Vox Rationalis

Buffett's Big Surprise: Sage of Omaha Was in Favor of Bailouts

"It's hard to disagree with that straightforward conclusion as to the motivation behind the sage's self-serving rhetoric."

And obviously, those who post articles on seekingalpha.com (myself included) are raging egomaniacs motivated purely by the euphoria of foisting our names in front of others. What? There are other possible motivations? Ones that don't serve to enrich our egos?

More than one possible answer to a question. It must boggle your mind.

What's Buffett's Ideology?

Social Media wrote:

> Why doesn't he share BRK profits with his shareholders? what is point
> of value if one cannot enjoy the cash out of it?

Simple. By not paying dividends, Berkshire allows shareholders to take all of their taxable gains at the time of their choosing, which can be greatly beneficial. Or to allow greatly appreciated shares to pass through their estates, which reduces the tax on gains to ZERO.

Few shareholders would argue that BRK's profits haven't benefited them, since their holdings have appreciated 1014% since 1/12/1990 (the oldest number on Yahoo), or a bit more than twice what the S&P 500's returned during that time.

What's Buffett's Ideology?

Dividend Tree wrote:

> Vox Rationalis,
> All the points that you quoted and responded, doesn't that point
> towards shrewd business acumen ? And not value investing alone as
> one may read all over the place! Thanks for you comments though !

I think you probably needed to provide your definitions of "value investing" and "business acumen." I believe Buffett would be the first to tell you, he is a capital allocator. He lets the business people run the businesses. So from that standpoint, his business acumen is unknown - he lets the experts take care of that.

What's Buffett's Ideology?

"Are these examples of value investing within derivatives domain?"

Yes!

"...during 4Q2008 and/or 1Q2009 BRK offloaded significant position of his holdings in landmark US companies. Buffett is using BRK’s cash to invest in instruments which are not available to general public. Remember his preferred share at fixed 10% interest rate both in Goldman Sachs and GE!"

These two are not unrelated. Buffett had an opportunity to exchange blue chip equity holdings with low dividends into blue chip equity holdings with high dividends. Who wouldn't do this?

"So Buffett is taking advantage of huge cash and public stature to step on common shareholder dividends of less than 5%?"

Wait, you're complaining about Buffett making such an investment? Do you think that every investment option should be available to every investor?

"Or does this mean there are no value investment opportunities even with markets down by more than 50%?"

If you think Buffett and/or BRK wasn't buying in early March, well, I think you're foolish.

"Since he is not investing in common shares, does this mean there is no value in traditional US markets?"

1. You don't know what he is investing in personally, nor do you have any better knowledge about what BRK's been doing than the rest of us.

2. Near the November bottom he was putting large amounts of cash to work in GS and GE. Since then he's taken advantage of opportunities due to the failing of credit markets. Is there really any need to question whether these investments presented great value?

Does this mean there's no value in equities? Of course not. It means there were better opportunities in the credit markets. If I could have loaned money to Harley Davidson at 17%, I would have.

Recession Hits Omaha: Moody's Downgrades Berkshire Hathaway

"The rating cut is specifically related to the decline in profitability coming out of Berkshire’s worst year since Buffett took over in 1965."

No. Moody's indicated that the primary rationale was the reduced capital cushion caused primarily due to falling stock prices. It then indicated that reduced earnings was a contributing factor. But look closer at the earnings. Comparing 2007 to 2008, earnings fell from $13.2 billion to $5 billion. Of the "lost" $8.2 billion, more than $6 billion were paper mark-to-market losses on derivatives, including $5 billion on the infamous equity index puts. The difference in the two years in investment gains was $6 billion, primarily due to the large gain BRK took in 2007 on its PetroChina investment. From these two entries, it looks like the decline in profitability was due completely to the declining equity markets, which (don't tell the bears) is quite unlikely to repeat its performance this year.

Luckily, there's another easily obtained metric we can use to compare: operating cash flow, where the drop from 2007 to 2008 was 10.34%. For comparison, operating cash flow was 10.36% HIGHER in 2008 than in 2006.

"At Ockham, we have BRK-B as Overvalued currently..."

Really? Overvalued? Pretty bold, considering it's trading at just under 1.3x book and under 1.9x tangible book, both of which are toward the low end of historical measures.

"...as the famed company’s earning are expected to slip in 2009."

Well, I guess you're talking about operating earnings since the lowest estimate I've seen puts the bottom line number about 40% higher than last year. More importantly: do you always base your valuations on a single year's earnings?

Buffettology: Book Represents Buffett's Approach to Investing

"Similarly, rather than invest in the vehicles of communication (cable, radio, and newspapers), better to buy the advertising agencies..."

This is kind of amusing, considering that BRK's 20% ownership of The Washington Post has been one of the most successful investments of Buffett's career, despite WPO's 63% decline from its all-time high.

The Real Reason Behind Berkshire's Exploding CDS Spreads

David Clayton wrote:

> @BS Detector: The idea of reverse-engineering the Berkshire index
> puts intrigues me. Have you made any progress, or would you mind
> if I put an article together on it?

I haven't done anything with it. Have at it.

Explaining the Berkshire Share Price

paultaut wrote:

> BS Detector: The voting aspect is popular and unlikely to be removed.

Agreed. I think SA has likely seen an increase in traffic directly attributable to the voting function. Since traffic drives ad revenue, there's no way they will/should kill it. This doesn't mean it can't be improved, and I've emailed them with suggestions. I have no idea whether my ideas fell upon deaf ears, if the development aspects are too daunting, if revamping is in the works, or if they're taking their time so that Voting 2.0 has little left to improve, understanding that there's no way to make it perfect.

> You probably won't believe me but I have given you an "up" occasionally,

I have no reason to doubt this.

> ...that I don't understand why there are so many negative votes.

Simple - I piss people off. And reaching -500 or -600 or -700 only takes one committed person (such as b****.* AKA p********d, who has used those and additional accounts to systematically "thumbs down" me - though I think he's not the only one).
[usernames disguised so that perhaps Seeking Alpha will allow this post to stand]

>Would you pay an annual fee to read the Articles posted?

Not today. This is the central question facing all media. With august print publications such as the Seattle P-I and perhaps the SF Chronicle biting the dust in the face of free competition online and on TV, how long can it last? Will we end up with Google news and a few hangers-on? Can anybody else survive if content is free?

> This comment is addressed specifically to you. How long do you think
> it will take for a couple of posters to give it a Con?

No idea. If your detractor(s) is clever, he won't do it, since that would make it appear more likely to have been me. For my ratings, much depends on whether my detractors are on vacation or not, since they seem to have nothing else to do while at the computer.

> just because we differ, doesn't mean I do not learn from the exchanges I help to create.

Peace. I'll still pound you for incorrect assertions of facts, and you should still pound me for being an ass.

Peace just the same.

Explaining the Berkshire Share Price

paultaut wrote:

> Do you actually believe that the number of votes you give whether
> Pro, Con or total cannot be tracked? That who is using the website
> at any given time, cannot be pinpointed?

Of course not. What did I write that might have given you that impression?

> Take Friday the 13th(I lost about 80 votes with the exact same situation
> as you describe, none of my recent comments had more than a couple
> of negatives)

That's not the first time that my identifying a systematic self-voter has been followed up by somebody (not me, though I'm well aware I can't prove it) providing thumbs-down systematically.

> Its pretty simple, the system is being altered or haven't you noticed.
> Fairly soon those that trash just for the sake of trashing will be
> identified. They have no place on SeekingAlpha.

What makes you think Seeking Alpha would "identify" anybody? I've urged them to scrub the voting, but I see no reason to suspect anything's in the works.

The Real Reason Behind Berkshire's Exploding CDS Spreads

Nicholas Waltner wrote:

> Technically, one derives the zero-coupon curve to price options at
> each date in the future. I didn't bother doing this, as the curve
> is fairly flat past 10 years and hence is about the same at the coupon
> curve.

It seems to me that the risk-free rate has to be a short-term rate, that rates include risk based on duration. Unless risk-free doesn't necessarily mean risk-free.

> but index yields have gone up a lot - but who knows what the final
> dividend yield will be owing to all of the cuts.

It has to be lower. S&P dividend rates haven't been anything close to this high in 20 years.

The Real Reason Behind Berkshire's Exploding CDS Spreads

Mr. Waltner:

No time at the moment, I'll be back to this tomorrow, but:

1. I don't recall the yearly exposure numbers, but that's a good data point for determining the average purchase point each year. I think we need to make an assumption as well about the blend of the four indexes involved, but I haven't done any work to make a logical suggestion for that.

2. Your 90.8% of the December 2007 S&P close of 1468 puts it at 1333 (not 1384 - please verify your number), which is if I remember correctly rather close to the number he used in an example in this year's letter. I think the odds are good that this number was not a random choice, but was chosen to make his example reasonably close to the real situation.

3. Premium was I believe $4.9B as of YE08. It think it was $4.5B at YE07.

4. I'll need to bone up on option pricing a bit before I can have anything close to a considered opinion on the rest, though one thing jumps at me - the interest rate. First is a nit, as I recall U.S. Treasuries are generally used as the proxy for a risk-free investment rather than LIBOR. Secondly though, I think it's reasonable to think that the recent flight-to-quality has driven yields on Treasuries artificially and unsustainably low; at YE the 10-year was at something like 2.25%, while in the years leading up to October is was rarely below 3.5%. Does B-S specify a selection methodology here? Does it even differentiate based on the time period, that longer-dated options should use a different rate than shorter-dated options? I think I know where you got your number, and I'd guess that Buffett got his by looking at a longer-term, less panic-driven sample. Are both methods legit according to B-S?

Can you reverse-engineer his other assumptions?

Also, I'd like to see your numbers again based on current levels (S&P at 750, 10-year T at ~3%).

BTW, I'm one who likes data, so more detail is always better for me personally. But to save my many detractors from having to look at ever more words, links for the details are are fine with me.

Is Berkshire a Long Run Buy?

"There surely must be a premium in the shares simply because of Buffett’s reputation. That could come out of the price. Moreover, Berkshire appears to be an extension of Buffett: It’s been his show."

Two points.

Decomposing BRK can provide support for both the undervalued and overvalued positions. My feeling is that on a price to tangible book value basis, it doesn't look cheap, but on a cash flow basis it does.

I think the net Buffett effect right now on the stock is very close to zero. Buffett's age and succession questions present risks, and I think the market is in effect overvaluing risk premiums due to heightened risk aversion, and many share prices are discounted more than is appropriate. This is countered by the undisputable Buffett premium, but right now I think the net Buffett effect is as low as it's been since 2000.

I'm long BRK.

Berkshire's Downgrade: Rating Agencies Become More Irrelevant

Perhaps nothing should be AAA. Gee, what a novel concept for one of the companies that put AAA on so much mortgage-related debt that's now haunting us all.

One thing's pretty certain: Moody's will not be downgrading BRK.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

Nice reasoning behind the BRK CDS pricing here: seekingalpha.com/artic...

Explaining the Berkshire Share Price

By they way, paultaut, how is it that your commentor rating jumped by about 100 votes overnight, but none of your recent comments has more than a couple of votes? That little icon is so important to you that you systematically vote for your own posts. Sad.