It's true that if you mark the shares at market, buying a $30 share for $30 is a wash. The effect would only become evident in the accounting as the share price increased and the holding of BRK within BRK magnified the appreciation. If the shares were cancelled, shares would appreciate to NAV, period. But if BRK holds BRK, the effect is reflexive and NAV increases NAV.
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secret of Buffett's success
- Thread starter billyjoerob
- Start date
It's true that if you mark the shares at market, buying a $30 share for $30 is a wash. The effect would only become evident in the accounting as the share price increased and the holding of BRK within BRK magnified the appreciation. If the shares were cancelled, shares would appreciate to NAV, period. But if BRK holds BRK, the effect is reflexive and NAV increases NAV.
M
morganist
Quote from billyjoerob:
I've figured out the secret of Buffett's success. As is well known, he chose to house his insurance operation in a textile stock. This had a number of advantages, chiefly that it depressed the price of the stock for a number of years while Buffett was acquiring shares. But he wasn't buying the shares and retiring them. The shares were bought by the insurance company within Berkshire. This created a reflexivity within Berkshire, which owned Berkshire: as Berkshire appreciated, the insurance float appreciated, leading to more float and capital, more earnings and higher stock price, and so on. Likewise, when the stock declined and sold below intrinsic value, the insurance company bought more shares, essentially shrinking the float and increasing the book value. Of course none of this self-dealing was reported and no shares were retired because the insurance company is not Berkshire, it is a separate entity, but the effect is the same.
Buffett did the same with Blue Chip Stamps. He owned shares of BLue Chip Stamps, which was also buying shares of Berkshire and other companies with the stamp float. As Berkshire appreciated, Buffett bought more shares of Blue Chip Stamps, essentially buying more of his own stock via BCS. It is similar to a closed end fund owning its own shares. As the fund buys in its own shares at a discount, the NAV increases, and this is magnified by the self-ownership. As the fund appreciates, it can also increase NAV by selling shares above NAV, but this does not show up as an increase in shares outstanding as the shares were already issued, just owned by the fund itself. So essentially Buffett is trading in and out of Berkshire's own stock, buying below and selling above NAV via the insurance company, which are guaranteed positive return trades. Buffett's biographer describes this as the "homeostatic" effect of the insurance float within Berkshire, without laying out exactly how it worked.
What you are saying he artificially pushed up the price of his shares through buying and selling them with other entities he owned?
Wouldn't that be considered insider dealing or fraud and also his fortune would be fake.
Quote from morganist:
What you are saying he artificially pushed up the price of his shares through buying and selling them with other entities he owned?
Wouldn't that be considered insider dealing or fraud and also his fortune would be fake.
No. Sorry that my explanation was not clear. He essentially traded in his own shares, buying low and maybe even selling high, via the insurance company. Not fraud, simply using "Mr. Market" to his advantage. Henry Singleton who ran Teledyne did the same thing, except he bought and sold the shares like any normal company, and had to report the cancellation of the shares. So Buffett did have a big advantage in that respect, he never had to report the de facto "shrinkage" to minority shareholders.
Quote from billyjoerob:
It's true that if you mark the shares at market, buying a $30 share for $30 is a wash. The effect would only become evident in the accounting as the share price increased and the holding of BRK within BRK magnified the appreciation. If the shares were cancelled, shares would appreciate to NAV, period. But if BRK holds BRK, the effect is reflexive and NAV increases NAV.
No, if shares were canceled at a discount to NAV, the cancelled shares' claim of future earnings and hence the increased market value would flow through to the remaining shareholders, and would benefit the shareholders proportionately with respect to however much the discount to NAV at which the shares were bought back at. Thus, there is not much difference between who bought back the shares. The net effect is just the same.
Even accepting the OP's original assertion, the only way this works is if BK makes good money over long stretches of time. Which means it really doesn't answer the question it claims to be addressing.
Quote from Ripley:
No, if shares were canceled at a discount to NAV, the cancelled shares' claim of future earnings and hence the increased market value would flow through to the remaining shareholders, and would benefit the shareholders proportionately with respect to however much the discount to NAV at which the shares were bought back at. Thus, there is not much difference between who bought back the shares. The net effect is just the same.
Let's assume that Berkshire issued rights to shareholders to buy at book. AIG did this about two years ago. The effect of course is that as the stock appreciates, the rights also appreciate. One magnifies the other. If Berkshire buys back shares and retires the shares, it also retires the option. If it buys the shares in the insurance co, it still owns the option. As the stock price appreciates, so does the option owned by the insurance co. So it's the same but different.
Quote from Random.Capital:
Even accepting the OP's original assertion, the only way this works is if BK makes good money over long stretches of time. Which means it really doesn't answer the question it claims to be addressing.
This could be pulled off without any operating company at all. So the actual corporate results are not in fact relevant, although good results don't hurt.
The biggest advantage Buffett has is he doesn't have to run his investment shop like a mutual fund. There is no idle cash sitting around dragging down performance, and no redemptions causing sales of stocks he'd rather not sell. If an opportunity shows up all he has to do is tap BRK for the cash. He is fully invested all the time. Put him in a Mutual Fund and his performance would be nowhere near what it is now. That being said, he has a very sound investing philosophy and he's an obviously talented investor.
Quote from billyjoerob:
What would proof look like? Berkshire reported securities holdings in SEC filings. Not clear whether those filings include all of the holdings of the many insurance subsidiaries. It is possible for the subsidiaries to own shares of the parent company, for instance National Indemnity received shares of BRK when Berkshire bought BNSF with Berkshire stock.
It is known, from Alice Schroeders biography, that Buffett admired a man named Wattles, who ran a company called American Manufacturing, which owned partial stakes in a number of below-NAV closed end funds. Those funds in turn owned shares in discounted closed end funds, and as he bought them in, it was a guaranteed way to compound wealth. He also admired an insurance company in California (run by a family called the Ahmannsons) that created a successful company in a publicly traded stock and bought the stock back from unsuspecting investors, who thought the shares were worthless, for pennies on the dollar. So he had the idea in his head that buying back shares cheap within a holding company structure or from unsuspecting investors was a very powerful way to compound wealth. He bought 5000 shares of Berkshire from his mother at pennies on the dollar, for instance.
So no proof on the initial claim.
Any citation for the claim that he bought 5000 shares of Berkshire from his mom?