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I like that BRK beat the market last year by 10bps. Much of my savings is in BRK. The way I look at it, you're actually investing in dozens of well-run cash-gen

by anonu 9y ago

I like that BRK beat the market last year by 10bps. Much of my savings is in BRK. The way I look at it, you're actually investing in dozens of well-run cash-generating companies. What really sold me on BRK was how Buffet started a massive capital improvements project into their railroad business. If my memory serves me right, the investment was around $8bn, maybe 3 years ago or so. This was an investment in infrastructure on a scale not seen - and certainly beat railroad competitors in terms of capex by 2x or 3x. My revelation was: had the railroad business gone to the market to raise those funds how would it have gone down? Bankers would have had a field day with fees. Traders would rush in. Speculators would dump the stock or bonds at a moment's notice. BRK creates near zero friction within its businesses. You have cash in one place, you can just move it easily to another place where its needed, simple. EDIT: It was $5bn injection in BNSF in 2014: https://www.fool.com/investing/general/2014/02/05/berkshire-hathaways-bnsf-railroad-oks-5-billion-sp.aspx https://www.fool.com/investing/general/2014/02/05/berkshire-...

cheez 9y ago
What do you get from having your savings in BRK? I thought they don't return anything to shareholders?
- zrail 9y ago
  Capital gains over time, plus the significant possibility of dividends when Buffett and Munger finally give up the ghost.
- graeme 9y ago
  Buffet's letters cover this well with respect to other stocks. Basically: if a company reinvests profits and grows, you as owner now own part of a more valuable thing. This will increase share value on average over time. This isn't speculating in a capital gains increase. This is a measureable increase in value based on earnings. So, if coca cola increases profits, berkshire can reasonably expect this is to their direct benefit: even if coca cola pays no dividend. They could have basically. And you can realize a gain when you eventually sell.
- anonu 9y ago
  Interesting thought. I suppose it depends on whether you believe in the dividend irrelevance theory or not. Who can put money to better use? You or Warren?
  - leetcrew 9y ago
    if you think you can make better use of the dividend, why buy that company's shares at all? even if a dividend were break even compared to the capital gains from reinvesting directly, you would still come out worse from having it taxed as income.
    - icebraining 9y ago
      It's not that simple; a company may have a great use for part of their revenue but not for the rest. If a company spends $1 to make $2, but can't simply spend $2 to make $4 (market may be tapped out, or require lowering prices to reach the rest - reducing the average returns), they have to figure out some different way to spend the extra $1, and which you might think they are not good at. In fact, this is easy to see in practice: Apple has tremendous amounts of capital reserves which they are just investing on the market. In fact, $35B of those are in US Treasuries. Is it that absurd to think one can make a better investment than that?
    - walshemj 9y ago
      Depends how you do it and tax treatment an dif your working or not in the UK you can use ISA's to avoid all tax on dividends. Also in the UK you have a separate tax allowance for dividend income. What I also do is stop reinvesting dividends when funds are at a premium to NAV. I have also stopped reinvesting dividends as I think the market will fall this year - I can then buy after the market has fallen. You could also be cute and reinvest your dividend income into a pension and get tax relief back.
- defertoreptar 9y ago
  It's funny you should ask. Buffett has actually said that if a company is not able to find good ways to reinvest their earnings, then it should be issued to owners as dividends. Buffett is actually breaking that rule right now by Berkshire Hathaway having a massive cash balance.
  - tim333 9y ago
    He doesn't have a good way to reinvest just now but probably believes one will turn up. He came out pretty well having a lot of cash in 2008. As a Berkshire shareholder I'd much rather have the cash sitting with Buffett rather than paid to me as a taxable dividend.
- tim333 9y ago
  Capital gains through increasing asset value. Check out the table at the start of the annual letter.
DavidSJ 9y ago
I think you mean 1000 bps (10%)?
- anonu 9y ago
  From the first page of the letter, S&P was up 21.8% and brk was up 21.9%... For all intents and purposes they were inline with the market...
  - DavidSJ 9y ago
    Sorry, I accidentally looked at the row below 2017’s, which is the average for Berkshire Hathaway’s history.
bradleyjg 9y ago
Are you concerned about succession risk?
- anonu 9y ago
  Not really. People were worried about Steve Jobs and Apple. They did fine. I think Buffet has instilled enough of his values and vision in the company, memorialized in the annual letters, books, interviews. The concepts will live on.
  - deleted 9y ago
    [deleted]
    - leetcrew 9y ago
      > Let's look at Apple 10 years after Jobs' passing. 3 years to go! How have you liked Apple's innovations since 2011? it's always important to remember that the CEO is not solely responsible for the successes and failures of a multi-billion dollar company. that said, it's really hard to look at apple under cook's leadership and say that it's anywhere near as innovative as it was with jobs at the helm. the bulk of their current revenue is just riding the wave that jobs started with the first iphone. the iphone x is the most daring thing they've done in years, and it's basically just an iphone with a big screen. the iOS UX is still really good, but it's not much better than a clean android setup. on the other hand, the desktop UX feels very dated at this point. I never thought I would find windows to have a more modern look and feel than apple, and it's downright depressing to see what the mac pro has become. the company still performs very well as an investment vehicle though; I doubt they are in any trouble in the near-medium term.
      - fullshark 9y ago
        Apple watch was after Jobs died, it's a success even if no one thinks it is. There's a very real chance nothing they do will ever compare to the Iphone.
nickbauman 9y ago
Here in Minneapolis we have a logistics practice for Amazon a buddy of mine works for. He mentioned sort of offhandedly that Amazon has already maxed overland and air shipping capacity in the 48 states. The BNSF investment seems even more brilliant knowing that now.
kgc 9y ago
10bps, but no dividend, which is usually about 2% isn't it?

by anonu 9y ago

cheez 9y ago

What do you get from having your savings in BRK? I thought they don't return anything to shareholders?

zrail 9y ago
Capital gains over time, plus the significant possibility of dividends when Buffett and Munger finally give up the ghost.
graeme 9y ago
Buffet's letters cover this well with respect to other stocks. Basically: if a company reinvests profits and grows, you as owner now own part of a more valuable thing. This will increase share value on average over time. This isn't speculating in a capital gains increase. This is a measureable increase in value based on earnings. So, if coca cola increases profits, berkshire can reasonably expect this is to their direct benefit: even if coca cola pays no dividend. They could have basically. And you can realize a gain when you eventually sell.
anonu 9y ago
Interesting thought. I suppose it depends on whether you believe in the dividend irrelevance theory or not. Who can put money to better use? You or Warren?
- leetcrew 9y ago
  if you think you can make better use of the dividend, why buy that company's shares at all? even if a dividend were break even compared to the capital gains from reinvesting directly, you would still come out worse from having it taxed as income.
  - icebraining 9y ago
    It's not that simple; a company may have a great use for part of their revenue but not for the rest. If a company spends $1 to make $2, but can't simply spend $2 to make $4 (market may be tapped out, or require lowering prices to reach the rest - reducing the average returns), they have to figure out some different way to spend the extra $1, and which you might think they are not good at. In fact, this is easy to see in practice: Apple has tremendous amounts of capital reserves which they are just investing on the market. In fact, $35B of those are in US Treasuries. Is it that absurd to think one can make a better investment than that?
  - walshemj 9y ago
    Depends how you do it and tax treatment an dif your working or not in the UK you can use ISA's to avoid all tax on dividends. Also in the UK you have a separate tax allowance for dividend income. What I also do is stop reinvesting dividends when funds are at a premium to NAV. I have also stopped reinvesting dividends as I think the market will fall this year - I can then buy after the market has fallen. You could also be cute and reinvest your dividend income into a pension and get tax relief back.
defertoreptar 9y ago
It's funny you should ask. Buffett has actually said that if a company is not able to find good ways to reinvest their earnings, then it should be issued to owners as dividends. Buffett is actually breaking that rule right now by Berkshire Hathaway having a massive cash balance.
- tim333 9y ago
  He doesn't have a good way to reinvest just now but probably believes one will turn up. He came out pretty well having a lot of cash in 2008. As a Berkshire shareholder I'd much rather have the cash sitting with Buffett rather than paid to me as a taxable dividend.
tim333 9y ago
Capital gains through increasing asset value. Check out the table at the start of the annual letter.

DavidSJ 9y ago

I think you mean 1000 bps (10%)?

anonu 9y ago
From the first page of the letter, S&P was up 21.8% and brk was up 21.9%... For all intents and purposes they were inline with the market...
- DavidSJ 9y ago
  Sorry, I accidentally looked at the row below 2017’s, which is the average for Berkshire Hathaway’s history.

bradleyjg 9y ago

Are you concerned about succession risk?

anonu 9y ago
Not really. People were worried about Steve Jobs and Apple. They did fine. I think Buffet has instilled enough of his values and vision in the company, memorialized in the annual letters, books, interviews. The concepts will live on.
- deleted 9y ago
  [deleted]
  - leetcrew 9y ago
    > Let's look at Apple 10 years after Jobs' passing. 3 years to go! How have you liked Apple's innovations since 2011? it's always important to remember that the CEO is not solely responsible for the successes and failures of a multi-billion dollar company. that said, it's really hard to look at apple under cook's leadership and say that it's anywhere near as innovative as it was with jobs at the helm. the bulk of their current revenue is just riding the wave that jobs started with the first iphone. the iphone x is the most daring thing they've done in years, and it's basically just an iphone with a big screen. the iOS UX is still really good, but it's not much better than a clean android setup. on the other hand, the desktop UX feels very dated at this point. I never thought I would find windows to have a more modern look and feel than apple, and it's downright depressing to see what the mac pro has become. the company still performs very well as an investment vehicle though; I doubt they are in any trouble in the near-medium term.
    - fullshark 9y ago
      Apple watch was after Jobs died, it's a success even if no one thinks it is. There's a very real chance nothing they do will ever compare to the Iphone.

nickbauman 9y ago

Here in Minneapolis we have a logistics practice for Amazon a buddy of mine works for. He mentioned sort of offhandedly that Amazon has already maxed overland and air shipping capacity in the 48 states. The BNSF investment seems even more brilliant knowing that now.

kgc 9y ago

10bps, but no dividend, which is usually about 2% isn't it?