Random thoughts

I believe all edges are ephemeral, if there is a factor that works, everybody copies it, duplicates it and it morphs to no edge. The only sustainable edge is great stock selection, great temperament, managing risks.

Now, many here has Berkshire as a very high % of your portfolio, representing a significant single stock risk, and Berkshire in-turn owns Apple, which is far higher allocation than any Index, another single stock risk for Berkshire… and the risk to your portfolio is multiplied. Apple has 6.56% allocation in SPY, whereas at Berkshire it is 20% allocation (% of marketcap).

So the entire discussion about the benefit of equal weighted Index over SPY is bit comical.

Now, many here has Berkshire as a very high % of your portfolio, representing a significant single stock risk,

Berkshire is more like a mutual fund than a company. An actively managed fund.

An index fund is passively managed. Whether it is equal weighted or cap weighted, it is passive.

So the entire discussion about the benefit of equal weighted Index over SPY is bit comical.

The benefit – or lack thereof – of how a passive index fund is weighted is a completely different subject than the weighting of the companies held by an active fund.

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An index fund is passively managed. Whether it is equal weighted or cap weighted, it is passive.

Not really!!! someone decides what companies goes into index. I suppose you know that…

The benefit – or lack thereof – of how a passive index fund is weighted is a completely different subject than the weighting of the companies held by an active fund.

You can keep splitting the hair, at this rate CNRS will come to this board to hire.

I will make this easy.

Kingran - you are right and we are all wrong.

There; does that make you feel better?

tecmo

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Kingran - you are right and we are all wrong.

Can I get couple of hundred such posts? LOL.

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Now, many here has Berkshire as a very high % of your portfolio, representing a significant single stock risk…

As Ray has already pointed out, it’s pretty hard to consider BRK a single stock. It’s ownership of other stocks and diverse companies in total eliminates much of the single stock risk. I seriously doubt we would see Pampered Chef having correlation with an oil company or Apple. Multiple fund managers makes it less likely that there would be single company fraud risk associated with BRK. I do not yet have a position in BRK but I am looking at it as an actively managed fund that happily doesn’t typically spew off dividends, but not so much as a single stock.

…Berkshire in-turn owns Apple, which is far higher allocation than any Index, another single stock risk for Berkshire… and the risk to your portfolio is multiplied. Apple has 6.56% allocation in SPY, whereas at Berkshire it is 20% allocation (% of marketcap).

So the entire discussion about the benefit of equal weighted Index over SPY is bit comical.

The concentration that BRK holds in Apple is exactly what makes the discussion over cap weighted vs equal weighted index funds critical, not comical. If we buy BRK, we sure as heck don’t want to double down on Apple by buying QQQ as well, and would buy QQQE. Anyone who uses funds should run an x-ray of their portfolio to see if they are overweighting specific stocks. Diversification is obviously important. Understand what you hold and make informed decisions.

IP

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hard to consider BRK a single stock. It’s ownership of other stocks and diverse companies in total eliminates much of the single stock risk.

How do you spell commitment bias??

I understand the other 80% of Berkshire portfolio mitigates 20% of Apple risk, but 6.5% in a 500 companies portfolio is too much. 2% is okay but not 6.5%.

Please make sure you don’t turn yourself into pretzel.

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hard to consider BRK a single stock. It’s ownership of other stocks and diverse companies in total eliminates much of the single stock risk.

How do you spell commitment bias??

Commitment bias, also known as the escalation of commitment, describes our tendency to remain committed to our past behaviors, particularly those exhibited publicly, even if they do not have desirable outcomes.

https://thedecisionlab.com/biases/commitment-bias

Hmmm. Considering I do not yet own a single share of BRK, not sure how that applies.

I understand the other 80% of Berkshire portfolio mitigates 20% of Apple risk, but 6.5% in a 500 companies portfolio is too much. 2% is okay but not 6.5%.

I look at my total portfolio as a whole, including all the holdings of each fund. I don’t care if most of my Apple holdings is via BRK. What I care about is that I not hold too much Apple. Is that too complicated a way to look at it for you?

IP

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I believe all edges are ephemeral, if there is a factor that works, everybody copies it, duplicates it and it morphs to no edge.

If the edge is simple enough, you would think so. And yet there is every reason to believe that some people do better in the market than others. Why would this persist? I think I know that penny stocks are BS, that they appeal to what one might call the lottery ticket bias: who cares if the expected return is negative when they only cost $1? If edges are ephemeral, shouldn’t behaviors which are the opposite of edges also be ephemeral? Why can people continue making money by appealing to the wishful thinking of some humans?

I think in fact many edges are not ephemeral, but they stop being edges over time as, one way or another, they get broadly adopted to the benefit of everybody who adopts them. At an earlier time, buying blue chip stocks with unassailable balance sheets and long records of outperforming was an edge. Over time, markets such as NYSE which had more severe quality requirements on the businesses they listed for trading than other markets, became more popular, in some cases so popular as to cause people to forget that it used to take hard work to avoid buying by accident the kinds of businesses that NYSE won’t list.

An edge is just a good practice that not everybody understands or has a path to benefit from yet. Edges as such don’t go away, they just get built into the system in such a way that everybody benefits from them.

In this way, edges disappearing over time is a feature, not a bug.

The only sustainable edge is great stock selection, great temperament, managing risks.

Buffett and Saul and Mungofitch and a reasonably long list of famous investors have that edge. Standard and Poors seem to have that edge to some extent.

But what of us lesser humans who figure that out? If I have figured out that Buffett has an edge which he consistently makes available to his investors, and I invest in Buffett, do I not have a sustainable edge as well?

Indeed, investing in stocks run by talented brilliant hard working CEOs with track records that are good, that is, investing in stocks listed on an exchange with a good record, is that not an edge over picking my investments from the penny stocks that can’t get listed?

So the entire discussion about the benefit of equal weighted Index over SPY is bit comical.

Comical in the same sense that learning everything about a field helps you succeed in that field technically. Yes, it is comical that as a very good radio engineer that I can tell you more about how to build a bad radio than can the lesser engineers, that’s pretty funny. That Musk can tell you more about how to build an EV that no-one wants to buy than can General Motors, that’s hilarious! That a good man can tell you more about evil than can Stalin and Hitler combined, I’m laughing so hard I’m crying!


Working hard to understand things WAY BEYOND the range of things you actually decide to try is, essentially, the special talent that humans have evolved that puts us at the top of the world. We haven’t learned how to solve a specific problem, we have jumped the queue and learned how to solve problems. Not all ideas are good ones, but you will be a poor judge of better and worser ideas unless you learn a lot about a lot of them. Mungofitch throws off more interesting ideas than he uses, I’m pretty sure, and his predilection to investigate and understand so many aspects of the moving pieces of investing is deeply intrinsic to the results he has gotten.

We all coattail if we want to succeed. Even my spending 7 years in graduate school to become the odd mix of physicist-economist-engineer-philosopher that I became was a form of coat-tailing even as it gave me the skills to do independent research and design. Graduate school would have been nothing without the great and successful professors, researchers, and fellow students I was able to learn from. My coat-tailing on Mungofitch has helped me to learn how to coat-tail on Buffett and Saul. I coat-tailed on the poster ItsGoingUp who helped me to coat-tail on Musk during some of TSLA’s big rises.

Yes the only sustainable edge is to learn that their are people that have fairly sustainable edges who are available for coat-tailing. Some are easier to coat-tail on than others. 7 years of graduate school is a tough ask for some really superb coat-tailing, but Buffett and Musk are pretty easy to coat-tail on, just buy stock. Of course the easier someone is to coat-tail on the less of an “edge” they provide, in the same sense that if everybody learns simple math, than the elimination of simple mistakes that math allows is no longer an edge, it is something everybody can benefit from.

To quote the bard: “you just keep thinking, Butch, that’s what you’re good at.” It is a pleasure to bat the ideas around with you.

Cheers,
R:)

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Buffett and Saul and Mungofitch and a reasonably long list of famous investors

Really? I like Mungo but I’m sure he’d rightfully object to being placed near Buffett in this sentence. Never mind Saul. His wrecklessness is disqualifying.

PP

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Really? I like Mungo but I’m sure he’d rightfully object to being placed near Buffett in this sentence.

I hope Mungofitch has figured out what Ben Franklin wrote about humility. That it is hard to make a case that it is a virtue, but that the appearance of humility is doubtlessly useful in human affairs. I think Mungo really is technically speaking right up there.

But my larger point was that this thing that some famous investors have in a larger scale is actually available much more broadly and at a lower scale. Even my decision to invest in stocks instead of CDs or cash over the years has gigantically improved my life, sort of micro-scale alpha right there. If we are going to understand edge, why not understand it across all its dynamic range in humanity?

Never mind Saul. His wrecklessness is disqualifying.

His wrecklessness? He is not wreckless. He constantly warns and cajoles and reminds people of the seriousness of what he does and the difficulty. Then he tells you what he does and why. Have you read Vonnegut’s short story “Harrison Bergeron”? Please do. Baby proofing a few rooms in a house where a new baby lives makes sense. Baby proofing the technical literature in any field will produce a stupid stupid world where technical progress is non-existent. That would suck for me.

But that’s just my values vs. yours. I like doing things I can do because I know how to do them, even when others might best avoid doing those things because they don’t really understand high voltage. Yes, high voltage should be labeled and follow standards to keep it away from killing idiots. No, if idiots still manage to kill themselves, that is not a problem with high voltage it is a problem with idiots. We disagree on values.

But on quantitative metrics, Saul has grown $1 into $2000 in the 32 years over which he has reported his progress. Buffett took 49 years to do that with BRK stock. Buffett’s first BRK $1 is now worth $7560.91, but that has taken 60 years. Whatever you might think of Saul’s dangerous practice of describing in detail what he actually does and why, his results may speak for themselves.

Cheers,
R:

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I believe all edges are ephemeral, if there is a factor that works, everybody copies it, duplicates it and it morphs to no edge…

One way to view that:

The underlying notion is that the market is mostly efficient most of the time, so edges are hard to sustain.
Fair enough, as a general concept.

But consider:

There is no doubt that some industries simply have much better economic characteristics than others.
One would expect the market to bid up the good ones and discount the bad ones till returns were about the same across industries.
But it doesn’t happen, and the differences are not small.
The apparel industry underperformed the S&P 500 by -4.55%/year in the last 36 years, through thick and thin.
My personal favourite, medical devices, beat the S&P 500 by +5.80%/year in the same 36 years, through thick and thin.
The entire US heavy construction industry made net nothing 2008-2018.

If one merely posits that Berkshire is in one (or more) of the above-average industries, a logical consequence would be that the the edge would be expected to continue.

Capital allocation is key to all businesses, and probably somewhat more so for Berkshire than for most.
They have a lot of new capital coming in the door that needs to be put somewhere, after all.
So the degree to which Berkshire’s edge remains will certainly vary with the skill of the person doing the capital allocation.
But don’t take that idea too far: it’s not a closet tracker mutual fund. There is no axiomatic reason to expect index tracking as the baseline assumption.
Merely being generally concentrated in industries with a tail wind goes a heck of a long way.

Remember Mr Buffett’s old saying:
“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”
So, to do pretty well in the market, just pick some good industries.

Jim

PS

Though it’s not necessary, the optimist might take the idea further:
You could then consider the observation that the top 2-3 firms in most industries have MUCH better economic characteristics than the rest of the pack.
Apple is a stand out example, but it’s so exceptional it’s easy to forget that it is just an outlier demonstration of a general rule.
Some of these advantages are, like the industry effect, things that last decades.

So, perhaps one might expect a bit more lingering advantage from owning (statistically) somewhat more of the firms with the good economic characteristics within their industries than the ones with the ho-hum characteristics.
More Apple than Nokia. More BAC/USB/BK than Deutsche.

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Buffett’s first BRK $1 is now worth $7560.91, but that has taken 60 years.

When Buffett took control of Berkshire Hathaway in 1965, the price was about $19/share. Today it’s $415,850, that’s 21,886 times, not 7560 times.

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Buffett and Saul and Mungofitch and a reasonably long list of famous investors

Really? I like Mungo but I’m sure he’d rightfully object to being placed near Buffett in this sentence.

Very much so.
I assume I am not a particularly successful investor in the grand scheme of things.
I do imprudent things sometimes, some of which cause large losses. Berkshire would never want me working there.
Nobody here would want me working there.

I might land above the median, but that’s not hard for anyone who merely avoids some subset of the dumb things.
To start with I don’t get my shoes shined while I’m out and about, so I avoid those stock tips.
And I’m just too darned cheap to buy “story” stocks.

Jim

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If the edge is simple enough, … Why can people continue making money by appealing to the wishful thinking of some humans?

Edges as in strategy I am talking, not about scam’s.

I think in fact many edges are not ephemeral, but they stop being edges over time…
That’s what I meant by everyone copies and no longer it provides alpha.

Mungofitch throws off more interesting ideas than he uses

Look, discussing variety of ideas is fine. I myself do that. When the ideas are challenged, you defend the idea, or move on. Something to think about…

Buffett and Musk are pretty easy to coat-tail on

Yes and no. Personally, I don’t think super billionaires are not a model for many average investors.

First of all my comment is about investment process, not about industries/ companies. Having said that, even in companies many are copied. When JIT first came, soon it is adopted by everyone it became vogue, now you can see this in software companies, how one feature is introduced by one company is immediately copied and replicated by others.

However, I have also talked about sustained advantages. In the context of industries, sustained advantage is not luck, but thoughtful, purposeful actions. Take Amazon, they kept investing on many areas. Forget about AWS, in their retail side, Amazon has developed a supply chain monster, it is 3rd biggest behind UPS and FedEx and soon going to be number 2. With no experience in movie business they build #2 streaming service. Imagine a company like disney with their massive movie, studio, distribution is still behind Amazon Prime.

You can say similar things about many companies, where they constantly innovate, innovation led by heavy investment in R&D etc. they are sustainable advantage. Those intangibles are awarded in higher multiples.

When the innovation is not happening the multiples shrink, softy during 2000 to Satya.

Separately, Berkshire’s advantage is Buffett. Many thinks their insurance, operating business etc as advantage. The true value creation at Berkshire is Buffett. Post Buffett, until the new management shows they can create value, if Berkshire re-rates, I will not be surprised.

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Separately, Berkshire’s advantage is Buffett. Many thinks their insurance, operating business etc as advantage. The true value creation at Berkshire is Buffett. Post Buffett, until the new management shows they can create value, if Berkshire re-rates, I will not be surprised.

Re-rates in what way?

Currently at about 1.2x last known book, and a PE of 12-15x (with look-thru, and depending on how you calculate it). That’s already a pretty low rating.

One might almost say a post-Buffett Berkshire is already built into the price.

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Currently at about 1.2x last known book, and a PE of 12-15x (with look-thru, and depending on how you calculate it). That’s already a pretty low rating.

One might almost say a post-Buffett Berkshire is already built into the price.

Yes, that is true, but it’s also true that we should probably expect a negative market reaction when he resigns from running the company. It could be a wonderful buying opportunity if it takes us from value pricing to deep value pricing.

I do agree with Kingran that Buffett is BRK’s edge, but it’s also true BRK is built of numerous varied businesses with good longterm prospects, so unless the new leadership actively destroys value, the company will have many decades of strong earnings to look forward to, even if the alpha provided by Buffett is gone.

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Buffett and Saul and Mungofitch and a reasonably long list of famous investors have that edge. Standard and Poors seem to have that edge to some extent.

Ha ha…putting board members alongside Buffett. Laughable.

Currently at about 1.2x last known book… One might almost say a post-Buffett Berkshire is already built into the price.

You may say that. Remember Buffett solves lot of issues, mistakes, failures. There are string of sub-par acquisitions and then he springs Apple. It solved IBM, Precision, Lubrizol, carrying $100 B cash on balance sheet, etc. Now, the future management can it solve some of the inherent issues with Berkshire conglomerate? The above are not solved by the “stellar” operating companies, but by Buffett. At this time I view Berkshire bench of managerial talent is “show-me” quality. Besides Buffett’s word I have nothing to hang my hat on. That’s why I mentioned post-Buffett is they can hold the fort together, or show they can create value, today’s price is a bargain for the next decade.

What if they cannot, What if Berkshire goes below book? I am not saying it will, but is it so inconceivable?