Buffett's Surprising New Moves Fit His Core Principle:

Have An Edge
seekingalpha.com/article/4376207-buffetts-surprising-new-moves-fit-core-principle-edge

Jim Sloan September 25, 2020

Summary

Two recent Buffett actions may seem out of character: a $6.5 billion investment in
stodgy Japanese trading companies and a $500 million investment in hot IPO
Snowflake; what's up?

Buffett formed many lifetime principles as a 16-year-old horse handicapper, including

the importance of information, sizing bets, and having an edge over the opposition.

This applied in his "cigar butt" years, his blue chip ROIC years, his use of insurance
float, his utility/railroad acquisitions, and his deals; in all cases he had an edge.

Despite striking out in new directions his recent actions each involved an edge which
improved upon the ordinary odds and applied such racetrack/casino principles as
properly sizing bets.

Buffett's greatest edge may be in knowledge stemming from Berkshire itself, both for
buybacks and for buying assets such as Dominion's pipelines for which Berkshire
Hathaway Energy provided an information advantage.

"Plus ca change, plus c'est la meme chose (the more things change the more they stay
the same)" - epigram by Jean-Baptiste Alphonse Karr, 1824

What's up with Buffett? Is he bent on taking Berkshire Hathaway (BRK.A)(BRK.B)

down new and radical paths? The short answer is yes. The short answer is also no.

Two recent actions may have struck Buffett watchers as out of character. First he reveals
that over the past year he bought a $6.5 billion stake in five relatively stodgy Japanese
trading conglomerates known in Japan as sogo shosha. Then within a matter of weeks
he announces that Berkshire has taken a small but significant stake in the year's hottest
IPO, Snowflake (SNOW), using two different approaches just a few days before the IPO.
Buffett had previously made it clear that IPOs were not for him or Berkshire. What's up
with all that? Has he taken leave of his... basic principles?

In this article I'll take a hack at the long answer, which starts with a few basic principles
he learned as a teenager. The world changes. The markets change. But remember the
French proverb cited above. Whether it's algorithmic trading, new forms for companies
going public, or merely great generational changes in what's working in the markets,
there's a need for both a core of basic principles and a carefully measured flexibility of
mind.
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But where can you discover the kind of principles that are powerful and general enough
to work in many different markets and circumstances? As it turns out, Buffett's first
encounter with the most fundamental principles for investing came to him at an
unexpected place and a surprising age. He wasn't just the typical nerdy kid who bought
a stock or too in a custodial account - he did that too, of course, and made a total of five
bucks on three shares of Cities Service Preferred. But hey, lots of kids do that kind of
thing, which is fun and makes you feel prematurely grown up. I did a bit of it myself,
but I clearly did not grow up to be Buffett. Having an interest in stocks as a kid is
probably best described as necessary but not sufficient. Buffett went to a much stranger
place to learn the right questions to ask about stocks.

What you really need is an opportunity to discover a few basic principles that will stand
the test of time. They should be as relevant at the end of your career as when you are
just starting out and make sense whether you are young or old. Buffett had a bit of luck
with ideas he bumped into in the course of an unusual teenage experience.

Buffett Learned Core Principles At The Racetrack

The most powerful investment instruction for the sixteen-year-old Buffett took place at
the race track. Still back in Nebraska he and a friend started by "stooping" the floor for
"place" and "show" tickets discarded by naive bettors disappointed that they didn't have
the winner. In their naivete they didn't realize that their tickets paid out modestly for 2d
and 3d place as well. There's a value investing metaphor somewhere in this which
closely resembles Buffett's original model of picking up "cigar butt" stocks which were
discarded but had one more puff in them.

What Buffett did next was more interesting. He and a friend put out a tip sheet called
Stable-Boy Selections. To do this he began to study handicapping, and in the process
learned such things as the fact that you could handicap by speed or by the class the
horse had competed successfully against. They sold their tip sheet for a quarter until the
race track shut them down. A year later with a teacher who was also interested in
horses, he returned to the racetrack and instead of "stooping" or selling a tip sheet, he
bought the best tip sheet, studied, and formulated a plan.

I'd get the Daily Racing Form ahead of time (he told biographer Alice Schroeder) and
figure out the probability of each horse winning the race. Then I would compare those
percentages to the odds. But I wouldn't look at the odds first, to avoid prejudicing myself.
Sometimes you would find a horse where the odds were way, way off from the actual
probability. You figure the horse has a ten percent chance of winning but it's going off at
15 to 1 (implying only a 6.7% chance so that the payout probability exceeded the odds by
about 50%)."

What Buffett had stumbled upon was the concept of having an edge, in this hypothetical
case a 50% edge on what was admittedly a long shot, although betting on a large
number of such long shots would likely be highly profitable. The basis of success was
that you were betting against people who based their choices on the jockey's colors or
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the names of the horses. Implicit in this process was the most important principle
behind any kind of betting, using edge/odds as a guideline for sizing bets or deciding
whether to bet at all.

This simple criterion is actually a version of one of the most sophisticated approaches to
any game involving information and played under uncertainty. This principle involving
the use of edge/odds for proper sizing of bets (including the decision not to bet) is
called the Kelly Criterion after mathematician and information theorist John Kelly.
Kelly worked at Bell Labs with Claude Shannon, also a mathematician and the inventor
of information theory, who ultimately became a famously successful investor using legal
inside information. A system counting the fives to size bets in blackjack was put
together by Ed Thorpe, who also knew Shannon at MIT. Thorpe used this approach to
beat blackjack dealers, a system he wrote about in Beat the Dealer. Thorpe later ran a
successful hedge fund which prefigured today's algorithmic trading.*

Buffett is neither a high-order mathematician nor an information theorist, but he is very

quick with basic math and its implications. He didn't miss the main thing. He was a
decade ahead of the mathematicians and information theorists thanks to his
experiences at the race track. Here are the major principles Buffett took away from his
race track experiences, good and bad:

1. Information is everything. The way to win is to have more information than the
other guy.
2. Opportunity arises whenever other bettors or market participants are naive, lazy,
badly informed, under pressure to deal, or simply not very smart.
3. Always look for an edge.
4. Size your bets appropriately based on edge/odds.
5. You don't have to bet every race.

Looking closely, you can see these principles ripple through every major stage of
Buffett's career.

The Partnership Years

These simple principles applied with the analytical methods he learned from Ben
Graham enabled Buffett's original hedge fund (The Partnership) to return 29.5% before
fees (24.5% after) versus 7.4% for the Dow with no down years between 1956 and 1969.
The market was simpler in those days, and many players were as badly informed as a
bettor playing the jockey's colors or the horse's name. Buffett won by doing his
homework and having the information advantage that came with command of detail.
He also employed the concept of having a "margin of safety," which amounts to
undertaking only bets which have a high probability of success.

In 1969 Buffett closed the partnership on the grounds he was finding it difficult to
discover mis-priced stocks. In reality, he had perfectly timed the end of a long bull
market and chose to follow the key principle that you don't have to bet every race.
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Float, Moat, And ROIC
The trouble with finding "cigar butt" stocks was that as soon as they closed the gap to
fair value you had to find another one. There had to be a better way, and Charlie
Munger provided one. The trick was to buy stocks with high return on invested capital
and a good place to reinvest it. The next thirty years at Berkshire Hathaway were driven
by two investment themes:

1. Property and casualty insurance companies which provided an underwriting

profit if managed well and at the same time created a "float" of customer
payments which was essentially free if your underwriting was good and became a
free source of cash to invest.
2. Quality companies with outstanding products and brands which served as a
"moat" to hold off competitors and also high return on invested capital which they
were able to compound internally. They were wonderful if you could purchase the
company outright, as with See's Candy, but they were also pretty darn good if you
simply bought gobs of the stocks, as Buffett did with Coca-Cola (KO) and
American Express (AXP). He holds them still, decades later, and happily receives
a rising stream of dividends which annually exceed his purchase price.

Warren and Charlie more or less invented the concepts of "float" and "moat" as
investment edges, and while they were not the only people to think about ROIC, they
were early in understanding that it was the underlying force behind growth. Put
together, the three concepts - moat, float, and ROIC - worked brilliantly and were the
main drivers of Berkshire's extraordinary growth in value until Berkshire began to feel
the pressure of holding too much cash.

Assured Profitable Reinvestment

In 1999 Buffett's struck out in another new direction by buying a control position in
Mid-American Energy. Although utilities had slow user growth and their rates were
regulated, they enjoyed an advantage which came with regulation: an assurance of a
reasonable return on capital required to maintain their service. Given the low cost of
cash from insurance float, companies in a regulated industry were a bond-like sure
thing. Berkshire Hathaway Energy - now a large unit of Berkshire overseen by Buffett's
likely successor Greg Abel - embarked on two decades of bolt-on acquisitions and
purchased any infrastructure assets that became available.

Railroads had similar advantages, and Buffett was able to acquire BNSF by a handshake
golf-course deal with CEO Matt Rose. Industrial companies in general shared some but
not all of these advantages, and Buffett was the buyer of choice for privately owned
Israeli metalworking company Iscar and a cluster of industrial assets which no longer
fit the portfolio of the Pritzker family. His edge in these purchases was having capital on
hand, and in the case of Iscar providing the individual owner a chance to cash out by
selling his lifework to a company which would continue it as he would have.

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Deals When The Other Side Is Highly Motivated
Nothing shows the use of an edge better than the deals cut with Dow Chemical ( DOW),
Harley Davidson (HOG), Goldman Sachs (GS), and GE (GE), all of which were stuck in
a tough situation because of the 2008-9 crisis. There's no better edge than the one you
have when the other side is desperate. Receiving preferred shares at high interest dates,
with early payback penalties and kickers in the form of warrants, made these deals a
rare combination of low risk and high return.

The home run of these deals was his $5 billion purchase of preferred shares from Bank
of America (BAC) in 2011. The market feared that BAC was about to fail, and Buffett
called to make them an offer they couldn't refuse (which had popped into his head while
taking a bath). With the preferred shares he received 6% interest along with warrants
which were then out of the money but subsequently enabled him to purchase BAC at a
price which which has subsequently tripled.

No Edge Works All The Time

It should be noted that the prospects for Buffett's similar deal with Occidental
Petroleum (OXY) have been greatly damaged by the COVID lockdown, along with his
four airline investments. Several wholly owned Berkshire subsidiaries have also seen a
reduction in their immediate prospects, including the relatively large 2015 acquisition
of airline-related Precision Castparts. Even with an edge, be it deal structure or general
market acumen, not all bets work out.

The long period of low rates has made marginal investments more attractive, but the
several problem investments of recent years should be taken in context. Buffett has
more often been criticized for not taking action than for actions he actually took. The
bets that didn't work out were generally small on Berkshire's scale assuming that
Precision Castparts is likely to bounce back over time. What comes in for little positive
notice is the virtue of Buffett's relative inaction. A product of overall market conditions
that existed before COVID, this clearly represents the principle of not betting at all when
the odds are insufficiently favorable.

Using An Edge In Buying Japanese Trading Companies

Many people did not notice at the time - and I did not make it an aspect of my analysis -
that Buffett's purchase of equal amounts in five Japanese trading companies had a
particularly favorable twist. My own initial thought was that the companies were vital
and produced stable dividends, albeit a dividend stream somewhat lumpier that of most
large American companies.These sogo shosha thus fit the longtime Buffett model of
stocks as "equity bonds," producing a bond-like return in the form of dividends
accompanied by a reasonable prospect of modest price appreciation.

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Dividends received within Berkshire are very valuable because more favorably treated
under current corporate tax laws than capital gains. Though anything can happen when
it comes to taxes, a corporate tax increase is much less likely than a tax increase for
affluent individuals because of the argument that American business must be
competitive with foreign businesses. The equity bond aspect was reflected in Buffett's
buying these company's within National Indemnity, where their regular dividend
payment could offset future expected payouts. Every operational aspect, therefore, was
well thought out.

There was, however, one factor which has not been prominent in discussions, including
my own initial analysis. The $6.5 billion outlay for shares in the five companies - Itochu
(OTCPK:ITOCF), Marubeni (OTCPK:MARUF), Mitsubishi (OTCPK:MSBHF), Mitsui
(OTCPK:MITSY), and Sumitomo (OTCPK:SSUMF) - was almost exactly offset by
borrowings denominated in yen at the hyper-low interest rates in Japan - ranging from
.17% to 1.1% in the case of the yen loans. Thus with average dividend rates of the five
companies around 4%, the purchase of the five companies involved a carry trade of
sorts, or arbitrage if you prefer. In essence Buffett and National Indemnity were
receiving very secure payments roughly 3% above the cost of funds, with changes in
exchange rates removed from the picture. Much like insurance float, it was essentially
free money with a suitable investment available for putting it to use.

It will be interesting to see whether this major foray into international investing also
leads to Buffett operating within an expanded universe of potential investments. It
could be that Buffett simply sees in Japan, an obvious low risk way to participate in the
growing Pacific Rim, a more favorable situation than in most foreign markets. It is also
possible that Buffett may expand the size of his bet on the five sogo shosha, where he
can double his investment without regulatory objection. He may also branch out into
other areas of the Japanese market.

Using An Edge To Buy In Front Of The Snowflake IPO

The purchase of some $500 million of the Snowflake ( SNOW) IPO was perhaps the
most surprising move Buffett has ever made. In every respect it appears to violate
principles explicitly stated and observed in Buffett's past. It is, first of all, a tech
company, and it comes with all the difficulties of analyzing tech, especially very young
tech startups. Buffett has spoken of the problems that come with Initial Public Offerings
and the extreme unlikelihood of his ever buying into one. It is also extraordinarily
expensive by all measures, has no profits, and sells on the basis of an enormous
multiples of bookings. Buffett has steered clear of all such companies in the past. Why
change his approach now?

There are a few positive aspects particular to Snowflake which Buffett must have
considered. For one thing, the business model is very well designed as tech startups go,
with a clear sense of the ultimate scale of their data cloud storage-and-accessing market
and also a reasonable ability to estimate their likelihood of capturing large market

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share. Current growth matches up well with the IPO price if it is likely to persist for a
considerable period, always a big if. Berkshire is in good company, as Salesforce (CRM)
equalled their commitment to the IPO. That's an important imprimatur from a company
certainly extremely well informed about the opportunity and risks, as well as the
process moving from private equity startup to public company.

In an article I wrote on great contemporary market winners I invoked the implied Adam
Smith view that such companies might reasonably be viewed in the beginning not by
current metrics but by an informed estimate of the market they will eventually serve
and the share of it they will attain. This view appears from the initial mission statement
to be exactly the way Jeff Bezos formed Amazon (AMZN).

I can't resist thinking that Todd Combs had some role in this, especially considering
that he was the instigator of the thus far successful investment in Brazilian payments
company StoneCo (STNE) and Indian payments company PayTm, in which Ant
Financial has also invested and which is scheduled to go public in 2022. On the other
hand, the second part of Berkshire's investment, a private deal to buy the shares of early
private investors - an amount equal to the IPO commitment - has more the feel of a
Buffett action.

The edge here? For one thing, it turns out that arranging to buy in both cases at the IPO
price had a huge advantage in retrospect. Almost all day one investors ended up paying
well over twice the IPO price. Maybe this price is also way off base, but only time will
tell. It's also important to be aware of the sizing of the bets. The combined price paid for
Snowflake is less than combined investments in StoneCo and PayTm, and is quite small
when compared to Berkshire's available cash. It is also just under 10% of the price paid
for the four Japanese trading countries, which are less exciting but far more likely to
meet the smaller objective of a steady and rising dividend payout.

If you had to sum it up, Berkshire made one very conservative bet in a foreign market
and one much smaller bet in a company with high risk but enormous upside and the
advantage of getting in at an early point - the sort of bet that recent years has turned out
pretty well for informed investors in tech IPOs, especially if executed with some price
advantage.

Buffett's Most Important Edge

I would be remiss not to mention the single area in which Buffett has the greatest edge:
Berkshire itself. So far in 2020 Buffett has bought back at least $7 billion in combined
Berkshire A and B shares, probably more than he invested in the Japanese companies
and Snowflake combined. This should come as no surprise. Berkshire has lagged the
market and is relatively cheap by many measures, even after reduced earnings including
a large write-down of Precision Castparts.

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The important fact not to miss is that Buffett knows the risks and the value of his own
company better than anyone else possibly could and also better than he could possibly
know any other potential investment. It should get the attention of other investors that
he has begun to size the buyback bet as having a higher probability of good return than
any other investment he currently sees. One should also remember that Buffett has no
personal interest in Berkshire buybacks except what he shares with all continuing
shareholders (he is careful to buy back at prices which do not disadvantage either
holders who exit or holders who stay).

There's also another information edge that comes with being at the center of Berkshire.
Not only does Buffett get timely updates on the economy, quite competitive with the
information received by the Federal reserve, but he also receives extremely valuable
insight into particular industries, including some which are out of favor and thus
candidates for investment. The Berkshire Hathaway Energy division run by Greg Abel
has been a particular source of such information. Abel has made many bolt-on
acquisitions. His extensive experience with energy transmission and storage assets
enabled Berkshire's single largest capital commitment so far this year, the $10 billion
cash-plus-debt-assumption acquisition of pipeline and storage assets for which
Dominion Energy was, if not quite desperate, a highly motivated seller.

What's Your Edge?

Here are a few things Buffett's actions seem to be telling us:

1. Unless you have an edge, there are currently few opportunities in the US stock
market either for making acquisitions or for buying shares.
2. Berkshire Hathaway itself is reasonably cheap and safe. Buffett makes buybacks at
prices not accretive to book value but accretive to overall value.
3. Foreign investments may provide more opportunity at this time.
4. The small scale of his investments as a percentage of Berkshire's cash reserve
signify his view that these are risky times in which cash may be needed
unexpectedly, but you can expect better opportunities at some point in the future.

These are all implications of Buffett's action which may provide important food for
thought for the average investor.

Should you try to piggyback the actions of Buffett? Certainly not in all cases. One can
make the case for looking closely at the Japanese trading companies if dividend yield
with modest growth are your primary objectives. I may attempt to write a short article
about that, prompted by my ex-wife's query about which of them she should buy. At the
present moment you can probably buy these sogo shosha for about what Buffett paid,
although they have traded at times as much as 30% below the current price over the
past couple of years. You'll just have to accept exposure to the Japanese currency, as you
can't easily replicate Buffett's borrowing in yen. Currency hedging is expensive and not
generally recommended in stocks although it sometimes makes sense with bonds.

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As for Snowflake? It was risky even at Buffett's price, a risk which he and his
lieutenants had clearly thought through. If you check the market, you will see that you
and I cannot get anything close to Buffett's price. The value of Buffett's position more
than doubled on day one. I doubt that he would buy it today. You and I shouldn't.

It's too bad we can't all take advantage of the kind of edges that Buffett often has
available. We can from time to time look at mis-priced securities and buy them in the
size that edge/odds calculation suggests. First, however, assess yourself and be sure you
are aren't the type of better who bets the jockey's colors or the horse's name. Then ask
yourself the basic question: what's my edge?

I would like to hear your thoughts on this question in comments.

*Buffett's racetrack and horse handicapping experience are from Alice Schroeder's
Buffett biography The Snowball. Information on the Kelly Criterion and its application
are from William Poundstone's Fortune's Formula and a variety of other sources.

Disclosure: I am/we are long BRK,B, BAC. I wrote this article myself, and it expresses
my own opinions. I am not receiving compensation for it (other than from Seeking
Alpha). I have no business relationship with any company whose stock is mentioned in
this article.

Editor's Note: This article discusses one or more securities that do not trade on a major
U.S. exchange. Please be aware of the risks associated with these stocks.

kiwicarrotcake
And this doesn't include the $1 billion funding he just made. Just solid terms all around.

25 Sep 2020, 01:00 PM

fujilomi
Great 5 principles to trade by. 6. It is better to be lucky than good, but not so good when
your luck runs out. Sure hate suffering bad beats in poker when the fish are lucky
against ME lol, having an edge may not matter short term. That is why sizing bets and
bankroll management is so important, to survive when YOU are unlucky.

(edited)
25 Sep 2020, 12:43 PM

Author’s reply »

Ha! Great added principle!

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25 Sep 2020, 01:24 PM

Proxima
Thank you for one of the best articles that I have read on SA. Terrific analysis and
insights. I have noticed over the yeas that when the pundits become critical of Buffet we
are near a top and a potential crash. Buffett was washed up and out of touch with the
wisdom of tech stocks in 1999 :)

25 Sep 2020, 12:42 PM

Author’s reply »

Thanks for you kind words.

25 Sep 2020, 01:25 PM

BalancedView
An informed article. thank you

25 Sep 2020, 12:29 PM

Author’s reply »

Thanks.

25 Sep 2020, 01:25 PM

joesmith323
Jim - I would love to see you write an article dedicated to explaining the Kelly Criteria
and how to use it for investing.

25 Sep 2020, 12:15 PM

Author’s reply »

That's a wonderful idea. I have actually used it in an approximate way to think about my
position sizes. Let's see if I can figure out a way to package it.

25 Sep 2020, 01:26 PM

10/22
joesmith323
For me, a fairly high level of mathematical sophistication with references for more
reading would be best.

25 Sep 2020, 01:56 PM

PanicFirst
I doubt Buffett made the IPO call...

25 Sep 2020, 12:10 PM

Author’s reply »

Yes, I wondered too. It's in Todd Combs territory and he is looking better and better as
a future CIO. And just today I read an article on cloud from Wisdom Tree which showed
data that 65% of the money made in startups in that area were after the IPO, 35%
before. I think Combs and Buffett may have collaborated. Somehow finding investors
ready to get out sounds more like Buffett. In any case, a very smart way of doing it.

25 Sep 2020, 01:28 PM

quotation
Premium
Thought Buffet said "never bet against America" but goes off to invest abroad for higher
carry returns.Seems at odds. Truism of _do what they do, not what they say_?

25 Sep 2020, 11:53 AM

DpSht
Spell his name right if you want to comment.

25 Sep 2020, 12:14 PM

@quotation Being for, or against, something else doesn't mean you're for or against the
first thing measured. I can be for, or against, the Astros. Simultaneously, I can be for, or
against, the Raiders. Or, even the Cubs.
25 Sep 2020, 12:31 PM

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Author’s reply »

Except for the Iscar deal Berkshire has been pretty much a domestic company invested
in largely domestic industries - housing, for example. I think he just realized that he had
to expand his potential investment universe because the US market was priced so high.
Japan does a few things differently from us, but they share the stability and rule of law,
although until recently not very shareholder friendly. These companies have stepped up
the dividends and buybacks. It's interesting that Buffett has done foreign investment,
sometimes more successfully than others, in the UK, Israel, and Japan. The more I think
about it the more I realize that those three are the short list for countries who do things
overall in a way similar to ours. What do you think?

25 Sep 2020, 01:33 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

When buffets still existed, especially for Indian food, I always told my wife I think I'll
order the Buffett. I got the vegetarian tasty stuff, with the illusion of being healthy, and
went wild on the mango ice cream.

25 Sep 2020, 01:35 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

I'm with you. I live in Chicago and pull strongly for whichever team appears to be on the
rise and winning while wishing well for the other. Right now they are about to slug it
out for playoff position. I guess true fans take a different view.

25 Sep 2020, 01:36 PM

gandc
I own BRK as well as several PE firms that invest in companies like PLTR as I cannot
hope to get allocations for these stocks.I have several moonshot penny stocks in Tiny
Tech and Tiny Pharma that hopefully will pay off.Good portfolio construction these
days is to be overdiverified with small 1/4 positions, like AAXN that I just bought as well
as selected ETFs in hot sectors - TDIV, IHI and IBB.I also have selected country ETFs in
India, Mexico, Poland and South Korea.I have KWEB and FXI for my China
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exposure.AAPL is UP...AAPL is Down... AAPL is UP...AAPL is Down...AAPL is
UP...AAPL is Down...AAPL is UP...AAPL is Down.......welcome to 2020.@gandc
25 Sep 2020, 11:53 AM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

I own or have looked closely at several of the above.

25 Sep 2020, 01:37 PM

Market Map
There's been just too much dissonance in BRKs decision making over the past 15 years.
Maybe we would like to pin our hopes on an earlier period of Berkshire's existence and
stellar performance, when it was a much smaller and more nimble entity, but investing
a large stake of precious retirement $$ on these "bets"and experiments doesn't seem
like a prudent move. An income stage investor may want to review the historical odds
suggesting that an investment in a simple, well diversified index / fund representative of
large cap value may sustain up to a 7% annual income withdrawal accompanied by
terminal portfolio growth - this over seventy one rolling 20 year periods back to 1932.
https://tinyurl.com/y6key3v5
(edited)
25 Sep 2020, 11:45 AM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

I get your point. The utilities and BNSF have been fine, though, along with the bolt-ons.
I wasn't enthused about PCP even at the time, although I arbitraged it very successfully.
(Buffett deals rarely fail.) I wasn't also too keen on OXY, although I think he got
bushwhacked there and also with the airlines and PCP by an event none of us could
have predicted. I don't think PCP was shooting the lights out before COVID, however.

25 Sep 2020, 01:40 PM

Balthazar-B
"This simple criterion is actually a version of one of the most sophisticated approaches
to any game involving information and played under uncertainty."This, combined with
disciplined teamwork, explains how one excels at Bridge. Or building a long-term
13/22
successful business.

25 Sep 2020, 11:24 AM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

Yep, and Buffett plays bridge with masters as well as Bill Gates.

25 Sep 2020, 01:40 PM

Nc88
Thanks for providing the ticker symbols for Buffet's recent Japanese purchase. I wonder
what was the prices that he bought at.

25 Sep 2020, 11:04 AM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

I have also wondered but nobody seems to know. I poured over all SEC data, nothing of
course, and looked for articles that might know. I think we will have to wait for the next
BRK quarterly statement to get average price. With Mitsubishi, for one, he may have
paid up to 20% less than the present price. I don't think he paid much more than the
present price.

25 Sep 2020, 01:42 PM

eiomojo
Great article. But it would be stronger if you also discussed his winning moves where he
had no edge. That would circumscribe your truth and make it even more powerful. I'm
thinking of Apple and his big position in it. Apple is the most public of public
companies. Despite the fact that he spoke with Cook about the wisdom of buybacks, I
doubt he had any inside info. Yet his bet was a huge win. One "edge" is taking info
everyone has and weighing it differently. In Apple's case, any investor could have done
what he did, and many people beat him to it, making his assessment years before he
caught on.

25 Sep 2020, 10:58 AM

14/22
Jim Sloan
Contributor Premium Marketplace
Author’s reply »

I thought of that. I think Buffett has a keen understanding of brand power, and I also
think he recognized in Tim Cook exactly the right man for the job of succeeding Steve
Jobs and also as a shareholder friendly straight shooter.

25 Sep 2020, 01:44 PM

SanMania
I don't understand this sentence: "Dividends received within Berkshire are very valuable
because more favorably treated under current corporate tax laws than capital
gains."Dividends are taxed at ordinary income tax rates (not "current corporate tax
rates) which are higher than long-term capital gains which are taxed at lower long-term
capital tax rates. What am I missing?

25 Sep 2020, 10:37 AM

Gary Gambino
Contributor Premium
Corporate tax rates are completely different from personal tax rates.Corporations pay
ordinary corporate income tax rates on capital gains. (21%)Corporations are also
eligible for a "dividend received deduction" that works on the following scale:Less than
20% ownership: 50% deduction (11.5% effective rate)20% - 80% ownership: 65%
deduction (7.35% effective rate)Over 80% ownership: 100% deduction (0% effective
rate)

25 Sep 2020, 11:15 AM

Gary Gambino
Contributor Premium
Correction: Less than 20% ownership: 50% deduction (10.5% effective rate)

25 Sep 2020, 11:18 AM

tzac22
I'm guessing, but search Dividends Received Deduction

25 Sep 2020, 11:32 AM

15/22
Jim Sloan
Contributor Premium Marketplace
Author’s reply »

Thanks for raising the question. Buffett did a major explanation in a recent annual
shareholder letter, maybe 2017 or 16, about how the corporate structure inverts the
individual structure. You and I do better with long term capital gains, but businesses
pay their incremental income tax rate. The dividend rate inside corporations is much
lower because the framers of the code appear to have recognized the double taxation
issue as they have not with individual taxes. Thus KO and AXP, among others, are more
attractive as dividend payers and less attractive after long term cap gains significantly
knock down your capital. The corporate tax is slightly higher insider insurance
companies but not enough to make a huge difference.

25 Sep 2020, 01:48 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

Thanks, Gary.

25 Sep 2020, 01:48 PM

Hermann Balck
Premium
Since March, Warren has invested big in natural gas pipelines and midstream assets,
Japanese Trading companies, and Berkshire itself. What does this say? He believes
inflation will be coming. His entire portfolio is set up to do well during inflation.

25 Sep 2020, 10:14 AM

Joe_G
His biggest holding today is still cash. Hardly something that you'd be stockpiling if you
expect inflation around the corner.

25 Sep 2020, 10:22 AM

Hermann Balck
Premium
16/22
Look at cash vs. float, most of that cash has to be held for future insurance liabilities.
What will happen when there is inflation and interest rates start to crack and go up with
serious volatility in rates? Nothing really to buy right now, so he waits for the system to
correct itself. Does time really have negative value? Does time really have no value over
10 freakin years? Yeah, the system will correct itself at some point.

25 Sep 2020, 10:30 AM

dave9923
I thought that Buffett said he only needs to hold a certain amount of cash (he often
mentions 20 billion) for things such as insurance liabilities, maybe a bit more. However,
I don't believe he needs to hold the 130 billion or whatever he holds in cash now for the
purpose of meeting future insurance liabilities, since his policies have caps. I believe he
would invest the excess cash if he could, and is indeed worried about future inflation,
but is still prudent and patient and investing that excess cash only when he finds
compelling opportunities.

25 Sep 2020, 12:43 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

Could be. Inflation lowers PEs. Usually.

25 Sep 2020, 01:49 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

I think Buffett has a good eye for the period of time over which gas pipelines will still be
important. He looks at BHE and is also familiar with alternative energy, and I think the
transition is going to take longer than some assume.

25 Sep 2020, 01:51 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

One hopes.
17/22
25 Sep 2020, 01:51 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

He did mention at the virtual annual meeting - shaggy hair and all - that he feels the
need to hold more cash just now in defense against unpredictable events which may
impact his operating companies.

25 Sep 2020, 01:52 PM

denkrak
If Buffet believe in inflation then why he sold the banks? Please explain.

25 Sep 2020, 02:01 PM

Hermann Balck
Premium
There's only scenario where banks do well under inflation is mild under controlled
inflation with a steep yield curve,ie, the 1990s. Serious inflation banks perform bad.

(edited)
25 Sep 2020, 02:13 PM

Hermann Balck
Premium
If he dips into the float for risky assets, he has to be right. He usually only does this
during market crashes, exactly when the rest of panic .

25 Sep 2020, 02:15 PM

jrpspamm
I like the Japan info. Not so sure about SNOW. Many competitors in data aggregation
not clear to me SNOW has any inherent advantage, and I would agree with your
thinking that this was not directly a Buffet buy. Hope they have a stop price in mind

25 Sep 2020, 10:11 AM

18/22
dave9923
Todd Combs is CEO of GEICO, and perhaps GEICO is using SNOW's technology, giving
him insight. I've read about how Buffett and Muner should have seen Google earlier
since GEICO used Google for ads.

25 Sep 2020, 12:45 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

Great points. jrpspam should check out today's Wisdom Tree piece on IPOs.

25 Sep 2020, 01:53 PM

Oakland2020
In my view, the main edge any outsider can have vs. Buffett is the size of assets under
management. With $496B market cap and a cash pile of around $130B it may seem
reasonable to think that one could time the market and get a superior return on capital,
at least when one gets lucky. Just owning costco this year you would have done great.
No doubt, timing the market is tricky and there are benefits to just buying berkshire and
staying long forever. US elections are coming and even if Buffett has said to focus on
what you pay for a business, this time it may be an important event to consider,
particularly when the commander in chief would like to stay indefinitely in power,
undermining the legitimacy of the process. In the 50+ years Buffett has been too
conservative with buybacks looking in the review mirror and it is reasonable to think
berkshire is a a snowball that looks is ready to roll. Todd Combs working with Benioff
and Bezos is a new start. I also like Ted’s media investment.

25 Sep 2020, 10:03 AM

ScottyBeameUp
Trump derangement syndrome.

25 Sep 2020, 01:11 PM

Jim Sloan
Contributor Premium Marketplace
Author’s reply »

19/22
I think he often bought with diversifying risks as a factor, but it more aware now that
simply maintaining Berkshire's ROIC is very powerful.

25 Sep 2020, 01:54 PM

MassiveAttack1987
There is the interview with the founder and CEO of SNOW uploaded by Yahoo Finance
at Youtube.When he was asked if he personally met Warren Buffett, he said No, but he
talked to Todd Combs..This statement is clear: SNOW is the investment done by Todd
Combs.Thank you for your article.If you do not lose money, BRK. A or B is still a very
good option.

25 Sep 2020, 10:01 AM

Mike 007
Of course buying an IPO before public is on times like this and on an company which
others are on hype risky...but not in "SNOW". It was clear it will not stumble out of gate.
So much about inside knews! To purchase in Japan...which is likely over the bottom is
wise and better than in US who is just over the top.Nothing new in thatTo purchase in
Goldmining, well...times are changing!Holding cash, well...yah Trompete formation
says it. If one can read markets.Diamond reversals mostly never very profitable.We are
not yet in an diamond......its my prediction to be completed within 4 years from
now.2024 we are out. Just look out below.

25 Sep 2020, 09:59 AM

Author’s reply »

I wonder who had the goldminer idea?

25 Sep 2020, 01:55 PM

dhjebwh
These are not "Buffett" actions, these were Berkshire Hathaway actions. It really
irritates me when people just use "Buffett" for anything that happens at Berkshire
Hathaway. These (except for the Japanese investments) the Snowflake, Amazon and
GOLD investments were not by Buffett but either Ted or Todd. Buffett has said before
that Ted and Todd have his "full trust" and "they don't have to ask [me] they can do
what they want." Each of them manage portfolios worth ~$14-16B and they can do
whatever they want with that money, Buffett does not do everything at Berkshire. They
don't even have to ask his permission.
20/22
25 Sep 2020, 09:55 AM

crazyspotter
you are aware that Warren has 2 younger people that help allocate capital now named
Todd & Ted. To think they aren't behind the SNOW offering would be silly

25 Sep 2020, 09:53 AM

Joe_G
While I understand that Buffett wouldn't want to give away trade secrets, as a
shareholder it would be good to hear from him more than once a year. His refusal to
participate in quarterly calls is to the detriment of shareholders who would like to know
more about what is going on with the company beyond the bare minimum that is
reported in the 10-Q.

(edited)
25 Sep 2020, 09:47 AM

UncleLongHair
When you're winning your grinning. When everything was going well and performance
was good and lots of deals were being made shareholders didn't need to hear much.But
now that performance is poor, investments are few and questionable, and there are
mysterious developments like a first time investment in Japan, shareholders should
rightly be asking some questions. But there is nowhere to ask and no answers to be had.

25 Sep 2020, 09:57 AM

Author’s reply »

Maybe he doesn't want the world at large to know much about his thinking.

25 Sep 2020, 01:56 PM

Entreri
Snowflake is very risky and although at his price it has doubled, they have incredible
established competition.I can’t comment on particular set of Japanese stocks,
insufficient knowledge. I personally wouldn’t buy a single Japanese company, including
Toyota.Buffett should add to EVs by taking a share in Rivian. BYD is a conglomerate
and GM is dead money. Ideally should have dumped GM (instead of adding in early
2020) and bought Tesla.
21/22
25 Sep 2020, 09:46 AM

The Japan trade is a classic value play with a margin of safety - no edge there. Any
institution can hedge foreign exchange risk by borrowing in that currency.Agree that
Berkshire had an edge in the Snowflake deal. No one else would have been able to get as
many shares of such a hot IPO as Berkshire did. A first-day pop was almost guaranteed
and that's just free money sitting on the table. Now that SNOW is freely traded, I would
argue BRK's edge is gone. Todd and Ted should now gradually sell off enough SNOW
shares until Berkshire has gotten back its initial cash outlay.

25 Sep 2020, 09:45 AM

Author’s reply »

agree

25 Sep 2020, 01:58 PM

galicianova
Marketplace
truly an insightful article!

25 Sep 2020, 09:45 AM

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