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The Berkshire Hathaway of the Internet (2017)

awilkinson.medium.com

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Re: The Berkshire Hathaway of the Internet (2017)

#21

Post by dhdhfhf3737548 »

dhdhfhf3737548 wrote: post #11

I figure that any acquirer who wants to go this route needs to basically be ready to pay in cash? Tying to finance a deal through debt (LBO or otherwise) would mean that you need to be prepared to do precisely the sort of DD bemoaned here? Just trying to think through, “if it is so obvious, why isn’t everybody doing it?”

Another possible contributing factor: Famous firms like BH are able to use their notoriety to access reliable and valuable information (e.g. “is the management team any good?”). I’m sure a lot of people would love to wow Buffett with their astute insights into great values in their industry. (In the same way that a famous VC might be inundated with emails about the next hot thing.) You’d still have to work through a lot of chaff to find patterns. At least you’d have the raw material to find patterns, though.

The initial Tiny deal that was discussed relied heavily on the investor’s personal knowledge of the firm’s operators. This is similar in that it is an information asymmetry story.

A counterexample to this is the relatively early National Indemnity deal cited by the author in the opening of the piece. If Tiny is, indeed, recognizing outsized returns then that would also count against the importance of this factor.

Re: The Berkshire Hathaway of the Internet (2017)

#22

Post by texasbigdata »

salmonlogs wrote: post #20

If the genius business model relies on trusting people because "we have tons of mutual friends" then its just friends of friends investing in each other. That is not even slightly comparable to Berkshire Hathway and shows a stunning level of naivety. The typical process requires due diligence because there is no trust - there are a huge amount of dodgy businesses, sketchy owners and smooth talkers trying to extract c…

If it is naive the LPs signed off and agree with the strategy.

If it’s not, it differentiates them from competitors. Until you’ve received a 35 page word document from a big public company with bullet point questions (their “standard” catch all set) it’s hard to describe the sheer pain of certain diligence; it can take a team of 6-8 people up to 2-3 weeks to turn something (depending how much you prepared by predicting requests and prepopulating the answers into data room before).

Having worked in financial services, my intuition suggests they are correct. For example once on a buy side engagement helping a client find and acquire bolt-ons (outsourced Corp dev essentially), ran across a company where something didn’t feel right. Did exactly what the Tiny guys did: looked at the bank statements and credit card info and built my own set of financials from scratch in roughly a day. It’s doable.

Now… also had the opposite happen and found some really eyebrow raising stuff over the years. Probably more often than not at least something borderline material shows up if you dig deep and far back enough. The partner at large fund once told me: “No deal is perfect; if you waited for the perfect company you’d never invest.”

Re: The Berkshire Hathaway of the Internet (2017)

#23

Post by rini17 »

salmonlogs wrote: post #20

If the genius business model relies on trusting people because "we have tons of mutual friends" then its just friends of friends investing in each other. That is not even slightly comparable to Berkshire Hathway and shows a stunning level of naivety. The typical process requires due diligence because there is no trust - there are a huge amount of dodgy businesses, sketchy owners and smooth talkers trying to extract c…

Maybe it comes out like 3 deals the BH way where one gets bad, versus 1 deal with the standard due diligence? Of course that won't work on naivete alone. But using keen business (Buffett) and psychological (Munger) sense, why not?

Re: The Berkshire Hathaway of the Internet (2017)

#24

Post by nabla9 »

smg wrote: post #9

There is more to BH than how they acquire companies. They also have a track recored of out performing S&P for decades. I doubt if BH alpha is because of their streamlined acquisition process. Does Tiny have a similar record?

The whole idea that BH is a success due to good deals is wrong. BH has made good deals and bad deals, but that's not the main reason for their long term track record.

BH has a good record because they have structured their business to have a permanent edge: Their insurance&reinsurance business (half of the business) generates cash and float constantly. The side of the company seeks ways to invest all that cash. Often buying whole businesses.

In other words, BH cuts out several levels of middlemen. They are an insurance company, holding company, private equity & alternative investment management company and investment fund rolled into one. Cutting out banks, private equity, fund managers bring in huge savings.

The reason why BH has not been outperforming SP500 in the last 10 years is that cash is cheap for everyone (this is the longest boom in history) Once the water level drops again and we see who swims naked, BH will outperform again.

Re: The Berkshire Hathaway of the Internet (2017)

#25

Post by libertine »

dhdhfhf3737548 wrote: post #11

I figure that any acquirer who wants to go this route needs to basically be ready to pay in cash? Tying to finance a deal through debt (LBO or otherwise) would mean that you need to be prepared to do precisely the sort of DD bemoaned here? Just trying to think through, “if it is so obvious, why isn’t everybody doing it?”

I think this weights more then simply making it easy though having cash ready does make it easy.

What seems to be most consistent is having a motivated buyer and a motivated seller, and then it seems like it's just the parties involved making some compromise so that both make a good deal.

If both stand to win, I don't think just because BH gets a discounted price that makes it any less attractive: owners might just want to cash out and see seize the opportunity. If the owner doesn't want to sell you could even pay above market values and probably they won't part with it.

Re: The Berkshire Hathaway of the Internet (2017)

#26

Post by renewiltord »

elchief wrote: post #4

It's not because he makes it easy. He buys them when they're strapped for cash Fruit of the Loom: 1999 Bankruptcy, 2002 acquisition by BH He even bought into Berkshire Hathaway itself, on the cheap

It’s definitely more than just being smarter. The shape of Buffett’s Salomon Brothers deal is an example.

Re: The Berkshire Hathaway of the Internet (2017)

#27

Post by lotsofpulp »

nabla9 wrote: post #24
smg wrote: post #9

There is more to BH than how they acquire companies. They also have a track recored of out performing S&P for decades. I doubt if BH alpha is because of their streamlined acquisition process. Does Tiny have a similar record?

The whole idea that BH is a success due to good deals is wrong. BH has made good deals and bad deals, but that's not the main reason for their long term track record. BH has a good record because they have structured their business to have a permanent edge: Their insurance&reinsurance business (half of the business) generates cash and float constantly. The side of the company seeks ways to invest all that cash. Often…

> The reason why BH has not been outperforming SP500 in the last 10 years is that cash is cheap for everyone (this is the longest boom in history) Once the water level drops again and we see who swims naked, BH will outperform again.

At the start of the tech companies’ boom, Buffett famously said he does not invest in tech companies because he does not invest in what he does not understand. Then he bought a ton of Apple a few years later, and that is basically the only thing keeping Berkshire stock in the game.

The last amazing deal I can recall that Berkshire made was Goldman Sachs during the 2008 financial crisis. Other than that, I think he might have been better off buying VOO. The company itself is 40% Apple right now, for which Berkshire paid full retail price when it was bought.

I think the parameters of the game that used to allow Buffett to achieve exceptional results have long changed, as evidenced by the numbers.

Re: The Berkshire Hathaway of the Internet (2017)

#28

Post by lotsofpulp »

missedthecue wrote: post #5
elchief wrote: post #4

It's not because he makes it easy. He buys them when they're strapped for cash Fruit of the Loom: 1999 Bankruptcy, 2002 acquisition by BH He even bought into Berkshire Hathaway itself, on the cheap

Exceptions to the rule. Precision Castparts, Burlington Northern, Clayton Homes, Duracell, Pacificorp, Lubrizol, Acme Brick, Dairy Queen, Pilot Flying J, all were bought as healthy companies.

And Apple, which makes up 41% of Berkshire’s value today, and Bank of America, which is another 14%.

Re: The Berkshire Hathaway of the Internet (2017)

#29

Post by sfobiab »

Andrew Wilkinson recently took a company public in Canada through a reverse takeover https://www.google.com/search?q=CVE:+WE

Very early in the life of the company they have undertaken some pretty dishonest accounting of their revenues, net retention and other key metrics. The CFO resigned after the first reporting quarter.

I have a strong feeling there is more to this character than just the recycling of virtue filled business models.

Buyer (seller) beware.

Re: The Berkshire Hathaway of the Internet (2017)

#30

Post by sumedh »

lotsofpulp wrote: post #27
nabla9 wrote: post #24

Earlier quoted context omitted.

The whole idea that BH is a success due to good deals is wrong. BH has made good deals and bad deals, but that's not the main reason for their long term track record. BH has a good record because they have structured their business to have a permanent edge: Their insurance&reinsurance business (half of the business) generates cash and float constantly. The side of the company seeks ways to invest all that cash. Often…

> The reason why BH has not been outperforming SP500 in the last 10 years is that cash is cheap for everyone (this is the longest boom in history) Once the water level drops again and we see who swims naked, BH will outperform again. At the start of the tech companies’ boom, Buffett famously said he does not invest in tech companies because he does not invest in what he does not understand. Then he bought a ton of Ap…

> Then he bought a ton of Apple a few years later,

Did he buy it or was it one of the two fund managers who work for BH?

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