mplaut

Charlie Munger's Letter to Wesco Shareholders: Quick Recovery Unlikely in 2009

I looked up the letter after reading your article and was surprised to see that you did not include the following VERY interesting quote:

"Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value’s intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway.

"All that said, we make no attempt to appraise relative attractiveness for investment of Wesco versus Berkshire Hathaway stock at present stock-market quotations."

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

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.