Edge

Finding the financial stories most people miss.
Markets • Companies • Money

[Edge @betedg]

@bubosees cash gave them the power to move when others couldn't

[Edge @betedg]

Berkshire did not necessarily win Johns Manville by offering the price.

Berkshire may have won because Berkshire could actually finance the deal.

At the 2001 Berkshire Hathaway meeting Warren Buffett discussed the acquisition and explained that another group interested in Johns Manville ran into financing difficulties.

That changed the landscape.

Buying a company is not about deciding what an asset is worth.

You also need to be able to close the transaction.

A buyer can have the strategy, the right valuation and even the willingness to pay but still lose the deal if the buyers financing falls apart.

Berkshire had an advantage.

Berkshires financial strength gave Berkshire the ability to commit capital when another potential buyer could not secure the financing it needed.

So the acquisition was not simply:

Berkshire finds a business → Berkshire buys it.

The interesting mechanism was:

Strong balance sheet → reliable access, to capital → ability to execute → competitor constrained by financing → Berkshire obtains the asset.

This is one of the obvious benefits of financial strength.

A strong balance sheet does not just reduce the risk of a year.

It can create opportunities precisely when other buyers are constrained.

That matters most in acquisitions.

When credit markets tighten or financing becomes uncertain the pool of buyers can shrink quickly.

[Edge @betedg]

@DaniilBuilds Exactly, having cash gives Berkshire an edge when others cant get financing

[Edge @betedg]

@DaniilBuilds the real edge was turning one good acquisition into a source of capital for the next one

[Edge @betedg]

@dwerty_qq edge came from seeing the bubble before the market did

[Edge @betedg]

@YaroslavRDn ownership can be worth less than control

[Edge @betedg]

John Malone put money into Ted Turners company when it was in trouble with money.

The surprising thing was what Malone ended up getting.

In 1986 Turner Broadcasting had than $1.3B in debt after buying the MGM/UA film library.

The company had a $121.4M loss in the nine months of the year.

Turner needed money.

In 1987 a group of cable operators led by TCI put in $565M.

But this wasn't just helping the company out.

TCI got shares, a place on the board and the right to stop company decisions.

This changed how the investment worked.

TCI was not someone who owned part of Turner.

It was also one of the companies that sent Turners shows through its cable system.

Malone was getting a place between the people who sent the shows and the people who made the shows.

That position turned out to be very valuable a years later.

By 1995 TCI owned about 21% of Turner.

Then Time Warner wanted to buy Turner in a deal about $7.4B.

Malones small piece of the company gave him something much stronger than just a small share.

He could decide if the deal went through.

He used his power to get better terms for TCI like changes to the exchange rate.

This is the part of investing in companies that people often overlook.

The return on an investment doesn't always come from the company getting more profitable.

Sometimes the rights that come with owning the company are valuable.

Malones money went into a company.

What he got back was shares, control, over decisions and the chance to make choices.

Years later that small piece became a way to get a deal because someone else wanted the same thing.

The lesson is not buy troubled companies."

It's that a small share can be worth a lot more when it gives you the power to make things happen.

[Zynex @0xzynex]

https://t.co/s7CSVJZhBN

[Edge @betedg]

@DaniilBuilds its a strong example of opportunity cost money wasn’t lost on a bad asset, it was lost by being locked into the wrong allocation

[Edge @betedg]

@DaniilBuilds you right bro

[Edge @betedg]

@shevaxgod a valuation is only as useful as the assumptions behind it seeing the model lets you challenge the reasoning, not just argue over the number

[Edge @betedg]

@DaniilBuilds Exactly. opportunity cost is often invisible because the account statement only shows what you still own, not what that capital could have become

[Edge @betedg]

Charlie Munger once said that a single investment decision cost him two hundred million dollars.

The strange part is that Charlie Munger did not lose any money on that investment.

Charlie Munger bought 300 shares of Belridge Oil in 1976 paying one hundred fifteen dollars per share. Three days later the broker returned with an offer for one thousand five hundred shares at the same price. Charlie Munger wanted those shares. However there was a problem. To buy the shares Charlie Munger would have had to sell something else he already owned. Charlie Munger chose not to do that. The additional one thousand five hundred shares would have required one hundred seventy-three thousand dollars of capital according to later accounts, from Charlie Munger. Belridge Oil went on to become an investment.

Years later Charlie Munger called that decision a "mistake of omission". Estimated the opportunity cost of the decision at about two hundred million dollars in his 2001 account. That is a different kind of investing mistake.

I can see how you might lose money by buying something.. You can also lose money by holding something merely good while something exceptional is available. The capital already sitting in your portfolio is not neutral. Keeping it in Investment A means you are choosing not to put it into Investment B. That is the part investors often miss about opportunity cost. Charlie Munger did not fail to recognize Belridge Oil. Charlie Munger recognized it bought it and then refused to make room for more. Sometimes the hardest capital‑allocation decision is not what to buy. It is what you are willing to sell to buy something.

[Lumen @lumenxbt]

https://t.co/3hWKMIBJcw

[Edge @betedg]

@Neighboritto the real advantage isn’t working longer. It’s protecting enough uninterrupted attention to make decisions that compound

[Edge @betedg]

@andreysuperior the investing lesson is that uncertainty doesn’t disappear just because you have a strong thesis,
good investors size for the range of outcomes, not just the one they expect

[Edge @betedg]

@orderflowk exactly man

[Edge @betedg]

Salomon had about $150 billion on its balance sheet.

The bigger problem was that a lot of it had to keep being financed.

Berkshire Hathaway had invested $700 million into Salomon in 1987 through stock that paid a 9 percent dividend.

By 1991 Salomon was running a leveraged securities business with about $120 billion of short‑term financing.

Then the Treasury trading scandal struck.

Senior executives resigned. Treasury restricted Salomon’s activities. Confidence in Salomon weakened.

Suddenly the question was not only whether Salomon owned valuable securities.

The question was whether lenders and counterparties would keep financing Salomon.

At one point about 15 to 20 percent of $780 million, in near‑term commercial paper was reportedly being renewed.

That distinction is crucial.

A leveraged financial institution does not need its assets to become worthless to face a crisis.

If funding stops rolling over Salomon can be forced to shrink positions or sell assets simply because the financing that supports Salomon is disappearing.

Buffett temporarily took control of Salomon. Worked to restore confidence.

The episode showed why leverage works differently in institutions.

For a company debt can become a problem when earnings fall.

For a leveraged securities firm "the willingness of people to keep funding the balance sheet can become the problem itself."

Trust is not reputation.

Sometimes it is liquidity.

[Edge @betedg]

@orderflowk one more filter: does the signal still work once everyone starts watching it? sometimes the crowd becoming aware of the signal is what kills the edge

[Edge @betedg]

@Zi01nn check if the earnings hold without the tailwind, thats a real test

[Edge @betedg]

Blackstone lost 100% of its original equity investment in one of its earliest deals.

The company was Edgcomb, a steel distributor Blackstone invested in in 1989.

At first, the business looked profitable.

But part of those earnings was tied to a powerful tailwind: rising steel prices increased the value of inventory Edgcomb already held.

That can make a distributor look more profitable without proving that its underlying economics have permanently improved.

Then steel prices turned.

The inventory gains disappeared. Earnings weakened. But the debt used to finance the business did not disappear with them.

That is where leverage becomes dangerous.

It doesn't just magnify a bad outcome.

It tests whether the earnings supporting the debt were actually durable.

Blackstone eventually lost 100% of its original equity investment.

The lesson from Edgcomb wasn't simply “use less leverage.”

It was more uncomfortable:

Before levering a business, make sure the earnings you're levering are real, repeatable and durable.

[Zynex @0xzynex]

https://t.co/s7CSVJZhBN

[Edge @betedg]

@DaniilBuilds yes, the markup left, the debt didn't

[Edge @betedg]

@DaniilBuilds increadible man, who can see the future