Has anyone done any detailed analysis/thought experiment on what the impact of rising rates/inflation would be on Berkshire overall?
With rising rates, it would seem there would be some definite positive impacts:
Higher interest on all the cash. This is pretty obvious.
Rising rates should cause stock valuations/prices to fall which should help Berkshire deploy some cash.
Would rising rates hurt PE firms competing with Berkshire for acquisitions? Do they rely mostly on cheap debt?
Would the combination of these possible positives be an overall net positive for Berkshire after calculating in the negative impacts of rising rates and inflation?
Also, after absorbing the fact that my ownership percentage of Berkshire’s businesses has increased about 10% over the last two years because of buybacks, I’m wondering if huge mega-elephant acquisitions are even worth it at this point. To move the needle an acquisition has to be really big, and I’m trying to figure out if the risk/reward makes sense. Seems like there is a bigger risk something could go wrong with such a huge purchase, especially since WB and CM might not be around long enough to help see it through. I think this is especially true after new management takes over— I don’t think a huge needle-moving acquisition is a great idea for new management to try to pull off.
Maybe Berkshire will be able to shrink the canvas enough through buybacks so smaller acquisitions and bolt on purchases are able to move the needle so management doesn’t feel the urge to shoot a giant elephant?
Rising real rates are probably good for Berkshire.
The simplest rule of thumb is that high real rates are good for those with cash, bad for those with debt to roll.
Berkshire is cash rich, so higher real rates would in general be good.
A much bigger tail wind for other insurers.
But if nominal rates rise, but inflation rises more (and that situation lasts), that’s a fall in real rates, which is bad for Berkshire.
The only benefit to Berkshire would be that with higher bond rates (nominal or real, the markets are stupid),
equity valuations would likely fall a lot, so there might be more opportunities to make good purchases.
…after absorbing the fact that my ownership percentage of Berkshire’s businesses has increased about 10% over the last two years because of buybacks
Don’t forget to absorb the fact that you also lost your share of the $51bn cash used for those purchases.
Your gain resulting from those buybacks isn’t the 10% extra you own of everything, but only the much smaller gap between what was spent and what it’s worth.
If they hadn’t done the buybacks you’d own only ~90% as much business value, but on the other hand
Berkshire could afford to give you a cheque for about ~$34000 per share that they can not now do.
I’m happy with the buybacks, but the value gain effect is slow and gentle.
WEB also said last year’s mtg although our costs have gone up it appears we have been able to pass it on in general. More income but it now buys less goods and services!
Would rather have inflation at a constant and predictable 2% going forward!
It seems to me that the typical recession and debt cycles have been one-upped in severity by the 2009 financial crisis and covid. It isn’t surprising at all to me that Berkshire management stayed relatively conservative during those periods.
Given current debt levels throughout the economic system Berkshire may very well continue to play safe in the next downturn. What I am suggesting is that Berkshire makes hay during typical economic stress periods and it has been a while.
So in essense while div20 unnecessarily went into the depths of negativity when it was obvious to many of us that the Berkshire stock price lag would end, he was correct to be somewhat upset. It is near impossible for Berkshire to make a slam dunk during periods of fully priced/overpriced like the last few years.
A while from now my view is that Berkshire, the business and stock, will have beaten the market by a noticeable amount. But this will be revealed slowly, so slow that nearly everyone will be frustrated (as usual).
I’m happy with the buybacks, but the value gain effect is slow and gentle.
I am glad to see “slow and gentle” shifting of the narrative. From buybacks are neutral to there is value gain, however little it is. Little by little, slowly and then suddenly… oh I am talking about sunset.
