S&P: 1.8% real GDP growth plus 3%+ inflation (not 2%) plus 1.5% dividend yield = about 6.5% total return, with less than that in the next two years.
BRK.B: dividend adjusted growth of S&P + 2 percentage points, minus 1%,/yr multiple decline = 7.5% total return.
More or less (
These assumptions all presuppose no correction to the the S&P in the next year or so correct? I’m still expecting a J Grantham style reversion to the mean…he’s calling for 2500…all those talking heads on CNBC are at least begrudgingly acknowledging a possible downdraft early next year to about 3000, given a best case scenario of substantial earnings drop off with a mild recession. Hard landing could cause further deterioration in earnings, with maybe more regression in the index. If these things come to pass, maybe the index will not be so unattractive next year. Berkshire, will of course, decline in sympathy, but not as much due to cash redeployment to juicy opportunities, ‘n’est-ce pas?’
I’m not going to quote divi and say, dollar cost average, sleep soundly and all that stuff…but, not being a timer, this might nevertheless be a one time opportunity to keep some powder dry at a key inflection point, and then do the divi thingy in another year or so… Personally, I have too much Berkshire in taxable accounts with large embedded gains, so I am beginning to consider laying off some of my concentration risk in BRK in my other tax-defered accounts which have no current tax consequences, so I can sleep soundly at night.
Oops. I forgot the multiple contraction. Subtract 2 percentage points per year to get 4.5%.
I do think the S&P will correct in the next year or so. The P/E is currently too high. The 4.5% ten-year return would be less than 4.5% in the next couple of years, and then more than 4.5% in the following years. Just FWIW.
The old “Buffett Indicator” (The ratio of total market cap to GDP) which Warren described as, “the best single measure of where market valuations stand at any given moment,” currently stands at 154% of GDP.
“If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% as it did in 1999 and a part of 2000–you are playing with fire.” ~Warren Buffett
When the Buffett Indicator is at 70%-80% of GDP I’ll be a buyer of the S&P. Until then its BRK for me…