After Munger, Buffett Says Berkshire’s Size Rules Out Big Performance
I'm going to dial back (which is to say omit entirely) the sarcasm and snark I typically employ while editorializing around Berkshire Hathaway's results.
This is the first quarterly update since Charlie Munger's death and Warren Buffett's first annual letter penned in the absence of his business partner. There's nothing to be gained (and something to be lost) from adopting a mocking or derisive cadence in the service of cheap humor at Warren's expense going forward. So I won't be doing it.
Whi
H
Your two main takeaways (and Buffett’s) are not only true but they have been true for some time. They are also inevitable and will be from now on. What he needs to do with half that cash is reward his shareholders with a dividend.
One other thing the oracle pointed out, indirectly, is the difference between market value and GAAP net worth. The market value of a company does not belong to the company. They cannot spend it nor use it in company operations any other way. Market value belongs to shareholders who bought it from other shareholders. The company promises no return on this value and are not legally required to guarantee anything about this value. There is no legal obligation involved in any way. People who equate a company’s market cap with its size are confused about what they own. I guarantee you Warren Buffett knows what he owns and what his company owns. It ain’t what most people think. Watch out for the mighty seven. Warren’s works own more of the top corporate assets in our economy than anyone else. The shareholders of Nvidia, Amazon, Microsoft and Apple own more snipes. Check you own bags folks.
Mr.Lucky, can you provide further explanation as to what you are saying in the last 5 sentences of your post? I sense it is important, but I am not exactly sure what you are trying to tell us.
I just recently (in the last 12 months) added some Brk-B to my investments. The amount of cash that it generates is phenomenal. Even if they don’t authorize a special dividend, buying back shares at this rate, over time, is not the worst thing- because a huge chunk of a dividend (in a taxable account) would be paid out in income taxes. Some shareholders might want to be able to control the timing of that taxable event- through selling shares at such time they want cash.
I’m not Lucky but I think he’s saying: Buffet owns whole companies that are profitable and he gets all their profit (free cash flow) and can put the cash in the bank or buy things – every year.
The “S&P 7” have extreme market caps which is what investors have bid up when buying shares, but those companies can’t “sell all their shares” and get a Trillion dollars… and once they sell stock to “capture” the value of a high stock price they’re diluting everyone and possibly starting a rapid descent in market cap – see Netflix or Facebook.
I’ve never bothered to read Buffett’s annual letter, but your synopsis swayed me on this one. Thanks for that and the added color.
#LuckyOne – some great points. GAAP company value versus market cap is interesting to think about it. But sadly, don’t many execs run their companies with an eye to the share price? Using the buy-backs at bad level Buffett alluded to and such. All in the name of the all-sacred Shareholder Value.
Hi H.,
I read Buffett’s remarks differently. Since you voluntarily refrained from sarcasm, maybe I can use some.
My real life experience of Buffett’s style of business is that a Berkshire business bought the assets of a small company making metal plate connectors; the types that connects 2×4 to make roof trusts. I had inside knowledge of that business.
That was the last competitor that was missing to basically have a monopoly in the northeast for this particular widget. Maybe you could say that Berkshire “scaled” that industry which historically was very local. That company was careful to keep that last company alive, at least in name. But the manœuvre was quite obvious to insiders.
And I work in insurance and reinsurance where the size of Berkshire in the industry ensures their domination. That business gave Berkshire’s its “float” (the lag between premium and claims payments) that is its cash pile. That enables the rest.
I sometimes sarcastically wonder if the secret of his success is not very un-American monopoly building, rather than the folksy “value investing” mantra. I wish US anti-trust laws would recover the light it once had.
Interesting counter points. Thank you for adding color.
I agree, Charlie Munger’s interview with Collison (of Stripe fame) has tidbits where Charlie says “Warren only invests when he has a sure edge”.
Basically that he’s very risk averse and always has an inside angle – and yes monopoly (literally the railroads they bought) are the simplest angle (to extract predictable profit aka “rents”).
Monopoly makes for capitalist wisdom but maybe not so good marketing?