BRKB is fully valued. The S&P is 50% overvalued. Interest rates are rising. While over the long term BRKB will likely return 10%, and the S&P 8%, the next 2-3 years will be a roller coaster ride. My guess is that the S&P will peak in 2022 and then fall 30% to 40% from there to the following trough. Possibly as much as 50%. BRKB will move in sync with the S&P, but BRKB will not fall as much as the S&P because BRKB is not currently overvalued. Without factoring in tax, the way to get the highest return from either the S&P or from BRKB over the next few years is probably to go 100% cash from now until after the crash, and then to go 100% in either the S&P or BRKB. Few people swing their asset allocation that much, not even me, but it would probably be better than holding steady throughout the ride. A 10% rise from here to the peak, followed by a 30% decline to the following trough is not a good return.
I will not follow my own advice because I do not want to sell BRKB and pay capital gains tax, and because there are always a few other stocks that I want to own, but I strongly suspect that when I look back in three years, I’ll find that I would have been better off if I had sold now and waited for the crash to be over.
Few people swing their asset allocation that much, not even me, but it would probably be better than holding steady throughout the ride. A 10% rise from here to the peak, followed by a 30% decline to the following trough is not a good return.
Perhaps so.
Though there is a remarkable amount of truth to the maxim that a lot more money has been lost trying to avoid bear market losses than was ever lost during bear markets.
I don’t disagree with your conclusions, but I phrase the question differently.
Whether BRK or SPY, you know that it will be worth more in a decade, and it’s a pretty good bet there will be a bear market along the way.
You could just sit it out if you like and ride the ups and downs. Or downs and ups.
So, it’s not a question of whether you HAVE to sell, as you clearly don’t.
It’s a question of whether and how one might make additional profit from any potential bear, if you wanted to.
Phrased that way, I think the answer is just to ensure you have some cash to take advantage of a moment of fantastic deals.
You don’t need to have all that much cash to be able to do that.
There is no need to go fully to cash, especially when you figure in the unpredictability of it all.
“Whether BRK or SPY, you know that it will be worth more in a decade, and it’s a pretty good bet there will be a bear market along the way.”
True, and we don’t know for sure that BRK or SPY is due for an imminent decline, although I’m pretty sure that SPY is. Imagine if I started a custodial account today for a grandchild. I’d probably be better off waiting to invest the cash in either SPY or BRK until after the correction that I think is imminent. The potential upside of investing the money today is outweighed by the potential downside of a decline right out of the starting gate, certainly for SPY and quite likely for BRK. Both SPY and BRK are very likely to be available at prices that are lower than today’s prices sometime in the next three years.
Though there is a remarkable amount of truth to the maxim that a lot more money has been lost trying to avoid bear market losses than was ever lost during bear markets.
This hit me pretty hard over the last two years. I was patting myself on the back late February and March 2020 when I was out of the market for a lot of the decline, but then I missed the ensuing bull due to expecting further decline and staying out of the market for pretty much a year. Early this year I rebuilt my portfolio with a heavy emphasis on value stocks which missed most of the gains of the last 8 months. The last couple months, my value stocks have finally outperformed, but the gains I missed compared to sticking with my plan of Jan 2020 were significant.
Whether BRK or SPY, you know that it will be worth more in a decade, and it’s a pretty good bet there will be a bear market along the way.
I agree both will be worth more in a decade, but will the market price for the S&P be higher? The ten year returns of S&P 500 from the last time Shiller’s CAPE (Price/ten year average earnings) was this high, ~40, were significantly negative. According to his dataset, the S&P hit 40 back in Jan. 1999, peaked at 44.2 Dec. 1999 , and fell back below 40 in Sept. 2001. Ten year returns were negative (ignoring dividends) for most of that time, though flattish in 2001. As you recently pointed out the 10-year returns from early 1999 through early 2009 were particularly brutal because of the timing of the depths of the 2007-2009 bear.
It was a long 13 years before the S&P finally started moving over breakeven for good from the 1999-2000 start dates, though by that time accumulated dividends would have given you 30+% return, more if re-invested.
It’s interesting for me to mull over these kinds of things, but I’m not sure it’s good for my investment health, lol. I have enjoyed studying individual value stocks this past year, and I feel a lot better about my portfolio than if I were in the S&P, but odds would indicate I’m probably just another investor who will underperform the index in the long run.
I don’t find the idea that markets (and therefore BRK) will be lower within the next year or so to be scary. I wish we could get there already, but that’s a patience issue for myself. But I do think the recent positive momentum is a good time to evaluate how much BRK you’re holding – IF you have issues with holding huge percentages of it in your portfolio.
My personal issue is that I sold out of nearly every other position as prices keep climbing. I still have a spot of GOOGL and am considering adding more when/if prices drop and I’m thinking of increasing my coverage in QQQE because even I think holding 90% BRK/10% cash might be a little too daring. I don’t expect BRK to have anything come out that PERMANENTLY impairs performance, but no one can be 100% sure of anything. We’ve seen a lot of outright lies being treated as the truth by alarming percentages of the public, so temporary impairments could happen. I don’t expect it to happen, but you can’t rule it out.
I’m keeping 20% in cash, figuring if there is a downdraft, I can pick-up some bargains. But I’m also not needing outsized returns to do well. Nearly 25 years of investing in BRK, only selling when valuations have gotten ahead of themselves and buying when much lower, have done OK by me. Following BRK this closely has enabled even a moron like myself to know where we are in the cycle. Which looks higher than usual but nothing outrageous. Not a bad time to lighten up IF you feel the need. Hopefully, we’ll go even higher so the signal to lighten up is unquestionable and we all make out REALLY well.
If you’re looking for undervalued investments, buy international stock ETFs. Except for Berkshire Hathaway, virtually everything else is grossly overvalued.
I was expecting the Dot Con bust to lead to a generation of sensibility and NEVER imagined today’s unprecedented number of asset bubbles.
The bond bubble is the most idiotic bubble in the history of the world. Most bubbles rely on the hollow promise of hitting the jackpot to lure in suckers. This bond bubble doesn’t even have that.
The meme stock bubble is a close second. At least the Dot Con bubble provided the hollow promise that its companies would take over the world and grow to the sky. The meme stock bubble doesn’t even offer that. It’s just a war between one group of manipulators and another. The only reasonable and prudent thing to do is keep out and avoid being collateral damage.
If you’re looking for undervalued investments, buy international stock ETFs. Except for Berkshire Hathaway, virtually everything else is grossly overvalued
Are you saying international ETF’s undervalued or overvalued?
While our glass-is-half-empty view on Growth is sobering, there is a very different way to look at today’s environment. Indeed, relative to traditional equity benchmarks, we think it is one of the best opportunity sets in over 20 years, as in one of the best times to look different and take active risk.
When most liquid asset classes are set to deliver a negative or near-zero real return, value stocks stand out as the only asset class likely to generate a 5%–10% real return over the coming decade. The opportunity to buy value stocks may be short-lived and we may wait decades for an opportunity of a similar scale.
And that is much as I’ve been ranting and pulling my hair out about market-cap-weighted U.S. stocks, you know, one of our largest funds is a U.S. stock fund. I will say U.S. stocks are an attractive asset class if you tilt toward value, by the way, small cap and value. This is actually one of the biggest opportunities in history for value stocks in avoiding the market-cap-weighting.
DopplerValue: If you’re looking for undervalued investments, buy international stock ETFs. Except for Berkshire Hathaway, virtually everything else is grossly overvalued
Kingran: Are you saying international ETF’s undervalued or overvalued?
DopplerValue has often posted about the relative cheapness of international stocks.
Research Affiliates, GMO, Meb Faber and other shops (see the post by James in this thread) have recently talked about the relative and absolute attractiveness of value stocks, and especially international value stocks.
I think Jim has responded that yes, they are cheaper, and there’s a reason for that.
Over the last year:
US Value has outperformed US blend.
International value has outperformed International blend.
I think Jim has responded that yes, they are cheaper, and there’s a reason for that.
Depends on the market. Some are cheap, but they’re always cheap because they deserve to be cheap.
Others are truly cheaper than usual, though not much as far as I can tell.
But yes, I think it’s very useful to:
use CAPE as the valuation metric, not current P/E;
compare each market to its own history; and
never try that sort of valuation exercise for a market that is too small or too concentrated.
For a while Finland was “Nokia and the other fellas”.
The idea behind country valuation mean reversion is that aggregate earnings will tend to track GDP, and are therefore relatively predictable.
But that reasoning works only for a broad mix in a biggish economic area with a somewhat cohesive match between the companies and the business they’re doing within that economy.
Europe or China or US yes, Austria or Malaysia no.
Looking at the index or PE or CAPE for a small country/region is no more predictable than the few big firms that dominate it.
If someone asked me which markets were cheap, I’d work the other way around.
Use the FT.com global equity screener to see what firms meet my usual criteria, then see where the results are concentrated.
Right now it looks like a lot of Taiwan, Hong Kong, and (unusually) Malaysia.
Probably best to keep away from Sri Lanka at the moment, even though business is booming.
Government salaries plus debt interest (just those two things) = 150% of government revenues. Big debt payments coming up.
Those dates will be coming, then going.
For a while Finland was “Nokia and the other fellas”. The idea behind country valuation mean reversion is that aggregate earnings will tend to track GDP, and are therefore relatively predictable. But that reasoning works only for a broad mix in a biggish economic area with a somewhat cohesive match between the companies and the business they’re doing within that economy. Europe or China or US yes, Austria or Malaysia no. Looking at the index or PE or CAPE for a small country/region is no more predictable than the few big firms that dominate it.
One thing I look for in an international stock ETF is diversification with respect to individual stocks. Unless the fund specializes in higher quality stocks (like MOTI’s moats and DGRE’s dividend growth stocks), I want no more than 1% to 2% of the portfolio invested in the biggest stock position. So this rules out single-country funds, except for Japan funds and US funds.
Except for my Japan fund, all of my international stock ETFs are diversified with respect to country. Some are developed market funds, and some are emerging market funds.
My international stock ETFs are:
DFJ: WisdomTree Japan SmallCap Dividend Fund
DGS: WisdomTree Emerging Markets SmallCap Dividend Fund
MOTI: VanEck Vectors Morningstar International Moat ETF
IQIN: IQ 500 International ETF
DGRE: WisdomTree Emerging Markets Quality Dividend Growth Fund
GWX: SPDR S&P International Small Cap ETF
FNDC: Schwab Fundamental International Small Company Index ETF
