for those that don’t need living expenses, why are you selling and to what extent of your portfolio?
I sold some to keep my cash balance where I want it, in relation to net worth.
It always pains me to sell, but I’m retired and living off the portfolio, so I try not get too greedy.
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Valuation isn’t bad.
History in the last 15 years suggests that one might expect little to no market price return beyond inflation in the next year.
My sundry models give one year forecasts in the range of inflation-2.6% to inflation+6.5% as a central guess, starting from $500k.
And only the ones that consider observations prior to the credit crunch are coming up with the positive numbers.
Plus, there is a war on, and not a little one.
This is often followed by market turbulence; I think the market has under-reacted to a whole lot of things so far.
Frequently such turbulence drives the price of Berkshire shares down and their value up, improving the return prospects considerably.
There is certainly no need to sell any shares. (Unless, as you say, you have expenses coming up)
But it wouldn’t be so crazy if one wanted to lighten up in a tax-sheltered account.
I’ve been doing some selling today.
I get a lot of pleasure (and money) from buying good stuff when it’s on sale,
and it seems that the chances are pretty good that we’ll see that kind of opportunity within the next 6-12-18 months.
A bit of extra dry powder seems OK to me, figuring that Mr Market will make some blunders soon enough.
Jim
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Contradicting everything I said about my “holy” tax-advantaged shares I just sold 2.8% of my Berkshire = 2% of portfolio.
Why? Because I am weak. Price too tempting for me to resist. As always when I sold Berkshire I will regret it.
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I have not sold any of my core holdings but I have reduced my shares controlled by around 15%, all in tax free accounts. I have sold covered calls against another ~20%.
Similar to Jim, I think the short term prospects for the share price look slim when running my various guessing tools. Depending on what valuation method I use, I would say we are in the top 2%-15% of trading days based on different price/valuation measures. I had topped up my exposure through the end of November last year so I’m comfortable pulling a little back here and waiting.
Jeff
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I get a lot of pleasure (and money) from buying good stuff when it’s on sale, and it seems that the chances are pretty good that we’ll see that kind of opportunity within the next 6-12-18 months. A bit of extra dry powder seems OK to me, figuring that Mr Market will make some blunders soon enough.
Is it all dry powder or is something attracting the interest of your fresh capital?
PP
Is it all dry powder or is something attracting the interest of your fresh capital?
Nope, no specific target. The cash allocation is rising.
Sending a little to charities shortly.
Berkshire, of course, if it gets cheap again. That’s the easy one.
I’ve been nibbling on Carmax lately (KMX). I like that company.
QQQE will be in my “fair value” estimate zone soon if the slide continues, and I’ve been thinking about a core position there for a while.
Very roughly, I figure a price of $58-63 would be historically typical, and the price is already down into the high $60s.
A friend is thinking of starting to write repeated cash-backed puts to get a good long term entry there.
The attraction? The rate of growth of earnings is very good, and, perhaps surprisingly, it has been pretty steady and predictable over the years too.
And, being 100 equally sized positions in pretty big companies, it can’t really go bust even if some of them are relatively speculative issues.
Despite the superficial differences, that’s many of the same attractions as Berkshire.
But I think it might be one of those years that some serious patience will pay.
Maybe we’ll see some two foot hurdles.
Jim
PS
For the depressing side of things, I recommend reading this week’s Economist.
The leader about the war, and the article about commodities. And, well, much of the rest too.
Not that anybody knows what will happen next, but some speculations are better quality than others.
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QQQE will be in my “fair value” estimate zone soon if the slide continues, and I’ve been thinking about a core position there for a while.
Very roughly, I figure a price of $58-63 would be historically typical, and the price is already down into the high $60s.
A friend is thinking of starting to write repeated cash-backed puts to get a good long term entry there.
For a sense of scale–
June $65 puts on QQQE are bid $3.10 at the moment.
So, if you write one of those you need $69.10 cash to back it up.
If QQQE stays above $65 (current price is $69), you keep the $3.10.
That is a 5.0% return on the capital you tied up for 95 days, or 19.2%/year rate annualized linearly. So, outcome 1 is OK.
Alternatively, if the price is low, you end up buying QQQE at $61.90.
That’s in my “normal valuation” zone, which is a pretty good zone: real earnings have risen about
inflation + 8.2%/year on trend since 2005, so that’s the long run return one might reasonably aspire to.
Plus about a half percent in dividend yield, give or take.
Jim
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A friend is thinking of starting to write repeated cash-backed puts to get a good long term entry there.
Juicy premiums. Not much Oint but not that big of a deal when it’s just a market maker on the other side anyway most of the time. Any background on the odd strikes at $xx.13 across some months? I’m assuming something out of the ordinary occurred for them to be adjusted but curious if you happen to know what it was. A special dividend by one of the components?
Jeff
I use a model based on Bloomstran’s numbers which are I think the best publicly available. Today’s valuation is higher than all but one month in the last five years. You’ve always been able to buy it back at a lower price at these levels.
OTOH Perhaps a Sovereign Wealth Fund has got its act together and will bid it up enough to significantly reduce the probable future advantage it has with US large caps. I don’t think that’s likely though - the SWF mass buying that is, not the better returns versus the index.
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“I use a model based on Bloomstran’s numbers which are I think the best publicly available.”
2021 Semper Augustus Client Letter P 96
2021 Intrinsic Value by Market Cap and Per Share ( I assume these are as of 12/31/21):
--------------------------------Market Capitalization---------Price Per A Share-----Price Per B Share
Sum of the Parts Basis----------------$891 billion------------------$603,882--------------$403
GAAP Adjusted Financials-----------860 billion--------------------582,872---------------389
Simple Price to GAAP Book Value–880 billion--------------------596,253---------------398
Two-Pronged Approach (Ours)------949 billion---------------------643,192---------------429
Simple Average----------------------$898 billion-------------------$606,55---------------$404
If one believes Bloomstran’s numbers, why would anyone sell?
https://static.fmgsuite.com/media/documents/8b3d617a-4dc3-4d…
June $65 puts on QQQE are bid $3.10 at the moment.
So, if you write one of those you need $69.10 cash to back it up.
Sorry, I’m a terrible typist. Got the 9 and 1 keys mixed up.
If you write a $65 put for a premium of $3.10, you need to have started with $61.90 of cash.
Then the rest seems OK…
If the option expires, it’s a $3.10 return on $61.90 cash brought to the deal, which is 5.0% in 95 days.
Jim
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Any background on the odd strikes at $xx.13 across some months?
I don’t actually know.
Usually, strange numbers are the result of a split, but there hasn’t been one.
A wild guess not having done a search:
Some firm did a big special dividend or spin-off.
Option contracts are not adjusted during their term for regular dividends, but are adjusted for “special dividends” which can include spin-offs.
Jim
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Because the trading value runs a persistent discount to its theoretical value, even if that value is accurate. Think of the trading discount of a CEF and when to buy that.
OTOH Perhaps a Sovereign Wealth Fund has got its act together and will bid it up…
Something that continues to baffle me is the “new normal” for A share volume starting virtually over night on 2/18/2021.
The average A share daily volume for the prior five years was 338 A shares per day.
From 2/18/2021 forward it has been 1690 shares per day.
And there has been no similar increase in B share volume during this time. And no new major shareholder disclosed that I’m aware of either. Maybe it’s a bot.
Jeff
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QQQE will be in my “fair value” estimate zone soon if the slide continues
Hi Jim,
Do you think QQQE is better priced than QQQ? QQQ has seemed to thrash QQQE through the years – do you not think the top 10-20 heavyweights can grow ahead of the rest? I know you like equal weight SP500 indexes over the weighted SP500 indexes – is it the same reasoning here or do you think it is a valuation difference? The big companies seem fairly reasonable now, no? Thanks
I sold some BRK and bought KKR with the proceeds. BRK +11% this year. KKR -30% YTD. After this move, I like KKR’s forward prospects much better. Enough to sell BRK and buy KKR
Do you think QQQE is better priced than QQQ? QQQ has seemed to thrash QQQE through the years –
do you not think the top 10-20 heavyweights can grow ahead of the rest? I know you like equal weight
SP500 indexes over the weighted SP500 indexes – is it the same reasoning here or do you think it is
a valuation difference? The big companies seem fairly reasonable now, no?
Truthfully, I have little idea about whether QQQ or QQQE will do better going forward.
But that’s rather the point: the reason I prefer QQQE.
Four companies make up over 37% of QQQ, and 8 companies make up over half.
You can’t predict the trajectory of QQQ unless you can predict what will happen to those few large firms.
If you can, then buy those firms.
If you can’t, then QQQ is a poor choice because the outcome is close to random from your point of view.
So, I can’t really figure out who would be suited to investing in QQQ.
QQQE, on the other hand, is remarkably predictable. The top 4 positions represent 4% of the whole, always.
It’s a bet on, in effect, a whole sector.
Technically it’s “all but one sector”, as financial stocks are not allowed, but by tradition it is also growth oriented firms because of the chosen exchange.
Here is a data set corresponding (in effect) to the earnings of QQQE over time.
Draw a graph.
2005-01-01 3.357
2005-07-02 3.501
2006-01-01 3.412
2006-07-02 3.523
2007-01-01 3.622
2007-07-03 3.721
2008-01-01 3.662
2008-07-02 3.778
2008-12-31 3.687
2009-07-02 3.554
2010-01-01 3.572
2010-07-02 3.846
2011-01-01 4.024
2011-07-03 4.141
2012-01-01 4.119
2012-07-02 4.170
2012-12-31 4.089
2013-07-02 4.189
2014-01-01 4.190
2014-07-02 4.251
2015-01-01 4.341
2015-07-03 4.346
2016-01-01 4.248
2016-07-02 4.234
2016-12-31 4.249
2017-07-02 4.430
2018-01-01 4.447
2018-07-02 4.405
2019-01-01 4.483
2019-07-02 4.546
2020-01-01 4.619
2020-07-02 4.720
2020-12-31 4.627
2021-07-02 4.720
2022-01-01 4.686
What this really is:
Since QQQE is equally weighted, the median earnings yield is a good proxy for the average–and steadier.
I took the median trailing earnings yield on each date, did an inflation adjustment,
multiplied that EY times the no-dividend index level at each date to get the earnings figure for each date,
then took a logarithm so the trend of earnings will become a (roughly) straight line.
A slope through this gives a rate of earnings growth of inflation + 8.22%/year.
Add half a percent for dividends, and that will be what long run returns would be expected, absent changes in valuation level.
Pretty darned good.
Also, this gives you an idea of what the “usual” earnings yield is for this group of companies over the last 15 years.
It’s not unreasonable to suppose that a similar figure will be common in future.
Bottom line: the graph is amazingly straight.
Earnings have growth within this set like a freight train: powerful progress, with a pretty predictable route.
So, I speculate that something more or less like this will happen in future.
This is not perfect, but it’s a whole lot more predictable than QQQ which depends on the futures of just a few specific firms.
Jim
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Thanks Jim. Appreciate the additional input.
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“ A slope through this gives a rate of earnings growth of inflation + 8.22%/year.
Add half a percent for dividends, and that will be what long run returns would be expected, absent changes in valuation level.
Pretty darned good.”
Thanks for sharing Jim! I have been thinking about QQQE recently and, as Bloomstran has reasoned recently in his superb letters, the FAANGs cannot keep growing to infinity and beyond.
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