Rakesh Saxena

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Thanks raytoei. Your approach is appreciated. - Rakesh


On Jan 31 07:46 PM raytoei wrote:

> Rakesh Saxena,
>
> I am going to file this paragraph away and revisit at the end of
> the year:
>
> "In the interim, it is not difficult to see Berkshire Hathaway shares
> dip well below their November 20, 2008 lows. Look for a decline of
> 35% from Friday’s levels at some point during the second half of
> this year.
>
> Unrealized losses on Berkshire’s put option insurance contracts may
> well breach $10.5 billion by the time the annual results are announced.
> Though all four major indices, particularly the Standard & Poor’s
> 500, would have to hit zero for Berkshire to lose the entire $37
> billion at risk, the prospects of the company’s performance being
> impacted by another $2-3 billion in unrealized losses in 2009 are
> very real indeed."
>
> I am very interest by highly intelligent writers who make statements
> on near term stock movements.
>
> raytoei

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Dear StockMarketSage: Interesting Site. Keep up the good work. Many thanks - Rakesh


On Jan 27 05:20 PM StockMarketSage wrote:

> Wow! Thank you, thank you, thank you! Ever since I posted a tounge
> and cheek video called 5 Overrated Value Investors I have been bombarded
> with hate emails. It was like attacking Ted Williams or Apple Pie.
> Your writing ability is 10x better than mine and I appreciate someone
> else coming out and bringing out discussion points like this! I plan
> on sending plenty of people to this article!
>
> The Sage
> stockmarketsage.com/20.../

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Dear User345770: If you read the article carefully, you will note that there is no obsession with Berkshire's derivatives. The question: are such derivatives part of the business model or not? Many thanks - Rakesh


On Jan 27 06:13 PM User 345770 wrote:

> Obsessing over modeling derivative "losses" 15-20 years in the future
> is mental masturbation. I might suggest you use your high IQ for
> something more constructive.

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Aashish. My view, as you probably know, is that the economic crisis this time around is not cyclical. Not that will "no one will ever make money in business again"; just that the restatement of assets and the process of de-leveraging (both globally), will place severe restrictions and limitations on the inherent ability of private capital to generate profits. And, again in my view, certain traditional business models in finance and insurance need revision. Many thanks for your comments - Rakesh


On Jan 26 10:58 PM ustaad wrote:

> Rakesh,
>
> A central tenet of Buffet's success is that he's figured out better
> than most which risks to take, which ones to avoid and more importantly
> adequate compensation for taking on those risks -- whether on the
> underwriting side or equity investing side. He's been prepared to
> walk away from business when premiums are inadequate. In my book,
> if current premiums understate risk, it'll be great thing for long
> term Berkshire shareholders (with oodles of short term volatility)
> as the competition will not be able to survive such an event. <br/>
>
> Frankly, Berkshire's index puts have been discussed ad-nauseum on
> this web-site in various degrees of negativity -- accounting/non-cash
> losses, impact from increased volatility etc. I'm not sure what the
> brouhaha is. Non-cash charges don't mean anything in my book. The
> puts are not priced on the basis of volatility. Their maturities
> are staggered over a long period of time and they are written on
> different indexes. The stock market has bever seen such an extended
> period of underperformance. If the market does underperform over
> such a long period of time, Berkshire will generate lots of capital
> to invest at depressed/attractive levels.
>
> I personally am not wired to be short things, but have no problems
> with people who can figure it out. In the short term, I don't see
> a lot of reasons to be long anything, however most money is made
> by investing during such times in durable franchises. As regards
> valuation -- equity prices are really driven by future cash flows.
> The fundametal mistake that people made recently is to assume that
> the long term future will very much resemble the recent past. Perhaps,
> people are repeating that same mistake in assuming that no one will
> ever make any money in business again.
>
> I have read (and enjoyed) some of your other articles. It's rare
> on this stie to see good/forthright analysis. Thanks.
>
> Aashish

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Valueinvestor: As you will see, I am sticking to the "sprint"--I have no desire to question Warren's "long-term" approach. For purposes of clarity, I am not a long-term trader since I only deal with facts as they are presented today and then enter positions based on my interpretation of what the facts will unfold within months, or less. Many thanks - Rakesh


On Jan 25 01:14 PM valueinvestor1 wrote:

> Berkshire is a great alternative for those who do not need income
> and would rather have their "profits" reinvested tax free and enjoy
> the interest free loan from the government the wa Buffett has made
> his 50 billion plus.
>
> Buffett has earned he and his invetors over 200 billion dollars in
> his lifetime.No one else is CLOSE
>
> Critiquing him is certainly fair game but his record over 55 years
> is unparalled.

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Ricard: The very short-term traders relate to banks and financials, i.e. Citi, GS, BAC etc., where sharp swings in either direction are influenced by news. I would trade with a bearish bias, selling on rallies which are based more on hope than fact. Many thanks - Rakesh


On Jan 25 12:55 PM Ricard wrote:

> Thanks for this well-written article. I had a question about your
> last statement:
>
> "The principal reason why this writer is only prepared to short Berkshire
> on rallies from this juncture is that there are ample trades in the
> relatively lower-priced financial stocks which continue to offer
> 25-30% returns over a 7-10-day period."
>
> Can you give an example of one of these 7-10 day trades? Thanks again.

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Dear mplaut: What we are looking at is an extended recession; in my view, the current downturn is different from previous ones in the sense that it is not cyclical--a fundamental contraction is ongoing. You are correct that "recalibrating" is required. But, in this environment, what will that do to premium rates, particularly when premium income declines are not temporary in nature? I will address the business model aspect in more detail in another article. Many thanks - Rakesh


On Jan 25 11:39 AM mplaut wrote:

> The analysis is very good and thought provoking. One of the main
> assumptions, that is not often realized with respect to Berkshire
> Hathaway, is that despite all of its many and varies businesses,
> it main business is insurance.
>
> I understood (I believe that it is from one of Buffet's annual letters)
> that the basic insurance underwriting model is to break even on premiums
> versus payouts, and to make money from the float, that is, from holding
> the premiums until they have to be paid out.
>
> If the actuarial realities have not changed - and there is no reason
> to think that they have - then the model should still work. If the
> returns from the float are lower than in the past, that is probably
> part of the "recalibrating" that everyone has to do and does not
> indicate that the model is busted.

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

CaptainJJack:

I think you have got to the crux of one issue, i.e. the type of risk in the Berkshire portfolio, and whether the ratios within the insurance portfolio have changed in recent years. My reading of the recent annual reports (and SEC filings) over 5 years shows a marked (new) emphasis on what I call non-actuarial risk. But your comments are welcome in this regard.

On another note, my view is that regardless of actuarial interpretations concerning premium rates, insurance companies have designed their business models around investment gains, and the actuarial content has been diluted over the years, intentionally or otherwise. But we can have this discussion at a later time, perhaps when the next BRK numbers are out.

Many thanks - Rakesh


On Jan 25 11:45 AM CaptainJJack wrote:

> Buffet has often said that he looks at the Underwriting gains separately
> from the investment income gains. As an actuary in a prior life,
> I think you are ascribing A LOT more emphasis on the investment income
> gains on the business BRK writes than the business requires.
>
> The key to the business BRK writes is how they handle the retrocessions;
> i.e. how the deal with the risk. I've seen nothing to suggest that
> anything much has changed here.
>
> So, I agree that 2009 will be a challenging year, but I disagree
> that the insurance business model is somehow fatally flawed.
>
> There may well be currency fluctuations, but given where the US budget
> deficits are heading, you can hardly argue that the dollar's strength
> will continue longer term.

Berkshire Hathaway: Failing Business Model Points to a 35% Decline

Thanks Kruser53. Just two clarifications are in order. One is that the investment income target of $1 billion is for each quarter. Second is that, in the interests of brevity in this particular forum, I did not go into an analysis of Berkshire's Level 2 and Level 3 (FSAS 157) assets. In any event, let's hope that the annual report has more specifics on a number of issues. - Rakesh


On Jan 25 09:49 AM kruser53 wrote:

> Rakesh, you have written a very well researched analysis. Thanks.
>
>