>Those who regularly preach doom because of government budget deficits (as I regularly did myself for many years) might note that our country’s national debt has increased roughly 400-fold during the last of my 77-year periods. That’s 40,000%! Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a
worthless currency. To “protect” yourself, you might have eschewed stocks and opted instead to buy 3 1 ⁄ 4 ounces of gold with your $114.75. And what would that supposed protection have delivered? You would now have an asset worth about $4,200, less than 1% of what would have been realized from a simple unmanaged investment in American business. The magical metal was no match for the American mettle.
And close to the end:
> Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have “done it alone.” The tidy rows of simple white crosses at Normandy should shame those who make
What matters is being the world's reserve currency. I don't know a metric for that. Loose it and then debt matters a lot.
Reserve currency status helps US financial sector but it also hurts US competitiveness and exports. The net benefit is estimated to be between 0.3 to 0.5 percent of US GDP .
1. An exorbitant privilege? Implications of reserve currencies for competitiveness https://www.mckinsey.com/featured-insights/employment-and-gr...
2. Questioning the U.S. Dollar’s Status as a Reserve Currency
Just because there are some downsides, doesn't mean all the upsides go away.
I don't know if holding up Japan's situation as a beacon of light is particularly enticing here.
So in that specific situation it was entirely possible for a gov to intervene without resorting to buying foreign currency.
In my country they still didn't, in Hungary they did.
With regard to economics, deflation seems bad. Really bad. I (think) I get your point. I think you’re expecting physics results from economics. Econ usually says weak things in a limited context, like weather.
Yes. Debt matters. I would be happier with less of it. But in our current context, for a little while, it’s not that important. It’s a fire 300 miles away. The fire could be a really big personal problem surprisingly quickly, but today the biggest worry is housing and feeding the refugees. It’s a strained analogy. Hopefully it gets the point across.
I'd like to increase the volume of my balloon as much as possible. I blow it up a little bit. It increases a little bit. I blow into it hard. It substantially increases. I keep blowing and it invariably keeps getting larger and larger. There is an absolutely perfect and undeniable correlation between how much I blow into that balloon and the measured volume. In fact it's not even a correlation, it is a clear causal relationship. This leads to an empirical conclusion that is completely wrong.
In our society those that say to keep blowing are going to end up succeeding. Not only do their predictions work out, and quite profitably so, but they're also optimistic and promise untold volumes to come. The understanding would be to consider that in fields where meaningful tests cannot be readily performed, empiricism should never replace logic. And illogical but empirically supported concepts should be treated with extreme skepticism. Logic can be flawed and proven to be wrong. Empiricism can be equally flawed, yet the danger is that it can also be impossible to prove wrong until you're left picking up pieces of rubber.
Does debt not matter because we have experienced relative stability and growth for 70 years? If we had another depression (not the hyped great recession but true depression) or world war, would we be better off with less debt or does it truly not matter?
There's a lot of emphasis, when we think about economies, on economic systems (fractal reserve banking, limited liability companies, etc.) and political ones. Those are relevant, but... technology is a primary mover in all this, not just an effect of the political-economic cause.
How is having that much debt a good thing?
People often use their small local understanding of debt ("my debts are bad, because the legbreakers will come if I don't pay") as an interpretation/understanding mechanism for the entire economy, and that misleads them.
Buffett answers this in a previous paragraph about BNSF. BNSF has debt but they also have cash generation even in times of recession. This is really important. If you are unable to generate cash during recession and you have a ton of debt, you are dead.
A similar analogy applies to US. During recession, they can print money and generate cash. US will never default on their debt, or the probability of them defaulting is almost 0, hence the coveted AAA rating. Granted, the value of that printed money decreases right away, but eventually the value will stabilize w.r.t all other currencies and a stable store such as gold. Also note that the combined household wealth in US is nearing $100 trillion. That should count for something.
It's ok to have debt, if you have significant cash flow to cover your debt eventually, even in times of recession. Apple follows a similar philosophy. They raise debt for their share buybacks and dividends, even though they are sitting on a cash pile.
The US Government seems to have begun a habit of launching investigations of credit agencies that downgrade its credit rating. It's happened to S&P and to Egan-Jones.
Meaning the US government has not halted or suspended trading of the dollar-p ever. The US has, by all reasonable measures, paid back its debt on-time. If an entity has multiple billions, or even hundreds of billions, perhaps trillions of dollars to protect: where do you put your money that is equally safe? No where.
It's a good thing because it's secure. Because it pushes the world forward.
The nominal value the deb does not matter. As the debt has been growing, so has the economy. Government debt should be measures in relation to GDP.
Alternative name for government debt is delayed taxation. If private sector can use money more productively, government should delay the taxation and take more debt. I'm not advocating MMT here, just saying that reasonable government debt equals using the US economy as a leverage.
> There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.
> Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.
Taking inflation into account, '$114.75' in 1942 is equivalent in purchasing power to '$1,444.20' in 2019, according to:
Joking aside, what MMT says is pretty easy to understand from reading ~100 pages and watching some YT lectures/debates, where mainstream economists also voice their opinion. A reasonably intelligent person can make up their own mind, irrespective of what others think.
Finally, if you watch debates on YT, it's not true that mainstream economists say it's garbage. They usually say "MMT is essentially accounting truisms".
Here's Paul Ryan asking Alan Greenspan about this:
Printing money does not food create. Look at Zimbabwe for what happens when MMT is put into practice.
His discipline not to be distracted by things outside his investing thesis seems critical. Other opportunities? Maybe they're better, maybe not. But better to optimize for simplicity and reliability, powered by cash flow.
He mentions how accolades belong to talented BH managers rather than himself in almost every letter.
He’s made his ideas known for half a century.
Their success is not just a sequence of good investments. They make sound investments but sometimes they fail and they may cling to them too long (IBM, textiles). Heinz may turn out to be bad investment when it seems that consumer tastes are changing. I'm not sure about Wells Fargo either.
Berkshire insurance and reinsurance business is producing of steady flow of cash and float they need to invest. It's the cheap money they have available at all times that is the secret sauce. The result is profitable investment opportunities without the middlemen.
TL;DR: Other companies go to Goldman Sachs to finance their investments. Goldman Sachs goes to Berkshire Hathaway to fiance their business.
I won't speculate on an era after that because ideally they would stay as the management/investment team for quite a long time.
It's in the letter but also detailed here:
So just like the small VC when the game was small and before (as the saying goes) everybody and their uncle got in they did well. Now it's a much different story.
And importantly the halo of Buffet will not win out over a much bigger offer from someone else. It maybe have in the past but the game has changed. Now add to that that it's obvious that Buffet will not be a star or around for another X years and we have a recipe for Berkshire not being a long term bet.
So once again two things going on here.
a) Warren won't be around for long enough for the tide to turn back (if it does at all). Many of the deals that got done are because of his star power (similar to Steve Jobs at Apple closing an important arrangement by force of will and halo)
b) Others in the game. Competition that far exceeds what it was in the past.
High market value is based on what companies (or with goods people) are willing to pay. If there is more money floating around and there are more buyers then the price you pay will increase. And I am not talking about economics taught in school either. I am talking common sense the way anyone can observe even if they never took a course or read a book.
I don’t know how to value the float. Its value is largely dependent on the record of the person deploying it I’d think.
The value of the float is at least the value of it invested in Treasuries, I would think.
No because the float is actually a liability for paying claims. The company doesn't own the float, but they can use it like an interest free loan. And, in fact that might be a good way to value it. The cost of what would be interest payments at whatever the prevailing rates are.
Consolidated cash flows. Years 2018, 2017, 2016 (millions of USD):
Net cash flows from operating activities:
37,400 45,728 32,647
(32,849) (41,009) (84,225)
(5,812) (1,398) 12,791
Further, theres a reason why Ray Dalio is saying its a good time to hold some gold today. namely the absurd US entitlement schedule/unfunded pensions and global debt being absurdly high(320% of GDP). Despite what Buffet is saying, regular deleveragings (say every 10 years or so) do clearly happen as seen in 2001 and 2008 (though 2008 wasnt really a deleveraging of debt like it was in 2001 if you look at the data) - obviously it was a greater shock however... We are arguably in the "long term debt cycle/a super cycle" as Dalio writes in his latest book (which happens about every 70 years) because global interest rates are at rock bottom (central govts around the world dont have tools to bail out the economy at these levels). I know Buffet is right in the very long run, but I dont have the stomach endure the next 3 years or or so/be down like 50% for a period of time. Ill invest back in the market after this next recession.
“There’s two kinds of items that people buy and think they’re investing,” he says. “One really is investing and the other isn’t.”
Bitcoin, he says, isn’t.
“If you buy something like a farm, an apartment house, or an interest in a business… You can do that on a private basis… And it’s a perfectly satisfactory investment. You look at the investment itself to deliver the return to you. Now, if you buy something like bitcoin or some cryptocurrency, you don’t really have anything that has produced anything. You’re just hoping the next guy pays more.”
When you buy cryptocurrency, Buffett continues, “You aren’t investing when you do that. You’re speculating. There’s nothing wrong with it. If you wanna gamble somebody else will come along and pay more money tomorrow, that’s one kind of game. That is not investing.”
It's funny that the company is so big that there simply are not enough businesses to keep it satiated.
If that goes on long enough... There will be a time when it's more valuable to break up the conglomerate.
You should read a bunch of the annual reports and decide if it makes sense to move any of your funds into BRK. If you decide it is a good idea, Buffet bought back stock when BRK.B was around $207 (you should probably research this to be sure), so anything under that is probably a good price. (Above it might be a good price, but we know that at or below was a good price in Buffet's eyes) as of 2018.
I wanted to see it as a graph. So I cleaned it up in VIM and then made this chart from it:
Berkshire is not paying dividends like most firms do and their stock value grows 2 -3 percent more than SP500 price index just for that reason.
I could add a log scale chart, but since the value is the annual percentage change of market value, I think a linear scale is the right choice. But I'm not 100% sure. Would like to hear some opinions on this.
Even better, report the log((100 + percentage_change)/100) so that adding performance in different years is a meaningful operation.
As for the log scale .. I'm not sure if that is the right choice.
Is berkshire double taxed on the income it’s companies make?
Say Berkshire owns a company. Does that company pay corporate income tax on the money it makes. Then it passes the rest of the profit to Berkshire and does Berkshire pay income tax again on that money?
Say a child company earns some money. First it pays corporate tax on it. The. It issues a dividend to brk. Then brk pays a dividend tax? Then they pay a corporate tax on the remaining money?
So there are two ways to make money being an active manager: have a low IV with a high N or have a high IV with a low N. It’s difficult to maximize both at the same time because you won’t be able to find enough trades with a high IV, so you need to keep lowering it (the lowest you can go is obvioisly >50%) to get more trades.
This is why quant funds have so many positions, because they aren’t very certain about their bets. Buffet takes the opposite approach, only putting on a couple massive trades that he thinks have a high IV.
So it might be more accurate to claim that they don't support HTTPS.