Investment Strategies / Mechanical Investing❤
No. of Recommendations: 5
Several of Buffett's top portfolio investments have very low ROE, esp. the more recent ones.
Most striking are CVX, OXY, BAC, KHC and the Japanese trading companies, which have 5-year ROEs in the single digits.
Many of his earlier investments like KO, AXP and MCO have very high ROEs as does Apple.
Are all the recent low ROE investments, special situations where ROE is temporarily depressed, and not relevant to the decision to invest?
I always thought ROE or ROIC as one of the most important indicators to screen for, to indicate a moaty and well managed company. But apparently not to Buffett.
Has Buffett shifted to special situations, because he can't find great companies at attractive prices (except Apple)? What am I missing?
No. of Recommendations: 12
I imagine ROE isn't a particularly meaningful metric for CVX or OXY.
Commodities firms usually have more of a return OF equity rather than a return ON equity. They don't produce oil, they just dig it up.
Basically, the value of their assets isn't a firm number in the way it is for "normal" businesses, so it can't be used as a good metric.
I suspect Mr Buffett's attraction to OXY is that they will in fact be extremely profitable over time (barring intermittent times of low oil prices), PROVIDED capital allocation is done in a way to throw off profit rather than boost size and volume beyond what pays.
I have never been a big fan of BAC, since they have such modest profitability historically, consistent with their usually very modest ROE.
ROE at a bank is best thought of as return on assets, times leverage.
All the banks have lower leverage these days, so the ROEs are lower. So to find the best business, looking at ROA has traditionally worked better.
But BAC historically had a reliably poor return on assets too, which meant that it took that much more leverage to get a decent return.
They struggled to get over 0.8% for ages, which is at the borderline of "why do you even bother to stay in business".
However they have been better in the last few years. The best reason to think it might last is that Mr Buffett isn't a fool.
I have long wondered what Mr Buffett saw in them. One possible conclusion is that it's more of a perpetual bond thing. At a fantastic entry price.
They aren't going to go bust, they will make money on average through the cycle.
Most cycles, anyway...they have always had a history of being the bank that steps in every pile of poop that comes along.
If they had an evident charm when he bought in, it was that they were growing.
And in fact the ROA has been quite good since Mr Buffett bought in. Average 1.39% from 2016 through 2020, which is outstanding for them.
But they're back around 0.9%, who knows what will happen next.
KHC has simply been a disappointment...I think a high ROE was expected, but didn't arrive.
Nobody gets all the picks perfectly.
Incidentally, some people think they might conceivably be a good investment at these levels.
The debt has been paid down a lot, and the earnings may not be plentiful but they're likely to last far into the future.
Low single digit sales growth, mid single digit EPS growth, and a rise in multiples to reflect their soon-to-be-regained steadiness and better balance sheet?
I'm not saying that, just summarizing the case that others see.
So, of the low ones you mention, I'd put two down as "not really relevant", one as "simply hasn't turned out well, oh well", and one "it's a mystery to me why we bought it"
Jim
No. of Recommendations: 1
Is it tarring with too broad a brush, that there are countries that are apparently capitalistic, but don't care about shareholders at all?
Examples: Japan. Israel. These two I have some (long ago) experience with.
Europeans are still somewhat shareholder friendly, but maybe except for UK nobody is close to good old USA.
Why Buffett expects Japanese companies to give him, a passive shareholder, returns better than any decent US company is beyond me.
I think from time to time he is seduced by apparent cheapness and thinks the margin of safety is so good that this banana tree will certainly produce mangoes at some point. Examples - Posco. Tesco.
No. of Recommendations: 13
Why Buffett expects Japanese companies to give him, a passive shareholder, returns better than any decent US company is beyond me.
To summarize the heart of the problem, it's not so much that ex-US firms don't make enough money, but that the money doesn't end up in the pockets of minority shareholders for one reason or another.
Diversion through self-dealing restructurings (S Korea, France), or simply stacking up the banknotes in the corner (Japan), or any other number of ruses.
So I think perhaps Mr Buffett has had the same thought I have had from time to time:
If it's outside the US, insist on a substantial dividend. The sogo shosha have yields in the 3-5% range.
At least in that case you know that you're getting SOME of the profits. The disposition (or diversion) of the retained earnings isn't a critical factor.
If the dividend yield alone is a perpetual bond with a high and effectively inflation protected yield, you're good to go.
If, like Berkshire, that's what suits your portfolio. And, like Berkshire, you aren't counting on selling at a higher price in order to make your money.
For advanced students, make sure you're relying on the dividend from the same member of the corporate group that the controlling family relies on for spending money.
Jim
No. of Recommendations: 7
