Given where the interest rate is and where it is expected to go in the next few months, equities multiples will shrink, ergo, Berkshire share price will decline further.
If you are buying at today’s price, basically you are buying for really long-term and willing to endure short-term price declines. I am reasonably convinced we will see $250, under certain circumstances $225.
I am not sure. Lot of folks talk about their ability to invest long-term, but when the stock declines are steep, they throw the towel. Human psychology.
Given where the interest rate is and where it is expected to go in the next few months, equities multiples will shrink, ergo, Berkshire share price will decline further.
As someone who has often thought over the years, ‘wow, that Kingran bloke is certainly wrong’, I want to comment today that I think Kingran is right. What a wonderful conclusion to your posting arc, on this era of the boards! Hurray!
To be specific:
I believe that you are right that rates will drive down equity multiples. And that BRK will be dragged down along with it, regardless of value. After all, that’s where the whole concept of deep value comes from, pricing on high-value stock sometimes gets dragged down even cheaper by the collapse of prices for poor-value stock.
And because in a crisis, all correlations trend to 1, [A], even Berkshire. Presumably because nobody likes trying to meet a margin call with their most badly hammered asset, and everyone loves buying the freshest bargains far more than boring old bargains.
We can see this in recent months. Berkshire has been following the SP500 rather closely. From memory I think the historical 5y correlation is 0.6-ish, but lately it feels closer to 1.
For those who like smoothing out uncomfortable data spikes from their datasets, I think the recent BRK ‘peak’ earlier in the year was a bit mad in nature and not a great source to inform a model, regardless of the accuracy of price-to-peak-book vs price-to-current-book in the past.
I think, with inflation, interest rates, supply chains, disease, energy and warfare as they are, we may be entering a whole new era for economics & interest rates - and value models for e.g. BRK derived from the last 25 years may not be as useful as they seem, or as useful as they have been in the past. [B]
I am reasonably convinced we will see $250, under certain circumstances $225.
I agree. Berkshire is good value, but right now the market has just barely left behind a Shiller CAPE level of 29 just a few days ago, 29 being a level which exceeds the valuation of the US market throughout the entire entire period 1880-1997 (except immediately before the great crash of 1929).
Suppose the SP500 were to drop by a regular bear market’s worth (-37% [C]). That would take ^GSPC from 4818 to 3035. It’s currently at 3677. And suppose that BRK were to be closely correlated with that drop. Let’s say 1.0 short-term correlation for talking sake. And we go from 3677 to 3035. That would take us to $220 per BRK B share. That would not even be an unusually aggressive bear market, merely a historically average one with an assumption of high correlation in the last stages. An aggressive bear (i.e. with recession in play and rising rates) would make $200 absolutely possible.
Suppose we were to revisit the price-to-book reached recently in the depths of March 2020, which was not a particularly deep crash by the standards of history, nor was it a time far from today in terms of the ‘shape’ of BRK. I think BRK dropped to $159, P/BV 0.91? If such a gentle crash replays itself, what might be possible for BRK? Again, history suggests that $200-220 might be entirely possible.
Is it wise to keep the bulk of one’s money for such an opportunity? Probably not, depending on the value you assign to ‘just making decent money’ as opposed to the improbable yet lifelong joy of being a Legendary Wizard of Market Timing.
I have been mostly 100% cash since last autumn and am waiting for BRK to drop below $251.1. [D] My money is quite literally where Kingran’s mouth is. [E]
Apologies for any errors in any of the above, most of the stats/data/references are from memory since I am running against the clock to get this posted, in a very real sense.
LM
[A] Source: Somewhere in James Montier’s ‘Behavioural Investing’ tome, but that book feels like it’s 10000 pages thick so I’m certainly not looking for it right now.
[B] George Soros wrote wonderfully about this in his book “The Crisis of Global Capitalism” (1998), which contains a totally unexpected series of chapters on themes such as
‘all models have a finite lifespan’
‘recognising when a model suddenly no longer applies is very important, i.e. that’s when you make the biggest mistakes or the greatest profit’
‘dynamic/static prediction error’. ie. some models of the world, are wrong, by some offset, and others are wrong, because they can’t update fast enough to keep pace when the world changes quickly.
I would recommend that book to everyone here who enjoys building finance models.
[C] ~43% in crashes accompanied by recession, or crashes taking place in the last 3 decades.
[D] I abhor multiples of 5/10 when setting price targets, it seems so… unContrarian.
[E] Not something I feel 100% comfortable about, now that I’ve just expressed it like that.
Thanks, Luxmain. Appreciate your thoughts and that you have come out of lurking mode at this auspicious time.
I will read, “The Crisis of Global Capitalism.” Can’t believe I’ve never read Soros, but then I never thought I would really do any investing.
And I, too, congratulate Kingran for the same posts.
As a beginner, with lots of concepts to learn, understand, and interweave, I had noted Grantham’s and Dalio’s macro and historical approaches. It seemed logical to keep those concepts in mind, and have a fair bit of cash, myself.
This is a bit like music. The melodies, tempos, and dynamics. Exciting. We are all musicians.
The interest rates have significantly moved up, but valuations of Berkshire and many companies have actually rallied a lot from that post. Luckily, I have managed to hold on to Berkshire and many other stocks that I owned. Investing for a long-term is not easy, especially if you check your portfolio every day, or every hour.