fast-moving, creative culture given their size. At $500, you are getting a free or very low cost option on all their incubating projects.
Finally, they are on the right side of multiple huge secular waves: the conitnued adoption of the Internet around the globe, the migration of a large part of advertising dollars online, and the rise of mobile. Cisco expects mobile traffic to
increase 26-fold between 2010 and 2015. Google will benefit.
For more on Google's moat see: gregspeicher.com/?p=2570.
Charlie Munger on Google's Moat - It's Huge... Probably the Widest He's Ever Seen [View article]
josew - In developed markets, the pie has been carved up. Google grows in these markets because the total number of searches (the size of the market) is increasing and the revenue per search is increasing.
Citigroup: Offering an Attractive Risk-Reward Opportunity [View article]
Here is Francesco Vanni d'Archirafi, CEO Citi Global Transactions at the February, 2011 Morgan Stanley Financials Conference, presenting on GTS.
Presentation
www.citigroup.com/citi...
Transcript
www.citigroup.com/citi...
Whichever Way the Market Goes, Berkshire Shareholders Win [View article]
Whichever Way the Market Goes, Berkshire Shareholders Win [View article]
www.scribd.com/doc/465...
Also, Buffett typically likes to have good amount of cash on hand at all times to provide liquidity and a margin of safety. He will never take the cash down to zero.
Whichever Way the Market Goes, Berkshire Shareholders Win [View article]
Coca-Cola Offers Good Risk-Adjusted Returns [View article]
KO rarely gets cheap given its obvious superior economics. It provides a level of certainty that few other businesses have. When to enter and how to size a position are part of the art of investing.
James Montier on Inverting Discounted Cash Flows [View article]
Stephan - I think free cash should be used for a DCF and that the company should be given credit for the cash on its balance sheet. Using a no-growth terminal value is simply a way to be conservative.
A Market Valuation Update [View article]
The Ability to Reinvest Capital: Investments That Generate Wealth [View article]