Berkshire, Berkshire Hathaway, Warren Buffett discussed on We Study Billionaires - The Investors Podcast
High integrity decentralized to the point of abdication as Munger said capital Allocation Stock Selection Insurance underwriting king abandoned opportunities all these things are in the ethos of the company. I personally believe that there will generally be okay. It's hard to imagine that there isn't some impact so if I kind of go through each of the businesses like the insurance operations I think those don't change a ton thick. They've got plenty of brainpower with G to still manage that part I know. Buffet helps jeep but deal flow. I think absolutely has to be impacted. How many business founders sell their business for less than they could probably get somewhere else to sell to buffet specifically that I think is a very real advantage that he's built as a way of cashing in on his reputational capital that he's built over the last fifty years of doing business the right way. He deserves to pay less than market because he has done such a good job with his reputation. I also think the performance of any CEOS in the subsidiaries of all these different companies. It could go down. I mean when you are having to send a letter to Warren Buffett about your operations for that year and report to local Warren. Like how you did and you WANNA make him proud. He's not around. It could slip a little bit. I mean I think that's just sort of natural human nature. I think the portfolio management side of things will be just fine with Ted and todd. I think both those guys are really sharp but target imagine it. There isn't less remote host worn and Charlie just mostly probably because of the deal flow aspects. They have to get in line and pay. Whatever else is paying for acquisitions? You're just not going to get the same kind of deals and therefore the same kind of returns on the businesses that you're buying because you're probably GONNA have to pay a little bit higher price for everything so on net. It won't be as good but the ethos still makes it one of the better companies in the world as far as how clean they are and how they do business. Suject rule simply. What's the biggest threat to Berkshire Hathaway or opinion? I would probably say complacency and that can come in different ways. I think that this management team. That's been around since nineteen sixty five deserves the benefit of the doubt on all things they've earned it however is a shareholder you can get complacent about when things start slipping a little bit for instance picking the book value out of the report. It's a little bit of changing the goalposts somewhat. I mean the timing of when he's done it and there've been a few other changes. I won't go into them because they're they're down in the weeds for most investors. But if you want to read a deep dive on that I would suggest checking out semper. Augusta's letter I don't know if you've ever read that one. But Chris Bloom Strand I think is one of the best analysts on the planet and he does a call it. A fifty page write up of Berkshire every year. He's a true true expert at this company. But anyway I think he's highlighted some of the places where they will change a little bit of things in reporting or move parts of the business and it'll be a little bit less clear how that business did or what the returns on equity were for that segment of the business mostly in the name of trying to make the numbers easier for the average person to understand but for the very very deep dive analyst. It clouds some of what we used to be able to know about the company so those little things can slip here and there that the disclosures part of things because the management has earned such a reputation. You can get complacent about just assuming that they're always doing the right thing all the time and that can get you into a dangerous place. 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So if you imagine these companies that are owned by Berkshire inside of Berkshire but they're publicly traded companies and they're doing their own business they're generating their own cash flows and sometimes they're paying dividends to Berkshire and so last year there. Ten largest holdings in their securities portfolio delivered three point eight billion dollars in dividends. They got sent to Omaha. Checks that showed up in the Berkshire checking account while those companies had another eight point. Three billion dollars in retained earnings last year. So that's money that's created inside of the companies that they own but that Berkshire doesn't really have control over it. It's still within the company and when I say that eight point three billion dollars that's figured out by taking the percentage that Berkshire owns of the company and then applying that percentage to what the total amount was so just to make the math easier. Like let's say that. Let's say ten percent of Apple. An apple earned one hundred billion. Will inside of that you could imagine that Berkshire Kinda earn ten billion through their ownership of Apple. I think you can't assign a dollar for dollar valuation to those earnings is that it could very likely be that company. That is making the decisions on that dollar. Where does it go to could be making bad cap allocation decisions and even making that dollar worth zero like we've seen that before with companies that make stupid choices with the money that's generated? It does not accrue as shareholder value. It ends up disappearing so the first kind of metric that we have to look at is. What do they do with the money? And I think buffets obviously trying to choose companies that have the ability to invest in projects that will generate further returns on capital. And keep this engine running and even growing and so you start to see why he's such a big fan of buybacks is because that instead of that dollar inside of that portfolio company going off into maybe a project that is destroying value. Maybe it gets bought back now. And His share of the company now increases. Obviously the price paid matters for that as well. So if they're overpaying for their buybacks than they are destroying value for the remaining shareholders including Berkshire and then the other part that. I think you should think about there. Is that money stays within apple or wells Fargo or wherever it is that Berkshire owns berkshires. Not Having to pay taxes on it at the moment so there's already call it a fifteen to twenty percent. Maybe even twenty one savings by not sending that money to Berkshire to them control. So there's no easy answer there because it's very fluid on like what do they end up doing with the money that determines the future value of what that retained earning was worth but those are some of the parameters that I think about I look at the retained earnings inside of the portfolio companies. You know it's fascinating. This is a topic that Buffett has been talking about a lot lately. I think this is a great accounting discussion. And it's something that many young investors don't understand. I Know Stig and I have talked about look through earnings for the non operational subsidiaries numerous times on the show and it's really neat to see him bringing up more more and. I think it's important because there's a lot of value there. That's not immediately evident if you're simply looking at the income statement the consolidated income statement for Berkshire Hathaway Okay so with all of that said talk to us about your intrinsic value for Berkshire hathaway.