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Trimmed a little...

tecmo
...

Trimmed a little...


I trimmed a lot - well, in fact, I sold all my shares. $37b in operating earnings is fantastic, but that's almost the end of the good news. I don't know if Buffett was trying to moderate people's expectations, with such stellar operating results and the recent high prices, but it sure worked for me.

Here's what retained my attention.

On the positive side:

(i) as expected, interest income is much improved, with higher interest rates;
(ii) underwriting was stellar as well, with no big catastrophes last year;
(iii) the stock portfolio is doing well, as you would expect, with stock markets reaching new highs.

On the negative side:

(i) underwriting is the most volatile part of operating earnings;
(ii) stocks are overvalued, and in particular, I have a lot of concerns with the 50% concentration in Apple;
(iii) the railroad is not doing very well;
(iv) the energy utility was awful, and its prospects are awful. I don't think I've ever heard Buffett express so much regret about a huge part of the businesses run by Berkshire. In particular, the utility and railroads which we thought might be able to be absorb tremendous amounts of capital with low, but guaranteed, returns, making the float valuable, turn out to be much more vulnerable than most of us thought. No wonder the subject of a dividend came up.
(v) the subject of a dividend came up.
(vi) there are really no prospects for big private acquisitions, and Buffett's not interested in venturing outside the USA (despite the USA turning out to be not so reliable after all).
(vii) I can't name a recent fully acquired business that has really worked out well: Energy utilities, BNSF, Precision, BAC, and now Pilot (ok, there was Apple; but see point ii). And with Pilot, I have to even question Buffett's good judgment which I have put so much faith in. The Haslams seemed pretty crooked to me when the deal was announced, and recent events have completely borne out that initial impression.
(viii) It sounded like Buffett might be ready to pass the baton. Maybe it's not as much fun without Charlie.

So I'm not happy any more having a big part of my investments with Berkshire. I'm not happy coming to this conclusion, after over 20 years with a big Berkshire position, and I admit to feeling some regret, and maybe I am acting too quickly. But this is my time out at $425, and I think the price would have to be a lot lower to get me back in. Berkshire is probably still a reliable way to stay rich, if you're already very rich, but I'm not rich enough not to want to get richer.

DTB

(vii) I can't name a recent fully acquired business that has really worked out well: Energy utilities, BNSF, Precision, BAC, and now Pilot (ok, there was Apple; but see point ii)

Sorry, I meant big acquisition. Unfortunately we -- you, :( -- do not own all of BAC and Apple...

I netted $436.117 in pre-market.

Then I bought May 30 T-bills at 98.655
I presume those will be at 100 on maturity, which will return 1.363% in 94 days, or 5.297%/year rate annualized linearly.

Jim

(v) the subject of a dividend came up.

You mean this?

"Berkshire does not currently pay dividends, and its share repurchases are 100%
discretionary. Annual debt maturities are never material."

That's the only mention in the letter of Berkshire paying a dividend.

Wow, interesting post DTB.

I haven't gone that far, but I do own fewer shares than I have since forever.

Compared my typical number of shares long 2017-2020, which was relatively flat, my long positions are down to 45% of that level and I've written "covering" calls for another 20%. So if the price drops I'm at 45% of my prior number and if the prices stay high I'll be at 25% of the old number.

Just to add even a little more darkness, your first point...
(i) as expected, interest income is much improved, with higher interest rates;
...doesn't IMO add up to anything. Higher interest rates do nobody any good if the inflation rate is higher. Berkshire may actually be worse off now on the interest rate front with both rates and inflation higher, since the nominal interest is taxed, not the real interest. It's only the after-inflation after-tax gain that adds value to a share.

However I'm sticking with this ticker. I expect that at some point the valuation level will be really cheap again, and the bulletproofness hasn't gone away, so I'll probably pile back in then. But I wouldn't be keen if I were a person who ignored swings in valuation levels and never used the "juice" of the leverage in calls.

Jim

(v) the subject of a dividend came up.

You mean this?

"Berkshire does not currently pay dividends, and its share repurchases are 100%
discretionary. Annual debt maturities are never material."

That's the only mention in the letter of Berkshire paying a dividend.


Yes. OK, he didn't say there would be a dividend, but he did suggest that it was going to be hard to know what to do with all that capital - hard to find a big enough purchase, not interested in looking abroad, and not wishing to knowingly throw good money after bad. (That 'knowingly' word made me shudder, too.)

And he repeats the phrase that is in every annual report, for many years, that "Berkshire has not declared a cash dividend since 1967."

But in the letter part of the annual report, he has not usually mentioned the possibility of paying a dividend at all. In fact, he has always said, in his public communications, that that would be a last resort. And now, when referring to uses of cash, he doesn't just say that Berkshire pays no dividends, he says they don't "currently" pay dividends. Admittedly, one can read too much into that single word, "currently", but it is getting harder to rule out the possibility that that policy might change soon.

dtb

I'm 100% out of Berkshire today for the first time in many years. Today's action was quite extraordinary given the earnings report at the weekend. I'm investing the proceeds in US Treasury bonds from two to five years with the aim of selling them in the next recession - or fear of the next recession.

Just to add even a little more darkness, your first point...
(i) as expected, interest income is much improved, with higher interest rates;
...doesn't IMO add up to anything. Higher interest rates do nobody any good if the inflation rate is higher. Berkshire may actually be worse off now on the interest rate front with both rates and inflation higher, since the nominal interest is taxed, not the real interest. It's only the after-inflation after-tax gain that adds value to a share.


You make a convincing argument that most of the impact of interest rate hikes gets eaten up by taxes: the pre-tax real gain is interest minus inflation, but taxes are implied to interest, not just to the interest minus inflation difference.

However, in this case, operating profits (in the special, Berkshirean sense of the word) are post-tax, and have gone from $4.8b (2021) to $6.5b (2022) and now to $9.6b (2023; Item 7, page K-35), so I guess current rates are still better than older rates, inflation notwithstanding.


However I'm sticking with this ticker. I expect that at some point the valuation level will be really cheap again, and the bulletproofness hasn't gone away, so I'll probably pile back in then.

Yes, in that sense I am very much sticking with the ticker. I can’t even bring myself to remove the ticker from my Yahoo Finance list of current holdings. I’m in ticker shock.

Dtb

Then I bought May 30 T-bills at 98.655

Didn't you say half a year ago T-Bills with only 1-2 months remaining and the constant need to renew them is too much bother/work for you and that therefore you prefer to buy them with 1/2-3/4 year remaining? I conclude you expect to have better opportunities for your cash in a few months - - - for example a company with HQ in Omaha?

"Then I bought May 30 T-bills at 98.655"

Is that the net price you got? Because I bought some May 30 T-bills today at auction and they were 96.6717 which results in a stated rate of 5.255% and an investment (annualized) rate of 5.400%.

These were the reported results of today's auction -

Term: 13-Week
High Rate: 5.255%
Investment Rate*: 5.400%
Price: $98.671653
Allotted at High: 71.62%
Total Tendered: $236,704,744,300
Total Accepted: $84,497,713,900
Issue Date: 02/29/2024
Maturity Date: 05/30/2024
CUSIP: 912797HS9

*Equivalent coupon-issue yield

Didn't you say half a year ago T-Bills with only 1-2 months remaining and the constant need to renew them is too much bother/work for you and that therefore you prefer to buy them with 1/2-3/4 year remaining? I conclude you expect to have better opportunities for your cash in a few months - - - for example a company with HQ in Omaha?

I don't remember saying that...but I say a lot of things : )
I've never bought T-bills before this month, so I wouldn't have been speaking from experience.

It's definitely less work to buy less often, though I doubt that's the main factor to consider in a sensible decision about term. The point of very short term notes (3 months typical, 6 months max) is that they are extraordinarily price stable and liquid, so they can be converted into cash on a moment's notice without fear of capital loss. As soon as you go longer, you're more or less forced to start to have a bit of an opinion about the future trajectory of rates because prices fluctuate.

Yes, I certainly do hope to have better opportunities for my cash within a year. I would very much welcome a brief price crash in our favourite firm, if nobody minds too much. Just look away.

Jim

You make a convincing argument that most of the impact of interest rate hikes gets eaten up by taxes: the pre-tax real gain is interest minus inflation, but taxes are implied to interest, not just to the interest minus inflation difference.
However, in this case, operating profits (in the special, Berkshirean sense of the word) are post-tax, and have gone from $4.8b (2021) to $6.5b (2022) and now to $9.6b (2023; Item 7, page K-35), so I guess current rates are still better than older rates, inflation notwithstanding.

I still think there is no improvement, other than during a fleeting period that monetary inflation fell before short term rates did. That's the exception, not the rule.

Higher interest income is good, but it has to be enough to offset higher losses on the purchasing power of the cash pile if inflation has risen.

Using simple CPI-U as a proxy for the loss of purchasing power, US currency lost value from end 2017 to end 2020 at a rate of about -1.76%/year. 3-month T-bill rates averaged 1.47% in that stretch, or 1.16% after tax in Berkshire's hands. Net, the cash pile was losing value at around -.6%/year.

Then interest rates rose. Yay! But...
From end 2020 to end 2023 US currency lost purchasing power at a rate of about -5.37%/year. 3-month T-bill rates averaged 2.46%, or 1.94% after tax in Berkshire's hands. Net, the cash pile was losing value at around -3.43%/year.

So, even though there was seemingly a much higher interest income on the cash and short term fixed income investments reported, it was actually a deterioration in the rate of value generation/loss.

Different date ranges will change the size of the problem, but the main point is that the after-tax interest income rate has to rise MORE than the rate of erosion of nominal purchasing power did for the increase in interest rates to have left us better off. Other than a recent transient blip, I don't believe that is the case.

Jim

I bought May 30 T-bills at 98.655"

...

Is that the net price you got? Because I bought some May 30 T-bills today at auction and they were 96.6717 which results in a stated rate of 5.255% and an investment (annualized) rate of 5.400%.
...
Price: $98.671653

[I presume you mistyped and your price was 98.xxx from lower in your message, not 96.xxx]

Yes, 98.655 was the net price I paid. Plus a small commission which brought it up to (ummm) 98.657 all in.
That was in the secondary market. I can't bid at Treasury Direct, you have to be a "US Person" to do that.

If your price was the 98.671653 auction price, that's only an annualized yield difference of about 0.066%/yr from my trade. Prices are almost flat, but not perfectly so.

Jim

And now, when referring to uses of cash, he doesn't just say that Berkshire pays no dividends, he says they don't "currently" pay dividends. Admittedly, one can read too much into that single word, "currently", but it is getting harder to rule out the possibility that that policy might change soon.

I think you are reading too much into it, and out of context, too.
He wrote "Berkshire does not currently pay dividends" in the section on Berkshire's financial strength, where he ends with "Berkshire is built to last".

But, what if they did start paying a dividend, how much would it be?

I get non-insurance operating earnings of $10.34 per b share.
Say they have a 50% payout, that's $5.17 per share, or 1.3%.

Not sure many folks will be excited about that. Buybacks are far better.

I can't bid at Treasury Direct, you have to be a "US Person" to do that.

I have an account at Treasury Direct that was set up many years ago and is rarely used. Most people I know detest using TD.

I've bought a bunch of treasuries the last couple of years at Fidelity, Schwab and TD Ameritrade. Pretty easy although each site has its quirks. I've only sold a couple. Part of my buying was some money I was holding for a house purchase. And part of the buying of treasuries might be causing me some pain at tax time since the rates were higher and I ended up with a lot more interest than expect.

For people that haven't done so you can usually opt to search only for treasuries and avoid searches than include TIPS and strips which sometimes comes up in searches.

With the liquidity and east of buying/selling I usually will go the treasury route instead of CDs.

Rich

"I can't bid at Treasury Direct, you have to be a "US Person" to do that."

I don't use treasurydirect much anymore, instead I simply place and order to buy the new issues at my broker. No fees or markups.

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