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Berkshire Hathaway Inc. Message Board

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  • donedoodit donedoodit Oct 26, 2012 11:27 AM Flag


    If the beachlawyer thinks his float has been hurt by low interest rates, wait 'til he sees what happens to the value of that float when interest rates go up. Take a look at his bond portfolio and give some consideration to what he once asked Jack Byrne when Jack was running Geico: "Why do you lend when interest rates are rising?"

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    • I think you're looking at this the wrong way: BRK's bond "portfolio" is not intended as a long term investment. Buffett hates the idea of cash. The only reason we hold bonds is because we have to in our insurance operations or for liquidity purposes. I would bet that nearly all our bonds are short term maturities, so rising rates have little effect on their prices. In the mean time, we hold $70 billion dollars of float, earning miniscule rates. With normal interest rates, our float could earn billiions more each year. The value of our float is a function of what it earns. In today's low interest envrironment, it earns very little. To me, this is as good an explanation for BRK's low Price/BV ratio than any other that has been offered.

      • 1 Reply to beachlawyer2003
      • You are not displaying a great deal of understanding or knowledge of the business. Further, you make guesses (wrong, I might add) about the details when the facts are right before you. Read the most recent annual report on SEC Form 10-K.

        Page 7 tells you what the float is. It is a liability, backed by investments. Historically, the insurance industry has teneded to back its property-casualty and reinsurance reserves with very conservative investments -- bonds.

        Page 8, WEB tells you that his portfolio consists of large amounts of fixed income securities.

        Page 37, WEB tells you that he has $28 billion of bonds that have been marked up to fair value of $30 billion. He also has $75 billion of equities and $21 billion of cash.

        Page 56. Take note of the $53 billion of goodwill

        Page 58. Here is a precise desciption of what happens to the portfolio in the event of changes in the interest rate environment. For instance, a 300 basis point increase (you do understand basis points, don't you?) will drive the value of the bond portfolio down $2 billion.

        Page 75. Here is a mapping of the maturies of the bond portfolio. Roughly $7 billion matures in one year or less and $14 billion in 1-5 years. Also, approximately two-thirds of the bond portfolio is split reoughly equally between corpoprate bonds and foreign government bonds (Greece? Spain? Ireland? Finland?)

        Traditionally, insurers and especially reinsurers have tended to match the maturities of their bond portfolios with the expected maturities of the liabilities that, on average, are about ten years out. But over the past decade the insurers, including WEB, have gone short on the investment portfolio to protect themselves against the eventual rise in interest rates. So you are at least partly correct, even if it is by accident.

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