BRK-A — Berkshire Hathaway Inc.

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CEOs across sectors are foolishly repurchasing stock, BUT NOT Buffett – he will only buyback BRK shares when it crosses below a certain threshold on book value (when it falls below $162,000).

• This is a lesson for companies who are blindly getting on the stock repurchase bandwagon, you should employ a methodology similar to Berkshire. Warren Buffett like most CEOs believes that the intrinsic value for BRK is much higher than its current book value; BUT he did not spend a penny buying back shares in 2013 because it did not trade below this trigger level. 
• Setting a threshold to repurchase stock based on this metric (the actual level could be higher or lower than 120%) helps because: (1) it puts a floor on the stock price; (2) prevents the company from initiating the buyback program when the operating cash flow and stock prices are at a cyclical high, and (3) the company does not destroy shareholder value by subsidizing shareholders who are liquidating their position.  
• So at current book value of $134,973, the repurchase trigger for him is any price below $161,968.  When Buffett is “aggressive” at buying BRK, I will also step in to buy BRK at that time.  

Even with extreme weather in the US during 2013, the insurance operation yielded a profit (this made it 11 years in a row for the company).  Their float increased to $77 billion, which means they should be able to earn about 4-5% on this capital in the future (about $3.5 billion in annual profits).

BRK’s subsidiaries spent $11 billion on capital expenditure, which was double their replacement value (deprecation expense).  Buffett is doubling down by investing in CAPEX, this is opposite of what most companies in the S&P 500 are doing at this time (most are doubling down on buybacks while cutting CAPEX).  The company spent 89% of this CAPEX in the US.

BRK increased its ownership of its Big Four investments in 2013, which are American Express, Coca-Cola, IBM, and Wells Fargo.  These purchases are making BRK more levered to the Financial sector.

Hidden value: GAAP rules don’t allow

$3.0 billion of income from its passive investments (net of dividends) to be consolidated + Bank of America warrants are worth about $6 billion.   BRK’s earnings would be $3.0 billion higher, if GAAP accounting would allow their minority interest in Big Four investments to be consolidated with rest of the company.  If you make this adjustment, the company’s earned income would be 15% higher.  To look at it another way, their adjusted PE is well below 14.0x, not the 16x universally quoted.  This would make the company cheaper than the S&P 500 – this is without the benefit of backing out excess cash from its market value for the P/E calculation.

Did Not Offer a Great Outlook for Insurance – “Competitive dynamics almost guarantee that the insurance industry – despite the float income all companies enjoy – will continue its dismal record of earning subnormal returns as compared to other businesses.”  The edge that BRK has that other insurance companies don’t is Warren Buffett himself.  However, if he goes (decides to retire or God ultimately adds Buffett to His Portfolio), then the return earned on the float is also likely to decline and closer to industry average, regardless of how highly he believes in his management.

A major insurance catastrophe would actually be an opportunity for BRK to take market share from its competitors .  Even with a $250 billion insurance wide loss, BRK will remain profitable while many companies in the industry will struggle to survive — in this environment, BRK would consolidate or gain market share.

Railroads are about four times more energy efficient than Trucking.  The labor input for railroad is likely to be even more productive given that locomotive(s) link between 60-100 railcars and drive non-stop to their destination.

During the next decade, you will read a lot of news – bad news – about public pension plans.

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.)” Even better for greater diversification and potential return, in my opinion, is Vanguard’s Total World Stock Index – higher expense ratio though.

BRK is heavily levered to Financials and it will almost certainly outperform the S&P 500 when the Financial sector outperforms. BRK has well over 40% interest in the financial sector and it is much more levered than the S&P 500 to this sector with its interest in six public financial companies – the company’s actual leverage to this sector is even higher considering their controlling interest in insurance businesses.  Also, we don’t know how much financial exposure is included in passive interests grouped together in “others”.  During years that Financial outperform the S&P 500, BRK is likely to do the same with its massive exposure relative to the overall US economy and the S&P 500.