Posted by: donmihaihai | February 26, 2018

Another letter, another writing

BH’s shareholder letter got shorten in 2017. Disappointed because I don’t read the K but anyway the only thing I am losing out is getting ideas on how to study businesses and industries.

There are a lot of “market talk” in the letter.

A kindergarten- like analysis produced an outsize return for what it should be fixed amount for charity. It happened because opportunity dropped right in and obvious to those who are prepared and would likely not happened if the guarantee to make up any shortfall wasn’t given. I thought he was going to do just that while reading and I smiled when he did. Investment decision is about knowing/ analysing the expecting outcome and weighting the probability of it happening.

Talked about how BH share price dropped between 37% to 59% for 4 times in 53 years. Duration of the drops last from less than a month to almost 2 years. Not as if there is no other drops in share price but these were the significant drops. Is it scary? I have experienced 90% dropped from purchased prices myself so the peak to valley dropped will be > than 90%. Not that I have lost sleeps because of it.

Sharp drop get more attentions but it is the long slow drop that is the killer. Imagine the share price drop slowly for a year and while you are holding on to a 50% lost, share price swing around 40% to 50% lost for the next maybe 3 years. It will kill most of you and I will bet on it.

Take this as a warning. I don’t know when but I am almost certain that you will experience it if you invest long enough. I have experienced both. And yes this is a kindergarten- like analysis on market.

WB always talk about return on net-tangible assets/ net worth/ shareholders’ equity in yearly letter and usually once at the beginning of the letter. Sometime he mentioned more. This year more.

The annualized increased in book value is the annualized return on shareholders’ equity of BH over 53 years since only one dividend payment and little share count dilution. ROE is the measure of how successful the company is able to generate return. How the company generate this return is the qualities side.

ROE plus price purchased and sold will be the return investor has on the stock. Assume I was there to buy BH in 53 years back at exactly 1 X shareholders’ equity and sold 1 X shareholders’ equity 53 years later. My return will be 19.1% annualized.

So there are only 3 things. ROE, purchase and sale price. In fact sale price is not as important as ROE & purchase price. Think about probability and outcome. The probability of purchasing at above valuation, getting below average ROE and selling at below valuation is really low. By probability alone, most are unlikely to lose money by investing in stock. Nah, it is not true. Math is correct but look around, most people are trying so hard to get into that small probability. It is human at work.

Investing is about being rational.


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