It won’t be like Hurricane Covid – fast to arrive, fast to depart. It will be slow and grinding.
One quibble, hurricane covid did not depart quickly. There was no real path out of the plague, until the availability of the vax almost exactly a year later. The market staged a fast recovery due to a tidal wave of propaganda that everything would blow over in a couple weeks. Remember my posts about the “panacea of the week”? Remember the repeated assurances that kept resetting the goal line as one deadline after another passed?
Recession reality could probably be swept aside as easily, with an equal onslaught of “morning in America” blather. Remember the sharp V bottom the market made in March 2009? The data didn’t bottom out until months later, but all the data and earnings reports in early 2009, no matter how horrible, was always spun as “better than expected”.
I was specifically thinking of BRK since I do read mungofitch’s posts. I admire mungofitch a lot.
My reading of the Macro situation is that BRK may be in a stronger position than many other companies if it doesn’t have much debt (I haven’t studied the financials) but it will still be vulnerable to Quantitative Tightening and the coming recession.
The “historically attractive valuations” are compared with valuations that were inflated by Federal Reserve monetary pumping, like all other stocks. How much will the Fed let this deflate? It’s too early to say.
Should BRK-A valuations be compared with pre-2008 prices or with post-2008 and especially post-2020 prices when the Fed was pumping like there was no tomorrow? You can see the immediate impact of the Fed’s policies in the BRK stock price chart when juxtaposed against the Fed Assets chart. How much will the Fed walk this back? What will be the impact on BRK’s price if the Fed truly does normalize rates in their effort to control inflation?
I was talking about the impact of Hurricane Covid on the asset markets, not on human beings.
The markets are influenced by humans, and my examples showed how humans can be buffaloed.
Compare the steepness of decline and recovery in 74 and 82, with the sharpness of the “everything is better than expected” V bottom in 2008, and, especially, the “hydroxychlorquine will save us” V bottom in 2020.
My reading of the Macro situation is that BRK may be in a stronger position than many other companies if it doesn’t have much debt (I haven’t studied the financials) but it will still be vulnerable to Quantitative Tightening and the coming recession.
And it is likely to be subject to non-rational impacts on the market, like margin calls or just plain fear due to downward cascades. I’ve been looking at BRK lately, and while it seems to have a stalwart core of shareholders, much of it’s assets is in other companies, like Apple. The stocks they hold are not really under their control, other than to buy or sell.
My reading of the Macro situation is that BRK may be in a stronger position than many other companies if it doesn’t have much debt
Wendy, my understanding is that the debt held by BNSF and BHE is non-recourse to the parent. In addition, these are both regulated (mostly) so their returns are more of less guaranteed. Debt is a normal part of their operations.
The remaining debt is pretty small in relation to the earning power of the companies. Not much leverage to worry about.
Berkshire has basically sold at a lower P/B since 2008 than before.
Since you follow Mungofitch (so do I) you already know that BRK is attractively priced now in relation to any recent history.
What will be the impact on BRK’s price if the Fed truly does normalize rates in their effort to control inflation?
Perhaps think of it this way. Insurance is repriced annually so it can keep up with events. Reserves are hurt by inflation so they need inflation to be subdued. The railroad and Berkshire Hathaway Energy will still earn regulated returns. That’s the big three ex Apple.
The remaining owned businesses are a mix of a number with pricing power (moats) and those more subject to the economy. On average, probably better than most plus the smaller part of BRK.
The equities will be impacted negatively by higher interest rates, but a chunk of that is already priced into the calculations. Lower prices will provide more homes for reinvesting BRK’s cash flow. The cash itself will be impacted positively while waiting.
On balance, I believe BRK is better positioned than most. It remains the core and majority of my holdings and I’m comfortable.
My reading of the Macro situation is that BRK may be in a stronger position than many other companies if it doesn’t have much debt (I haven’t studied the financials) but it will still be vulnerable to Quantitative Tightening and the coming recession.
Historically, BRK’s superpower is the interest-free float from the insurance operations which was then invested into other businesses. Some say that the low interest rate environment of the last several years has blunted BRK’s advantage (combined of course with BRK’s massive size). If interest rates go up a lot–which seems to be the way things are headed–BRK might be a good buy right now. FWIW, the current price seems to be attractive without any of the above handwaving. I don’t normally post trades, but I bought some today at $270.44.
The stocks they hold are not really under their control, other than to buy or sell.
The above has a serious omission! It should read “other than to buy, hold, or sell.”
Just because a stock goes down in price does not mean the company that issued the stock is going up, down, or sideways. What you need to know is whether the stock will bounce back and as part of making the portfolio secure, debt should be limited so as never to face margin calls or other contingent liabilities.
While I don’t follow Berkshire-Hathaway Buffett is know to have a lot of cash on hand in search of investing opportunities. BRK is like an index fund on steroids.
The stocks they hold are not really under their control, other than to buy or sell. … The above has a serious omission! It should read “other than to buy, hold, or sell.”
The omission was yours, in failing to include the previous sentences in my post that went with the one you quoted:
“And it is likely to be subject to non-rational impacts on the market, like margin calls or just plain fear due to downward cascades. I’ve been looking at BRK lately, and while it seems to have a stalwart core of shareholders, much of it’s assets is in other companies, like Apple.”
The point was that while BRK seems to have a core of shareholders that are less likely to emotionally sell in a down market, the company has the risk of emotionally selling from the public stocks they hold when the blood runs in the streets.
The point was that while BRK seems to have a core of shareholders that are less likely to emotionally sell in a down market, the company has the risk of emotionally selling from the public stocks they hold when the blood runs in the streets.
But if BRK is planning to hold the public stocks in their portfolio for the long term, as is generally the plan, then the drop in the prices has little to no impact on their business other than providing an opportunity for Buffett and his lieutenants to deploy billions of dollars of their cash horde into better-valued stocks.
While BRK does sell stocks at times, as circumstances change, overall they are a net buyer of stocks, and as such they like to see prices dropping.
Also if we encounter the bad macro-economic conditions of a recession with high inflation, the Fed will still likely be focussed on fighting inflation, so money will stay tight while businesses are under pressure from the recession. That is the kind of environment when BRK can make valuable additions to their roster of fully owned businesses or otherwise make valuable deals to provide liquidity to businesses out of their massive cash hoard.
BRK is built to flourish in tough times, which is why historically a solid measure of valuation has been price/peak book … you don’t adjust the book price down to reflect falling stock prices in their portfolio, nor do you use an updated lower official book price in the middle of a recession, because those same conditions causing the falling stock prices represent opportunity for BRK to add value long term.
But if BRK is planning to hold the public stocks in their portfolio for the long term, as is generally the plan, then the drop in the prices has little to no impact on their business other than providing an opportunity for Buffett and his lieutenants to deploy billions of dollars of their cash horde into better-valued stocks.
I tried to explain that in a previous post. Berkshire has the option to hold, Buffett and Munger are not likely to get emotional or to get margin calls.
“That is the kind of environment when BRK can make valuable additions to their roster of fully owned businesses or otherwise make valuable deals to provide liquidity to businesses out of their massive cash hoard.”
while most everybody knows who Buffett and Munger are, they are very old ( 91 & 98 ).
Do BRK investors have the same trust in the heir apparent(s) ? I have not followed BRK at all,no
investment dollars in it.
https://finance.yahoo.com/news/warren-buffett-charlie-munger…
“Over the last two years, Buffett and Munger have made their succession plan clear to investors, by installing four key executives at the helm of the conglomerate: Greg Abel, who heads Berkshire Hathaway Energy and is likely to become CEO, Ajit Jain, who oversees the insurance business, and investment managers Todd Combs and Ted Weschler.”
But if BRK is planning to hold the public stocks in their portfolio for the long term, as is generally the plan, then the drop in the prices has little to no impact on their business other than providing an opportunity for Buffett and his lieutenants to deploy billions of dollars of their cash horde into better-valued stocks.
Gives a hit to their book value, as was reported today on SA, sending BRK down $5.64 currently:
Get ready for a shock. The book value of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is in the process of falling by a scary amount. That will become apparent in about a month when it reports second quarter earnings. There are a few underlying reasons but very few companies have the unusual degree of exposure to a huge downward reset of valuations. The bear market will weigh on both reported net income and the balance sheet even as its fundamentals remain solid.
The value of BRK is not meaningful for the next few years.
That is a wildly incorrect statement, LOL
There is nothin worthwhile about investing in BRK for the short term.
There will be an opportunity to get into BRK at a much better price.
I’m glad you have such confidence in your crystal ball, mine is cloudy. While I think it likely the market, and BRK, will continue lower, I am far from certain.
What I am certain of is that this is a significantly better than average entry price/value for BRK and prospects for a good long term return from this price are excellent.
I played that game of thinking I’d get a better price back in 2020, I was wrong and I missed a roaring recovery and advance to new highs while I was in cash waiting for the stock market to fully reflect the severe global Covid recession. So I’m trying to buy and hold stocks for their value in the long term rather than trying to predict how low they’ll go or to time the market.
Almost all of its assets are in other companies, some public, some private, some wholly owned, some not wholly owned. Companies like GEICO, Apple, Coca Cola, BNSF Railway, Lubrizol, Occidental Petroleum (they just bought more recently), Sees, Krat, Netjets, etc.
On Jun 23, 2022, BRKB was $267.52, and over the short-term, the next ~6 months, there was indeed an opportunity to buy it at a lower price two times. Each time for about $3 lower, once on Sep 26, and once on Oct 12.
But $3 lower on a $267 stock is not really a “much better” price, it’s only a tiny bit better.
I’ve written some Jan '23 puts on BRKA with the hope that they will be exercised and allow me an entry point below 300. They expire in 17 days from now. I would have preferred buying at $267, but was too fearful at the time.
