2022 Performance - Cross Post

Folks on the METAR board are comparing notes on 2022 performance. Below is what I shared with them.

Up 10% YTD thanks to XOM (40% + dvd’s). Some payback for the downturns we suffered during the price war and then pandemic demand crunch. It all evens out over time.

JNJ doing what it’s supposed to do - be less volatile. Up circa 4% with dividends.

BRK down circa 9%. Tolerable

Cash somewhat of a flywheel. Down in real terms but I’m sleeping well.

One might note a few commonalities among the above three stocks.

All are shareholder oriented. I trust the management. I think I understand the companies.

All were (or are) AAA rated when bought.

All are internally diversified within their sectors. Combining the three I feel pretty diversified. The Munger viewpoint.

All are big enough and strong enough to ride through a depression if anyone is.

That’s not an accident. I wasn’t trying to beat the S&P 500 when I bought or kept them. I was trying to put my retirement assets - ex cash - where I felt comfortable for the long haul.

Since the Gen Re acquisition by BRK, there’s surprisingly little difference in their total returns. That acquisition changed BRK.

XOM took a beating 2016-21 due to the Saudi-Russia price war followed by the pandemic crushing demand. But it outperformed BRK for the period 1999 to 2015 as did JNJ - counting dividends. And it’s catching up some now for the capex it continued to make during that difficult period.

Others have done better - some much better - with the hot stocks. But I’m content.

Especially with the new friends I’ve made from the Berkshire crowd. And what I’ve learned from them as well as Buffett and Munger.


Do you think the Gen Re acquisition changed Berkshire for the better or for the worse or that it just “changed it?”

Do you think the Gen Re acquisition changed Berkshire for the better or for the worse or that it just “changed it?”

For the worst. As Buffett ultimately said:

"After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses).

This is not a popular item to discuss with BRK people. So, after a couple of early attempts, I’ve avoided talking about it. People don’t enjoy negative comments. But I did go over it with a private e-mail group of long term investors. 18 pages of quotes and data. After that, they understood so I let it be. But now I’ll speak up in answer to your question.

Folks including Bloomstran and many on our board continue to view it as a brilliant move - exchanging overpriced KO and other stock for Gen Re’s fixed income, avoiding capital gains taxes and getting fixed income to deploy. And it would have been had (a) the fixed income been reinvested and (b) especially had Buffett bought back the stock he issued in the period after the acquisition when BRK stock dropped back into the $50k range and below.

But neither happened. The sum of cash plus fixed income dropped by just under $0.8 billion in 1999 due to UW losses by GRN. Otherwise it continued to grow even with the acquisitions BRK was making. They were basically funded by earnings, some stock, and dividends from BNSF funded by debt. Gen Re had negative cumulative earnings until they quit reporting them in 2017 even though they returned to profitability - circa $250 million average 2008 to 2017 after Gen Re was “fixed.” The huge early losses overwhelmed the later smaller earnings.

Float initially grew from $15 billion to $23 billion with heavy UW losses. As they imposed discipline in the business, float slowly declined back to $18 billion in 2016, the last year reported.

Maybe the easiest way to look at it is to judge what Gen Re’s value would have to be today to match Berkshire’s growth - growth not funded by Gen Re. At 272,200 shares it would have to be worth over $100 billion. Anyone think that’s realistic?

It really is obvious upon inspection. If I exchange stock A for stock B and Stock A grows at 10% a year while stock B barely grows, the person issuing Stock A has made a mistake. Even if he bought B cheaply, the difference in growth rates make it a bad deal- just a matter of time. This is far more important than any capital gain taxes saved upon purchase.

Buffett really believed he had made an acquisition that increased BRK’s value at the time. And he was reluctant to admit that early on, even though his comments then became very negative on Gen Re until it was fixed.

The big mistake in hindsight was not quickly repurchasing the shares issued. The longer the wait, the bigger the mistake.

Those extra shares, mostly non-productive, have been a heavy added weight in Berkshire’s saddle. And the legal problems that came with Gen Re weren’t fun either. Questioned Berkshire’s ethics and some good people got sacrificed. Fortunately, we’ve gotten one back.

A final thought. Well before Gen Re I recall Buffett talking about insurance as being a bad business unless you had a niche or major competitive advantage. We have that in Ajit’s reinsurance business, Geico, and the small niche direct insurance firms. But Gen Re is basically a commodity reinsurance business - unlike its reputation prior to Buffett buying it. And he didn’t check to see if things had changed. If Gen Re has an advantage, it’s Berkshire’s financial strength. It’s not like BHE or BNSF, both commodity businesses but regulated so a return is basically guaranteed. Gen Re doesn’t enjoy that.


This is not a popular item to discuss with BRK people. So, after a couple of early attempts, I’ve avoided talking about it…

You make a well thought out and well expressed case.
But as it happens I don’t buy it…it seems to be extremely well constructed backwards from the conclusion that it was a bad deal : )

I am perfectly willing to concede that the business had no earnings power value to speak of, as things later turned out, which was a bad surprise.
Plus some submarine losses about to be realized, another bad surprise.
These are the reasons that Mr Buffett has said the deal was bad. Fair enough, in effect he bought a pig in a poke. A sick pig.

But it did still have two things: a pile of assets ($17.6bn in bonds, a fair bit of cash, and zero equities).
A lot of that was funded with $14.9bn in float and a little debt, which came along with the deal.
I don’t know the exact net book value acquired, but I think it was about $8.2bn??
So, I look at it very simply: was that pile worthless? Obviously not.
What was it worth? Since the float didn’t go away (even though it was not profitable),
I would suggest that the value of the acquisition was very roughly the gross (not net) pile of investment
assets acquired, minus the losses realized on the derivative portfolio in the few years after, the hidden poison.
It was a good time to be a buyer of bonds, so I think the acquired portfolio of cash and bonds was worth its face value.

Then, what was given up? $22bn of newly minted Berkshire shares at market value at the time the deal was inked.
My estimate of the actual value of those shares at the time is $11.0bn.
That’s only half of 22 by coincidence:
After much number crunching I estimated book per share was temporarily elevated by about 11% due to the exuberant market value of some stocks,
and was not actually worth more than 1.55 times book even then, rather than the 2.78 at the time.

So, forget the forever-after larger share count…it was forever after more investments per share, too, by quite a lot.
One can argue endlessly about whether the specific assets acquired were used to buy successful investments or unsuccessful ones on average.
I have seen analysis of several counterfactual realities which come to very different conclusions.
We can say little other than that Berkshire’s headline book per share sure would have fallen a lot more in 2000-2002 than it did in our reality: equities per share were more than book per share.
Suffice to say it was a good few years to have a rather more bond-heavy portfolio of investments per share.
So forget that view.
The question of whether it was a good deal or not can be answered much more simply (and conservatively) by looking at it as a one time transaction for assets:
Which was worth more, what was given up ($11bn in value), or what was acquired (net assets of bonds and cash, the additional bond and cash portfolio funded by float, minus the imminent losses).

Gen Re’s aggregate underwriting loss was $7.47bn 1999-2002, of which about 30% was attributable to the Sept 11 attacks.
Aggregate underwriting profit was $3bn in the subsequent 14 years up to the date it stopped being reported separately in the top level figures I use.




With great respect, I’ll take Buffett’s judgment of the GRN acquisition over yours. Exchanging over 20% of Berkshire for a commodity insurance company was a mistake. And the mistake compounded over the years as Berkshire grew and GRN did not.

I argued GRN as being a mistake with Greg Defelice on this board a few short years after it happened. If Buffett wanted to acquire more assets to use as investments he could simply have issued overpriced stock to the market. That would have avoided a lot of grief.

It’s not a hindsight argument. The later facts just demonstrate that you don’t exchange good assets for no growth ones. The cash and fixed income didn’t go down starting from the acquisition’s close.

The big mistake was to not buy back the good assets when they were cheap. Buffett even talked about doing so in 2000.

I’ll leave it at that. Gen Re isn’t even remotely worth the stock that was issued to buy it. Berkshire shareholders are worse off for Buffett having done so.

I stand by my position.


Exchanging over 20% of Berkshire for a commodity insurance company was a mistake.

Sure, if thought of that way.
But that isn’t the only way to think of it.

It’s good to be stingy when issuing new shares, for sure.

But my line of reasoning to test whether it was a good deal is much simpler:

  • Is it ever worth issuing new shares to buy static assets clearly worth more than the intrinsic value of shares being issued?
    Sure, I think we would all agree, in many or most circumstances.
    (and assuming that the company in question can use the assets for something, of course)

  • And if so, then at what ratio does it become a good decision? Assets worth 10% more than the shares issued? Worth twice as much?
    I’d say it’s smart at any ratio comfortably large enough to provide a usefully positive gain even
    after requiring a solid margin of safety on the estimates of the intrinsic value on both sides.

  • Did the Gen Re deal make sense at the ratio at which it was done, assuming that the only value acquired was the intrinsic value of the portfolio and its accompanying float?
    My conclusion is “yes”.

It certainly would have been way better if the business had been worth something closer to expectations.
But that’s what the margin of safety was for. Things went badly, but that ill wind only changed the expected great deal to a realized good deal.

The “alternative reality” route of reasoning to justify the purchase is very much tougher.
For example, would we own MidAmerican had the Gen Re deal not been done a year earlier? I assume not.
But that conclusion isn’t necessary to conclude that it was a worthwhile deal.
I think the value surrendered was probably quite a bit less than the value gained even assuming
that Gen Re as an operating business was never going to turn a profit.

Gen Re isn’t even remotely worth the stock that was issued to buy it.

I agree that Gen Re the business wasn’t worth the value of the stock used to buy it. No earnings, to make a long story short.
But as mentioned, I think that’s the wrong question. Or rather, not the only relevant question.

I believe the static assets of Gen Re were worth much more than the value surrendered, so that’s all it takes to make the deal a net winner.
I take that in the sense of net intrinsic value of the assets and liabilities acquired:
the gross investment assets around $24bn which I estimate was about 21% cash at closing, plus a perpetual float stream starting at $14.9bn.
In return, issuing stock with an intrinsic value I estimate around $11.0bn, to which you could add
(with hindsight) the $4.4bn pretax in cumulative underwriting losses in the next 19 years.

If someone offers to give Berkshire a profitless video rental shop with a $1m investment portfolio in return for one newly issued A share, should the company take the deal?
Sure. Let’s hear it for dilution. The only question is the ratio.
The profitability of the video rental shop isn’t the only consideration. With enough assets in the deal, it isn’t even material.



Jim, I’ll let you and Buffett decide.

He’s stated his judgment of the deal.


Another way to evaluate the acquisition:

In June 1998, if one had $22b to either buy BRK.A shares at about $60,000/share, or buy GenRe shares at $276.50/share, which one would have been a better investment? The answer should be obvious in retrospect.

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This is not a popular item to discuss with BRK people. So, after a couple of early attempts, I’ve avoided talking about it. People don’t enjoy negative comments.

If they are honestly felt and have thought out ideas behind it, I very much appreciate and enjoy positive and negative comments. Nothing is perfect. “Negative comments” reassure me that thought is being applied to the stock. Things can seem a bit pollyanna-ish to this outsider.

Besides, it prompted an excellent exchange with Jim.



In June 1998, if one had $22b to either buy BRK.A shares at about $60,000/share, or buy GenRe shares
at $276.50/share, which one would have been a better investment? The answer should be obvious in retrospect.
The answer should be obvious in retrospect.

In June 1998, would you rather have $11bn worth (IV) of Berkshire shares, or a portfolio of $24bn in cash and fixed income that isn’t overvalued?
The answer should be obvious in retrospect: the big portfolio.

The $24bn portfolio does entail:

  • a $14.9bn perpetual float balance of perpetual zero cost
  • an upcoming underwriting loss of $4.4bn that you don’t know about yet, and
  • the fact that you’re expecting a ~$1 billion a year in average underwriting profit that, as it turns out, you never get.

It was certainly an excellent decision at the time, though admittedly a bit more due diligence might have helped.
And even with the horrible things that weren’t yet known, it still ended up clearly better to have done the deal than not.

I absolutely agree that it would have been better yet to have sold new shares for cash at 2.8 times book, with hindsight.
Mr Buffett is a bit eccentric in that he probably thought that unfair to the new shareholders, even if it would have been a great for existing ones, so that wasn’t in the cards.
But the existence of a better possible deal doesn’t make the existing one a loser.
The only thing that would make it a loser is if $11bn worth of Berkshire businesses had been worth more than the $24bn leveraged portfolio that was acquired.
Clearly it wasn’t.

Even with all the unexpected bad news, the cost of the leverage equated to less than 1%/year of the portfolio value in the subsequent 20 years.
So, in effect the cost of the $24bn portfolio was $11bn plus 1%/year.
(while, yes, avoiding a spectacular tax bill from selling down the Coke position which was a clearly contemplated alternative)
I wish they could do that deal every day.



In June 1998, would you rather have $11bn worth (IV) of Berkshire shares, or a portfolio of $24bn in cash and fixed income that isn’t overvalued?
The answer should be obvious in retrospect: the big portfolio.

That IV estimate was wrong, because BRK’s book value was still growing around 20% and if that continued for many more years, the IV would be multiple times higher than any estimate at the time. I admitted it’s difficult to estimate the IV then because no one knew how the high growth rate would change. But it became obvious in retrospect.

That IV estimate was wrong, because BRK’s book value was still growing around 20%

The fact that something had previously been growing at 20% a year in the past, and also recently becoming overvalued, doesn’t mean it was worth its then-current price.
I’m pretty sure we all know that.

What was it actually worth at the time?
Absolutely everybody and her brother knew Berkshire shares were overvalued at the time, check out the WSJ article at the time.
The price was ~$80k when the deal was done, and I paid under $70k over three years later for my first block…and overpaid at that.

The precise future was unknowable at the time, but one could have made a decent guess.
A moderate downwards cyclical adjustment for the clearly overvalued stock portfolio, and a reasonable assumption of slower future rate of value growth.
I estimate the shares were overvalued by a factor very close to 2 at the time.
True, had I done the exercise then, I probably would have concluded it was only 50% overvalued, but I’d have been using bad reasoning and extrapolation.
I suspect Mr Buffett had a much more realistic view than I would have.

He, and everybody else, knew he was issuing wildly overvalued shares.
And that, as a clear consequence, the value paid was not anywhere close to the market value of the headline purchase price.
Thank heaven he issued shares rather than using cash.
From the 1998 report when the Gen Re deal was done:
"Our future rates of gain will fall far short of those achieved in the past. Berkshire’s capital
base is now simply too large to allow us to earn truly outsized returns. If you believe otherwise,
you should consider a career in sales but avoid one in mathematics…"



It’s very difficult to estimate IV with high growth rate. I wouldn’t fault Buffett for the Gen Re acquisition at the time. But only in Retrospect, we know BRK was worth a lot more than the market price at the time.

I don’t disagree that the Gen Re deal looked great based on the existing financials. Especially when Buffett really wanted to do the deal.

I don’t agree that you can disregard the long term impacts of issuing 20+ percent of Berkshire for a commodity business going in - and that turned out to be grossly mismanaged. A strategic error.

And I also contend that this became apparent early after the acquisition. As I’ve stated - several times - the big mistake was not repurchasing the BRK shares that were issued and correcting the dilution.

As Munger teaches, it’s unwise to mix turds and raisins.

The long range impacts of the extra 200,000 plus shares dilutions far overshadows the short term impacts.

Just as Buffett himself concluded in an annual report.


Great post as always Tex.

Warren Buffett never lets cash burn a hole in his pocket…well almost never. But he has almost no lifetime experience holding $1.15 dollars cash in his pocket and a portfolio valued in $1.15 dollars… Other that the period immediately before the Gen Re deal. It burned a hole in his pocket.

Buffett says it’s better to buy a wonderful business at a fair price (witness his 2 generational “all-ins”: Gen 1: Coke. Gen 2: Apple)…rather than a fair business at a wonderful price. Charlie does need to remind of this from time to time lol…

Well, Gen Re was a good business with a good reputation in an industry in which Buffett has expertise and was comfortable growing. At a time when HE WANTED TO DEAL. His margin of safety, maybe for the only time in his life before or since—was his CURRENCY.

Reading Schroeder’s book on this period I just think Buffett got itchy to put his rarely if ever held $1.15 dollars to work….

Well, it eventually worked out and got fixed but the opportunity cost—as you do eloquently outline—was enormous. It’s right up there with the gas station Buffett bought 60 years ago. Though not as costly :slight_smile:


The answer should be obvious in retrospect: the big portfolio.

Hmmm liabilities, debt, do they ever matter? I guess in real life.