- discussion about December's tax change (>> The $65 billion gain is nonetheless real – rest assured of that. But only $36 billion came from Berkshire’s operations. The remaining $29 billion was delivered to us in December when Congress rewrote the U.S. Tax Code <<)
- the new GAAP accounting standard that will produce huge quarterly swings in Berkshire reporting in the quarters to come.
- 2017's frenzy in high purchase prices for American enterprises, and the side-effects of using debt to finance them. (>> If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life. <<)
- payments made by Berkshire for hurricane insurance.
- strong discouragement to borrow in order to buy stocks (>> the strongest argument I can muster against ever using borrowed money to own stocks.
There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your
positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines
and breathless commentary. And an unsettled mind will not make good decisions. <<)
- details about Warren's bet against hedge funds when compared to S&P indexing.
- risks in owning bonds versus stocks.
Overall, I found the letter to be a useful reading for those passionate about investing or financial self-sustainability.
I fear people may misinterpret what Buffett said esp. for those who don't have memory far back enough. In 2007 I recall one could buy long term CDs at 7%. These were basically relatively riskless guaranteed returns for small investors. Nowadays the comparable returns are a little above 3%.
During the financial crisis many credits of financial companies were selling for a fraction of their face value. For example AIG bonds, or Bank of America subordinated debt. You could buy them for a whopping nominal interest rate north of 15%.
Even as late as 2011, during the muni market scare, one could buy California state taxable bonds and and California school bonds (federal and state tax-exempt) at about 8% interest rate. If one were a little more adventurous (and read up on the laws a little) one could have bought California muni bonds backed by redevelopment tax increments at close to 10% (and insured as well).
All these were safer than stocks at the time and delivered comparable returns. They were not meaningful if you have a portfolio the size of Buffett's, but they were good opportunities for small investors.
Making money on AIG and Bank of America bonds really required intelligence to understand why AIG of BoA wasn’t going to be another Lehman.
This is why information is money. Warren Buffet may have known or understood the implicit political assurances of which banks were "too big to fail." Under such circumstances any idiot can pull the trigger.
Well below this for smaller investors. Yield curves are getting hammered. Generally about 2.5%, and that's through smaller banks.
I want 1 year of expenses in cash, 2-4 years of expenses in bonds and the rest in stocks. Then I will have the courage to wait out (or buy into) the inevitable stock market crashes. This is my ideal retirement holding--while I have labor income is a different story.
I don't buy bonds for the return, I buy them for safety of principal. So, the risk of lower return is absolutely acceptable to me.
PS Please don't take investment advice from random people on the internet, definitely including me.
Stocks and bonds are not as anti-correlated as you might hope. The main benefit is diversification, and in that regard, it's really just lightening up your load of stocks - not actually the introduction of bonds. You may want to consider additional instruments for safety purposes.
Edit: I should note that when I am saying bonds I really mean the type of bonds held in this mutual fund (for example):
Edit: nevermind, I guess you mean with the incremental savings.
2 years in Series I bonds, 1 year in cash, the rest goes into a very aggressive investment portfolio of equities and real estate.
Secondary cash reserves all have similar problems.
When people invest, they are worried about things like a market correction wiping out half their purchasing power should they decide to sell and spend it next year. These events are protected by owning bonds and cash. But the real insidious killer is the long-term risk of sitting in the sidelines as bull markets go by and wipe out your ability to purchase long-delayed spending on the cheap. Or in other words, the risk that today's price is the lowest you'll ever be able to find the S&P 500.
I'm worried about that last scenario enough that I'm considering changing my investment strategy from 100% global stocks to include buying some long-dated S&P 500 call options. If the market goes down my future cash flows buy my retirement spending on the cheap, so losing a relatively small amount of money on call options that expire worthless is fine. If the market goes on a tear and stays up, though, I'm in a pretty rough spot.
This kind of pop evo psyche just so story is not any different than stories about how natural phenomena are the result of gods playing capricious games with humanity. It comes from the same place and has the same validity.
It's exactly my whole point that it is unreasonable for me to do so. ThrustVectoring was trying to appropriate the good will and prestige that science has built up without doing the hard work that's necessary for his argument to actually deserve that good will and prestige. It's a kind of free riding.
Edit (added): Sorry that's probably a little uncharitable of me. We've rather been talking past each other. From my perspective I've felt I wanted to discuss the science and you've been saying no, we can't discuss it, it's not science. But that's just my perspective.
Past performance is no indicator of future returns. I am long cryptocurrency as well but the main attraction from an investment standpoint into cryptocurrency is twofold:
1) Volatility is incredibly high (useful for various reasons; does not come without a downside, also obviously)
2) Yield curves of US equities are trash
A portfolio that is predominantly cryptocurrency is... pretty silly. It would be hard to reasonably argue against a majority share of equities and basic portfolio advice from someone like Buffett, with heavier weighting on higher variance items like cryptocurrency.
Are they? What's the average yield across the whole cryptocurrency market vs the US stock market?
The only valid form of yield in crypto I think is earnings due to Proof of Stake deposits.
There are lot of risky bets being made on back of cheap debt. I don't know how long will this sustain - Tesla, NXP, Broadcom and Qualcom to name a few - It will be interesting to see how things turn once the rates start to turn.
Is attaining debt at a 4% rate mortgage riskier than utilizing their float?
"Don't use leverage" is good advice for people who do not have the skills and experience to properly manage risk (which is to say, over 90% of the population). The proper answer is something like a long explanation of the Kelly Criterion, risk of ruin, how to evaluate the very fuzzy notion of your own career's job security and social safety net, and a ton of other factors.
Circling back to your question about a mortgage, though - just don't become "house poor". You want to have free cash flow above monthly expenses. Outside of that, on a 30-year fixed-rate mortgage basis, feel free to borrow and invest literally every dollar the bank approves you for. Especially if the loan is single-action or your investments get funneled into creditor-protected retirement accounts.
That is a very interesting strategy. Do you have any recommendations for books or other resources that discuss this?
If you don't pay your mortgage, it's generally either impossible or not worth suing you for the outstanding balance. Usually what happens is the bank spends a few months going through the foreclosure process, trashes your credit score, takes your house, and evicts you. This is bad, but if you owe $400k on a house that's worth $300k, it's less bad than continuing to pay your mortgage and dump an extra $100k down the drain. You save up first + last + security + moving costs for an apartment or renting a house out of the freed up cash flow, deal with the fact that getting credit is going to be difficult for a while, and move on with your life.
I know, citation needed...
Edit: I guess a secondary concern is the risk of interest rates going up, will you be ok if the cost of servicing the debt doubles?
Are people seriously considering borrowing against adjustable-rate instruments to buy equities?
My interest is that the policy risk according to Berkshire actions is less than 4% debt they could likely attain (or better). In other words - they are recommending investors not to use leverage, but in a sense they do use it against policy risk.
The trade off between debt and policy risk is interesting as both greatly increase returns by leverage.
Talk about the understatement of the century. 20% annual return, that's it? Should be easy...
What really sold me on BRK was how Buffet started a massive capital improvements project into their railroad business. If my memory serves me right, the investment was around $8bn, maybe 3 years ago or so. This was an investment in infrastructure on a scale not seen - and certainly beat railroad competitors in terms of capex by 2x or 3x.
My revelation was: had the railroad business gone to the market to raise those funds how would it have gone down? Bankers would have had a field day with fees. Traders would rush in. Speculators would dump the stock or bonds at a moment's notice.
BRK creates near zero friction within its businesses. You have cash in one place, you can just move it easily to another place where its needed, simple.
It was $5bn injection in BNSF in 2014: https://www.fool.com/investing/general/2014/02/05/berkshire-...
For all intents and purposes they were inline with the market...
This will increase share value on average over time. This isn't speculating in a capital gains increase. This is a measureable increase in value based on earnings.
So, if coca cola increases profits, berkshire can reasonably expect this is to their direct benefit: even if coca cola pays no dividend. They could have basically.
And you can realize a gain when you eventually sell.
even if a dividend were break even compared to the capital gains from reinvesting directly, you would still come out worse from having it taxed as income.
In fact, this is easy to see in practice: Apple has tremendous amounts of capital reserves which they are just investing on the market. In fact, $35B of those are in US Treasuries. Is it that absurd to think one can make a better investment than that?
Also in the UK you have a separate tax allowance for dividend income.
What I also do is stop reinvesting dividends when funds are at a premium to NAV. I have also stopped reinvesting dividends as I think the market will fall this year - I can then buy after the market has fallen.
You could also be cute and reinvest your dividend income into a pension and get tax relief back.
I think Buffet has instilled enough of his values and vision in the company, memorialized in the annual letters, books, interviews. The concepts will live on.
it's always important to remember that the CEO is not solely responsible for the successes and failures of a multi-billion dollar company.
that said, it's really hard to look at apple under cook's leadership and say that it's anywhere near as innovative as it was with jobs at the helm. the bulk of their current revenue is just riding the wave that jobs started with the first iphone. the iphone x is the most daring thing they've done in years, and it's basically just an iphone with a big screen.
the iOS UX is still really good, but it's not much better than a clean android setup. on the other hand, the desktop UX feels very dated at this point. I never thought I would find windows to have a more modern look and feel than apple, and it's downright depressing to see what the mac pro has become.
the company still performs very well as an investment vehicle though; I doubt they are in any trouble in the near-medium term.
Buffett said Ajit Jain, the chief of one insurance division has made more money for Berkshire than Buffett himself
Oh, I wouldn't say that. Succession risk is a lagging indicator. That Apple is doing fine now - extremely well, actually - and has for a few years since Jobs passed away is no good predictor of the future. There are a lot of reasons to be short Apple's long-term future; moreso since Jobs died.
>Each has been with Berkshire for decades, and Berkshire’s blood flows through their veins. The character of each man matches his talents. And that says it all.
given it will probably be Ajit or Greg as things stand. Quite likely Greg as CEO.
Companies like American Express or BNSF have provided value for decades, and will continue to provide. Buffett used his extraordinary understanding to make great investments on these and other companies.
But I am a web guy, not a railroad guy. I want to use what understanding of the web I have to make good long-term investments in great digital companies. Unfortunately it seems like so many of them are in flux, in part because the market grabs their valuation and attaches truly insane expectations.
So my question...what are the digital businesses for which you have the highest expectations? Extra points for not mentioning AmaGooBookSoft.
My few are Stripe, Square, and Zillow.
Alphabet (parent company of Google) is gearing up to be the Berkshire Hathaway of technology companies. If you read Larry Page's letter announcing Alphabet, it's clearly informed by Berkshire's principles of operation. It's even reflected in the name: alpha bet, or investment return above the benchmark.
But you’re right, especially compared to Apple they’re positioning themselves to grow through acquisition. I do wonder if Amazon has the highest chance of maximizing that strategy.
If watching Alphabet, wouldn't we see 9 failures or luke warm successes to the 1 big success?
Buffeft and Munger have regretted not investing in google and amazon when valuations were lower.
Other than apple, verisign and verisk are the main tech companies buffett is in.
That’s interesting on verisign. Never would’ve thought of them.
First, the company needs some sort of moat along with the ability to expand the moat. That is really hard to do in a software world when things can change so quickly.
There is a long list of other things, such as how complex the business is, the quality of the managers, the ability to reinvest capital, minimal need for additional capital expenditures, and so on.
As Berkshire has grown larger these requirements have shifted. What made the early success of Berkshire was taking the cash that the original textile company had, buying an insurance company, and then other companies that delivered great cash flow (See’s Candies, and newspapers to keep it simple.)
A lot of the moats that made those original businesses are less possible today, newspapers being the prime example.
I’ll just skip the rest and say what I think are great examples today:
Epic (unreal engine)
Google (the search/ads side)
Amazon, as long as it continues to be well run and doesn’t venture in to anti-trust territory
Apple, not quite, but their moats have gotten much stronger
Price paid for these is another matter.
If a company has terrible or negative cash flow and/or weak or non existent moats, then even a bargain price may be a terrible deal.
Buffett largely avoided tech because it didn't have a decades long track record. The answer may be "none of the above". It's not to say there are no good returns. Just a big harder to predict, without special knowledge. (Special can be: industry expert)
I heard it was because he never really understood the tech behind the companies. He has also stated that he regrets not investing in Amazon early on.
Buffet looks for a decades long track record of profits. Almost none of tech except companies from the 80s or 90s can provide that.
Intel is in many ways Buffett-style bet currently
- long history of profits
- Low valuation by the market compared to rest of the tech sector (p/e was 12-14 last year before the hike)
- There is pressure from AMD and NVIDIA on the otherhand and Apple (own CPUs) and Google (TPUs) on the otherhand. But Intel still have pretty incredible moats in brand and manufacturing capacity
I don’t know enough about the management to say if it matches Buffett’s standards for great management
He has been reading IBM's annual reports for the last 50 years.
This letter left me feeling a bit empty, which I've never felt before after reading Berkshire letters. No in depth discussion of anything interesting. I actually see it as a bit of a worrying sign.
I'm speculating here, but maybe Buffett is conflicted about discussing the changes in corporate tax code in more depth given that it helps Berkshire and shareholders (himself the most, as the largest shareholder by far) at the expense of the country?
Buffet interview talking about the tax changes before they got through.
>to assign a large portion of our debt to any individual business would generally be fallacious
could fit with the dictionary definition of
>containing or involving a fallacy; illogical; erroneous
Ie. it would be illogical to say this debt belongs to this business when it is a liability of Berkshire as a whole. But yeah a little clunky perhaps.
Also re discussion of individual businesses he explains:
>For many years, this letter has described the activities of Berkshire’s many other businesses. That discussion has become both repetitious and partially duplicative of information regularly included in the 10-K that follows the letter. Consequently, this year I will give you a simple summary of our dozens of non-insurance businesses. Additional details can be found on pages K-5 – K-22 and pages K-40 – K-50.
For pages K-whathaveyou you need to go to Berkshires site and download the full annual report.
Re IBM, Buffett is a Carnegie follower and would be reluctant to say he sold because Ginni Rometty wasn't getting anywhere.
(Fundamental Technique #1 https://en.wikipedia.org/wiki/How_to_Win_Friends_and_Influen...)
That's the problem I have with a lot of the culture in crypto investments. A lot of the newer investors are investing in crypto as a ticker symbol, just hoping its fiat price will increase. They couldn't care less about actually using crypto.
Similarly, those who buy into cryptocurrency will ideally hope that others will value it as a viable alternative to fiat, thus increasing its worth. This is in contrast to buying into crypto because its worth measured in fiat is increasing on an exchange.
Is there a Godwin's law for crypto in HN discussions?
>"In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, _a sensible purchase price_.
>"That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far
from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic
>"Why the purchasing frenzy? In part, it’s because the CEO job self-selects for “can-do” types. If Wall Street
analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening
teenager to be sure to have a normal sex life."
Next 100 years for American business will be the best if China usurps America and others like India follow. Countries have their comparative advantages, and returns to scale and network effects increase the pot for everyone.
However, in the case of the US there's the caveat that it runs the world's reserve currency, controls the petrodollar, and is able to strongarm other countries into accepting its domestic banking laws (through the likes of FATCA).
That situation is unlikely to persist for the next 100 years, which is going to be disproportionately bad for the US economy.
2. It will be harder for our government to do things that make the rest of the world hate us.
US citizens might be better off with a less powerful government.
This is something that is just said and 'known' to be true without people looking into what it means and how big the effect is.
It harms US exports (USD exchange rate is artificially high) but it helps US finances. Generally it seems to have slight net positive effect. By no means is it fundamentally important for US economy. In the normal year, the reserve currency effect is estimated to be between 0.3 to 0.5 percent of US GDP. In bad year much less.
B of all, You can stay in Kansas City or Des Moines the Friday night before the meeting, and potentially get a flight out Saturday night or Sunday. It's two hour drive from Des Moines to Omaha, so doesn't make for too crazy early leaving Saturday morning.
There are also some decent hotels on the drive from KC or Des Moines to Omaha, so you could stop a bit closer.
> It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.
Even if you look only their public stocks, Berkshire has certain advantages compared to individual investor.
They can buy a huge amounts of stock from pension funds with a discount to the market price. These kind of deals usually happen outside of public market so that the price din’t fluctuate due to the deal.
Also, individual investor can’t buy a public railroad company in its entirety. Berkshire did exactly that and continues to reap value from that deal, while individual investors of the said railroad company were forced to cap their long-term upside to the deal price.
but they have other business activities apart from their minority holdings, which you're ignoring.
they're also able to identify opportunities to take over (both private and public) companies entirely, and add value to those businesses in an active way that a small private passive investor is not able