BRK is very well positioned for what is likely the future economic environment of higher interest rates and higher inflation. Even if those outcomes don’t occur, BRK will be a solid investment for long duration holders. There was a time when BRK traded between 1.5-2 x book value for years. A seller today may not get the opportunity to buy BRK at valuations that have been seen over the last 10 years. Who knows? Meanwhile unless you have better places to invest your dollars and you certainly might, those uninvested dollars may decline in REAL value much faster than what you have seen over the last 10 years.
If you compare BRK in 2000 after the internet meltdown to now, I think the overall business and equities(especially valuations) are positioned much much better. We have no Coke at 50 x earnings. AAPL to me looks cheap compared to Coke in 1999 although AAPL certainly is not cheap today. Insurance, Rails, Utility, AAPL, BAC, and almost all current equity positions have much DURABLE earnings streams as far as the eye can see.
In summary, BRK remains a good long term investment that will continue to generate respectable safe returns over the next 20 years.
And remember Buffett was buying back essentially aa much as he can at 285 and I bet he is still buying back stock as the price to book metric becomes increasingly irrelevant. He also pointed out in the last annual letter that BRK has the highest hard asset valuation after depreciation than any other business. Those impossible to duplicate long duration productive assets (rail tracks, utility transmission lines, etc) are valued in past dollars and would cost today far more to reproduce in todays dollars.
Disclosure - 1/2 of my assets are in BRK with no plans to sell any time soon.
I don’t think there is an answer to the question of whether it’s a mistake to sell.
A mistake for whom? A mistake with what consequences?
A decision to own the stock at this point (or any point) has certain expected outcomes.
You might like that outlook, or not, to taste.
Rather, think about what the sensible return expectations are for the investment,
and decide how that rational expectation fits with your own portfolio situation.
Do you pay 50% capital gains tax? Are you accumulating, sitting pat, or liquidating your portfolio?
Do you have more or less cash than you think is a prudent target right now?
Do you have any alternative ideas for deploying that capital? Now, or reasonably soon?
For example, let’s posit that Berkshire’s valuation levels and value growth rates won’t be wildly different from their post-credit-crunch norms.
In that case, today’s slightly-above-average valuation level suggests a rational expectation would
be a slightly negative real return in the next year, maybe inflation -4%.
It also suggests roughly breakeven real return over the next two years, and maybe inflation + 8% thereafter, plus or minus a percent.
(The trend has been about inflation+ 9.2% in this stretch, but let’s have more modest forward expectations).
Overall, the plausible five year outlook might be inflation+5%/year for the next five years, give or take.
For some people that general outlook is just fine and sitting pat makes the best sense.
For others, a smaller position at this juncture might make better sense.
Either because there are other opportunities now, or you think the chances of other upcoming opportunities for that cash are good. Or you want the cash.
Just start with a rational set of assumptions and expectations, add in the facts of your situation, and decide based on those.
It’s not a philosophical or moral question.
I regard Berkshire Hathaway stock as the REAL blue chip stock. THIS is the ultimate buy-and-hold stock, the one to never sell and keep in the family. (That said, I wouldn’t hesitate to sell if the stock price were hyperinflated into an asset bubble like GME and AMC.)
No other corporation has such a vast variety of profitable businesses. No other corporation has the unique culture of Berkshire Hathaway. While I sometimes wish that there were good selling opportunities, that would require some people to buy in at those high prices and suffer from subpar returns. Furthermore, this would degrade the shareholder base by replacing value-oriented shareholders with momentum chasers, meme stock chasers, hyperactive daytraders, AI, and other people who don’t give a hoot about intrinsic business value.
Thus, Buffett and Munger make sure to communicate the right message to attract value-oriented shareholders instead of wild speculators.
Thus, Buffett and Munger make sure to communicate the right message to attract value-oriented shareholders instead of wild speculators.
My first thought on reading this is that Mr. Buffett should be buying only the Class-B shares, those more easily traded by the wild speculators, and leave the Class-A shares, those more likely held by value[oriented shareholders.
But then it occurred to me that then, who would be the real owners? Sure, those individuals who have Class-A shares. But also those large mutual funds, like BlackRock and similar ones who probably go in and out as their AI programs direct. And I would not wish them to be the major shareholders.
I think WEB is clear in his strategy of preferring A-shares over B-share. Taking A-shares out means preserving the voting power. The shares he is giving away are converted to B-shares to make sure their voting power is diluted.
We may not like it, but WEB is no different than Mark Z. Just different era, different operating companies, but same mindset.
It remains a mistake to sell Brk or sell calls today. Skate to wear the puck is going.
The past valuation metrics have been useful (P/B ratios) but will be much less useful going forward.
Why?? Quantitative easing is ending and the dollar will devalue in the setting of relatively low interest rates. We can’t afford to increase interest rates too much due to debt levels. In this setting, hard productive assets become ever more valuable in dollar terms.
Buffett has long been concerned about this and has positioned perhaps not intentionally BRK in hard assets (Rails, utilities, now oil (OXY and CVX), and VZ. Buffett has repeatedly emphasized BRK’s productive nonreplacable hard assets in the last 3 annual reports.
All is not good, of course. If BRK doubles in 7-8 years and the dollar has 50% less purchasing power over the same time, no real wealth has been created. However, holding dollars or buying other equities that don’t at least keep up with dollar devaluation is a much worse alternative. Selling calls as the assets continually get revalued upwards IMO is not a good strategy especially in a taxable account. In a retirement account, it certainly might work but you may never be able to buy back BRK at levels that you feel attractive (e.g. less than 1.3 x book value). Thus after selling calls and you are forced to sell as the stock rises faster than you thought, you may delay buying back the stock and be left behind.
Munger said it was a fluke in history that BRK did not outperform the S&P over the last 10 years. The next 10 years IMO will be oh so different. Good start so far in 2022!
“Munger said it was a fluke in history that BRK did not outperform the S&P over the last 10 years.”
Web436, while I generally agree with most of your assertions, I’m curious if you have a link or source for Munger’s statement. I have not come across it before. Thanks!