Back of the envelope 2y

[mungofitch]

As I have said, I do not yet hold BRK and being 60% in cash am looking for a good entry point for a
significant sum of money, (for us anyway.) It sometimes is hard to resist the seemingly almost cult
like conviction to buy now, particularly after the stock went sub $300 and then rose again, making
me concerned that I had missed my window of opportunity. But only slightly concerned, because I have
strongly felt the market in general was over valued and that the macroeconomics indicated it was
poised for a strong correction. (Yes, market timing. I know you all disapprove.)
…
why should the BRK valuation escape a downward trending market?

It’s not that I disapprove of timing.
I have precisely 1063 spreadsheets in my “market predictors” directory. (honest)
Nor that I think that Berkshire will escape a market rout.

But, beware certainty. Market timing is very fallible.
Seeing a good entry price for a core position, but passing it up because you have a hunch it’s going to get better, is probably not optimal.
Even if the hunch is a very well informed one.
Berkshire is cheaper than it has been 90% of the time since the post-crunch cheaper prices have been the norm, give or take. Maybe 85, maybe 95.
That valuation level probably falls into the category of “good enough”. Heck, for a core position, it’s not really necessary to do better than any “cheaper than average”.

Using timing to give you a slight edge averaged across 1000 small trades makes some sense.
For one big move, perhaps a little less so.

One way to outsmart your emotions:
Buy half now, half when you think the market has bottomed. (which might be higher than now)
If the market falls between the two, you’ll feel like a genius for having waited to buy the second half.
If today is the bottom and the second half it bought at a higher price, you’ll feel like a genius for having bought half now at the bottom.

All that being said, my gut feel matches yours.
I very much doubt that Friday’s close for Berkshire’s stock will be the lowest that is ever again seen.
But I was buying anyway, on the reasoning above: it’s a good price.
Don’t let striving for perfection distract you from snatching the merely very good.
Berkshire’s market valuation is about 25% cheaper than it was at its peak in March, in round numbers.
So, for a ten year hold, you’ll do 3.1%/year better than you would have with a purchase then.
That’s nice.

Jim

[inparadise]

It’s not that I disapprove of timing.
I have precisely 1063 spreadsheets in my “market predictors” directory. (honest)

LOL. I’ve learned the need to speak in spreadsheets with my engineer DH, which is one reason why I run a 10 year profit projection spreadsheet when presenting a real estate opportunity to him. Just the construction of a spreadsheet helps you to think through the validity and breadth of variables used for the calculations. So Bravo and thank you.

But, beware certainty. Market timing is very fallible.
Seeing a good entry price for a core position, but passing it up because you have a hunch it’s going to get better, is probably not optimal.
Even if the hunch is a very well informed one.
Berkshire is cheaper than it has been 90% of the time since the post-crunch cheaper prices have been the norm, give or take. Maybe 85, maybe 95.
That valuation level probably falls into the category of “good enough”. Heck, for a core position, it’s not really necessary to do better than any “cheaper than average”.

I understand what you are saying, and perhaps it’s my own ego getting in the way, or upbringing for that matter, being a New Englander raised by Depression babies. Frugal to the core. But when I look at the delta between the initial urge to buy and Friday’s price, waiting provided a year’s worth of expenses in savings to buy the same number of shares.

Using timing to give you a slight edge averaged across 1000 small trades makes some sense.
For one big move, perhaps a little less so.

Sorry, you lost me there. I would have thought it the opposite, particularly given my example above of already saving 1 year’s expenses. Either way I am likely to do the buy in at least 3 moves, set via GTC limit orders to avoid further equivocation, unless the value hits me in the face like AVGO did at $185 in 2020. Or our current home where we threw caution into the wind and scooped up when I realized just how underpriced it was. Both DH and I can admittedly get mired in analysis paralysis and I have to push HARD for quick action. It’s one reason why I loved Mechanical Investing. Decide on the screen and then the screen decides for you.

I know that buying and selling of assets is about 2 parties agreeing to a price, and have lost out on buying specific stocks or real estate for that matter by not moving fast enough or compromising on prices more. But something better always came along, with stronger seller motivations to give me my price.

We used to be 40% cash, 60% stock, the cash position in part due to my exiting bond funds in unwinding what a “professional” financial planner had put us into, and the taking of a lump sum for a couple of pensions when it looked likely the company could fail during Covid. We are now 60% cash because the value of stocks has declined. I recognize the folly of being so cash heavy long term, but also the benefit of buying/selling at the right price. Lots of moving parts, some of which I may be unintentionally ignoring which is why I keep on trying to understand what you say. Sometimes we just don’t know what we don’t know, and I respect the opinions on this board, even if I don’t always agree with them.

TIA,

IP

[mungofitch]

Using timing to give you a slight edge averaged across 1000 small trades makes some sense.
For one big move, perhaps a little less so.
…
Sorry, you lost me there.

My thinking is this:
Say I give you a model that tells you with 60% accuracy whether a given stock will be up or down in the next month.
It would be fantastic to use this model to build a long/short portfolio of 100 small positions: the predictions are good, on average.
But it would be folly to use that prediction to put 60% of your portfolio into a single position.
The individual predictions are not reliable enough.
That’s true of pretty much every market timing system, and every market direction call.
Some are extremely useful on average, but not good enough to make big moves.

It’s like card counting, or playing with a slightly stacked deck.
You’ll do well on average placing lots of little bets based on that edge.
But don’t go all in based on one prediction.
The art of using market timing models is to benefit from their predictive power,
while not really losing anything meaningful when they’re inevitably wrong.

The same is true of informed hunches.
I have a very strong hunch the market will be materially lower at some point this year.
And it’s highly likely that this will be true of Berkshire’s stock price, as well.
But I’m not going to make any big bet on that.
I’m just calmly adding to my position on the way down, reacting to the risk/reward on offer today rather than where I think it will be tomorrow.
The lower the price, the bigger the upside and the lower the downside. So, the bigger the position is warranted.

Jim

[SteadyAim]

But when I look at the delta between the initial urge to buy and Friday’s price, waiting provided a year’s worth of expenses in savings to buy the same number of shares.

Isn’t this just hindsight bias though? Just because it worked out ok doesn’t mean it was a good decision. I mean, I played russian roulette last night and I’m still here and I’m up $10 from the bet. Would you say that was a good decision?

SA

[inparadise]

It would be fantastic to use this model to build a long/short portfolio of 100 small positions: the predictions are good, on average.

I am a vanilla investor and won’t short a stock, so I cannot benefit from that model.

But it would be folly to use that prediction to put 60% of your portfolio into a single position.

It would be folly to put 60% of our portfolio into any single position. I am not planning to do that with BRK or any stock or index for that matter. I have multiple candidates for investments.

I have a very strong hunch the market will be materially lower at some point this year.
And it’s highly likely that this will be true of Berkshire’s stock price, as well.
But I’m not going to make any big bet on that.
I’m just calmly adding to my position on the way down, reacting to the risk/reward on offer today rather than where I think it will be tomorrow.

I guess I don’t see it as a big bet, but perhaps that’s because we could remain with as much cash as we have and we would be fine financially. I am just calmly waiting for my price point for entry, while doing more research and trying to at least know what I don’t know so I can become informed.

The lower the price, the bigger the upside and the lower the downside. So, the bigger the position is warranted.

I am not trying to be argumentative nor obtuse, but doesn’t the above point to my approach of letting the market settle out more before buying the safer approach? Yes, it is not an absolute that the market will continue it’s decline, but IMO it’s probable. Since I am not worried about survivorship of our retirement, and my informed opinion is that it will be less risky to wait for a lower entry, why would I buy at a higher price? FOMO? Not really my style.

This discussion is appreciated. I like to challenge my assumptions. It’s a great way to learn.

IP

[inparadise]

Me: But when I look at the delta between the initial urge to buy and Friday’s price, waiting provided a year’s worth of expenses in savings to buy the same number of shares.
…
SA: Isn’t this just hindsight bias though? Just because it worked out ok doesn’t mean it was a good decision.

To determine if my approach has been a good decision, I will have to execute a trade and later sell it at a price that will net me more profit than having initiated a position at $300 ish. At this time there is not enough data to draw a conclusion.

IP

[BenSolar]

“Isn’t this just hindsight bias though? Just because it worked out ok doesn’t mean it was a good decision.”

To determine if my approach has been a good decision, I will have to execute a trade and later sell it at a price that will net me more profit than having initiated a position at $300 ish.

At present your decision not to buy at $300 looks great, but the decision to not buy at present price of ~$272 is another and different decision. The price/book at $300 was ~1.3, about average in recent years, a little bit better but just a few percent, if I’m not mistaken. As such it was reasonably valued and apparently offered a solid return going forward, better than the S&P500, but wasn’t any table-pounding buy.

Currently though, at P/B ~1.17 is ~13% below average, and cheaper than it has been ~90% of the time in the last decade, according to mungo. Expected return going forward benefits from a nice gain as the stock reverts to average valuation, on top of already solid expectations, it’s a nice entry point.

Sure it could go lower, and I like you and mungo I expect that is likely, but, there is wisdom in the old saying about a bird in hand … if I had a big chunk of money looking for a productive investment, I’d probably go ahead and put some to work at these prices. But that’s just me. Your patience will probably be rewarded.

[Rayvt]

Currently though, at P/B ~1.17

I am seeing a different number. My automated scan shows:

Tue 21 Jun 2022 07:18:04 PM CDT
From ycharts: P/B 1.181
From alphaquery: P/B 1.14
From microtrends: P/B 1.15

Good enough for guverment wirk. Time to buy.