Li Lu watch & Balance Sheet Recession!

Posted on by balajithinks

We had posted about Li Lu and his efforts to gather data from China with observations on the Covid issue (here) Li Lu is largely credited with bringing BYD to the attention of Charlie Munger, Sokol and then Warren Buffett following which Berkshire bought a stake in BYD.

In nov 2019, Li Lu published an essay in Mandarin on China. A couple of bloggers recently translated that article and you can find it here. It is quite a fascinating read.  It prominently refers a book that I had read earlier this year and it made quite an impression on me. The article refers to the work to Richard C. Koo, who is a strong proponent of balance sheet recessions. Using this concept, he explains the lost decades in Japan and the lack of inflation & growth even though the government and the central bank has been injecting enormous stimulus & liquidity into the economy.  Richard argues that since the recession in 2008, the similarities to Japan have magnified in the western economies and tries to correlate the lack of inflation in EU and US to Japan despite massive interventions. He further lays the groundwork explaining that fiscal stimulus during times of deleverage of the private sector can be offset by fiscal intervention through government spending to keep the economy afloat without going through a depression type environment.

Another article along similar lines came from LT3000 here.

Li Lu’s essays, LT3000 lucid thoughts and Richard Koo’s work gives investors a perspective or a framework on how the government fiscal intervention in times like the Covid crisis  might pan out for inflation & growth.

 

 

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What are we reading?

Posted on by balajithinks
  1. Warren Buffett’s Kraft Heinz deal was unlike any Berkshire has done. He may not want to repeat it (here)
  2. Charlie Munger — An idiot could diversify his portfolio (here)
  3. Kraft Heinz books more than $1B in charge. Profit slumps (here)
  4. Inflated bond ratings helped spur the financial crisis. They’re back (here)
  5. The rot within India’s credit agencies (here)

Wells Fargo (WFC)!

Posted on by balajithinks

Wells Fargo has been a decisive name that has divided investors. While the fundamentals continue to hold steady, negative headlines and a rock bottom valuation continues to test the patience of investors. It has been interesting to look at what Charlie and Warren have been up to with Wells Fargo during this time.

Below is a look at the Daily Journal portfolio which is essentially managed by Charlie Munger. While the Daily Journal corporation is not the primary investment vehicle for Munger, it is hard to fathom Charlie not taking his fiduciary duty very seriously at Daily Journal on managing the portfolio.

Source: Dataroma (here)

The thing that caught my eye was just how big the Wells Fargo position is. It is over one half of the portfolio at this point. It is extremely interesting because Charlie has long preached assiduity and it looks like he is practicing it hard. Not a single trade on Wells Fargo since Q4 2013 (as far back as the database at Dataroma goes).

On the other hand at Berkshire, limited by an ownership limit of 10% that would force them to convert to a bank holding company, Warren Buffett has been selling just enough to keep it inside of the 10% ownership rule. While one can speculate on what would his actions if he was not loaded up to 10%, the act of keeping it just below 10% through this tough time for Wells Fargo is an indicator of the confidence that both Warren and Berkshire have on the bank.

Source: Dataroma (here)

Charlie Munger and Warren Buffett did weigh in on the Wells Fargo Issue a couple of months ago after the annual meeting at Omaha. It basically reinforces their faith in the bank while calling out the mistakes.

Some very interesting comments came from Saber Capital recently on Wells Fargo here

While it has been extremely interesting to watch the market react to the accounts scandal and politicians drum it up for headlines, what remains behind is a company that has $1.9 trillion in assets and $1.3 trillion in deposits that is buying back its shares and eating into itself. This year, an estimated 15% of the market cap of Wells Fargo will be distributed either in the form of a dividend or buybacks. Probably, it is not such a bad thing to be limited on growth but to allow the bank to buy itself back cheap on the back of negative headlines. While the headlines have been scary, the assets and the deposits are continuing to hold steady at Wells Fargo!

While time will tell how the next chapter unfolds but as an interested and a vested investor in Wells Fargo, it is tough to ignore the headlines and just watch the fundamentals. Probably time to practice some assiduity.

Blast from the Past: Timely reminder to think for yourself — Munger on Valeant

Posted on by balajithinks

This is a dated post but fun nevertheless.

It all started in April 2015 when Valeant Pharma was the toast of town.

And then Charlie said this: “Valeant is like ITT and Harold Geneen come back to life, only the guy is worse this time.”

No one really understood what Charlie meant at that point. There were some speculations but no one was sure. This was way before the entire Valeant thing unraveled. Pause a moment to think. A lot of us had access to the same information and Munger came to a radically different conclusion than the rest of the market. Bill Ackman tried to reach out to Charlie and convince him otherwise here. Charlie turned out to be correct. How many times as investors have we had a radically different opinion than the rest of the market put together and been right? Are the markets always efficient? What qualitative factor is the market not pricing in that is not evident in the numbers?

In November in 2015, he explained himself further when Valeant started to come apart. Look at the initial response from Munger.

Later, of course, Munger ended up comparing Valeant to a sewer.

Here is how Valent played out finally. They now trade as Bausch Health Companies (BHC).

Now, Charlie also said Ackman was right on Herbalife; that has not proven out yet. Independent thinking….

Buffett on Reinsurance

Posted on by balajithinks

Just a post to keep some notes on reinsurance to self.

The Berkshire Shareholders meeting had little in terms on new content though it was good to see that both Charlie and Warren razor sharp as ever.

Probably one of the most interesting insights came in the initial parts of the Q&A. Reinsurance. Berkshire Hathaway had sold down its position in Munich Re and Swiss Re in 2015. When asked a pointed question about it, Buffett was very articulate and gave two key reasons for it: a. Low to negative yields in Europe b. Surplus capacity in reinsurance industry.

In a way, Buffett was alluding to the fact that with hedge funds like Greenlight Re and Thirdpoint Re entering the reinsurance business and being hungry for float, it is likely that too much competition will make (or has made) pricing softer in the market. Supply up, demand is the same. This should raise two questions: a. Buffett is reducing exposure to the reinsurance business by reducing his stake, Greenlight Re and Thirdpoint Re are going long at the same time. One must thoroughly consider the consequences of betting against the man who built the most profitable reinsurance business in the world and has constantly reminded us that the insurance industry is survived the longest by those who walk away when pricing is not adequate to the risks taken. b. If there is going to be softer pricing in the market, investors in companies like Greenlight Re and Third Point re, not only have to tide over the cost of float but also the rich fees that the hedge funds rake in.  The two net cost adders might make the economics very difficult for investors to make meaningful returns unless the reinsurance companies have many home runs on the investment side.

With the low to negative yields, float becomes less valuable as the capital structure of many of the reinsurance business like Swiss Re and Munich Re allows them to invest float in only certain types of securities. Buffett is essentially betting that it will be tough for reinsurance companies to invest float in positive returns instruments for quite sometime to come. Unless of course, you are Prem Watsa and assume that deflation is going to take over in which case the bonds become very useful. Time will tell. Time to increase watch on the insurance holdings.