Berkshire and the power of reputation

Good day. More details are emerging about the budget proposed by the Republican of Congress. The camera version, in its current form, adds more to the deficit of what many investors expected, and makes great cuts to the social programs of what the Democrats had feared. The 10 -year treasure yields rose 7 basic points yesterday. Send us an email: Robert.armstrong@ft.com, aiden.reiter@ft.com and Hakyung.kim@ft.com.

More about Berkshire’s superior performance

Last week we wrote a couple of parts on the remarkable long -term performance of the actions in Berkshire Hathaway. We emphasized that, like Andrea Fazzini and her colleagues in AQR they have arguedMuch of Berkshire’s strong performance is explained by exposure to standard “factors” performance such as value, quality and low volatility, mixed with some leverage and many years.

Edward Finley, by Arrow Wealth Advisory, a friend without charging, conducted his own regression analysis between the A-Share performance of Berkshire and six canonical factors from 1996 to the beginning of 2025. That is shorter than the Frazzini study period (1976-2016) but more updated. What Finley found is summarized in the table below. It is full of horrible statistical terms, but I will guide it through it (the knowledge of my own statistics is thin, so real experts can send me an email to correct me if I ruin it):

The blue row at the top provides the factors: beta (low volatility actions), quality (high profitability), impulse, value (low price/book relationship) and size (small existence versus large). The “factor” of the market is only the performance of the entire market. The next column shows Berkshire’s regression coefficient for each factor. Look, for example, in the beta factor on the left. The 0.17 regression coefficient means that for every 1 percent move in the beta factor in a given month, Berkshire moves 0.17 percent. The next column, the T-Stat, is a measure of the statistical importance of the relationship between Berkshire’s performance and the factor. A number above two generally indicates importance. The final column, the annual performance, only shows how a long -term neutral market portfolio based on that factor (for example, buy small shares and sell large shares) carried out in an average year.

Then, what mattered to Berkshire during the period, according to Finley’s work, was the exposure to bass beta, value and (in a negative sense). However, simple market exposure was the most important. It is interesting that the quality was not so influential during the study period.

Now keep the cell on the right, the “annual interception”: a percentage point. That is the annual excessive performance, beyond a reference point, which is not explained by exposure to the factor. Berkshire’s general general yield (using the Wiltshire US great capitalization index as the reference point) was 3.3 percentage points per year. So, a little less than a third of that is No Explained by factors exhibitions. So what explains it? Ability? Leverage? Business use of leverage?

That is not the most interesting part. Finley broke out the performance review in a series of periods of five years, to see how factors’ exhibitions changed. Here is your graph:

Observe the form: the exhibitions unfold early and afternoon, but they all join around zero, that is, they do not explain so much of Berkshire’s performance, in the intermediate years between 2001 and 2011.

The interesting thing about that period is that it begins and ends with a market crisis: the disaster of the Puntocom and the outbreak of the real estate bubble. And, of course, during the period that covers both crises, less exposure to market factors (particularly he Market factor) is what you want as an inverter. How did Berkshire achieve this? The changes in their asset portfolio seem an unlikely candidate, since Buffett moves slowly there. Maybe cash exposure played a role; As we have written, the Berkshire portfolio part in cash was high from 2003 to 2007.

But here there is another possibility: that it was not Berkshire, but the market attitude Towards Berkshire that changed. Maybe during the turbulent period, people bought Berkshire not for their particular economic exhibitions, but simply because they believed that Berkshire and Buffett represented security and prudence. If so, that would confirm the opinion of however of the reputation, the images and the abilities of Baffett as Showman are an important performance factor, beyond the purely financial characteristics of Berkshire.

More about Swaps of Sovereign Credit

After yesterday letter Regarding market reactions to a breach of the US.

Why did the default insurance become much more expensive in 2023? Interest rates and peculiarity in sovereign CDs contracts. Brij Khurana in Wellington Management, consigliere of fixed income, explains:

If interest rates increase, the prices of longest -lasting treasure bonds move much lower. A mature 1 year bonus after 1 year, so it generally quotes near the torque, even when interest rates increase. . . Sovereign [CDS] The contracts are [generally] “Physically established”, which means that the protection buyer delivers eligible bonds to the protection seller if there is breach. The protection buyer only needs to deliver the nominal [“face”] Value of the bonds that he assured and, therefore, is encouraged to deliver the bonus with a lower price in dollars. Therefore, in a breach, it is likely that the protection buyer deliver a longest treasure that was issued with a very low coupon a few years ago, whose price has fallen significantly due to the greater interest rate environment in which we are currently.

Think about it in this way: I (AIDEN) Buy Rob protection from $ 100 million of treasure bonds. The predetermined values ​​of the United States owes me $ 100mn in cash; I owe a nominal value of $ 100 million of treasure bonds, not a market value of $ 100 million. Of course, he satisfies this with my bonds of longer duration that I bought a few years ago when interest rates were zero, which have a nominal value of $ 100mn but now they are worth it a lot Less in dollar terms, because rates have increased. I jump happily. Rob, which is, well, without charging, he declares himself in bankruptcy.

The price of CDs takes this into account. It is partly determined by the perceived probability of a breach (numerator) and partly by the present value of the expected cash flows if there is a credit event (denominator). With high interest rates, the value present in the denominator is much lower, because the buyer can deliver the treasure bonds to the cheapest price. The lower denominator mechanically drives the price charged in a higher CDS, as in 2023.

Therefore, CDs prices are an imperfect meter of the risk of non -compliance. We would argue that the chances of a breach were much higher in 2011, when interest rates were zero, than in 2023, despite the fact that CDs prices were much higher in 2023. and there are also a couple of other problems to use them. As Antulio Bomfim in Northern Trust said that it has not been charged, “the market of credit breach in highly qualified sovereigns such as the US. UU. It is very thin, and a small amount of transactions can move the markets considerably …..[they are a better indicator]If you are looking for emerging market economies, where there is a more significant probability of breach. ”In addition, the contracts of sovereign CDs of the United States are often called In euros, which means that changes in CDs prices also reflect expectations for the devaluation of the dollar in case of non -compliance.

In the absence of other good indicators of American budget stress, we will still use CD. But we will use them with a salt grain.

(I reiterate)

A good reading

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