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2020 Berkshire Hathaway Annual Letter [pdf]

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Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#81

Post by mettamage »

tim333 wrote: post #64
mettamage wrote: post #28

Earlier quoted context omitted.

Investing and poker have some fun commonalities. One that I want to focus one in this particular case is: always play the game you know well and know how you're going to win it [nuances, 0] In Poker: find the fish, understand why they're fish and exploit it [example, 1]. In investing: find underpriced assets, understand why they're underpriced and exploit it [examples, 2, 3]. From this perspective, Buffett doesn't un…

>From this perspective, Buffett doesn't understand how price movement works in tech companies. For someone who allegedly doesn't understand that the recent $89bn gain on Apple stock is nice going. Luck perhaps? Incidentally he's also talked about poker as a model for investing. After telling the Mr Market story in the 1987 letter he goes on: >But, like Cinderella at the ball, you must heed one warning or everything w…

> For someone who allegedly doesn't understand that the recent $89bn gain on Apple stock is nice going. Luck perhaps

From an investor point of view, you can't categorize companies as one label. You can categorize companies as tags. This is because every perspective that allows you to give you an edge and make money in a fairly reliable manner is a valid perspective.

Apple can be seen as a consumer/physical product company. Warren knows a lot about consumer behavior and branding. If he finds from that perspective that Apple is underpriced, then he can still make a bet while having a limited understanding of the technology by simply saying: a laptop is a laptop, it allows you to do laptop things (i.e. they're interchangeable), but Apple has an amazing brand like Coca Cola.

Of course, this isn't fully true (e.g. Windows enables different things than Apple in some cases like gaming) but combining it with superior knowledge in branding, it's good enough to make a bet.

Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#82

Post by simo7 »

dominotw wrote: post #20
simo7 wrote: post #16

Earlier quoted context omitted.

I'd say he broke his own game of investing, rather than the game in general. Given what he thinks he understand there's not enough opportunities to allocate this amount of capital. I guess that's why he hired the two new managers. By the way they did come up with some of the best ideas in recent years like Apple and Snowflake.

> best ideas in recent years like Apple and Snowflake. Are these really the best ideas. Bought apple only couple of years ago, snowflake was arguably the most hyped stock of all time. I don't see what the insight was here.

They are certainly very successful ideas in terms of outcomes. Apple went up more than 3X since he bought it in 2016.

Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#83

Post by simo7 »

mettamage wrote: post #28
bedhead wrote: post #6

While I'm not of these meme investors who thinks Buffett is "washed up", I confess that I've increasingly wondered if it's just sorta over. In some sense, it's not his fault. Berkshire has grown so large that it has significant scale problems. I joke that Buffett found the investing equivalent of the Donkey Kong kill screen, he basically broke the game. It's incredible. But there have been self-inflicted issues. The…

Investing and poker have some fun commonalities. One that I want to focus one in this particular case is: always play the game you know well and know how you're going to win it [nuances, 0] In Poker: find the fish, understand why they're fish and exploit it [example, 1]. In investing: find underpriced assets, understand why they're underpriced and exploit it [examples, 2, 3]. From this perspective, Buffett doesn't un…

> The central thesis of value investing is: if a company is going to close shop, the scrap value of that company will be higher than the market cap of that company. There's a lot more to it, but that's the gist of it.

There's enough "more to it", to make this statement incorrect.

You're describing Graham's style of value investing, Buffet's style is significantly different.

In fact the term "value investing" has now a very loose definition, since so many different styles are grouped under this term.

I'd say this is the most appropriate definition: "Investment is most intelligent when it is most businesslike" (straight from the Intelligent Investor).

In other terms, any type of investing that's not based on speculation is value investing.

Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#84

Post by tim333 »

bedhead wrote: post #6

While I'm not of these meme investors who thinks Buffett is "washed up", I confess that I've increasingly wondered if it's just sorta over. In some sense, it's not his fault. Berkshire has grown so large that it has significant scale problems. I joke that Buffett found the investing equivalent of the Donkey Kong kill screen, he basically broke the game. It's incredible. But there have been self-inflicted issues. The…

Well, the guy is 90. He's doing pretty well considering.

Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#85

Post by bobthepanda »

dominotw wrote: post #78
jsweojtj wrote: post #77

Earlier quoted context omitted.

I can't seem to read this in any other way than you are asking something like "why is it harder to find one hundred $100 million opportunities than one?" Finding one such opportunity is hard, finding two is harder because you have to find the first and then do more work to find the second. This pattern continues indefinitely for as many opportunities as you'd like to find.

> you have to find the first and then do more work to find the second. Isn't this typical scaling problem though? I wasn't imagining they go one by one. I guess your Implication here is that because there only one warren buffet. I guess that makes sense if Berkshire is ultimately one man Buffet show that can only scale as much as that one man can perform. That probably explains the recent under performance, age catch…

Everyone else is in the same boat as well. Low interest rates have made it harder and harder to hit high rates of return. Softbank ended burning a fair amount of money from its $100B Vision Fund, and a good chunk of that was the oil wealth of the Saudis.

Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#86

Post by rsj_hn »

dominotw wrote: post #76
rsj_hn wrote: post #75

Earlier quoted context omitted.

I didn't say the same size, I said finite size. If the market grows at a rate of 6% and your company is growing at 8%, then your company will eventually slow down to 6% or else the market will speed up to 8%, but in neither situation will you "outperform" the market forever. In the case of Buffet, Berkshire Hathaway has about $800 billion in assets under management. If the market size is 50 Trillion, and let's say th…

> I didn't say the same size, I said finite size. Not sure how you are defining "market". How is it finite size? What is the number after which it stops growing? > If the market grows at a rate of 6% and your company is growing at 8% Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all. Not sure where you got your your "market size" numbers fro…

> Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all.

Right because Berkshire stopped overperforming. In fact it has been underperforming the last 10 years, and Buffet was trying to explain why. https://investorplace.com/2020/10/berkshire-hathaway-stock-u...

But what what I was doing was explaining a counterfactual to show why every firm must stop outperforming. It's not just Berkshire, or 6%, 8%.

So I ran some numbers to explain to you how if A is part of B than the compound growth rare of A cannot forever be greater than the compound growth rate of B.

(Please do not reply to this comment with an argument that you are not talking about any stock called "A" and "B", just as the 6/8 seems to have tripped you up)

Berkshire is part of the market, thus it cannot outperform the market forever. In fact you expect reversion to the mean -- companies that outperform then underperform and vice versa. Why is there reversion to the mean? Because the special techniques discovered by the company are copied and disseminated, key people are poached, ideas that used to work reliably stop working, etc. So these social constraints kick in long before mathematical constraints, but even if in theory you can overcome the social constraints, you can never overcome mathematical constraints, and thus Berkshire and all other investment holding companies must eventually stop overperforming, and most only eek out a few years of net overperformance.

Re: 2020 Berkshire Hathaway Annual Letter [pdf]

#87

Post by dominotw »

rsj_hn wrote: post #86
dominotw wrote: post #76

Earlier quoted context omitted.

> I didn't say the same size, I said finite size. Not sure how you are defining "market". How is it finite size? What is the number after which it stops growing? > If the market grows at a rate of 6% and your company is growing at 8% Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all. Not sure where you got your your "market size" numbers fro…

> Total market valuation of Dow has grown at faster pace than Berkshire portfolio size. your 6% , 8% example doesn't hold at all. Right because Berkshire stopped overperforming. In fact it has been underperforming the last 10 years, and Buffet was trying to explain why. https://investorplace.com/2020/10/berkshire-hathaway-stock-u... But what what I was doing was explaining a counterfactual to show why every firm must…

> Berkshire is part of the market, thus it cannot outperform the market forever. In fact you expect reversion to the mean -- companies that outperform then underperform and vice versa. Why is there reversion to the mean? Because the special techniques discovered by the company are copied and disseminated, key people are poached, ideas that used to work reliably stop working, etc. So these social constraints kick in long before mathematical constraints, but even if in theory you can overcome the social constraints, you can never overcome mathematical constraints, and thus Berkshire and all other investment holding companies must eventually stop overperforming, and most only eek out a few years of net overperformance.

Understood. Thank you!

Now I wonder why brekshire investors keep holding the stock. Shouldn't the stock crash and burn. What is their logic ? Sunk cost bias?

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