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The Rational Walk

@rationalwalk

May 6, 2023 • 38 tweets • 11 min read • Read on X

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1) Berkshire Hathaway's Q1 2023 Press Release and 10-Q have been released. I will post some thoughts on this thread after I spend some time reviewing results.

$BRKA $BRKB #Berkshire2023

2) The news release is here:

berkshirehathaway.com/news/may0623.p…

And the 10-Q is here:

berkshirehathaway.com/qtrly/1stqtr23…

3) Berkshire used $4.4 billion to repurchase stock during the first quarter and ended with 1,450,152 $BRKA equivalents outstanding.

The 10-Q indicates that 323 $BRKA equivalents were purchased between 3/31 and 4/25, amounting to $150-160 million of additional repurchases.

4) Berkshire reported Net earnings of $35,504 million, of which $8,065 million was operating earnings and $27,439 million was attributed to investment and derivative gains.

5) Of the investment and derivative gains, ~$23.4 billion were due to changes in the amount of unrealized gains in the equity portfolio and ~$1.7 billion of after-tax realized gains. Additionally, there was a $2.4 billion remeasurement gain associated with Pilot.

6) Insurance underwriting results improved while investment income was sharply higher, likely due to higher interest rates (will need to investigate further in Q). BNSF and BHE posted lower operating earnings while other controlled businesses were basically flat.

7) Book value was $347,932 per $BRKA share or $231.95 per $BRKB share. This puts trailing P/B ratio at ~1.41x.

Berkshire no longer discusses book value but many shareholders still track it.

Float was up $1 billion since yearend 2022 to $165 billion.

8) From the Cash Flow statement, appears that Berkshire was a net seller of equity securities during the quarter.

9) From Note 5, Berkshire discloses that its Chevron holding was $21.6 billion at 3/31/23 compared to $30 billion at 12/31/22.

CVX price on 12/30/22: $179.49
CVX price on 3/31/23: $163.16

Rough estimate: Berkshire sold ~34.8 million shares of CVX during Q1. ~$6 billion worth.

10) Note 5 Table:

11) There were additional equity portfolio sales in Q1 but it does not appear that there were sales in the other named positions (AXP, AAPL, BAC, KO). We can see a lower cost basis in the "Commercial Industrial, and other" category which includes CVX. 13F will be out next week.

12) A new accounting pronouncement resulted in retrospective changes to 2022 results which is never fun for those of us tracking many years of data. (Note 2 goes over the adjustments). Will have to review later.

13) 10-Q discloses that the additional 41.4% stake in Pilot cost $8.2 billion. Berkshire previously owned a 38.6% interest. Pilot is now fully consolidated starting on February 1, 2023. Implied valuation for all of Pilot is $19.8 Billion.

twitter.com/i/web/status/1…

14) Since Berkshire paid a higher valuation for the 41.4% stake than it paid for the original 38.6% interest purchased in 2017, Berkshire recorded a $2.4 billion remeasurement gain associated with that 38.6% interest.

The implied valuation of $19.8 billion for all of Pilot… twitter.com/i/web/status/1…

twitter.com/i/web/status/1…

14) Correction to the above tweet. According to note 3 of the Q, the pre-tax non-cash remeasurement gain for Pilot was $3 billion, not $2.4 billion which was an after-tax figure I got from the press release.

This implies that carrying value for the 38.6% interest in Pilot at… twitter.com/i/web/status/1…

15) The Haslam family has the option to require BRK to redeem for cash, all or a portion of their remaining 20% interest starting in 2024, and this is now being accounted for as a redeemable non controlling interest. Berkshire's preliminary accounting for the assets acquired:

16) Berkshire's fixed maturity portfolio remains tiny as a % of investments and very short duration. Apparently, Buffett hasn't been persuaded to buy longer term bonds at current rates. I take this as an implicit statement on inflation and skepticism of the current yield curve.

17) Random observation: Clayton Homes has a remarkably good record on its lending portfolio.

18) Buffett has done a great job of securing very low cost debt for Berkshire for decades to come.

19) All you have to do to infer Buffett's views on inflation & the yield curve is to look at his fixed-maturity portfolio on asset side and then look at debt on liability side.

I'm sure the question will be asked during the meeting, but his actions make the question unnecessary.

20) Let's see how far I can get doing a quick review of the MD&A before the CNBC pre-game show for the meeting starts in half an hour ...

21) Looks like a good quarter for insurance. GEICO returns to underwriting profitability!

22) This is more of what I'm used to from GEICO in terms of combined ratio, but look at that expense ratio! Under 10% ... I don't think I have ever seen that before. This is GEICO's first quarter of underwriting profit since Q2 2021. 🍾

23) My spreadsheet of GEICO's quarterly results since 2018 (not yet updated for Q1 2023).

24) GEICO had a decrease in policies-in-force of 2.4 million (13%) over the past year. Avg premiums increased by 15.2% over the same period. GEICO significantly cut advertising which resulted in lower policies in force.

25) This is in stark contrast with Progressive $PGR which has had an increase in policies in force over the past year and has boosted ad spend significantly, as I discussed in an article yesterday. rationalwalk.substack.com/p/progressive-…

26) I am tempted to say that GEICO essentially said, "Progressive, go ahead and take this business"... and then did... look at Progressive's policies in force over the past year:

27) For much of last year, Progressive appeared to be doing well, but they flipped to an underwriting loss in March 2023 (they report monthly). Progressive's Combined Ratio was 99 for Q1.

28) While PGR had adverse prior year development of $602.1 million in Q1, GEICO had favorable development of $338 million in Q1. It appears that GEICO's conservatism last year might be beginning to pay off, but we should be cautious extrapolating too much from one Q ...

29) Good performance from the Primary Group, which I will review in more detail later.

30) Underwriting profitability in Berkshire Hathaway Reinsurance Group's property and casualty segment.

31) Investment income is sharply higher. What a difference positive t bill yields makes... tax rate is higher b/c proportionally less investment income is coming from dividends. Berkshire pays a lower tax rate on dividends vs interest due to the div received deduction.

32) For years Buffett refused to take duration risk while irresponsible players did so. Now the irresponsible whine and complain ("Who could've seen rising rates coming!!!") while Berkshire is unscathed. 👏

33) BNSF results are down on tepid revenue growth and much higher compensation/benefit expenses and fuel. The operating ratio is up to 68.4% from 64.6%.... this is not great. Will have to dig into this more after the meeting.

34) Wow ... physical volumes are down by a lot... Leading recession indicator?

35) BHE results ... seems like a lot going on here to unpack, will have to return to this after the meeting.

36) Real estate brokerage is down ... not surprising...

twitter.com/i/web/status/1…

37) Manufacturing, Service, and Retailing is about flat overall.

Looks like I've run out of time as CNBC's pregame show is about to begin, so I'll end this thread now.

I will have another thread for the meeting itself that will start shortly.

I am planning to write an… twitter.com/i/web/status/1…

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@rationalwalk

Jun 28, 2024

It is very uncommon to reach old age without some cognitive decline. Buffett and Munger are extreme exceptions because they started at a high baseline and remained so active.

Millions of Americans have seen in their own families what we all saw in the very sad debate last night.

And anyone who reacted with glee rather than sadness, at both a human level and much more so for our country, needs to engage in some serious self examination. This is a terrible and very dangerous state of affairs. For the good of the country, the President should step aside.

This situation was cruel and avoidable. How did Biden’s family allow it to happen?

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Politicians who have no core principles, and this is prevalent on both sides of our political chasm, will commit all sorts of sins to cling to power above all else. For what purpose? Their insatiable pride, their ego, their hatred of others, often desire to ultimately cash in.

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If you are retired, especially if you are in the "FIRE" community (as I am) and left regular employment decades before 65, you MUST find something to engage your intellect or you will lose it.

This is a critical health issue. Both mental and physical health depend on activity.

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I've owned two companies often thought to be mini-Berkshires. $L for several years in the early '10s and $MKL from 2011-23. It's not easy to beat $BRKB.

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A Man For All Markets

I first read Ed Thorp's autobiography in early 2017 and it made a huge impression at the time so I wrote down my thoughts. I recently revisited my notes. Here are some key take-aways from the book:

1) Thorp's early experiences in Las Vegas were crazy. In 1963, he was part of a team of six that pretended not to know each other and sat down at the baccarat tables at the Dunes Casino. He ended up doing so well that the pit boss drugged his coffee! Later, the brakes on his car mysteriously failed. Wild stuff!

2) Thorp gained an edge in blackjack with a card counting method. He proved the theory through hands-on methods in Reno and published his findings in a book, Beat the Dealer, which is still read by gamblers today.

3) Roulette was a bigger challenge. To gain an edge, Thorp collaborated with Claude Shannon to build the first wearable computer. It was intended to provide the user with an edge in roulette. The computer was conceived in 1955 and tested in Las Vegas in 1961. Some technical problems prevented serious betting but it was a success and unveiled to the public in 1961.

4) Thorp turned his attention to a bigger casino: Wall Street. At least on Wall Street, no one would doctor his drinks or mess with his car's braking system. Thorp read Graham and Dodd but also immersed himself in technical analysis. Early forays were not satisfactory but he kept at it and eventually struck gold ...

5) Common stock warrants proved to be fertile ground for Thorp. He came up with a mathematical model to detect mispricing of warrants relative to the underlying common stock. By purchasing the relatively underpriced security and shorting the relatively overvalued security, he scored profits. Thorp wrote another book, Beat the Market, to explain his strategy.

6) Thorp came up with the math behind the Black-Scholes model before Black and Scholes who were partly motivated by reading Beat the Market. Thorp was, at heart, a mathematician and academic and shared his ideas, perhaps a bit too freely. Otherwise, the Black-Scholes option pricing model may today be known as the Thorp-Black-Scholes model.

7) Meeting Warren Buffett. Thorp met Warren Buffett in 1969 when a dean at U.C. Irvine asked Warren Buffett to vet Thorp. The dean was receiving a distribution from the liquidation of the Buffett Partnership and wanted to know what Buffett thought of Thorp's warrant strategy. Buffett must have been impressed enough because the dean invested additional funds with Thorp.

8) Princeton Newport Partners. Thorp remained an academic through the 1970s but his income from investments eventually grew larger than his salary. Princeton Newport was Thorp's investment vehicle and he eventually gave up academia and devoted all his time to investing in the early 1980s. From November 1, 1969 through 1988, Princeton Newport returned 19.1% before fees and 15.1% after fees compared to 10.2% for the S&P 500. Importantly, this was accomplished with far lower volatility than the S&P 500.

9) Thorp and Madoff. In the early 1990s, Thorp was asked to evaluate Madoff's fund for a client. He was stonewalled by the Madoffs, but eventually discovered that the returns claimed by Madoff were impossible and that the trades reported by Madoff could not have possibly happened since they exceeded the volume for the market for certain securities. Thorp made it known that Madoff was a fraud but the establishment simply ignored his warnings.

10) Personal Finance. The book ends with a section on personal finance because Thorp felt strongly that lack of education in this area is a major problem for society. This was an unusual ending to an autobiography, but one that I think can be helpful for many readers.

A few years ago, I saw an interview of Ed Thorp who was in his late 80s at the time but appeared to be a man in his 60s. Thorp seems to have cracked the code of how to live a good life. His autobiography is essential reading for investors but also for anyone with a sense curiosity regarding a fascinating and well-lived life. Ed Thorp is now 91 years old.

This is the interview I mentioned:

I would also recommend this episode of @FoundersPodcast which is a discussion of the autobiography:

founders.simplecast.com/episodes/my-pe…

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I have questioned the wisdom of a 4% withdrawal rate for early retirees (FIRE) and recommended 3% or less, especially for retirees in their 30s or 40s. At fifty, my projected withdrawal rate for 2024 is only 1.6% of liquid assets, on a trajectory to be less than 1% by my sixties.

Some might say that I'm underspending my potential. All I can say is that, given my current life circumstances, I cannot spend more money in a way that will add meaningful utility. It would only be a waste. I live modestly and like it that way.

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