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Bram de Haas
Bram de Haas
Articles (230)  | Author's Website |

Warren Buffett on Succession, Tax Cuts and Market Valuation

Summary of Warren Buffett's CNBC appearance

January 11, 2018 | About:

Warren Buffett (Trades, Portfolio), arguably the greatest investor of all time, appeared on CNBC Wednesday morning to discuss appointing Gregory Abel as vice chairman for noninsurance operations and Ajit Jain as vice chairman for the insurance business. Buffett assured us he is in good health.

I do not think this news is actually a big deal as both executives will mostly be doing what they have been doing, although it does lift some of the mystery surrounding Buffett's succession plan.

Below is a summary of his opinions as well as my reflections. I have structured my notes by subject, but if you watch the interview you will notice they are not in chronological order.

Buffett doesn't think markets are overvalued relative to interest rates

Buffett repeats this opinion a couple of times. If you put it into context, you get the impression he dislikes equities the least. Here are some of the things he says (quotes may not be exact):

"If rates go up the value goes down (read: as in the value of the stock market)."

"We've had a bull market since march of 2009."

"The tax act is also a huge fact in valuation."

"Major change in the silent shareholder taking a lesser cut of 21% versus 35%."

Tax cuts

Buffett thinks the tax cut to 21% is not baked into the stock market and is a big deal for Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B). He points out this increases earnings power that accrues to the investors by more than 21%. It does not mean immediate cash in the bank for Berkshire, but over time it is significant. He also explains the $100 billion in deferred capital gains taxes on Berkshire's balance sheet will go down by several billion.

Every company with a lot of deferred tax liabilities will see liability disappear from their balance sheet and their book value increase. Corporations with a tax asset will have the reverse happen to them.

Some businesses will have the tax decrease competed away. Businesses with strong economic moats, which is what Berkshire prefers to buy, will have shareholders capture a larger percentage of the tax cut.

Berkshire is a net buyer in the market

Buffett says one reason is the money keeps coming in and they have to do something with it. Which is one of those remarks that have me think he's not that bullish.

He gave the impression he is still selling IBM (NYSE:IBM). Berkshire is probably not done selling or he would have no problem saying they got out. The 13-F comes out next month.

Interest rates and economics

Buffett pays no attention to anybody's interest rate predictions, including his own. In addition, he does not think economists help to do well in the stock market at all.

The national debt has increased 1,000 times over Buffett's lifetime. U.S. gross domestic product increased sixfold. No one would have thought that was possible when he was young. You do not want to be dogmatic in economics.

Capital allocation

Buffett has $80 billion for acquisitions. There is no target in his crosshairs, but he would really like to have a target. Buffett may allocate more money toward stocks, but will not buy a specific business or stock because of tax cuts.

 Charlie Munger (TradesPortfolio) came on later and said he sees bubbles in venture capital, with too much money chasing too few deals.

Both commented negatively about the cryptocurrency space.

Munger

Munger thinks there is a chance the tax cuts will work very well. In India, there is no dividend tax and no capital gains tax and India is a poor nation at that. Munger is not so sure India is wrong.

He thinks it is right to be in equities, but there will be a fair amount of agony.

He also thinks the situation is weird: Who could have thought the Fed could print so much money? Who could have thought interest rates could stay so low for so long?

Full video

Disclosure: Author has no positions in any stocks mentioned.

About the author:

Bram de Haas
Bram de Haas is the managing partner of several investment partnerships.

Visit Bram de Haas's Website


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