Joseph Blake

Joseph Blake
Contributor since: 2013
Well written analysis. I made similar points a few years back here when I said it was too big and would become another conglomerate. I am glad to see someone see the reality so clearly.
A comparison that I find interesting is to look at the S&P 500 Index versus the Consumer Staples Index versus Berkshire. At November 30, 2013 I found the 10 year annualized total return to be
S&P 500 7.67%
Berkshire 7.67%
XLP consumer staples index 9.78%
The favorable comparison of XLP versus the Index holds true for most five year periods back to 1989.
There are many reasons why Berkshire investors should be reconsidering the stock now versus the good fortune of having bought it 20 or 30 years ago.
The bigger Berkshire gets the more average it becomes. The elephant like acquisitions just makes the company a proxy at best for the index.
But there is a big downside when Buffett is gone. Who will be able to control the inevitable clashes among senior executives who want capital for their pet projects? The arguments for not paying a dividend no longer make sense and may well make the huge seize of the company more problematic. This is the classic reversion to the mean story which could become just another sluggish conglomerate.
Just saw this and thanks
Very funny.
The bigger he gets the more average the results. So why BH versus the index?
That is a fair comment. Most young people are doing this via 401 K plans which would not include Berkshire as an option. It may be expensive to accumulate if you are saving 5% of your income each month. For example, if they make $5000 a month and save 5% plus a matching amount they would buy $1000 a month. The costs of doing this may vary depending upon the plan and if it lets you buy securities of your own choosing. Most do not. It might work for a Roth or traditional IRA subject to commissions etc.
That you say Berkshire is a "mutual fund" is probably true but it may carry a conglomerate discount unlike a true mutual fund. More importantly the original question was what should a 20 something buy today. If they share your outlook and expectation for return it might be appropriate. But I think they could also get the same returns from a Consumer Staples Index Fund. They have produced a lot of alpha since 1989. See my article. Going forward I do not think Berkshire will perform as it did prior to 2000 for reasons already given. Thx
Tax questions are always personal. If you are a long term shareholder you have to ask how much you need in income each year and then answer if Berkshire still serves your needs. Do not let5 the tax tail wag the dog. But sometimes the tax question can govern your decision and leave you subject to losses in price greater than then the capital gain loss. This is just general comments but your tax accountant can advise more competently than I. I still recall the Enron shareholder who lost it all when it failed because his tax counsel said he would have to pay too much tax. Sadly it was his only asset. But Berkshire does not represent that type of risk albeit stocks fluctuate and you get no dividend to provide a regular income stream that might compensate for the fluctuations. And no a young investor should not buy Berkshire. They probably do not have the resources to buy A or B.
Your goals are good one and they are what most people should aim for. If they start soon enough they may get that. I have written elsewhere here about consumer staple stocks and why thy are a good choice for exactly the reasons you give. But an index of stocks is better than a really large company like Berkshire for various reasons already stated.
In no way was I referring to you.
The price appreciation for the S&P 500 cannot be looked alone. You have to include the dividends reinvested in the index or at some rate such as T Bills. Because Berkshire does not pay a dividend, I assumed reinvested in the index as the best proxy for an apples to apples comparison. You have to make a reasonable assumption of what happened to dividends to make a comprehensive comparison. Index without dividends is incomplete.
Can I really prove this? Please do the total return calculation for the last ten years and five years thru 12/31/ and you will get the numbers in the article. Berkshire underperformed the S&P 500. My source is Bloomberg. If the case is that Berkshire keeps the dividends and makes the shareholder better off is the argument then lets assume the dividends are reinvested in the index. This is not my fiction. It is the reality of the numbers. I am not making this up. It is a reason why I raise the issues I have. Thanks
My father started to give his children a new $10 bill each Christmas in the 1930s. Sometime around 1965 we still got $10. We all asked why it was not adjusted for inflation. He relied that he would adjust the size when his income was adjusted for inflation.
In recent years his total returns have been below market and based on beta that means the risk adjusted number versus the index is not favorable. But I would be pleased and honored if I could join you for one of the risk adjusted dinners.
Yes of course I will say that. You are right. But it is also possible that the price is discounted by what some would call the conglomerate discount. It has some very great businesses that are not going to lose their competitive advantage quickly. But there is a tendency for the market to almost always fail to fully value all of them. The larger the pie and its pieces this issue cannot be ignored. When Hanson broke up SCM some 20 plus years ago, they sold the parts they did not want for more than the purchase price. Admittedly an extreme example but it illustrates the point. The larger Berkshire gets the more that will be an issue in its valuation. The investor who wants a railroad won't buy Berkshire first even though BNSF is a superb property. You get the idea.
In the context of Neff when he said while taking less risk or risk adjusted returns is the same thing. Just as we might use duration as a metric to measure the risk level of one fixed income portfolio versus another, the same came be done with equity portfolios using a Sharpe ratio. That would be Neff's point. Enough of the theory. Neff's record speaks for itself and does not need me to defend it. Like John Bogle he did a great deal for the small investor who is not able to buy Berkshire shares. That matters a great deal in the age of 401k plans.
This article appeared in 2008 in re Neff.
His comments then are interesting but his love affair with Citibank not so interesting. But he believed that its retail presence globally was a great asset. Like many he did not see the rest of the iceberg.
Thanks for your very constructive comments.
I will revisit the reports as you suggest but I would ask if after five or ten years your total return is less than the index, that does beg the question if its enormous size prevents Berkshire from replicating its earlier performance in the future? Someone talked about 21% since day one but it is 0.78% under the index for ten years and 2,75% under the index for the last five years thru 12/31/12 inclusive of dividends on the index or total return basis. Dividends are 2% to 3% of the return on the index. They cannot be ignored. Berkshire does not pay dividends but that fact means that reinvestment outside of Berkshire would have made more. As said previously, from being a consistent outperformer of the index for most of the last 40 plus years, the record is now around average for ten years and less than that for the last five years. That is food for thought. As many know reversion to the mean is often inevitable with huge size. And that seems to be happening even under Buffett's watch. Will the future be better? This is a legitimate question that only time will tell. In five years so much will be revealed.
Even the Roman Empire divided because it was too big to manage.
Is there a lesson for the shareholders there? I think so.
I think this is a place for constructive comments and dialog. Anyone can be a bully on the internet. That said Neff's comment was based on risk adjusted returns and many have pointed this out over the years. He also ran a mutual fund whose investors come and go more readily than Berkshire's. Plus the Penn Endowment which had plenty of "experts" to second guess him at the business school and the board. Not easily done when you are not a major stakeholder. That also makes performance harder to do especially in the period of the 70s which older readers will recall as a horrible market. The Dow reached 1000 in 72 and did not see that again for the rest of the decade. I will simply state that on a total return basis Berkshire has underperformed the S&P for both the last five and ten years thru 12/31/12. Likewise in five of those ten years as well. I have yet to hear anyone here address that in the context of long term value investing. I understand the technical way to decide intrinsic value or how stocks build book value. But I do not accept that some theoretical intrinsic value is better than market after five or ten years. That is my opinion based on the facts of the returns for that period. It does not take away from Berkshire in the past or the enormous wealth created for him and his loyalists. But every so often it pays to take a deep breathe and take another look. If you want to shoot the messenger because I forgot the second "t", Ok do it but that is largely an ad hominem argument. And messengers are sometimes right even if they forget the second "t".
My brother was an accomplished cross county runner albeit not world class.
As noted below, I meant to say John Neff who ran the Windsor Fund for 31 years and also the U Penn Endowment.
On this we totally agree. It is a logical way to see the marginal utility theory in practice. That our age is perhaps remarkable for being the age of the inflated self goes beyond this web site's purpose. Nonetheless very true.
Sorry yes I was having a senior moment. It is John Neff. His comments about Buffett to which I refer were made at a CFA Society luncheon in Philadelphia in 2007. His track record for the Windsor Fund between 1964 and 1995 outperformed the S&P 500 13.7% versus 10.6%.
Some of you are into cult worship. But lets put that aside. My point is this- how long is long term? You keep telling me that this is a long term investment. For the last ten years it has underperformed the S&P 500. In the last five years more times than not. I have read a lot of theory here about book value etc but the market no longer rewards the shareholder as before 2000. So as a Marine veteran I can assure you I will listen to your opinions but I have not heard much here other than I do not understand the hieroglyphics as well as you. That may be but an investor who bought the index would be better off. If the market for the last decade is not a fair valuation of how Berkshire has done, then even Graham and Dodd or Buffett would be surprised.
CEO selection is secondary to the skill sets needed to run such a diverse portfolio where the skills vary so much. Buffett has a giant reputation and loyalists but whoever follows must manage the demands of very diverse businesses. The record of the past decade speaks for itself.
There is an issue that serious shareholders should consider. I might put it this way- what is the strategy? Is Berkshire a well run conglomerate, a better proxy for the S&P 500 Index or a well run investment fund? The past is not prologue. And the last ten years are not that stellar.
I do not understand the book value argument. There are plenty of companies that have had book value build over time but sell well below that. If there is one value a company is not worth it is book value except on day one when there are only two entries- cash and equity. We pay a price today based on our expectation about the future free cash flows of the business discounted by a cost of capital to reflect the risk of the enterprise. I understand that good businesses should sell at multiples to book and hope Berkshire always does but comparison of book to the the S&P seems to ignore that there is only one price that matters-market and those returns for Berkshire have been less than the index as noted previously.
That is an important piece of good news. Most foundations are a way to transfer control to later generations and avoid the price of estate taxation. If Gates has to sell the shares within 10 years, then we won't have the inertia that often goes with that ownership. For example the Kellogg Foundation once controlled over 50% of the stock. Management were among the trustees. Some years ago the stock went sideways for years despite share buybacks. There was a rich cashflow but it did not prevent mediocrity. The Keebler acquisition helped to change that. Likewise the disputes between the Hershey management and Milton Hershey School are well known.
If the lines kadison quotes lead to the shares in the Gates Foundation being sold over ten years ( and that is how I am reading that), that is good news for the shareholders and means management will need to produce or else. Or even pay a dividend.
I am sure even Mr Buffett might question the cult like answers that he is never wrong. I have seen his answers many times in re the business and they are valuable. He has said he paid too much for Berkshire originally and should never have bought it.
Sokol was a clearly a major player now and in the future but even Buffett hesitated at first to admit that his behavior was unethical. That would clearly violate insider training rules at most banks and would not happen. I readily acknowledge that Buffett has beat the odds for most of his working life but I seriously doubt that skill can be institutionalized. I would also suggest that the giant acquisitions of 8 companies that would be in the index otherwise may be a different risk than buying strategic stakes in well run publicly traded companies. But I have already made that point.
The company cannot in the long run manage all these giants optimize shareholder value. You can buy strategic stakes as Buffett has done in high performing companies such as Coke or Wells Fargo but 100% ownership of giants has not been proven a winning strategy in the long run. And that seems to be the time horizon of its investors.
I am not confused about original owners. I think yiu meant mangers not owners. I knew the Smith Brothers who founded Lubrizol and they are dead. James J Hill has long been dead but my point is that over the long haul who will cast the shadow over his team that he did. When you say the intrinsic value is 190,000 to 210,000 versus a market that is well below that, how do you know this? And if correct does that not say the sum is worth less the parts.
Most of you seem to be seeing that his returns will be less than index but with less risk or that he will still beat the index modestly. In the past ten and five years the index was a better choice. Lubrizol raises ethical and leadership issues that should not be ignored.
Its too big and too diversified for its own good and yours.
Owners? Or managers/executives? So tell me what is the value proposition- Buffett who is past 80, his executives or the fundamentals of of these varied businesses? And why is that not reflected in the past 10 years? I also think dividends are a good discipline on management and the best form of diversification.
Lets go out five years after Buffett is gone. If the share price languishes that can change the view of Gates and others. Also how does the foundation payout 5% of its asset value without dividends or sale of the stock? The IRS requires that distribution. Even Microsoft commenced dividend payments to satisfy the needs of fiduciary investors who could not own the stock unless they did.
I respect your knowledge but you are not addressing the issue of size, which inevitably means its returns revert to the mean or the value of the sum is less than the parts. Likewise, its size is made worse by non payment of a dividend. History tells us that once the star is gone we all see things that now seem obvious. GE without Welch had a huge banking business equal to or greater than its technology side. Hanson Trust opted to break up After the death of Gordon White and suddenly some financial issues about its FX management became apparent. Lord Hanson said at the time he thought it was better to break it up than address the succession issues. He and White were certainly value investors for a long time.
So history is really not on your side. May I remind that the total return for the ten years and the five years thru 12/31/12 is less than the S&P. And also the last five years. Some would call that disappointing to say the least.
If you are right that Gates will do nothing to act on changing Berkshire that may well confirm a long period of mediocre performance and another reason to exit.
If after Buffett Berkshire has problems, I do not think it will be decades to break up. There will be too much market pressure and its largest presumed shareholder the Gates Foundation could very well push for change by spinning off its 100% owned subsidiaries such as Burlington of Lubrizol. Or even push for a dividend so it can satisfy the IRS requirement to distribute 5% of assets every year. Nonetheless, that makes succession a very uncertain future. Buffett fans are great for their loyalty but they should wake up and ask if that uncertainty outweighs their memories of the past.
Sorry I forgot the extra "t". I do not object to the culture of Berkshire in any way albeit it depends too much on the reputation of one man. I seem to recall the Magellan Fund had a giant named Peter Lynch but no one after him could fill the shoes. It has long since faded. Berkshire if it does have problems after Buffett will not just shrink. It could be messy to unravel. It's been a long time since Berkshire had a 21% year. Size, no dividend and future leadership are the issues. I would prefer to own the Consumers Staples Index if I wanted less risk and outperformance of the S&P Index. My comment about performance is based on the last ten years. Some years ago John Nance who ran the Wellington was asked if he had as much money as Buffett. he replied. "No, but my returns were better and I took less risk."
I seem unable to download the excel file to find an answer to this question. Can you help?
In what way is this FCF model different than the standard ones used in many academic books?
Also in the model how are you handling changes in net working capital?
Most models consider that a deduction to find FCF. You may just be adding it to CAPEX. But again I am unable to download the excel file.