After the buybacks slow or stop

What will Warren do with $25B or more of cash pouring in each year?

With the stock trading around 1.5x last known book, inquiring minds want to know.

Obviously one option is a mega acquisition but the odds for that seem low.

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I don’t think $25 billion cash is coming in every year. May be you are counting operating profits and float increase? Float increase can be easily handled by investing in fixed income like any other insurance company. Operating earnings are used to buyback shares.

Operating earnings are used to buyback shares.

The question was what to do with that cash flow now that Berkshire is closer to fully valued. I think prior analysis has indicated that buybacks slow quite a lot or stop somewhere in the vicinity of 1.5 * book where we are now.

I say it will be business as usual. Buffett won’t worry about cash piling up in a war chest if there are no good places to spend it. Or he’ll opportunistically spend it, like with the sizable OXY purchases recently.

A lot of people believe we’re in the early stages of a bear market. I don’t know if Buffett has conviction either way, but I do know he’s always searching for ways to put $5 or $10 billion to work (or more, though that is hard).

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The question was what to do with that cash flow now that Berkshire is closer to fully valued. I think prior analysis has indicated that buybacks slow quite a lot or stop somewhere in the vicinity of 1.5 * book where we are now.

That is not my theory. I think there is a shift in WEB’s approach towards buyback, which is not yet well understood by the shareholders. I think given the cash pile and limited use, he is shifting to buybacks, and the valuation guidance he provided in the past is no longer the guiding principle.

I would rather prefer Berkshire use its operating earnings to buyback shares.

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A lot of people believe we’re in the early stages of a bear market.

Those folks believed we are due for a major crash since 2009. The indicators are all over the place. There are tons of high growth names that had seen north of 50% decline. Many are reasonably priced. Inflation means companies will be able to raise price for their goods and services. Not every company has a cost structure that will force them to pass those raises to labor or raw material etc.

Separately, we don’t know whether FED will actually follow through on their rate hikes or QT. We don’t know how the supply chain constraints will resolve.

I do know he’s always searching for ways to put $5 or $10 billion to work

You don’t know that either. Remember someone with $100 B in bank, and can afford to have a long-term view, knowing the world will turn around, Buffett didn’t make any meaningful purchase at the bottom, nor he made anything when we had a vaccine.

Most folks speak for Buffett as though they know him so well. WEB has written nice annual letters and gave interviews etc. But he hardly broke down his thinking process or any transaction. For ex: how long Berkshire has been blowing back the energy profits back into that business? When he talked about it?

The indicators are all over the place.

They’ve been going more and more unanimously bearish from what I’ve seen, following the Mechanical Investing board. This isn’t just perma-bears saying it now.

There are tons of high growth names that had seen north of 50% decline. Many are reasonably priced.

I agree there are probably spots of value available out there among high growth stocks, though a 50+% decline by itself means little when stock prices were utterly unattached from any value analysis. As we saw in 2000 even robustly growing companies’ stocks could fall 50% over and over and over before finding bottom. I.e. Amazon had approximately FOUR 50% drops from its high, and then fell another 20% before finding bottom.

Do you have any names you think are reasonably priced, in particular? My personal fave of the Saul hyper-growth stocks is Upstart, as it’s still clearly hyper-growth but also very profitable, has an enormous potential market and seems to be out way ahead of any potential competition. At its recent lows one can make an argument it was reasonably valued if you believe hyper-growth will continue at least another year or two. At $90/share it was PE 61.6, PS 6.4, with forward guidance for sales growth of 61% in the coming year up to $1.4 billion sales, which would give one year forward PS of 4. PE will probably not fall as rapidly as PS, as they’ll be investing heavily in scaling up their auto loan business and bringing forward their small business loan and small size loan business towards market.

I’m thinking about buying if it tests those lows again, which I expect, and if it drops significantly below I may go fairly heavy on it.

we don’t know whether FED will actually follow through on their rate hikes or QT. We don’t know how the supply chain constraints will resolve.

Of course there is uncertainty, but I see no reason to doubt the Fed will follow through, except in the situation that other factors cause a recession. Factors affecting supply constraints seem to only be getting worse with the war in Ukraine and Asia getting hammered with a rising wave of Covid.

“I do know he’s always searching for ways to put $5 or $10 billion to work”

You don’t know that either. Remember someone with $100 B in bank, and can afford to have a long-term view, knowing the world will turn around, Buffett didn’t make any meaningful purchase at the bottom, nor he made anything when we had a vaccine.

It’s true he wasn’t shopping at the bottom in 2020. As he has discussed, that was because uncertainty was so high he was focussed on insuring the capability of Berkshire to pay its liabilities and maintaining its fortress like balance sheet, no matter what.

He has certainly been deploying the $5-10 billion regularly since then though - mainly on buybacks, but also recently on OXY.

For ex: how long Berkshire has been blowing back the energy profits back into that business? When he talked about it?

He’s talked before about how he likes that business’ characteristic of being able to steadily accept huge investments at a respectable return, and how he likes the fact that characteristic will continue or expand as the nation migrates to a clean energy economy. So, yes, he’s talked about that. I can’t point you to exactly when, but I know I’ve read/heard it.

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I don’t think $25 billion cash is coming in every year. May be you are counting operating profits and float increase? Float increase can be easily handled by investing in fixed income like any other insurance company. Operating earnings are used to buyback shares.

Why don’t you think there is $25 billion in cash coming in every year? Operating earnings were $27 Billion last year and included taxes that were not all paid in cash. Operating cash flows have been extremely stable at $39 Billion for the last three years (this includes an average of $9 Billion annual float growth). BHE reinvests cash but also receives new cash from Berkshire in the form of preferred stock to fund acquisitions. BNSF dividends out all cash profits without fail.

The fixed income portfolio is so short-dated that only $16.4 Billion is counted as fixed income and not cash equivalents. 16.4 Billion out of $147 Billion in total float comes to about 11% and has only been shrinking recently. I don’t think new cash from float is going into fixed income, it is going into cash equivalents and potentially equities, operating company aquisitions. Most of the operating subsidiaries are owned by the insurance subsidiaries, not the parent. The Pilot buy-out will be insurance company capital, the Dominion pipeline deal was funded with a pref. investment using National Indemnity’s cash. The last time Berkshire bought bonds in any material size appears to be 2018 if I remember my NAIC filings correctly.

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My guess:

Buybacks will slow but not completely stop.
Cash will pile up and start to become a thing in the headlines, though more slowly.
A few more “good enough” investments. More than parking cash, but less than a long term marriage, like the slate of Sogo Shosha holdings.

I don’t think Mr Buffett is as worried about the size of the cash pile as most observers imagine.
It’s the overall portfolio that matters.
The cash pile itself is at the high end of its historical range but not appreciably beyond, as a fraction of the size of the firm.
But cash is in my view mostly just the short end of the “cash plus fixed income” allocation, which is far smaller than the historical average.
The allocation to equities is well above historical norms.

Jim

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They’ve been going more and more unanimously bearish from what I’ve seen

Not sure what those are. 4 days of 1% gain in SPY is so bullish, that in all its past occurrences except one SPY gains on average over 20% in the next 12 month. Similar readings on QQQ, similarly 90% stocks up readings…

Other Macro signs are emerging. Fed Chair Powell talked “labor market is unhealthy tight”, if we are having record employment, record economic activity, the supply chain constraints resolving further fueling economic activity, how can they be signals for bearish economic environment?

We may get a recession some day. But at this time I have a difficulty in seeing one.

I’m thinking about buying if it tests those lows again
There is a time to wait and there is a time to act. Who knows, what future holds, you may want to open some position.

Do you have any names you think are reasonably priced
The valuation on hyper growth are going to be difficult. I am looking at Paypal’s of the world, they are already profitable, have a proven business model and the price is getting reasonable.

He has certainly been deploying the $5-10 billion regularly since then though - mainly on buybacks

Buyback was a no brainer decision for sometime. No other CEO would have gotten away with carrying $100 B and undervalued shares so long. That doesn’t count as he is searching to deploy money. \

I can understand not investing at the bottom, because it is a unique situation no visibility, etc. But after the vaccine? I am not criticizing him for not making deals, rather the assumption that he is constantly looking for deals is something I am questioning.

I can’t point you to exactly when, but I know I’ve read/heard it.

Mid American was purchased in 1999 and he talked about reinvesting BHE profits back only recently. Like I said, lots of people think they are very familiar with WEB, his investment style, etc. Often the narrative misses the mark by a huge, very wide margin.

They’ve been going more and more unanimously bearish from what I’ve seen, following the Mechanical Investing board

From the peak of $479.98 to low of $410.64, that is 14.46% decline in SPY. So you had your garden variety 10% + decline already. Your probability for the market should include some sideways movement, and may be a bounce back in the second half.

The sideways movement may come in names like APPLE going down and not necessarily the stocks that went down earlier and in recovery now.

“[Mechanical Investing board’s indicators] have been going more and more unanimously bearish from what I’ve seen”

Fed Chair Powell talked “labor market is unhealthy tight”, if we are having record employment, record economic activity, the supply chain constraints resolving further fueling economic activity, how can they be signals for bearish economic environment?

The Mech. Inv. board indicators I mentioned are strictly stock oriented, not macro-economic. I.e. this post: https://discussion.fool.com/market-trend-indicators-35076550.asp…

Supply constraints were hopefully resolving, but now we’re seeing Covid lockdowns in huge areas of China, Covid disruption in South Korea, and the Ukraine war disrupting Europe and some commodity markets. So, looking forward we have zero assurance of continued improvement on the supply chain disrupted state.

Yes, the US economy is doing well, except for the inflation problem, and that economic growth will help fuel good earnings reports, but when the mood is bearish and interest rates are rising, the filter people view those reports through changes. While people were eager to buy growth stocks at sky high multiples last year, that has changed and we don’t know where the bottom of that re-evaluation will be found. I expect it will be further below, but lord knows I don’t have any special foresight.

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From the peak of $479.98 to low of $410.64, that is 14.46% decline in SPY. So you had your garden variety 10% + decline already. Your probability for the market should include some sideways movement, and may be a bounce back in the second half.

The sideways movement may come in names like APPLE going down and not necessarily the stocks that went down earlier and in recovery now.

Yeah, certainly possible. I haven’t made any portfolio moves based on my anticipation of an ongoing bear market, because I built my portfolio of stocks to be defensive in the first place. I’m close to fully invested in stocks, little cash, but, I am thinking of raising some cash. I’ll go through my portfolio and re-evaluate this week, see if there’s anything I no longer feel strongly about keeping.

“I think there is a shift in WEB’s approach towards buyback, which is not yet well understood by the shareholders. I think given the cash pile and limited use, he is shifting to buybacks, and the valuation guidance he provided in the past is no longer the guiding principle.

I would rather prefer Berkshire use its operating earnings to buyback shares.”

Agree! I see the buybacks continuing at a good pace. As long as WEB is repurchasing at a meaningful pace (and discount to His IV), I refuse to sell. They are his gift that truly keeps on giving. 15% cash position seems quite reasonable and there could be worse places to park funds than VZ and the Japanese trading houses. So glad a standard dividend will likely never happen on his watch. There are no elephants in sight but I think they will be sighted in due time.

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4 days of 1% gain in SPY is so bullish, that in all its past occurrences except one SPY gains on average over 20% in the next 12 month.

I don’t believe this to be correct as Jim’s favorite chart then would be a lie, would be made up by Mr.Rodrigue:

https://en.m.wikipedia.org/wiki/Jean-Paul_Rodrigue#/media/Fi…

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BRK could always invest in a multi-factor fund mimicking Buffett’s strategy:

Buffett bought stocks that are “safe” (meaning stocks that have low beta and low volatility), “cheap” (value stocks with low price-to-book ratios), high-quality (meaning stocks that are profitable, stable, growing and with high payout ratios) and large.

https://www.etf.com/sections/index-investor-corner/swedroe-b…

Don’t know why he doesn’t:

The most interesting finding of the study was that stocks with these characteristics—low risk, cheap and high quality—tend to perform well in general, not just the ones that Buffett buys.

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The most interesting finding of the study was that stocks with these characteristics—low risk, cheap and high quality—tend to perform well in general, not just the ones that Buffett buys.

What seems to be missing from these hindsight studies by academia is that Buffett figured all this out a helluva long time before they did.

Somehow they never seem to give him credit for that. Just like using leverage from float.

I’ll be damned if I understand why they always seem to try to bring him down.

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'I’ll be damned if I understand why they always seem to try to bring him down."

Envy. Makes many on Wall Street who run money for active fees seem useless.

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The Mech. Inv. board indicators I mentioned are strictly stock oriented

Here is the source of my 1% raise comments.

https://www.thechartreport.com/cotd-03-18-22/

I don’t know about the MI board work, I assume they will also flip their views as the price changes. Some of the other trends I monitor or the reports I read all flipped from totally bearish to cautiously bullish. Again as the author notes hear still more work needs to be done. But you heard about “where the puck is going vs where it is”.

After 2 years I walked into a dealership, took my car to the dealership for service. For a Sunday, the parking lot is deserted, the place used to have something like 60, 70 car salesmen, you hardly have 7 or 8 guys, Just few used cars and < 15 new cars.

While waiting for service, walked into nearby strip-mall, many shops closed, Bed-Bath many shelfs are empty, same store after store. Even Barnes and Noble, which is generally crowded is near empty and only 2 folks at the Starbucks. May be it was early 11:00 AM.

But I have never seen that place so deserted. So I understand how blessed I am and I hope the economy turns around, inventory situation improves.

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Why don’t you think there is $25 billion in cash coming in every year?

You are correct. My memory failed me.

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I’ll be damned if I understand why they always seem to try to bring him down.

Jealousy?

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