If someone appears to be repeatedly personal, lean towards patience as they might not mean offense. If you are sure, however, then do not deepen the problem by being negative; instead, simply place them on ignore by clicking the unhappy yellow face to the right of their name.
- Manlobbi
Halls of Shrewd'm / US Policy❤
No. of Recommendations: 25
This is one of the better write-ups of the quarterly results.
https://www.forbes.com/sites/bill_stone/2023/11/04...The usual first-order thinkers (and journalist bots) see the headline earnings down compared to the same quarter last year. They can be safely ignored.
The second-order thinkers are a bit smarter: they note the big jump in operating earnings, ignoring the price fluctuations of the portfolio. We seem to be seeing lots of those articles this time around. They are very impressed with the quarterly results, with operating earnings up 41%.
But in this case, I think third-order is needed: the operating earnings are up compared to a year earlier solely because the underwriting profit, which is almost as volatile as the stock market, is up a lot. If you do a cyclical adjustment on the underwriting profit, the operating subs as a group are doing very poorly at the moment, for a variety of reasons. Some of the recent reasons are mentioned in the linked article, but not emphasized as much as I prefer to.
I estimate in advance what each quarter's "steady things" net operating profit is likely to be. This involves applying a simple seasonal adjustment, plus an average growth factor from recent years, to the prior 4-8 quarters of earnings. Have a look at the graph.
www.stonewellfunds.com/SteadyThingsRealEarnings_2023-Q3.png
These figures are all inflation adjusted.
You can see how the model continues to think that "steady things" earnings should be rising, but they very much aren't. As a group, they went ex-growth a year and a half ago, despite what I presume is substantial growth capex and ongoing "tuck in" acquisitions. The gap between model and reality continues to widen, despite the fact that the recent data are included in the model, and the *level* is determined mainly by recent actual earnings.
The economy has been slowing, which is just a cyclical issue and will pass. But I am unsure how much that explains the flatness. Overall I am much more concerned than the average "second order thinking" press coverage.
Jim
No. of Recommendations: 20
I agree. The railroad is hugely significant and it has run into some headwinds. It is a capital intensive business and it appears to have suffered from the effects of inflation, with workers understandably demanding higher wages. The railroad has been a home run investment, with the double stacking and tunnelling work done a few years ago, provided a tremendous (one off) earnings boost. Now we see it is not The Coca-Cola Company. As Charlie says, welcome to life in the big city.
With respect to the wildfires liabilities, I presume this sits outside the regulated return we are allowed to earn? And is therefore a concern.
It will be interesting to see the analysts and market reactions next week. The insurance above trend results could easily have been a different story. That combined with issues at the railroad and BHE and general softening in many other areas could have just as easily have resulted in a bad quarter. Press is unusually too cheery. Talking about huge increases in operating earnings is too simplistic. Insurance has saved the day, this time.
But the long term reasons for owning Berkshire remain intact. It owns plenty of great non insurance businesses and investments. The insurance group is truly outstanding (but does require astute management). Capital allocation discipline is the secret sauce combined with insurance float and there is optionally if the market crashes. Extremely shareholder friendly. The price is reasonable relative to wider market.
One of the things I have learned at great financial cost over the years: it's easy to get too pessimistic on any company. There are just so many off putting things investors can focus on. Take share based compensation at big tech for example. Or worrying about the market. But it's really important not to get too pessimistic, but rather let all the great business qualities combined with the magic of compounding create wealth for you.
No. of Recommendations: 8
Insurance saved the day but I think the operating headlines "are who we thought they are", to borrow a quote from Dennis Green. I would argue this is part of the idea behind the 5 groves- that there are five pillars, or streams of income, that diversifies our profits and keeps it churning forward. It would be rare to have all 5 pillars humming at once and it wasn't very long ago that insurance was the laggard. As long as the number keeps going up and there are no major structural problems with any of the groves we're in good shape!
No. of Recommendations: 5
< It would be rare to have all 5 pillars humming at once and it wasn't very long ago that insurance was the laggard. >
Also, with short term rate at 5% comparing to 0.1% only two years ago, the $150b cash has added almost $7b annual income, more than compensating the drag in BNSF and utility business.
No. of Recommendations: 16
Also, with short term rate at 5% comparing to 0.1% only two years ago, the $150b cash has added almost $7b annual income, more than compensating the drag in BNSF and utility business.
Unfortunately that $7bn in income is a bit of a mirage. Real interest rates haven't risen.
If inflation rises from 2% to 6% and the interest rates you're earning rise from 1% to 5%, you're no better off pre-tax, and actually worse off after tax.
Phrased another way, the cash pile suddenly started losing serious value to inflation and the extra interest we earned was merely an incomplete compensation for that.
We might be in a few-month stretch that real rates are actually higher than they were or will be, but in general it hasn't been the case and is likely to remain not the case.
Jim
No. of Recommendations: 0
No. of Recommendations: 2
'Phrased another way, the cash pile suddenly started losing serious value to inflation and the extra interest we earned was merely an incomplete compensation for that.'
~~~~~~~~~~~~~~~~~~
This is an interesting website to see how inflation has decreased your purchasing power over the years. Also can choose your state or country location 'and see why the SF Bay Area is so unaffordable!
A $30K home purchase in 1963 is now inflated 10:1 to $300k on average across the US however now selling for $3M in the Bay Area!
https://www.in2013dollars.com/us/inflation/1963ciao
No. of Recommendations: 12
Why do you say real rates haven't risen?
https://tradingeconomics.com/united-states/5-year-...
5 year TIPS is at 2.2% (real yield) which is near the peak for the last 10 years. It's just that it's a discussion about the "cash" pile. Which is in reality held as a mix of 3-month and 6-month T-bills.
In the last 18 months CPI is up 7.1%, or 4.7%/year compounded.
The interest rate on 3 month T-bills in that stretch has been something like 4.55%, or about 3.6% after tax.
So, a real loss in the vicinity of 1.1%/year. Over a billion bucks.
Jim
No. of Recommendations: 2
The economy has been slowing, which is just a cyclical issue and will pass. But I am unsure how much that explains the flatness. Overall I am much more concerned than the average "second order thinking" press coverage.
Thanks for sharing the graph.
Berkshire's performance going off the expected rails is concerning. It's also concerning that there still doesn't seem to be evidence of Berkshire's pricing catching up/keeping up with the cost inflation that hit last in the last couple years.
Have the Q3 results caused you to consider reducing your BRK allocation? (including Cash that would likely go back into BRK at a more opportunity P/B opportunity)? Or at this point, are you waiting to see how additional quarters play out to get a better indication that "this time is different"?
No. of Recommendations: 4
Re: Inflation and the cash losing potency, maybe we will get lucky and find that the market for control acquisitions (you know, those things we are actually super interested in buying) experiences a little bit of deflation and helps our poor little cash pile look more potent again. A guy can dream!
No. of Recommendations: 3
Reminds me of Warren's great clarity and words of wisdom from the 2011 BRK report, p. 17 comparing the strong preference of productive assets to currency denominated and nonproductive assets with good discussion of the ultimate tax of inflation. Well worth the time and review imo.
Section is titled:
'The Basic Choices for Investors and the One We Strongly Prefer'
No. of Recommendations: 12
But in this case, I think third-order is needed: the operating earnings are up compared to a year earlier solely because the underwriting profit, which is almost as volatile as the stock market, is up a lot. If you do a cyclical adjustment on the underwriting profit, the operating subs as a group are doing very poorly at the moment, for a variety of reasons. Some of the recent reasons are mentioned in the linked article, but not emphasized as much as I prefer to.
I estimate in advance what each quarter's "steady things" net operating profit is likely to be. This involves applying a simple seasonal adjustment, plus an average growth factor from recent years, to the prior 4-8 quarters of earnings. Have a look at the graph.
Yes, the extremely volatile underwriting doesn't really belong in the 'operating earnings' column, or if it does, we need another column that excludes underwriting. Your 'cyclical admjustment on the underwriting profit', I presume, is just replacing it with something like the 20-year average underwriting profit (itself adjusted for the effects of growth and inflation)? Or just substituting U/W with a percentage of float, you used to use 0.8%, which in my opinion is very conservative. But using that, and December 2022 float which was $164b, it would be $1.3b for the year, and the $3b (pre-tax) earned in the first 9 months of this year would have to be adjusted down by about 2/3.
In sum, when utilities are losing all their earnings to legal reserves, railroads are down a bit, and for a and manufacturing are all down, having the 'operating earnings' bacon saved by a light hurricane year is small consolation. Not a happy Q report.
dtb
No. of Recommendations: 11
Your 'cyclical adjustment on the underwriting profit', I presume, is just replacing it with something like the 20-year average underwriting profit (itself adjusted for the effects of growth and inflation)? Or just substituting U/W with a percentage of float, you used to use 0.8%, which in my opinion is very conservative.
More like the latter.
I estimate it two ways and average the two months. One is average return on float (1.3%), and the other is average percentage of premiums earned (2.7%, after excluding big retrocession events).
At the moment my formula estimates the current four-quarter rate as $2.255bn/year pretax. The true figure for the last four quarters is $5.517bn--it has been a good year, so my smoothing lowers it.
Conversely the true figure for the four quarters ending 2022-Q2 was -$545m, a bad year, which my cyclical adjustment bumped up to $1.936bn.
The estimated underwriting profit is up almost exactly 50% in the last five years. Maybe Berkshire has stepped away from supercat a bit, but the insurance operation as a whole is still growing strongly.
Jim
No. of Recommendations: 4
I estimate it two ways and average the two months.
Hmm, I'd say "autocorrect" if I thought I could get away with it. I meant "average the two methods".
Jim
No. of Recommendations: 2
The economy has been slowing, which is just a cyclical issue and will pass. But I am unsure how much that explains the flatness.
GDP is up (4.9% YoY). Three month people employed up, inflation steady to down. I am not sure which part of the economy is slowing.
Craig
No. of Recommendations: 14
I am not sure which part of the economy is slowing.
It seems to be hollowing out from the bottom up. Poor people are already hurting. Rich people aren't. The middle is gradually moving from OK to hurting.
One simple narrative: consumers had a big pile of cash left over from the pandemic, both stimulus cheques and unspent entertainment/travel budgets.
Overall US consumer spending has held up well as that cash gets spent.
The poorest use it up fastest. The aggregate may still be big, but the amount still in the hands of those with a high propensity to spend it is running out.
This effect is amplified by home ownership and the wealth effect in the US: house prices are holding up oddly well, for now, an odd hangover from the free money years. The rise in interest rates is going to take a long time to filter through to the average homeowner, but inevitably it will. Some people will have to move, and their new mortgages won't be cheap.
It's not quite that simple, though, since the same effect is happening in a number of economies where the interst rates are already biting and the stimulus effect is long over. The main difference is that it's hitting the middle earners sooner.
A lot of "aspirational luxury" companies are seeing sales falling rapidly, while the true luxury goods are holding up fine, like Hermes.
Jim
