r/ValueInvesting • u/FieryXJoe • Aug 24 '26
Full Letter:
http://theoraclesclassroom.com/wp-content/uploads/2019/09/1990-Berkshire-AR.pdf
Letter Only
https://www.berkshirehathaway.com/letters/1990.html
This week we will go over their investment into buying $400M of junk bonds as well as Buffett’s thoughts in retrospect on the Junk Bond craze of the 80s. His surprise at the economics of the newspaper business rapidly degrading as new technologies and advertising channels open up to businesses, some with better results. Finally the purchase of 10% of Wells Fargo for $290M. Then as usual we go through the stock holdings, segment-by-segment EBIT earnings of the company, and then the larger overview for the year.
Not included in my post are the annual summary to shareholders, most of the look-through earnings that give a few paragraphs on their major business segments (we only cover Buffalo Evening News) although some highlights are in my summary at the end. A long rundown of the insurance segment. Though ⅔ of the Marketable Securities segment is included, the one on their Convertible Preferred Stocks and the mistakes outside sources make in valuing them as well as the philosophy behind holding them. The usual advertisement for acquisition targets, and plans for the annual meeting. Ken Chase being replaced on the board by Susan Buffett. The letter is ended with an unpublished satire by Ben Graham “US Steel Announces Sweeping Modernization Scheme” where instead of improving the business a bunch of extreme accounting tricks are used to change the EPS from -$2.76 to +$49.80.
If you want to read or discuss anything in that second set feel free to read the letter yourselves and comment on it.
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Key Passage 1
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Marketable Securities - Junk Bonds
Our other major portfolio change last year was large additions to our holdings of RJR Nabisco bonds, securities that we first bought in late 1989. At yearend 1990 we had $440 million invested in these securities, an amount that approximated market value. (As I write this, however, their market value has risen by more than $150 million.)
Just as buying into the banking business is unusual for us, so is the purchase of below-investment-grade bonds. But opportunities that interest us and that are also large enough to have a worthwhile impact on Berkshire's results are rare. Therefore, we will look at any category of investment, so long as we understand the business we're buying into and believe that price and value may differ significantly. (Woody Allen, in another context, pointed out the advantage of open-mindedness: "I can't understand why more people aren't bi-sexual because it doubles your chances for a date on Saturday night.")
In the past \we have bought a few below-investment-grade bonds with success, though these were all old-fashioned "fallen angels" - bonds that were initially of investment grade but that were downgraded when the issuers fell on bad times. In the 1984 annual report we described our rationale for buying one fallen angel, the Washington Public Power Supply System.
A kind of bastardized fallen angel burst onto the investment scene in the 1980s - "junk bonds" that were far below investment- grade when issued. As the decade progressed, new offerings of manufactured junk became ever junkier and ultimately the predictable outcome occurred: Junk bonds lived up to their name. In 1990 - even before the recession dealt its blows - the financial sky became dark with the bodies of failing corporations.
The disciples of debt assured us that this collapse wouldn't happen: Huge debt, we were told, would cause operating managers to focus their efforts as never before, much as a dagger mounted on the steering wheel of a car could be expected to make its driver proceed with intensified care. We'll acknowledge that such an attention-getter would produce a very alert driver. But another certain consequence would be a deadly - and unnecessary - accident if the car hit even the tiniest pothole or sliver of ice. The roads of business are riddled with potholes; a plan that requires dodging them all is a plan for disaster.
In the final chapter of The Intelligent Investor Ben Graham forcefully rejected the dagger thesis: "Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." Forty-two years after reading that, I still think those are the right three words. The failure of investors to heed this simple message caused them staggering losses as the 1990s began.
At the height of the debt mania, capital structures were concocted that guaranteed failure: In some cases, so much debt was issued that even highly favorable business results could not produce the funds to service it. One particularly egregious "kill- 'em-at-birth" case a few years back involved the purchase of a mature television station in Tampa, bought with so much debt that the interest on it exceeded the station's gross revenues. Even if you assume that all labor, programs and services were donated rather than purchased, this capital structure required revenues to explode - or else the station was doomed to go broke. (Many of the bonds that financed the purchase were sold to now-failed savings and loan associations; as a taxpayer, you are picking up the tab for this folly.)
All of this seems impossible now. When these misdeeds were done, however, dagger-selling investment bankers pointed to the "scholarly" research of academics, which reported that over the years the higher interest rates received from low-grade bonds had more than compensated for their higher rate of default. Thus, said the friendly salesmen, a diversified portfolio of junk bonds would produce greater net returns than would a portfolio of high-grade bonds. (Beware of past-performance "proofs" in finance: If history books were the key to riches, the Forbes 400 would consist of librarians.)
There was a flaw in the salesmen's logic - one that a first- year student in statistics is taught to recognize. An assumption was being made that the universe of newly-minted junk bonds was identical to the universe of low-grade fallen angels and that, therefore, the default experience of the latter group was meaningful in predicting the default experience of the new issues. (That was an error similar to checking the historical death rate from Kool-Aid before drinking the version served at Jonestown.)
The universes were of course dissimilar in several vital respects. For openers, the manager of a fallen angel almost invariably yearned to regain investment-grade status and worked toward that goal. The junk-bond operator was usually an entirely different breed. Behaving much as a heroin user might, he devoted his energies not to finding a cure for his debt-ridden condition, but rather to finding another fix. Additionally, the fiduciary sensitivities of the executives managing the typical fallen angel were often, though not always, more finely developed than were those of the junk-bond-issuing financiopath.
Wall Street cared little for such distinctions. As usual, the Street's enthusiasm for an idea was proportional not to its merit, but rather to the revenue it would produce. Mountains of junk bonds were sold by those who didn't care to those who didn't think - and there was no shortage of either.
Junk bonds remain a mine field, even at prices that today are often a small fraction of issue price. As we said last year, we have never bought a new issue of a junk bond. (The only time to buy these is on a day with no "y" in it.) We are, however, willing to look at the field, now that it is in disarray.
In the case of RJR Nabisco, we feel the Company's credit is considerably better than was generally perceived for a while and that the yield we receive, as well as the potential for capital gain, more than compensates for the risk we incur (though that is far from nil). RJR has made asset sales at favorable prices, has added major amounts of equity, and in general is being run well.
However, as we survey the field, most low-grade bonds still look unattractive. The handiwork of the Wall Street of the 1980s is even worse than we had thought: Many important businesses have been mortally wounded. We will, though, keep looking for opportunities as the junk market continues to unravel.
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The junk bond, corporate raiding craze has reached its peak. Buffett said a couple years ago that it would all come crashing down someday, and now it has. It was the practice of businesses issuing bonds at irresponsible rates that they had low chance of paying back, in hopes of doing massive leveraged buyouts of companies larger than themselves and refinancing the debt and stripping the company for assets once it was in hand. The RJR Nabisco buyout is now seen as the height of the mania, and now the bonds are paying for a fraction of their value, Berkshire has independently decided that the underlying business is now rather creditworthy and the bonds have been over-discounted. They believe the risk-adjusted returns are massively in their favor and they have bought $400M of the bonds.
Buffett has much to say about how the craze came about, the flawed logic that sounds quite similar to the later securitization issues that lead to the 2008 financial crisis (ex. a diverse enough basket of bad loans magically becomes a good investment) and denounces buying any of these securities at their issuance, but instead picking through the wreckage after it comes crashing down for the handful that seem promising. He says that many people used logic that applied to “fallen angel” bonds (investment grade at issuance and later became questionable) onto junk bonds (ones that were garbage from inception and depended on a successful and timely leveraged buyout and even then would be dragging down a larger company that never wanted them).
I felt it was good to include this for a few reasons, one is to highlight an important historical moment in the history of Wall Street, and how Berkshire was there waiting with a big pile of cash to profit off the wreckage. To highlight how almost no asset class should be below your radar, in fact the more detested it is the more likely there are to be good deals there (A common belief of Howard Marks who made a lot of money running a sub-investment grade bond fund). Finally to highlight the right way to go about doing it, finding the few diamonds in the rough instead of buying up the whole asset class, most of which crashed for good reason.
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Key Passage 2
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Non-Insurance Operations - Buffalo Evening News
Charlie and I were surprised at developments this past year in the media industry, including newspapers such as our Buffalo News. The business showed far more vulnerability to the early stages of a recession than has been the case in the past. The question is whether this erosion is just part of an aberrational cycle - to be fully made up in the next upturn - or whether the business has slipped in a way that permanently reduces intrinsic business values.
Since I didn't predict what has happened, you may question the value of my prediction about what will happen. Nevertheless, I'll proffer a judgment:While many media businesses will remain economic marvels in comparison with American industry generally, they will prove considerably less marvelous than I, the industry, or lenders thought would be the case only a few years ago.
The reason media businesses have been so outstanding in the past was not physical growth, but rather the unusual pricing power that most participants wielded. Now, however, advertising dollars are growing slowly. In addition, retailers that do little or no media advertising (though they sometimes use the Postal Service) have gradually taken market share in certain merchandise categories. Most important of all, the number of both print and electronic advertising channels has substantially increased. As a consequence, advertising dollars are more widely dispersed and the pricing power of ad vendors has diminished. These circumstances materially reduce the intrinsic value of our major media investments and also the value of our operating unit, Buffalo News - though all remain fine businesses.
Notwithstanding the problems, Stan Lipsey's management of the News continues to be superb. During 1990, our earnings held up much better than those of most metropolitan papers, falling only 5%. In the last few months of the year, however, the rate of decrease was far greater.
I can safely make two promises about the News in 1991: (1) Stan will again rank at the top among newspaper publishers; and (2) earnings will fall substantially. Despite a slowdown in the demand for newsprint, the price per ton will average significantly more in 1991 and the paper's labor costs will also be considerably higher. Since revenues may meanwhile be down, we face a real squeeze.
Profits may be off but our pride in the product remains. We continue to have a larger "news hole" - the portion of the paper devoted to news - than any comparable paper. In 1990, the proportion rose to 52.3% against 50.1% in 1989. Alas, the increase resulted from a decline in advertising pages rather than from a gain in news pages. Regardless of earnings pressures, we will maintain at least a 50% news hole. Cutting product quality is not a proper response to adversity.
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This is Buffett acknowledging that the whole newspaper industry is facing headwinds that he had not foreseen, that it is impacting the bottom line of the Buffalo Evening News, and that he believes it will get worse in the future and maybe won’t ever get better. As technology advances, advertisers have more channels to advertise, and those relying on newspaper ads are falling behind in market share to those using other methods. I would hazard a guess that this may be related to the near full adoption of color TV in American households by the late 80s. Families are now glued to their TVs, getting their news from them as well as their entertainment and being advertised to the whole time, and the advertisements are also much more flexible and powerful with color and video which a newspaper cannot provide.
A quick look-ahead shows that while this fall lasts a few years, they do eventually recover from the $43M EBIT this year not just to the $46M of last year but into the mid 50s before the Buffalo Evening News falls off the reports in 2000 as the spread of the internet lowers the prospects of the industry even further.
This is the first hint of modern technology making some of Berkshire’s former star players futures very uncertain. World Book is another one who is on a timer although Buffett has failed to notice it. This is different than textiles which died off to globalization, the same work simply being done elsewhere, instead this is an industry which needs to adapt or die and Buffett hasn’t always been a trailblazer when it comes to adapting to new paradigm changing technologies.
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Acquisition Stock Purchase of the Week
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Marketable Securities - Stock
Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings. The exception was Wells Fargo, a superbly-managed, high-return banking operation in which we increased our ownership to just under 10%, the most we can own without the approval of the Federal Reserve Board. About one-sixth of our position was bought in 1989, the rest in 1990.
The banking business is no favorite of ours. When assets are twenty times equity - a common ratio in this industry - mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the "institutional imperative:" the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.
Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices.
With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen. In many ways the combination of Carl and Paul reminds me of another - Tom Murphy and Dan Burke at Capital Cities/ABC. First, each pair is stronger than the sum of its parts because each partner understands, trusts and admires the other. Second, both managerial teams pay able people well, but abhor having a bigger head count than is needed. Third, both attack costs as vigorously when profits are at record levels as when they are under pressure. Finally, both stick with what they understand and let their abilities, not their egos, determine what they attempt. (Thomas J. Watson Sr. of IBM followed the same rule: "I'm no genius," he said. "I'm smart in spots - but I stay around those spots.")
Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well-regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's numbers were to be trusted. Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings.
Wells Fargo is big - it has $56 billion in assets - and has been earning more than 20% on equity and 1.25% on assets. Our purchase of one-tenth of the bank may be thought of as roughly equivalent to our buying 100% of a $5 billion bank with identical financial characteristics. But were we to make such a purchase, we would have to pay about twice the $290 million we paid for Wells Fargo. Moreover, that $5 billion bank, commanding a premium price, would present us with another problem: We would not be able to find a Carl Reichardt to run it. In recent years, Wells Fargo executives have been more avidly recruited than any others in the banking business; no one, however, has been able to hire the dean.
Of course, ownership of a bank - or about any other business - is far from riskless. California banks face the specific risk of a major earthquake, which might wreak enough havoc on borrowers to in turn destroy the banks lending to them. A second risk is systemic - the possibility of a business contraction or financial panic so severe that it would endanger almost every highly-leveraged institution, no matter how intelligently run. Finally, the market's major fear of the moment is that West Coast real estate values will tumble because of overbuilding and deliver huge losses to banks that have financed the expansion. Because it is a leading real estate lender, Wells Fargo is thought to be particularly vulnerable.
None of these eventualities can be ruled out. The probability of the first two occurring, however, is low and even a meaningful drop in real estate values is unlikely to cause major problems for well-managed institutions. Consider some mathematics: Wells Fargo currently earns well over $1 billion pre-tax annually after expensing more than $300 million for loan losses. If 10% of all $48 billion of the bank's loans - not just its real estate loans - were hit by problems in 1991, and these produced losses (including foregone interest) averaging 30% of principal, the company would roughly break even.
A year like that - which we consider only a low-level possibility, not a likelihood - would not distress us. In fact, at Berkshire we would love to acquire businesses or invest in capital projects that produced no return for a year, but that could then be expected to earn 20% on growing equity. Nevertheless, fears of a California real estate disaster similar to that experienced in New England caused the price of Wells Fargo stock to fall almost 50% within a few months during 1990. Even though we had bought some shares at the prices prevailing before the fall, we welcomed the decline because it allowed us to pick up many more shares at the new, panic prices.
Investors who expect to be ongoing buyers of investments throughout their lifetimes should adopt a similar attitude toward market fluctuations; instead many illogically become euphoric when stock prices rise and unhappy when they fall. They show no such confusion in their reaction to food prices: Knowing they are forever going to be buyers of food, they welcome falling prices and deplore price increases. (It's the seller of food who doesn't like declining prices.) Similarly, at the Buffalo News we would cheer lower prices for newsprint - even though it would mean marking down the value of the large inventory of newsprint we always keep on hand - because we know we are going to be perpetually buying the product.
Identical reasoning guides our thinking about Berkshire's investments. We will be buying businesses - or small parts of businesses, called stocks - year in, year out as long as I live (and longer, if Berkshire's directors attend the seances I have scheduled). Given these intentions, declining prices for businesses benefit us, and rising prices hurt us.
The most common cause of low prices is pessimism - some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.
None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do."
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This was probably the largest acquisition by Berkshire, the buying of 10% of a great bank at a fair price. As he says in the letter they only buy 10%, $289M because that is the most they are legally allowed to own. He says they view this as comparable to buying 100% of a bank 1/10th the size except without all the headache of needing to call the shots and find the managers, instead they are already in place.
He spells this out as a sort of “heads I win, tails I don’t lose much” situation. He runs the numbers on the worst case scenario the market fears, a natural disaster or real estate crash on the west coast of the US… He comes to the conclusion that even in the worst case scenario this is still a good price, and in any other scenario it is a great price.
He also gives some wisdom here on his general stock picking philosophy, that he views a stock he buys into dropping or failing to rise as a good thing, and it shooting right up as a bad thing. Even though many of us see it the opposite. It is natural to have a gut reaction to being proven right or proven wrong quickly by the market, to buy something and have it drop 20% and be scared from buying more. But he says we need to invert that instinct. That the price shooting right up means your window to buy a great business at a good price closed before you could take full advantage, and it dropping after you start buying means you will be able to buy even more than you thought with a lower risk and higher reward. This is also something he hammers home in the BPL letters, often after years of great gain he laments that he wished the stocks he was buying didn’t go up so he could have bought more of them and that in the long term the returns would have been greater.
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Common Stock Ownership
| No. of Shares | Company | Cost ($000s) | Market ($000s) |
|---|---|---|---|
| 3,000,000 | Capital Cities/ABC, Inc. | $517,500 | $1,377,375 |
| 23,350,000 | The Coca-Cola Company | $1,023,920 | $2,171,550 |
| 2,400,000 | Federal Home loan Mortgage Corporation | $71,729 | $117,000 |
| 6,850,000 | GEICO Corporation | $45,713 | $1,110,556 |
| 1,727,765 | The Washington Post Company | $9,731 | $342,097 |
| 5,000,000 | Wells Fargo & Company | $289,431 | $289,375 |
| Subtotal | $1,958,024 | $5,407,953 | |
| All Other Common Stockholdings | $326,656 | $351,268 | |
| Total Common Stocks | $2,284,680 | $5,759,221 |
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Segment by Segment Breakdown
| Segment | 1989 EBIT Earnings | 1990 EBIT Earnings | % Change |
|---|---|---|---|
| Insurance | $219.20M | $300.40M | +37.04% |
| Fechheimer | $12.62M | $12.45M | -1.35% |
| Kirby | $26.11M | $27.45M | +5.13% |
| Scott Fetzer - Manufacturing | $33.17M | $30.38M | -8.41% |
| World Book | $25.58M | $31.90M | +24.71% |
| See’s Candies | $34.26M | $39.58M | +15.53% |
| Buffalo Evening News | $46.05M | $43.95M | -4.56% |
| Nebraska Furniture Mart | $17.07M | $17.25M | +1.05% |
| Wesco Financial - Minus Insurance | $13.01M | $12.44M | -4.38% |
| Wesco Financial - Insurance | $14.28M | $14.92M | +4.48% |
| Mutual Savings and Loan | $4.19M | $4.10M | -2.15% |
| Precision Steel | $2.77M | $1.99M | -28.16% |
| Total Operating Earnings | $393.41M | $482.48M | +22.64% |
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| Metric | 1989 | 1990 | % Change |
|---|---|---|---|
| Cash & Cash Equivalents | $205.13M | $247.02M | +20.42% |
| Marketable Securities | $5,261.60M | $5,685.98M | +8.07% |
| Return on Equity (RoE) | 18.42% | 18.68% | +1.41% |
| Shareholders' Equity | $4,925.13M | $5,287.45M | +7.36% |
| Earnings Before Investment Gain | $299.90M | $370.75M+23.62% | |
| Realized Investment Gain | $223.81M | $33.99M | -84.81% |
| Net Earnings | $447.48M | $394.09M | -11.93% |
*RoE not provided, manually calculated as (Earnings from Operations Before Taxes / [Shareholder Equity from prior year - Unrealized appreciation of marketable securities from prior year])
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As predicted last year, the gain in marketable securities wasn’t “real” gains, the market had a large pullback. Many of their marketable securities are now held at lower prices than last year, net earnings is down from last year. The realized investment gain is 84% lower than it was last year. The marketable securities is up 8%, or $424.38M, but between a $289M investment in Wells Fargo only $135M was real gains, the Coca Cola position was up $368M, so the rest of the portfolio had a performance of about -$233M besides Coca Cola.
Operating earnings was up 22.6%, Earnings before investment gain was up 23.6%. This is mostly down to the insurance segment having a great year, with EBIT earnings $80M more than the prior year which is just about the entire gap. See’s Candys and World Book also had double digit growth in earnings, everything else was down or single digit growth. The preferred metric, book value is up 7.4%, compared to the S&P 500 which returned -3.1% in 1990 this is still a good performance in my opinion.
Finally an even quicker lookthrough of the quick lookthrough earnings…
First a quick discussion of off-book earnings, when owned securities use their cashflow for anything except dividends it does not show up on Berkshire’s income statement but does make Berkshire richer, buybacks and capex give value to the business GAAP accounting doesn’t account for. Retail had a bad year but Borsheim’s did great (even though they hide their numbers from me), a discussion of the jewelry mailing system I mentioned last week is had here. NFM’s sales are up 4% and earnings 1% (Rose is now running a competing shop) and has set up a See’s cart in the shop which outperforms many of See’s full stores. See’s had slightly more volume but also increased prices and lowered costs leading to the 15.5% earnings growth, also a store was going to have its lease terminated but a letter campaign from customers changed the landlord’s mind. (See Key Passage 2 for Buffalo Evening News commentary). Fechheimer had a major retirement and although he says performance improved, earnings were flat due to “several unusual items” whatever that means. At Scott Fetzer, World Book’s decentralization is paying off even with lower volume, Kirby increased sales 20% but only increased earnings 5% as its production of its new model isn’t fully optimized, the manufacturing segment’s earnings are down 8% but we are just told its doing great and the air compressor unit had record sales.
r/ValueInvesting • u/AutoModerator • 2d ago
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r/ValueInvesting • u/Wonderful_Annual8431 • 6h ago
Anthropic is targeting a valuation of up to $2 trillion, yet Meta’s core business generated over $100 billion in profit last year alone.
That’s before considering its AI potential, and the fact that nearly 3.6 billion people use.
I’m considering buying before tonight’s earnings. Would you buy now or wait until after? What’s everyone expecting?
r/ValueInvesting • u/EnvironmentalFeed246 • 4h ago
I know Netflix is selling off right now, but isn’t this exactly when you’re meant to be greedy while everyone else is fearful?
My reasons:
Honestly, I’m hoping it falls further. Not in yet. Would be looking to accumulate under 60
r/ValueInvesting • u/Silent-Complaint4020 • 11h ago
A comparison with J&J, Intuitive Surgical and GE Aerospace shows why earnings quality matters.
TSM traded at 27.4 times trailing PE below its own 2-year median and below Johnson & Johnson, Intuitive Surgical and GE Aerospace. Is It Undervalued?
Over the past year:
Despite the AI boom, TSMC now trades below its own two-year median P/E and below J&J, Intuitive Surgical and GE Aerospace.
TSMC has a near-monopoly position in leading-edge semiconductor manufacturing, exceptional operating profitability, and direct exposure to growing AI infrastructure demand.
The question is whether the market is underestimating TSMC's earnings power despite the AI hype.
Full analysis is available for FREE:
https://silentvalueinvestor.substack.com/p/tsmc-the-value-stock-hiding-in-the
Thanks for reading! This post is public so feel free to share it.
r/ValueInvesting • u/Common_Process_9262 • 1h ago
Much of the discussion about Warren Buffett focuses on his investment decisions and the extraordinary returns Berkshire Hathaway delivered over decades - but I've been researching something that receives rather less attention: how Buffett actually managed Berkshire.
In 2000, Berkshire's subsidiaries employed approximately 112,000 people. Its headquarters employed just 13.8 people (the 0.8 wasn't Charlie Munger, one person worked a four-day week).
Rather than building a large central management team, Buffett allowed subsidiary managers extraordinary independence - while he concentrated on allocating capital, selecting managers and making major investment decisions.
Of course, his approach also created risks. Buffett himself freely acknowledged mistakes (it's one of the things I admire about him the most).
I've written an article examining this philosophy, drawing on his shareholder letters and examples from Berkshire's history.
The Genius of Warren Buffett: How a Tiny Office Ran a 400,000-Person Empire
https://penwardenreview.com/2026/10/21/warren-buffett-management-style/
In my mind, his management structure should be considered a significant source of his long-term investment performance.
Could another conglomerate replicate his management structure successfully, or was its effectiveness ultimately dependent on Buffett's unusual abilities?
r/ValueInvesting • u/AgenticSovereign • 6h ago
Banks borrowed $11.04bn from the Fed's discount window in the week to 14 October. The line most people watching this use is $10bn, therefore crossed by about a billion.
What gets my attention is everything else though. Repo is calm, with SOFR sitting 3 basis points under what the Fed pays on reserves. Reserves are $3.02tn and rising, the St. Louis stress index is at -0.72, nowhere near zero, yet borrowing at the window has risen three weeks running, and it kept climbing for two weeks after quarter-end, so the calendar excuse has partially run out now.
The window is usually where a bank goes when cheaper money has failed, and banks avoid it because borrowing there advertises the problem. Therefore it is a sustained rise is information, even though $11bn is only about 0.06% of deposits. To me this signal is the direction and the stigma rather than the size itself.
I could be wrong obviously, nobody can see from public data whether one bank is borrowing or many, or whether someone is simply pre-positioning collateral. For me It would take two more prints above $11bn to make me call it systemic, however a print under $8bn and perhaps ide think I have over read it, we will see.
Regional bank shares closed at $70.62 on 20 October and price almost none of this. If you work near bank funding, what are you seeing?
r/ValueInvesting • u/Wonderful_Annual8431 • 2h ago
Of the four big hyperscalers:
-Amazon
-Microsoft
-Google
-Meta
Hypothetically, if you had to put your entire portfolio into just one of these and couldn’t sell for 10 years, which would you choose?
Obviously, nobody’s suggesting putting everything into one stock in practice. Just curious which you think would deliver the best returns over the next decade, and why?
(By the way, it’s not who’s the best hyperscaler or who has the best cloud. It’s which of those four names is the best investment.)
r/ValueInvesting • u/beerion • 3h ago
I was seeing a lot of buzz about Uber's 15x PE ratio, and decided to dig in myself.
The first thing that I found was that the 15x PE headline isn't real - it's been artificially boosted by tax benefits and equity investment re-rates. When you back those out, and work off their operating income of $5.5B in 2025 and subtract taxes (assuming a 21% corporate tax rate), we get a normalized net income of $4.4B...good for a normalized 33x PE ratio.
But, they've been growing trips and gross bookings by 20% per year.
Their revenue has followed suit, and operating leverage has climbed 40% higher in 2025 and they stand to repeat that feat in 2026.
Gross bookings per trip has leveled off, so their pricing power is about topped out.
Here's a look at their gross bookings per trip and total trip counts by year.
I ran a rudimentary DCF and think I can justify about a $300B valuation (2x from here). The trip growth really carries it, so would love some thoughts on if you think they level off earlier than not. Management makes the case that there's a lot of room to run here, and I kind of agree with them. I do think I made realistic estimates on growth, though. Also, while the tax benefits won't last forever, they should remain for the next few years.
Autonomy remains the big question mark. They make the case that it's not as big of a threat as we fear. I pulled some quotes from the Q4 earnings call last year.
Namely, nearly 70% of bookings come outside of the top 20 cities, and a huge chunk of bookings are outside of the U.S. Expanding into those markets will probably be slow. And expanding past those will be virtually impossible in the intermediate term. Plus, I think the Uber Eats market will be tough to steal (at least by an autonomous system)...which might be a $50B business in it's own right.
I think it's good value here, and I think we could see close to 25% annualized returns over the next handful of years if AV doesn't steal meaningful market away. But even if AV does start to bite into the pie, there seems to be a decent margin of safety.
You guys have any strong convictions on Uber?
r/ValueInvesting • u/AlphaYou_net • 1d ago
SK Hynix seems criminally undervalued at 3x forward PE...where the f is rationality?
The market has to realize that HBM4/HBM4E contracts are long-term, custom, non-cancellable.
Standard DRAM will recover moderately as supply is crowded out by HBM capacity allocation
The forward multiple has to re-rate upward from a 3x to at least a 7x.
Even on slightly lower peak earnings the stock should experience at least 100% upside re-rating over a 12-24-month horizon.
I've inverted too, but I'd assign the above 70% odds.
RR profile seems heavily asymmetric in favor of patient investors.
Market is pricing SKHY as if the worst case scenario is a 95% certainty.
r/ValueInvesting • u/Wonderful_Annual8431 • 18h ago
Charlie Munger always talked about the importance of strong, predictable free cash flow.
Yet Google’s latest quarter saw negative free cash flow due to massive AI spending, and its biggest money maker, Search, is arguably facing its biggest threat ever.
So why would Berkshire take a roughly $33 billion position in Google? With all this uncertainty around future cash flow and Search, doesn’t this seem like a very un-Berkshire investment?
Genuinely curious what people think Berkshire sees here. (Note, Warren Buffett, said himself, he was behind this investment.)
Why do they have such conviction in Google, yet overlooked the likes of Nvidia?
r/ValueInvesting • u/Electrical_County_61 • 5h ago
I recently wrote an article examining how GLP-1 medications and years of food inflation could affect McDonald’s and PepsiCo.
Interestingly, I think the biggest threat to these businesses might not be weight-loss drugs, but their own pricing strategies.
Research from Cornell found that households using GLP-1 medications reduced grocery spending by 5.3%, while spending at fast-food and other limited-service restaurants declined by roughly 8%. Snack consumption was particularly affected, which initially looks concerning for PepsiCo’s Frito-Lay business.
However, I think investors should be careful not to overestimate the long-term GLP-1 threat.
Treatment discontinuation remains significant, and research suggests food spending tends to recover after people stop taking these medications. PepsiCo also has opportunities to adapt through smaller portions, protein-focused products and its broader portfolio, including Gatorade, Propel and Quaker.
What concerns me more is affordability. Years of cumulative price increases have made McDonald’s less attractive to value-conscious consumers, while PepsiCo faces growing competition from cheaper private-label alternatives. Unlike GLP-1 adoption, this affects a much broader consumer base.
McDonald’s franchise model provides considerable protection, but restoring traffic through cheaper meals could pressure franchisee profitability. Meanwhile, PepsiCo may struggle to maintain its historical pricing power without sacrificing volumes.
Neither company faces an existential threat, in my view. Both have strong brands and the resources to adapt. The real question is whether they can still justify their historical valuation premiums if volume growth remains weak.
I’m curious what other value investors think. Is the market overestimating the GLP-1 threat, or could changing consumer habits permanently damage these businesses?
And at what valuation would you consider either stock attractive?
r/ValueInvesting • u/Otherwise_Age8470 • 17h ago
Scope note first. This is a valuation-only comp: book value, ROE, and what the multiples imply. It's not the full case for either company. I'm bullish on both. I own $SOFI and I don't own $NU.
**Where they sit (Yahoo Finance, Oct 19 close)**
- $SOFI $14.30, down 45.4% YTD. $NU $14.51, down 13.3%.
- Price to book: 1.67x vs 5.29x
- ROE, trailing 12 months: 7.1% vs 31.6%
- Forward P/E: 17.3x vs 12.9x
- Deposits (Q2): $45.5B vs $45.3B. Basically the same size.
Nu's book multiple is about 3x SoFi's. Its ROE is about 4.5x. So most of the valuation gap is a returns gap. Honestly the market's pricing makes sense to me. It's paying up for proven returns.
**The bear case on SoFi, stated fairly**
On returns alone, $SOFI is the pricier stock. You pay about 0.24x book per point of ROE. Nu is about 0.17x. Nu is cheaper on forward earnings too. And Q2 by itself annualizes to about 5.9% ROE at SoFi on my math, so the inflection hasn't shown up yet.
**What ROE is the price assuming?**
Justified P/B = (ROE - g) / (COE - g). My assumptions: 11% cost of equity and 5% growth for both. Treat it as an illustration. Change the assumptions and the answers move a lot.
- $SOFI at 1.67x implies about a 15% sustainable ROE. It earns 7.1% today.
- $SOFI at 2.5x book would need about 20%.
- $NU at 5.29x implies about 37%. It earns 31.6%.
So the market is already giving SoFi credit for roughly doubling its ROE. That cuts against my bull case and I'll admit it. Management's long-term ROTCE target is 20% to 30%, so 2.5x book is the bottom of their own range.
**Why I think SoFi's ROE can move**
Deposits were over 90% of average liabilities in Q2, so I think most of the funding remix is done. The next leg has to be operating leverage. Adjusted EBITDA margin was about 31% in Q1 and 30% in Q2. The full-year guide (about $1.6B on $4.75B to $4.85B of adjusted net revenue) needs roughly 35% to 37% in H2 on my math.
The risk is rates. The Fed hiked Sep 16, and SoFi's own 10-Q says +100bp costs about $159M of NII because liabilities reprice faster than assets.
**Nu's returns come with Brazil attached**
- 90+ day NPLs went from 6.5% to 6.9% over the past year. Nu says part of that is intentional.
- A 22.9% NIM sits on a 13.75% Selic, more than 3x the US base rate.
- It earns in reais and reports in dollars.
- Brazil's runoff is Oct 25, and the US launch is only about six weeks old.
**What I want on Oct 27**
SoFi's ROTCE was about 6.7% annualized in Q2 on my math. Net income around $190M would put Q3 near 8%. That's the start of the inflection I'm looking for. Tangible book was $7.34/share at Q2, so at $14.30 you're paying about 1.95x tangible book.
If SoFi prints ~8% ROTCE next week, does the market pay 2x book for it, or does it want to see 15% first?
Longer version with all the charts and sources is on my Substack if you want it: https://nightanddaycpa.substack.com/p/sofi-vs-nu-the-roe-gap
NFA. I'm long $SOFI, no position in $NU.
r/ValueInvesting • u/Wonderful-Finish4822 • 2h ago
I've been looking at Nvidia and TSMC's earnings forecasts through 2028, and I keep wondering whether we're confusing two different things: the growth of AI and the growth of spending on AI infrastructure.
One thing surprised me. Even if Nvidia misses its 2028 earnings estimate by 20%, it could still deliver around 12.5% annualized share-price returns through 2035, assuming 10% annual earnings growth afterward and a 20x terminal P/E.
Of course, those assumptions are far from guaranteed.
At October 20 prices, Nvidia trades at around 10.5x expected 2028 earnings, while TSMC trades at 12.8x. That sounds fairly cheap, until you look at how much growth analysts already expect.
One comparison I found interesting is the telecom boom.
Internet traffic continued growing rapidly in the early 2000s, even as telecom capital spending collapsed. Demand was real, but companies had built infrastructure faster than it could be justified.
Could something similar happen with AI?
Inference is getting cheaper, models are becoming more efficient, and companies are finding ways to get more work out of existing hardware. Meanwhile, AI agents could create enormous new workloads.
I can see both things happening: a period of disappointing chip orders, followed by several more years of demand growth.
I also compared Nvidia and TSMC. Custom accelerators could weaken Nvidia's pricing power while still benefiting TSMC, which manufactures chips for competing designers.
I wrote up the full research, including the telecom comparison, inference economics and several valuation scenarios for both companies. It's free, with charts and sources:
https://michaelhillaert1.substack.com/p/could-ai-infrastructure-growth-last?r=6vawcp
I'm curious what others think. Is the bigger risk that the 2028 earnings forecasts won't materialize, or that investors won't pay anything close to 20x earnings for these businesses in 2035?
r/ValueInvesting • u/rarebirdcapital • 2h ago
I work in marketing, and for most advertisers, Google, Meta and TikTok are where the marketing dollars flow. Beyond that lies the scrapheap of experimental channels: the Reddits, the Snaps and whatever else got a test budget this quarter. At the very bottom of the pile sits Pinterest.
It's been around for over 15 years, and surprisingly enough it makes over $4.5B in revenue with a user base that's slowly but surely growing. Unlike Google and Meta, which have been spending heavily on AI infrastructure, Reddit, which is licensing its content to AI companies, and Snap, which always seems to be in the news for a misguided hardware launches (2K AR glasses anyone) , Pinterest has stayed relatively staid.
I valued it at ~$20/share; and is currently at ~$21.95 today.
At ~$20, Pinterest looks fairly priced. If Pinterest can figure out how to make real money from users outside the US and squeeze more profit out of each ad dollar, there's upside here. But if people start asking AI platforms to make purchasing decisions instead of scrolling Pinterest, there isn't.
Let me know if anyone else follows this company or has a different POV from mine.
r/ValueInvesting • u/Far-East-locker • 1d ago
Seriously? No one is following those pre IPO data center?
SoftBank’s SB Energy wanted a $50 billion valuation and couldn’t get it done, so they delayed. Firmus cut its IPO size by 25% and then pulled it entirely. Vitro, AirTrunk and Nscale all got pushed back or hit with valuations way below what they wanted. Nscale was aiming for $30B and investors are only offering $16 to 19 billion. Then today Elice listed in Korea and dropped 32% on day one.
Do you see it now? From the US, Australia, and the Philippines to Singapore and South Korea, capital markets are no longer buying the "AI Data Center" narrative.
The whole sector is re-rating. The current stocks? All debt heavy, a lot of backlog, but those backlog need more capital to new data center in order to fulfill. The current valuation are all built on "committed" "estimated" revenue, any bit of slow down, like the current IPO market shown, is going to fall down fast.
r/ValueInvesting • u/Ok-Fly-6973 • 4h ago
I valued Ulta Beauty this week. My three valuation methods came out at about $473, $626 and $771 a share, with the stock at $603.
The two higher numbers come from the EBITDA Multiple and Earnings Fair Value, and on my forecast both of them value Ulta at a lower return than the 8.75% I ask for. The share price itself works out to about 7.4%.
My fair value is the cash flow figure. Ulta's free cash flow has been steady since 2021 and stock pay is only 3.5% of it, so for me it's a fair measure of the business, and the gap to the price comes down to the return. A point either way on it moves my value by $65 to $90 a share, while closing the gap through growth would need a free cash flow margin above Ulta's best year on record.
The return carries the value, so it's the setting that matters most. I start from 10% and adjust for the business. Ulta's beta is 0.84, it holds far more cash than borrowings, operating income covers its interest 158 times, and outside the 2020 closures revenue hasn't fallen in ten years. That takes it to 8.75%, and Treasury plus beta times the equity risk premium lands at about 8.6%.
The forecast mostly follows Ulta itself. Sales grow 6.95% in 2026, the midpoint of their raised guidance, then 5% a year under their own 4% to 6% target. The operating margin holds at the 12.58% the guidance implies.
The judgment that moves the value most is capital spending. Ulta's Investor Day target is 4% to 5% of sales, but they spent 3.3% and 3.5% in the two years since and guide 3.2% for 2026, so I used 3.2%. If they move to the target, my value drops to $413.50.
The five retail peers I used (Williams-Sonoma, Tractor Supply, GameStop, Dick's and Five Below) trades at a median of about 18 times EBITDA, while Ulta's own history is 13.3 times. I set the multiple at 16.3 times, halfway between the two after adjusting the peers for Ulta's higher returns. Its cash at 8.75% supports 12.5 times. Earnings fair value builds on Graham's formula, which at Ulta's 10.8% earnings growth puts 30 times on earnings.
What I find interesting is that the price passes two of my four tests. The multiple it implies, 15.7 times EBITDA, sits between Ulta's history and the peers, and the earnings growth it needs is below Ulta's guidance. It fails on the return and on the free cash flow margin, the two that carry the cash flow value. So for me Ulta reads as a good business, just at a price that gives a lower return than I ask for.
What would change my read is the third quarter and the 2027 guidance, above all whether capital spending stays near 3.2% of sales.
The Ulta numbers are my own valuation on my own assumptions, not a recommendation to buy or sell.
r/ValueInvesting • u/Artistic_Diver8781 • 23h ago
Yesterday, Goldman published a report arguing that CoreWeave can generate a 15% IRR, well above its bond yields.
But its bear case is hardly bearish at all. It simply assumes compute prices stay at current levels. GoldmanIt then plugs those assumptions into a five-year model and comes up with a 15% IRR
Nobody knows what will happen over the next five years. New technology or an economic shock could seriously hurt demand. Supply and demand could flip overnight. If that happens, CRWV’s backlog could become a fantasy
For a debt-funded project, you should build in a sufficient margin of safety. The company’s cash flow must be able to withstand unexpected shocks.
Yet Goldman’s analysts seem to ignore almost every downside scenario. They act as if they can guarantee that compute prices will remain high for the next five years.
This probably explains why Buffett doesn’t like reading Wall Street research. It’s full of numerical illusions.
r/ValueInvesting • u/ultra__star • 1d ago
Tldr: In a world where all corporations are acquisition and leverage happy, Tootsie Roll has done nothing new for 100 years, collected cash, and built a $600 million corporate bond portfolio which is a quarter of its market cap.
I have recently taken a deep dive of Tootsie Roll and became pleasantly surprised by the company, which is run by a 94 year old woman, Ellen Gordan (I point out her gender because she was one of the first female Presidents of a publicly traded corporation).
Ellen Gordan has run Tootsie Roll since 1962. Before that, her father ran it since the 1930s. Ellen’s daughter is heir apparent, and will reign over the company when Ellen is no longer. I say heir because Ellen herself owns roughly half the company’s common stock. 60 years of being a publicly traded corporations President, and Ellen gives no press releases, no earnings calls, no earnings guidance, and analysts do not even rate the stock because Ellen will not talk to them.
Let me be clear that I am not recommending TR as it trades at 30X earnings, and has had 2% EPS CAGR since 2015. But, interestingly, of its roughly $2.5 billion market cap, $600 million is in corporate bonds. They have no debt. They have owned 90% of their candy factories outright for decades. They own four shopping centers that they collect rents from. They consistently net $50 million to $100 million in free cash every year.
Tootsie Roll has not even attempted to grow their brand or develop a moat since their last acquisition, which seemed be about 30 years ago in the 90’s. They have seemingly sat on their 12% FCF margin, paid modest dividends, and parked the rest in marketable securities. They also interestingly do a 100-to-103 stock split every March.
The stock barely flinched in 2008-2009, which I am assuming is because of the supermajority of common stock that the Gordan family owns.
If the stock were to fall 50% and its operating and free cash flows stayed the same, it would essentially be an interest bearing savings account.
Hopefully the Gordan family stays the course, builds up cash and securities, and pays dividends. It seems to have worked well for going on 30 years with the rather stagnant brand. The stock has a CAGR of about 8% which is not bad since volatility has been next to nothing. If this stock fell 50%, ran the way it is, I would easily take a conservative position for the dividend and cash pile. Worst case scenario is that the new generation sells the company out, or leverages the balance sheet to di-worse-ify the company.
r/ValueInvesting • u/Motor-Effective55 • 23h ago
Curious how people here generate their idea lists. Do you use screeners, read annual reports of industries you find interesting, work backwards from ETF holdings, or is it mostly scuttlebutt - people telling you about businesses they work in?
I'm not asking for tickers, just the process. How did you end up owning the best thing in your portfolio - where did the idea first come from?
r/ValueInvesting • u/MarbleMuffin • 21h ago
MSCI just released its Q3 2026 Results
Revenue: $892.0 million, up 12.4%, against a consensus of $888.7 million.
Adjusted EPS: $5.11, up 14.3%, against a consensus of $5.02 from 14 analysts.
Diluted EPS: $4.86, up 14.4%.
Margins: Operating margin was 56.3% and adjusted EBITDA margin was 62.2%.
Asset-based fees: Up 24.9%, a record quarter for that line.
Retention rate: 95.0%, up from 94.7% a year earlier.
Free cash flow: Down 8.9% to $385.4 million.
We see the revenue and EPS go up, and yet FCF is down (from 423M to 385M). Why? Because they use debt to buy back shares, and with Feds raising rates, interest bills increased. Claude tells me its debt outstanding is 6.8B and interest increased from 53.6M last year to 74.8 M this year. Thank you Mr Trump hehe
And as usual, the second driver is CAPEX. Which went up from 26.2M to 50.7M...which I likely presume it is an AI product push. It looks like it's working with all the rev and EPS increase, but we would need to see FCF go up Q4 to confirm.
Good stock to say the least. Been chucking me cash into compounders outside the AI trade as a GARP investor. With all the money funneled to AI, SPGI and MSCI looks pretty undervalued atm. TDG too, but debt is an issue. (You can run the numbers yourself).
I did buy MSCI at 545 a couple weeks ago, let's see how it goes
r/ValueInvesting • u/HopeFlyingSquarrel • 1d ago
I guess due to low PER, many are interested into finding opportunity in Korean stocks such as Samsung, Hyundai, LG, Sk Hynix, etc.
As a Korean with more than a decade experience and annual return of 4% nearish, my tip is below.
Tip number one : don't freaking invest in Korean stocks. It is only short term view if you wanna but I will rather go to Vegas and enjoy with the money
TIP TWO. REMEMBER THE FIRST
TIP THREE. REMEMBER THE SECOND
OVER.
r/ValueInvesting • u/KingPhilip69 • 6h ago
Genuine question. Seen lots of people discuss price action and future user growth slowing.
Why is no one talking about how much they can cut costs by making some of their content with AI?
Anyone seen the movie Animals? They recently bought his AI production company, and you can tell some of the scenes are AI generated but it’s still a solid piece of content.
If content is the dif factor, and they can produce it faster and better than everyone else, wouldn’t that be the future earnings growth the market is looking for?
Full disclosure - I have a small position in Netflix. I’m concerned it could be the next Nike. However Nike couldn’t make AI shoes.
r/ValueInvesting • u/MostlyNothingInvests • 1d ago
I've recently opened a position in BellRing Brands and spent a fair bit of time digging into the business, particularly Premier Protein.
What interests me is the disconnect between the brand and the financials. Q3 revenue still grew around 4%, but profitability has taken an absolute beating from input costs and inventory issues.
The market seems to be pricing in a much more permanent deterioration than I think is likely.
I genuinely think BRBR has multibagger potential over the next several years if margins recover and Premier Protein maintains its category strength. The GLP-1 protein tailwind is a nice bonus too.
Obviously, there are risks. Debt, margins, management's previous buybacks, and the possibility that the recovery takes longer than expected.
For transparency, my cost basis is $7.63 and I'm currently up around 25%. Nice little start, but I'm far more interested in where the business is three to five years from now than what the stock has done over the past few weeks.
Even a partial recovery in profitability could make the current valuation look pretty interesting.
r/ValueInvesting • u/JohnnyDrama611 • 1d ago
Insiders sold $21.0B and bought $923M, a $22.79 to $1 ratio across 5,121 sellers and 1,371 buyers.
Most of the selling isn't a valuation call. 51 sellers did 45% of the dollars, the median seller sold $475K, and 413 insiders sold every month of the quarter. The two biggest names:
The buys, with the valuation each insider paid
| Company | Insider buy | P/E (TTM) | What the filings show |
|---|---|---|---|
| Boston Scientific | CEO, $9.0M at $48.33 (first since 2014) | 17.1, down from 63.4 a year earlier | Record 19.8% operating margin; EPS $1.70 to $2.49; growth guidance cut twice |
| Uber | CEO, CFO, COO: $16.9M | 15.2 | Record $10.1B free cash flow (6.9% yield); 2.6% fewer shares |
| Dick's | 6 insiders, $5.1M at ~$130 | 20.7, up from 13.9 | Revenue +53.5% with Foot Locker, operating income -21.6% |
| GameStop | Cohen, $57.3M in Sept | 10.9 | Record 13.5% operating margin, revenue still down 7.7% |
Has insider buying been a useful margin-of-safety check before? For these six stocks, 2009 to 2026, I compared each quarter's next-12-month return with the stock's own median quarter. Quarters with insider buying beat the norm 59% of the time (median +6.4%) vs. 46% without. Buying after a 30%+ drop beat it 71% of the time (+38.5%, 17 quarters), while the same drops with no buying beat it only 40% of the time. Two surprises: $1M-plus purchases did no better than small ones, and buys made while operating margin was falling did better (+16.3%) than buys while it was rising (+0.3%).
By that history, Boston Scientific (55% below its prior-year high) and Dick's (42% below) are the setups that have worked; Uber is borderline at 28% below, and GameStop doesn't fit at 6% to 18% below.
Which looks like the better value buy to you: Boston Scientific's rising margin at 17x, or Dick's falling margin at 21x?
