Hi,
First I apologize for asking now as I did not have the confidence to buy earlier last year when I was advised to do so. Rather than regret for my past inaction I was wondering if it is still okay to start buying. BRK B has gained about 14% ytd compared to S&P’s -8%. I am not sure if S&P will now catch up or the relative higher growth of BRK B will continue.
I was thinking of building up a part of my retirement fund by dollar cost averaging.
All advice will be appreciated.
TIA
alpha
Depends on your time horizon.
If you’re going to hold for 10 years, don’t sweat it. Buying now should be fine.
If you’re going to hold for a year, I wouldn’t buy today. But that’s just me.
I have a hunch there will be some very good deals at some point in the next year, perhaps Berkshire will be one of them.
Of course, a hunch is worth little.
A nice compromise that always works:
Buy half now, half a while later.
If the price rises, you’ll feel like a genius for having bought the first half early.
If the price falls, you’ll feel like a genius for having waited for the second entry.
For a numerical approach:
The current price $513500 ($342.35 per B) is a valuation multiple which has historically been consistent with
average one year forward returns that are slightly negative after adjusting for inflation.
Considering only the results in the 14.2 years since the start of 2008,
average one year forward returns from similar valuation levels have been around inflation - 4.8%.
The future may be different, but lacking better information it’s a good first guess that it won’t be a particularly good year for Berkshire’s price.
There is no obvious reason to expect the real price will be higher in a year.
It deserves to be, since the value is higher than the current price. But that’s usually the case, and will likely remain the case most of the time.
Jim
Many thanks Mungo.
I have now read your comments on a previous thread comparing BRK with SPX. I am convinced that SPX is rather overvalued whereas BRK is undervalued based on your arguments (which I value) and that after a length of time this difference will work to the advantage of BRK in terms of price gain which is what matters.
I understand you think in a year the price of BRKB will be more attractive and there is a chance that if I buy at today’s price I may incur a loss after a year. Perhaps I can start buying, allocating 25% of my planned investment this year (using Dollar cost averaging or similar) and 75% next year. Will this be reasonable if the above assumption is correct?
Regards
alpha
I understand you think in a year the price of BRKB will be more attractive and there is a chance that if I buy at today’s price I may incur a loss after a year. Perhaps I can start buying, allocating 25% of my planned investment this year (using Dollar cost averaging or similar) and 75% next year.
You might try something like Value Averaging. If you are “relatively sure” the price “might” go down during your cash deployment timeline, Value Averaging will likely do better (by a hair) than Dollar Cost Averaging. https://www.investopedia.com/terms/v/value_averaging.asp
To prevent the FOMO, and in case the price still keeps going up, maybe put 25% in now (like Jim mentioned), and VA the rest over the remainder of 2022 & 2023, once per quarter for the remaining seven quarters.
Tails
Rather than regret for my past inaction I was wondering if it is still okay to start buying. BRK B has gained about 14% ytd compared to S&P’s -8%.
Last year I bought some BRK.B around 290 and kicked myself when it quickly dropped to 275. Then it went to 300 … and dropped to 290.
In Jan I bought a few shares for my kids at 320 … and then it dropped to 305.
Who knows what it will do this year.
I still remember when I refused to buy a single share of BRK at $2000. Now that share would be BRK.A and worth $500,000.
To paraphrase Tuco: If you are going to buy, BUY don’t talk.
Who knows what it will do this year.
Actually BRK is one of the more predictable investments you can find. It typically has a steady earnings stream and trades in a well know channel multiple. Yes anything can happen in the short term, but forecasting out a year is a lot more feasible than with most other investment options.
tecmo
…
A compromise to get a better price: sell some put options and buy some shares
I bought in during the downturn of 2009. I told friends how I thought it was a good value, and they all nodded, but felt that they had missed the boat. Every time thereafter, at each peak, they bemoaned not getting in, but again felt they had missed the boat. Getting in at, or on the way to a peak might not be ideal, but the investment gains are not a one time event. To stick with the boat analogy, the ship offers relatively smooth steady sailing.
What started as a modest investment 13 years ago is now a huge piece of my retirement security. I would take the good advice given above—start buying some now, and keep buying until you feel slightly over-allocated. Then head to the ships lounge and enjoy the cruise.
I understand you think in a year the price of BRKB will be more attractive and there is a chance
that if I buy at today’s price I may incur a loss after a year. Perhaps I can start buying,
allocating 25% of my planned investment this year (using Dollar cost averaging or similar) and 75% next year.
Will this be reasonable if the above assumption is correct?
Seems reasonable.
As others noted, nobody knows what the price will be in a year. Prices can do anything in the short term.
With EVERYTHING there is a chance that the first year will be negative.
And also yes, Berkshire is unusually predictable compared to other things, within that chaos.
If you average the observed price over a stretch for many months, it’s not hard to have a somewhat reasonable expectation of what that will be.
My forecasts of average prices “around” a year later are within a few percentage points maybe 2/3 of the time.
That’s mainly because the valuation swings aren’t that wide.
Berkshire’s price since 2008 has been between 1.19 and 1.48 times peak-to-date known book-per-share 70% of the time. Median 1.363.
That’s not a very wild range.
Sure, buying over time makes some sense.
If you want to be fancy about it, here’s a thought:
Make a few monthly purchases. Pick a number of months that suits your level of patience.
Scale their sizes based on the price-to-book ratio at the time of each purchase.
At 1.50 time known book value as it is now, buy only a small amount. Not more than maybe 10% of your cash pile? Maybe 15%?
At 1.25 times known book value, just invest the rest of what you have available and be done with it.
And in between, buy in-between amounts, till you’ve deployed your money.
Keep half an eye for a market plunge. If you hear headlines like panic, rout, Armageddon, and
the mere notion of buying stocks that have been falling in price makes your stomach quake, that’s the ideal time to buy.
The icing on the cake would be a headline on Barron’s saying something like “Equities can never recover”.
The price will probably drop some more after you buy. Ignore that, it won’t last.
But don’t lose sleep over it.
Imagine Berkshire manages about inflation plus 7-8%/year in the next decade, roughly a doubling in value in real terms.
Even if you overpay by 5%, you still get a 95% gain instead of 100%.
Jim
Sure, buying over time makes some sense.
If you want to be fancy about it, here’s a thought:
Make a few monthly purchases. Pick a number of months that suits your level of patience.
Scale their sizes based on the price-to-book ratio at the time of each purchase.
At 1.50 time known book value as it is now, buy only a small amount. Not more than maybe 10% of your cash pile? Maybe 15%?
At 1.25 times known book value, just invest the rest of what you have available and be done with it.
And in between, buy in-between amounts, till you’ve deployed your money.
Keep half an eye for a market plunge. If you hear headlines like panic, rout, Armageddon, and
the mere notion of buying stocks that have been falling in price makes your stomach quake, that’s the ideal time to buy.
The icing on the cake would be a headline on Barron’s saying something like “Equities can never recover”.
The price will probably drop some more after you buy. Ignore that, it won’t last.
But don’t lose sleep over it.
Very good and logical advice. I am going to follow it.
Thanks.
alpha
Just one more query: Fidelity gives P/B ratio as 1.64 on yesterday’s date. Is this correct?
Last year I bought some BRK.B around 290 and kicked myself when it quickly dropped to 275. Then it went to 300…and dropped to 290. In Jan I bought a few shares for my kids at 320…and then it dropped to 305.
It’s best not to focus on stock price changes per se, after (or before) purchases, but on what you’re getting for your money at any given time when trying to decide whether to buy. If it seems like a bargain at that time based on conservative estimate, go ahead and buy, and then be comfortable that you got your money’s worth regardless of the subsequent short-to-medium-term stock price changes, which are out of your control. You can always reanalyze your original thesis at any time to determine if it was wrong, but don’t rely on price action alone for that determination.
Jim makes a good point about personal circumstances.
This is how I view a new investment in Berkshire today.
Things that are important that we know to be true:
It’s making around $45 Billion adjusted for accounting rules that distort economic reality
There is a material amount of cash awaiting a better return, call it $100 Billion
Market capitalisation is $715 Billion
5 big sources of value are: Insurance, Railroad, Energy, Apple and a mix of a highly diverse group of subsidiaries and investments
As a group, Berkshire is less effected by economic downturns than the average business (this is important to me personally)
Things that are important but we don’t know:
Wider economy including interest rates, inflation, global trade and politics
How durable each of Berkshire’s businesses are. I would argue that they will be way more durable than the average business. Buffett, the person that picked each of the businesses, certainly has a strong bias for businesses that tend to be around for a very long time. If the current businesses are largely still around 20, 30, 50 years from now, that is an enormous driver of intrinsic value.
We don’t know by how much the existing businesses will grow. Many have opportunities to grow, some like Energy, by a lot. Many could make intelligent guesses on this front, which may be accurate. Certainly, it would be a surprise to many, if the past growth in energy or insurance suddenly stopped.
We don’t and can’t predict with any degree of certainty, how much growth will come from capital allocation. That will depend on multiple factors including: how attractively priced businesses and shares of businesses are over the future decades and management’s skill at capital allocation. We do know that on the one hand there are excellent capital allocators but on the other hand the size of firm makes moving the needle challenging and eventually impossible. To double the size of them firm in 10 years, every Buffett disciple knows you have to grow by 7.2% CAGR, or in other words you have to double the $45 Billion to $90 Billion. Now take a look at Adam Mead’s Complete Financial History of Berkshire Hathaway and view the list and size of the businesses that generate the current earnings. You have to do it all over again almost (bar organic growth, economic growth and inflation). That will not be easy. Some might say, it will not happen. It’s a huge unknown but a very important factor in your return from an investment today.
Anyway, in my mind if you have a 5 to 20 year+, time horizon, Berkshire might reasonably give you a return of between 5% and 7% if valuation remains constant. The current valuation, which is really your question, is reasonable to modestly undervalued at current interest rates. Compared to the average firm or index which is maybe over valued at current interest rates.
For me, personally, I am holding Berkshire in my pension which I will not take income from for 20 years. I have to invest in something. I think Buffett and Munger would agree that Berkshire is a better choice than an index and significantly better than cash. The primary reason I also hold Berkshire in my early retirement fund, is my preference for avoiding permanent loss, if I can. I, like others, see Berkshire as a place to avoid permanent loss of capital and still enjoy returns, albeit modest returns given its size.
I would not borrow money to buy Berkshire.
I would not buy Berkshire if interest rates were 5 or 7%.
I would not buy Berkshire if I needed the money within 5 years.
I would not buy Berkshire if I was young, poor and had the ability to identify investments that could give me 15% or 20% returns.
I would consider having some cash on the sidelines to take advantage if Berkshire or other great companies got cheaper over the next few years. I have some cash for that very reason but it could well prove to be a mistake. Another thing we just don’t know.
Just one more query: Fidelity gives P/B ratio as 1.64 on yesterday’s date. Is this correct?
No. Fidelity are using the book value from 2021 Q3.
Last known book value (2021 Q4) is $228.41 per B share.
At yesterday’s close of $344.97 the P/B ratio was 1.51
3. Market capitalisation is $715 Billion
I think you will find the market capitalization today is closer to $760 Billion (a couple billion below this number to account for real time share repurchases.)
Yes, I did wonder about that number which I took from the Apple stock app. They must have adjusted something recently, as it had been correct previously. You are correct it’s not $715 Billion! Sorry about that.
1,510,180 A equivalent shares as at 31 Dec 2021 per annual report X closing price today $512,991
= $774.7 Billion less buybacks 1 Jan 2022 to date.
Just a $60 Billion error!
If you are dollar cost averaging, and if you have 10 years fine you can go ahead and do it. If you are dollar cost averaging and have 20+ years, I would lean more heavily on SPY and Nasdaq, then a single stock berkshire.
This is Berkshire board, you are going to get cool-aid drunken views. For multi-decade, SPY and QQQ will outperform Berky. Most folks are under estimating WEB’s stock picking skills, i.e., they are under estimating how much his stock picking had generated the wealth for Berkshire. That will be gone.
Post Buffett, any investor, betting Brekshire’s operating business and Insurance have superior economics, profits, growth than SPY or QQQ is not being objective.
As a group, Berkshire is less effected by economic downturns
I beg to differ. Railroad, utilities, Apple and to some extend Insurance all will be impacted by recession. Outside of Apple, Railroad and utilities have multi-decade operating histories, and you can verify yourself, how they correlate to economic downturn.
As far as buying now vs the recent 20% lower entry price just accept that it will take a few years to lessen the outcome divergence. The two very close time periods with significant different stock prices are a tough go when it comes to the inevitable thinking of how you do “compared to Mr. Market”.