I read your 2020 annual letter with interest, @chamath. Odd it was published in late May, but we’re all busy. Before commenting on this incredibly bad take of a comparison to Berkshire Hathaway, allow me to help you with some math. First, 1965 to 1974 is TEN years, not nine. 1/
Berkshire did return 12.5% against 1.4% from 1965-1974 but that’s actually ten, not the nine years you reference. Simple mistake, I’m sure. Had you used nine years Berkshire had returned 22.7% annually, quite a bit higher than the 12.5% you errantly show. More on this soon. 2/
Second, for what its worth, the S&P 500 actually returned 18.4% in 2020, not the 17.88% you mentioned twice and were careful to point out included dividends. I’d rather round to the tenths, check my source and be correct than round to the hundredths and be precisely incorrect. 3/
Perhaps you or your auditors used returns without dividends? That wouldn’t work, however, because the dividend yield was greater than 0.52%. Where do your numbers come from? Standard and Poor's provides them for free. 4/
Third, its difficult to know what math you are using here or from where you get your data. 2017 to 2020 is four years and the S&P 500 returned 16.0% over those four years. The five-year return is 15.2%, matching the figure in your table - but that’s five years. 5/
Further, over what period of time does 15.2% compound to a 59% overall gain? Your math makes no sense unless these are not annual periods. 15.2% over four years is 74.9% cumulative and over five years is 101.1%. How do you get to only 59% overall for the index? Weird. Support? 6/
Feel free to use these figures. Over the past five years, according to Standard and Poor’s, the index returned:
2016: 12.0%
2017: 21.8%
2018: (4.4%) - the parentheses reflect a negative
2019: 31.5%
2020: 18.4%
7/
It sure would be great to see how you arrived at 15.2% and 59% for 2017 to 2020. What’s your data source? Do material errors in your calculation for the index imply errors in your calculation of your investment returns? 8/
Also, why do you use Gross IRR’s in presenting your returns and not net or time-weighted returns? IRR is of course dollar weighted, so any increase in flows or assets will potentially overstate returns. If it helps calculating a compound return series can be done as such: 9/
(1 + the percent interest rate)^ time period. A series of returns can be linked as: (1 + the period percent return) + (1 + the period percent return) + etc…Or you can use a financial calculator such as the one below. I happen to have an extra which I'd be happy to send you: 10/
Fourth, it’s very lacking in your presentation and comparison that in an annual letter penned on May 26 seeing no mention made to the performance of each of your SPACs during the first five months of 2021, four of the six of which are substantially negative for the year. 11/
Finally, comparison of your returns for what you call 9 years to Berkshire’s first 9 years is stunningly bewildering (ignoring that the return series for BRK is in reality ten years - see above). How is that even remotely comparable? What's the point? Better than Mr. Buffett? 12/
Did you know that when buying control in 1965, Berkshire was failing in textiles which were ultimately closed in 1985? In fact, 3 of BRK’s first control investments, textiles, Diversified Retailing in '77 and Blue Chip Stamps in '83 were all companies that eventually failed. 13/
It was the diversion of capital to other money-making enterprises that saved BRK and allowed it to become what it is today. That's the brilliance of Mr. Buffett. I hope you continue to present your returns against Berkshire’s early years in each successive year without fail. 14/
Perhaps you cherry picked the most convenient time series for Berkshire, errantly using the 10-year and calling it the 9-year to more favorably suit the comparison? You may have known that the 1973-1974 bear market was vicious? Berkshire declined 2.5% in '73 and 48.7% in '74. 15/
1974 was year TEN under present management's control. At 8 years in, Berkshire had compounded at 26.3% against 7.8% for the index. By year 12, Berkshire’s compound return had recovered to 18.4%, having gained 129.3% in 1976. Pre and post the bear market. Cute using 1974. 16/
By 1981, Berkshire had compounded at 25.1% vs 6.4% for the index, remarkable in that the market put in its secular low at that time. By 1998, Berkshire’s annual gain had averaged 28.9% since 1965 vs 12.2% for the index, more than three decades. Certainly more than nine years. 17/
It’s impressive to see you calculate your 9-year gain at 33.0%. Of course that’s an IRR, highly influenced by the dollars at work at intervals, are gross of fees & not time-weighted. When $BRKA calculates their growth in book value per share, gains over time are AFTER TAXES. 18/
The stock price has closely matched gains in book value per share over time. No idea what you own outside of the SPACs, but I’d be hesitant to calculate a return on incremental rounds of VC financing until cash is ultimately taken out & taxed or the business is IPO’d or sold. 19/
It will be interesting to see how SPACs fare over time for the common shareholder, post wicked dilution and control premiums paid. Like Berkshire, capital allocation skills will be tested when confronted with buying businesses that are disruptive and prove to not disrupt. 20/
Meanwhile, the 11-year for Berkshire gets pulled down to 11.5% at 1976 so you have some cushion when presenting your 10-year return next year! After that the comparison will get way more difficult. It sure will be interesting to see how results fare and capital is allocated. 21/
If you can maintain anywhere near the 19% advantage over the index & allocate your way around the inevitable purchases of terrible businesses then another two decades hence you can crown yourself the new Buffett. In the meantime the comparison is a thoroughbred to a jackass. 22/
Lastly, I’d look into getting somebody to check your math before releasing your annual year-end letter next May. You control a lot of money and surely have resources. The picture of the jet is nice. Perhaps there's room at your shop for a fact checker?
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Berkshire Hathaway released its 2nd quarter 10-Q and operating earnings this morning. Despite little activity on the capital allocation front, Berkshire’s key businesses produced generally solid profitability, and FAR BETTER than is being generally reported. A brief summary: 1/5
Most observers reported operating earnings declined by 3.8% from $11.6 billion in 2024’s second quarter to $11.16 billion. When properly assessed, operating earnings in fact increased 7.9% from $11.2 billion to $12.0 billion when excluding a mark-to-market currency translation to U.S. dollars on Berkshire’s $22 billion foreign-denominated borrowings.
Berkshire releases a supplemental non-GAAP presentation of its operating earnings which logically excludes realized and unrealized investment gains and losses. Prior to 2018, unrealized gains and losses were not included in the income statement. The operating earnings presentation does include foreign currency gains and losses in each reporting period relating to translating the face value of debt borrowed in three foreign currencies for the period’s change in the exchange rate. Berkshire includes the loss or gain in operating earnings because as its balance sheet carrying value for the debt liability fluctuates, the unrealized, non-cash gain or loss is also included in SG&A on the income statement.
But think about what investments the internationally-denominated debt finances. In the case of Berkshire’s $14 billion of Japanese yen borrowed (long-term at an average 1.1% interest rate) the proceeds were used to purchase shares in five publicly-traded Japanese trading companies. The five companies had a combined market value of $23.6 billion at March 31. They have gained in price above Berkshire’s evolving cost basis and it has also increased position sizes in each. The dollar declined 4% against the yen during the second quarter. Berkshire includes any market value changes on the stocks trading on Japanese exchanges for each quarterly and yearly reporting period. It also includes any currency change in the translation to U.S. dollars in the market value of each stock position. In a period such at 2025’s second quarter, the declining dollar will add value to reported market value of the stocks, but will create a loss on the carrying value of the debt Berkshire borrowed in yen. Because Berkshire excludes the gains and losses on the stocks in each period (both from price change in yen but also from currency change), the analyst should also exclude the losses and gains on the debt translation. Berkshire’s debt footnote 16 in the 10-Q quantifies the underlying face value of borrowings in euros, British pounds and Japanese yen, the period U.S. translated carrying value, and the pre-tax gain or loss flowing through SG&A. The operating earnings supplement found in each quarter’s press release quantifies the after-tax quarterly gain or loss from currency on the debt in an italicized footnote, making the needed adjustment straightforward.
Long story short, properly excluding currency changes on foreign-denominated debt, operating earnings rose 7.9% in the second quarter and 3.1% for the first half, where most are reporting a 3.8% decline in the quarter and 8.9% decline in the first half.
It’s also being reported that Berkshire’s substantial cash holdings declined $3.6 billion in the quarter, from ~$348 billion to ~$344 billion. NO! Berkshire occasionally purchases a T-bill position on the final trading day of a quarter. When doing so, cash and the T-bill BOTH appear as assets on the first page (asset side) of the balance sheet and an offsetting liability for the purchase amount appears on the second page of liabilities and equity. On the next business day, cash and the liability disappear. Berkshire’s balance sheet had no liability for T-bills purchase at June 30 but did have liabilities of $12.8 billion at year-end 2024 and $14.4 billion at March 31. 2/5
Most observers don’t know to subtract the liability from cash and overstate Berkshire’s cash balance in reporting periods where a liability for T-bill purchase exists. I wrote in the last annual letter that my fantasy is that Berkshire will spend ALL of its cash on a T-bill position on the final trading day of a quarter or year. Heads will explode.
Enough on accounting. The capital allocation front was remarkably quiet during the second quarter. As expected Berkshire repurchased no shares. The stock actually traded above my appraisal of intrinsic value earlier in the quarter for the first time since our owning the stock in February 2000. The shares peaked the Friday before this year’s annual meeting at its highest fundamental valuation since 1998. Ongoing growth in intrinsic value and a ~12% price decline from the peak has the share now at about 85% of my appraisal and back down to valuation levels where Berkshire last bought back shares.
The common stock portfolio (largely held in the insurance operation) again saw net quarterly sales for nearly three years in a row. $6.9 billion of sales were less than offset by $3.9 billion of purchases in the quarter. That’s $3 billion of net sales for the quarter and $4.5 billion for the year.
Berkshire’s operating companies are earning good and progressively improving earnings. BNSF is solidly turning the corner. Cost misalignment and operational issues hampered profitability for several years, as did weak car loadings/volumes. The business is improving on all fronts with second quarter net income up 19.5% over last year and up 13.1% for the first half. Improvement came via overhead improvement, lower fuel costs, and car loadings up nearly 2%, with particular strength in ag and huge growth in coal. Yep. Coal. BNSF was underearning by perhaps $2 billion annually recently and has closed to gap to ~$1 billion. More work to to do but the progress is undeniable. Unmentioned was the recent offer by Union Pacific to buy Norfolk Southern, a transcontinental merger I never would have imagined passing antitrust review, but with the current administration, all bets are off. The combination would impart huge competitive pressure on the remaining Class I North American rails. Expect rail customers, and perhaps the other rails, to lobby hard against the merger.
BHEs earnings were up 7.1% for the quarter and 31.1% in the first half. Margins were modestly better, expenses higher, but most of the improvement was due to no additional reserving at PacifiCorp for 2020s Oregon and Northern California wildfires. Berkshire and BHE did mention the “One Big Beautiful Bill Act” and its potential impact, yet unknowable, on the ability to deploy capex using production tax credits in wind, solar and portions of new grid capacity beginning in 2026. I’ve read the legislation related to energy and my guess is much of what was enacted will be subject to change and reinterpretation. Like the regulatory climate in socialist-leaning states, what happens with tax policy related to renewables will dictate Berkshire’s ability to earn decent returns on capital and to deploy new capital. The value of BHE is in harm’s way for sure. 3/5
A $5.8 billion offer is at hand to take Macy's private at ~$21 a share, a 32% premium over Friday's $17.39 close. Bidders call the stock “undervalued,”down from $74 in 2015. The retail graveyard is full of turnarounds. Good luck. How bad is this one? Some stunning statistics: 1/
At the proposed buyout price the $5.8 billion offer values Macy’s at roughly 7x FY 24 profit. The retailer earns an apparent 20% return on $4.1 billion in equity (much less on capital given $5.8 billion in net debt). But how profitable is M really and where have profits gone? 2/
Over the last 25 years Macy’s reported $21 billion in profits. A quarter of those were distributed as dividends. Fully the remaining 75% of profit was spent repurchasing shares. At the $21 buyout offer the stock is no higher than 25 years ago!That’s $15 billion in bad buys. 3/
Berkshire reported 2Q results this morning. As always, there's more under the hood than the reported results. A few thoughts on what is a very mixed bag. BRK is a good proxy for the US economy. The industrial economy is weak, consistent with what other companies are reporting. 1/
For starters, operating income was $10.0 billion for the quarter, up 6.7% over 2Q 22 and up 9.2% for six months. However, properly excluding forex gains on non-US denominated debt, profit rose from $8.3 billion to $9.6 billion in the quarter, up 15.2% and 17.9% for six months. 2/
However, much of the increase came from income on Allegheny's acquired assets in October and from BRK's now 80% investment in Pilot, up from 38.6% (5 months consolidated and 1 month equity method). Higher interest income on a larger cash balance further drove much of the gain. 3/
Ark Invest, the bucket shop EFT promotional “investor,” the one whose founder CEO told a CNBC audience a year ago that ARKK would earn 50% a year (correct if she said minus), is back with its 3rd annual Tesla “research report” with a fresh $2,000 price forecast by 2027. Amen. 1/
That’s a $7 trillion market cap, or a mere 21% of the S&P 500's current cap. MSFT, AAPL, GOOGL, AMZN and META have a combined $7.7 trillion market cap today, up from $6.2 trillion at yearend. From today’s $165 share price, $2,000 in 4.75 years is 69% per year. Makes sense. 2/
Zero mention of expected hyperinflation in the report. Cue the class action lawyers. Cue @SECEnfDirector. The bull case is $2,500 per share, 25% higher than the base case and a market cap of nearly $9 trillion, or 26% of the current S&P and up from 1.5% of the index now. 3/
35 FACTS NOT LIKELY FOUND ON ARKK YET UNRELEASED 12/31/2022 FACTSHEET
1. Loss from 2/12/2021 Peak: -80.1% 2. CNBC Appearances Since 2/12/2021 Peak: 23 3. Cumulative NET Assets Raised Since 10/31/2014 Launch: $17.1 Billion ($14.5B in 2020 and 2021) 4. Assets at 12/31/2022: $6.0B
5. Cumulative Management Fees Earned: $300 Million 6. Market Value at 2/12/2021 Peak: $29 Billion 7. Dollar Loss Since Peak: $23 Billion 8. Annual Return vs S&P 500 Since 10/31/2014 Launch: 5.4% vs 10.3%
9. $ARKK Price 12/31/22: $31.24 10. Date Last $31.24: 08/22/2017 11. AUM at 8/22/17: $450 million ($15m @ 1/1/17) 12. Net Inflows Since 8/22/17: $16.9B (Out of $17.1 Since Inception) 13. Percent of ALL DOLLARS Invested in ARKK Since 10/31/2014 Inception Losing Money: 98%
13a. Yep
Who could forget the C-Suite high jinks when Elon and CFO Zach Kirkhorn invested $1.5 billion in Bitcoin and added the titles "Technoking of Tesla" and "Master of Coin?" Since the March 15, 2021 rebranding, Tesla and Bitcoin are down 48% and 70%, respectively. Great fun.🎄 1/
While the Bitcoin position and the Tesla outside shareholders have suffered mightily, how have the INSIDERS fared? If you guessed considerably better you are correct. Collectively the brass at Tesla appear to have unloaded 126 million Tesla shares for more than $41 billion. 2/
While Elon's sales are the preponderance of that, selling at an average share price of $325 is pretty good when measured against the present $123.15 price. That's a current bid 62% below the average sale. Nearly all shares were gifts from the board, not bought out of pocket. 3/