No. of Recommendations: 13
Like Bruce Flatt did with some of his BAM holdings, why not sell some/all BAM and roll the proceeds into BN which seems to be the more attractive investment?
If my financial profile were similar to Mr. Flatt's, I might do what he did. According to the filings, he started with about 14.5 million shares of new BAM at the spinout last December, got new grants in February that took his total over 17 million, then converted most of the new shares to BN, bringing his BAM count down to ~15 million, still more than he had in December. That's currently about $19 million a year in dividends, which would cover my living expenses nicely. I don't know about his.😁
I read Mr. Flatt's trades as more market signal than meaningful change in his portfolio. His BN share count went from roughly 63.5 million to 66 million, an increase of about 4%. If I altered my allocations in the same proportions, BN would grow from 64.2 to 65.7% of my Brookfield stake, BAM would fall from 32.6 to 31. Given my eyesight, I probably wouldn't notice.
Regardless of whether the expected increases actually occur, simply based on current earnings yield, BN is yielding 6% more than BAM. I am tempted to sell all by BAM and roll the proceeds into BN, but would like your opinion as a sanity check before I pull the trigger.
I agree BN is currently the more undervalued of the two. That's why it represents the bulk of my Brookfield allocation. It is also a more complicated investment. Its valuation is more subjective. I like the new BAM for its simplicity. I spend less mental energy worrying about it. I own enough BN to benefit should it return to its historical highs. I don't feel any compulsion to make my allocation among Brookfield tickers more lopsided than it already is.
In fact, I'm going in the other direction. I sold some BN this year and established a basket of other alt managers to diffuse the single-company concentration risk. I just reread The Smartest Guys in the Room and found it hit a little close to home. I'm sorry to say that I no longer find management as credible as I once did. Brookfield is the Lake Wobegon of companies. Everything and everyone are always above average.
My allocation decisions are idiosyncratic, relating to my age, risk appetite and financial profile. I do not recommend that anyone else pay the slightest attention to them. I encourage you to follow your own plan.
Speaking of alphabet soups, the complexity doesn't bother me too much as long as the numbers are not fraudulent. I don't think anyone here thinks that's the case. Otherwise, why are we even here. It's best to just move on and completely forget about Brookfield.
Here is where we part company intellectually. You present this as a binary choice. Either the numbers are fraudulent or they're not. If you think they are, you shouldn't be invested. If you think they're not, you shouldn't worry about anything else.
The reality is outside investors never know numbers are fraudulent until it's too late. The ways one judges the risks of that along the way are myriad. Mr. Buffett, for example, has built credibility over the years with a constant stream of self-criticism. Rare is the annual letter in which he doesn't mention some mistake he's made.
Mr. Flatt and the growing ranks of CEOs of the various spinoffs are not like that. I cannot remember the last time Mr. Flatt acknowledged a mistake. And yet we know he has made some because he is human. In any field, when one hears an uninterrupted cascade of self-promotion interspersed with grievance, the grounded listener may become suspicious.
Lots of businesses engage in self-promotion similar to Brookfield's, but many of them are less complex. When a retailer sells less stuff than expected, no amount of rhetorical hype can disguise that fact. With Brookfield, the metrics change regularly. The categories in which values and revenues are reported change as well. The multiples they assign various revenue streams change, often with no explanation. Earlier this year they abruptly removed LP real estate investments from the BPG line item. Why did they do that? They will say streamlining or some such corporate-speak. The answer that occurs to the skeptic is it made the out-of-fashion BPG line item smaller, perhaps in an attempt to downplay or disguise the aggregate allocation to real estate.
All these things can affect the comfort level with which an investor holds a security. Knowing the limits of my ability to see through opaque accounting maneuvers, BN becomes something of a black box. In its favor is the performance of its common shares during the 21 years Mr. Flatt has been in charge. Even at today's low ebb of an endpoint, the record is reasonably good, although not as good as it has been at various points in the past.
Less favorable is the vast increase in complexity over that span. The common stock has metastasized from a single ticker to nine. The real estate portfolio has gone from private to public back to private in a so-far largely unsuccessful attempt to unlock value. Multiple entities have small parts of multiple transactions well beyond my ability to dissect for advantage or valuation.
In the face of this extraordinary combination of complexity and opacity, trust in management becomes the coin of the realm. I would have more faith if the messaging seemed more straightforward and honest. Can no one acknowledge, in retrospect, that the GGP transaction was poorly timed? Can no one acknowledge the ethical tightrope that sometimes accompanies investing alongside sovereign wealth funds representing autocratic governments?
Being a critic of companies in which one owns shares does not necessarily imply one should sell those shares. No company is perfect, notwithstanding public messaging to the contrary. Trust is not a binary choice, it is a sliding scale. Over time, my trust in Brookfield management has declined, and with it the size of my investment allocation.
I still like the substance of their business -- the value sensibility, the operational dexterity, the fact that, as Tom Gayner says, they come to work every day looking at the whole world. But the opacity and complexity introduce an element of risk that does not exist in other potential investments. If something blew up tomorrow, some accounting maneuver that turned out to be illegal, would any attentive shareholder honestly be shocked?
There are more unknown unknowns here than in many common stock investments and that is a legitimate consideration in position sizing. At least, that's how I look at it.
