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.
There are capital allocators and there are good capital allocators.
At one end of the spectrum, you have airlines who are being eviscerated for spending close to all their free cash flow on buybacks. The management, fully aware of the operating leverage of their fixed assets, not only levered the company financially but also did not build up any resiliency in their balance sheets for any external shocks and are now looking for federal help to stem the crisis. Ditto with banks, where the supposedly Fort Knox balance sheets were tested and fed liquidity tap has opened up again and buybacks suspended. A classic case of buyback when the prices are high and not so much when they could be a bargain to their TBV.
On the other hand end of the spectrum, we have companies like Berkshire. While their equities portfolio is getting hammered with the rest of the market, they are sitting on mountains of cash ($128B+) as of Dec 2019 and an environment where they can deploy the cash effectively. Berkshire has resisted doing massive buybacks just because it had cash and is now looking smarter and better positioned than other companies that deployed a ton of cash at market highs.
Now the rubber will hit the road for Berkshire. They are in an environment where they can deploy cash more easily and furthermore the shares are trading at a multiple of book value that Berkshire has purchased stock back in the past.
H/T to @investor_bad who posts Berkshire daily BV with respect to the portfolio changes.
Something peculiar caught my eye in the Berkshire 13F filing this quarter. It is a very small holding and completely irrelevant given the size of the equity portfolio for Berkshire. The position is sized at a little over $25M and is too small even for Berkshire’s two investment managers, Todd and Ted. However, this is the first time to the best of my knowledge that Berkshire has purchased the S&P index (SPDR and the Vanguard S&P 500 ETF) as part of its main portfolio.
Time will tell whether this is the beginning of Berkshire deploying excess cash through an index fund or just a small position with no relevance in the bigger picture. While Warren Buffet has long been a proponent of S&P index for general investors, this is the first time he has used it as part of Berkshire’s portfolio.
13-f Link here
Consolidated portfolio changes from Dataroma (here)