A little cheaper.

BRK/B shares trading in pre-market at 313.21, or P/B of 1.36.

Starting from that sort of multiple, my models suggest a reasonable expectation for the next year would be in the general vicinity of inflation + 8.5%.
Not too bad.
That’s up from a one year expectation of around inflation - 4.8% at recent peak valuation multiples.

Jim

16 Likes

Not so attractive with rising rates. Also will it be enough to out run inflation and gold. Berkshire is still my best idea though. Man this is hard.

Given a recession Chev and Oxy will surely decline. Still, my view is these will be quite successful investments. Once again, in the midst of Buffett’s (to others, not me) tragically disappointing performance at the annual meeting, his brilliance ain’t gone!

1 Like

Not so attractive with rising rates.

How do you figure?
A return of (say) inflation + 8% is the same increase in purchasing power with high inflation or low inflation, with high interest rates or low interest rates.

The level of returns I’ve predicted might certainly be wrong.
And maybe that level of return is an interesting number to you, maybe not.
But it’s unchanged by changes in the prices of other things. Ships or shoes or sealing wax, cabbages or bonds.

Jim

4 Likes

Sorry I missed the ‘inflation +’ bit.

Inflation + 8% would be a hell of a return. Who knows.

Not too bad

Yes, but why risking your fingers by catching a Falling Knife (although I frequent exactly that board) when it seems to rather continue it’s fall?

I think Berkshire starts to look interesting about «270 1.2 x book given current market overvaluation. That’s my play anyway.

Mhm, too many which are waiting for 1.2x BV or a little above. So I have to raise my “buying BIG” to at least 1.25. Jim’s fault.

3 Likes

When the market drops, BRK’s book value also drops. So it would take lower price to reach 1.25 or 1.2.

1 Like

That’s based on a current / historic book value of 228 dollars per share. In the GFC it dropped to 0.9 and in 2020 also so I need a margin of safety of at least 1.2 imo.

When the market drops, BRK’s book value also drops. So it would take lower price to reach 1.25 or 1.2.

True, but probably not particularly useful.
The ratio of price to “peak-to-date book per share” is a better metric of the company’s value.
Dips in book value at Berkshire tend to be transient.

Also, empirically it has also been a better predictor of forward returns in the past.
Buying at a medium multiple of depressed book value (low multiple of peak book value) has generally worked out very well.

Jim

7 Likes

A return of (say) inflation + 8% is the same increase in purchasing power with high inflation or low inflation, with high interest rates or low interest rates.

Jim, in the past you’ve mentioned a pivot point where high inflation “breaks” the economy. Any thoughts/guesses as to what level of inflation it might take to start eroding and potentially break this approach of estimating Berkshire forward returns using inflation as the baseline?

<Dips in book value at Berkshire tend to be transient.

Also, empirically it has also been a better predictor of forward returns in the past.>

True if looking forward, because BRK has reliable earning streams amount to $25-$28 billions that would offset equity book value drop.

Jim, might I challenge you a little? I remember you repeatedly saying that in a bear market there is no hurry to sell, that after 3 months one usually still can get out with no more than -10%.

Ok, since the S&P top of 4800 it’s not 3 but around 4 months, but 15% down since then is “a bit” different than 10%. Hey, I did rely on the accuracy of what you said (just kidding).

Maybe I just had a revelation how markets work. As I just wrote it’s -15% in 4 months since the S&P top. Looking at 3 months you would of course have been correct, but I thought to myself “ONLY because of that big 2 weeks upward correction 2nd half of April” - kind of lucky coincidence.

But no, that’s probably the whole point, as this big hump fits exactly the “bull trap” part of Gonzalez’ chart. In other words: In a bear you can get out with a little loss if you wait for this according to Gonzalez&Jim typical correction.

If you miss it and already are where we are now, beyond this hump: Bad luck!

2 Likes

Jim, in the past you’ve mentioned a pivot point where high inflation “breaks” the economy.
Any thoughts/guesses as to what level of inflation it might take to start eroding and potentially
break this approach of estimating Berkshire forward returns using inflation as the baseline?

I think the models will work find so long as the economy is not having anything worse than a normal bad bear market.
Many things can cause those.
Really bad inflation can cause something worse.

But there aren’t many data samples. One, basically.
A guess: the US economy seems not to run well at sustained interest rates much above maybe 6%-7% ??
Double digits are definitely bad.
When the economy is flailing, dips in real earnings last long enough to materially hurt value–and stock prices–for a long time.
If you run a trend line through log real earnings 1972-1985 (or even 1995) inclusive, it has a negative slope.
That’s a pretty long time for no real progress in profits.

I think that the current bout of inflation is not entirely transient.
But I don’t think it will settle in at a level high enough and long enough to break things in that way.
There are quite a few economists who have looked at that one example, and they don’t want to try that again.

Jim

10 Likes

<Jim, might I challenge you a little? I remember you repeatedly saying that in a bear market there
is no hurry to sell, that after 3 months one usually still can get out with no more than -10%.

Ok, since the S&P top of 4800 it’s not 3 but around 4 months, but 15% down since then is “a bit” different than 10%.

An average can hide a lot of variation : )
It will tell you what a sensible expectation is, but perhaps not what’s going to actually happen.

But it’s true that the broad market index rolls off pretty gently after a top–more gently than you might guess. Usually.
Market peaks tend to be jagged, but if you smooth out the squiggles a bit they are usually pretty rounded in shape.
(Market bottoms tend to be pointy, by contrast, so selling near a high is generally very much easier than buying near a low)

Check out this table of average forward returns as a function of how long it has been since a fresh recent high
https://discussion.fool.com/a-new-sampp-high-so-the-99-day-indic…
Emphasis on “average”.

Drops soon after a recent market peak tend to be either shallow, or transient, or both.

Jim

3 Likes

But no, that’s probably the whole point, as this big hump fits exactly the “bull trap” part of Gonzalez’ chart. …

Mr Buffett is probably right that looking at charts is not the best way to spend your time.
Especially on this board.
But I do it anyway.

So:
Another bad omen is when there are more new 52-week lows than new 52-week highs in an index.
Consider the Nasdaq.
Here is a chart of that gap, with a smoothing line added:
https://stockcharts.com/h-sc/ui?s=$NAHL&p=D&yr=0&…
One might consider it a bearish omen when the blue smoothing line is below zero (blue line below the red line).
That has been true all the time since about November 20 last year (by eyeball), quite a while.

This is a chart, same time frame, of the Nasdaq 100 Equal Weight stock index price.
https://stockcharts.com/h-sc/ui?s=QQQE&p=D&yr=0&…
Notice that that index topped out around the middle of last November. Hmm, quite the coincidence.
That might seem obvious at first, but consider that there started to be were more new lows than
new highs just as the index was itself setting new highs: only a few stocks were keeping it up.
Somebody selling when that chart went negative would have, as of now, avoided a price drop of -28%.
That person would also be someone with very strong willpower, since the signal doesn’t work that
well very often and it is hard to sell when the index is near a fresh high.

Jim

5 Likes

Bearishness is off he charts. Heck, QQQ is further below 200 DMA than 3/2020.

Please tell me specific names to buy and at what price or stop the panic porn.

Not too bad

Yes, but why risking your fingers by catching a Falling Knife (although I frequent exactly that board) when it seems to rather continue it’s fall?

Nobody knows how far it will fall.
So, I keep an eye on the likely forward return based on my best estimate of the price-to-value ratio.
As soon as that is good enough for me, I’m willing to be a buyer.
It doesn’t really matter if the price falls more after you buy…that situation won’t last.

I tend to keep buying on the way down.
The lower the price for something, the smaller the downside is (not that there really is one with BRK) and the higher the upside is.
That combo lends itself to a larger portfolio allocation, so nibbling all the way down makes some sense.

Jim

14 Likes