This is happening right now on the BRK board. "I could have bought at $280 a week ago. But now it’s $270. I’ll wait until $260." BRK might drop to $260, but then are you going to move the goalposts to $250? Inevitably, stock prices will rise a little bit, and then they’ll wait for prices to drop again, and that’s how you drive yourself crazy. So, if you can’t override that psychology, dollar cost averaging into positions works just fine.
Yeah, I can’t figure that out.
Wait till it’s a good deal, then buy. If it drops some more for a while, who cares? You got a good deal.
It’s very hard to nail a bottom without fibbing.
I tend to buy in steps on the way down, starting when I think it’s a fair/good deal, and ending when I’ve got the biggest position size I want.
With Berkshire at its current price, just under $264 per B share, there is no reason ever to wait for a better price.
For a sense of scale, I figure it has been cheaper than this no more than around 8% of the time since 2005, depending on the valuation metric used.
Using price-to-book as the yardstick it has been this cheap under 4% of the time.
You might want to hold onto dry powder for something else, that’s certainly fine,
but if somebody wants Berkshire, waiting for better prices, like waiting for Godot, can be an infinite wait.
How are you calculating book value? I see ycharts has last quarter’s, but their holdings have declined a lot since then.
The thing to remember is that book value is just a proxy for the value of a share of Berkshire.
It’s not a closed end fund. Half the value comes from their operating divisions, which aren’t very well valued by book value.
And they hold their big stock positions for so long that what matters for those is the long run business results, not the current stock price.
When you think about it, the businesses they own (public or private) aren’t worth any less than they were at March 31: their future earnings potential are pretty much unchanged.
Since then they’ve made a lot of profit, too: so the company is worth more than it was at March 31, not less.
I do look at book per share, but I try to remember that it’s a back-of-the envelope thing, a shortcut.
Peak-to-date book-per-share has historically been a better metric of value because all the dips are (have been) transient, and also empirically a better predictor of forwards returns.
So again, you can feel fine ignoring the upcoming drop in reported book per share.
The better solution:
I use a different valuation method. I value all the operating subsidiaries and the biggest stock positions as a multiple of their earnings, not their market value.
So, for example, this change means that I valued the stock portfolio by about $50bn less than its market value at end Q1.
And, of course, it means that the market value drop of that stock portfolio is pretty meaningless.
I applied roughly that same technique in every period in the last 20+ years, so the short term squiggles in apparent value due to stock price changes largely disappear.
Using that value history and comparing it to the price history, the average one year forward return
since '08 starting from valuation levels similar to today’s has been about inflation + 23%.
Of course I don’t expect that, but I expect something quite good.
Sorry, back to my trading screen to buy some more…
Wait till it’s a good deal, then buy. If it drops some more for a while, who cares? You got a good deal. It’s very hard to nail a bottom without fibbing. I tend to buy in steps on the way down, starting when I think it’s a fair/good deal, and ending when I’ve got the biggest position size I want.
With Berkshire at its current price, just under $264 per B share, there is no reason ever to wait for a better price.
I read long time ago the advice: “You want to be selling on the way up and buying on the way down.”
It’s emotionally somewhat hard to do the “This is happening right now on the BRK board. “I could have bought at $280 a week ago.
But now it’s $270. I’ll wait until $260.” BRK might drop to $260, but then are you going to move the goalposts to $250?” thing. In fact a couple of days ago there was somebody who said that she waited for a lower price–and got it-- and thereby saved the equivalent of several months income. Problem is, of course, if you wait too long the price bottoms and you wind up chasing it up and up and up and up.
What I did is set a few GTC orders on BRK.B at successively lower prices in $10 steps. 295, 275, 265, 255. The 275 filled last week, the 265 filled today. No agonizing over “should I pull the trigger at this price”. Set up your targets and get a pleasant surprise when your broker sends you the fill notification.
I think what Jim is trying to say here is “Buy BRK” “Now”
True enough.
But it seems I’m always saying that to anybody who will listen, and many who don’t even want to.
The quality of result you get from glancing at a stopped clock depends entirely on when you choose to look at it : )
Jim’s a million times repeated (on the berkshire board, not here) “Price (SPY) versus value (BRK)” as I would sum it up = SPY was getting more and more pricey while BRK comparatively seen not.
I’m trying to love BRK as much as you do but they mostly track SPY and lag QQQ. What am I missing? … Jim’s a million times repeated (on the berkshire board, not here) “Price (SPY) versus value (BRK)” as I would sum it up = SPY was getting more and more pricey while BRK comparatively seen not.
See, I’m not needed.
Round numbers, the value of a share of Berkshire is up about inflation plus 10.1%/year in the last decade.
I calculate that in a couple of different ways and lately they have been giving nearly identical results.
For the S&P 500 in the same stretch, smoothed real earnings, the best metric of actual value, are up about inflation plus 4.6%/year. (historically very high, by the way)
Plus you get a dividend, averaging 1.94% in this stretch, for a total value generation of about 6.54%/year.
Any market return in excess of that has been as a result of getting more expensive, and should probably be though of as temporary.
A very crude rule of thumb of what to expect from the S&P 500 is the dividend yield the day you buy, plus the future GDP growth rate.
So we find ourselves in the odd situation that
Berkshire is quite a bit cheaper than usual right now
The S&P is quite a bit more expensive than usual right now
…yet Berkshire has, so far, continued to rise in value faster.
Certainly there are lots of other good things in the market that would meet the same criteria.
The typical S&P 500 firm is very pricey, but that’s certainly not true of everything.
I like Berkshire because its level of bulletproofness and predictability means one can have a very large portfolio allocation without losing sleep.
I expect higher returns from most of my other positions, but they are much smaller positions because of the wider range of plausible outcomes.
Can the same be said about QQQ vs QQQE, ie large tech stocks are overvalued? Seems to be a similar conundrum.
I estimate that QQQE is in the vicinity of fair value at the moment.
Real earnings for the group have trended very well since about 2005, and almost as well for longer
periods if you simply ignore dips in recessions which seem to completely disappear afterwards.
Based on the on-trend level of earnings, and the average multiple of trend earnings since 2005,
you’d expect a price in the vicinity of $61-$71 at the moment.
My best guess would be near the lower end of that range, maybe $63ish.
With the current price between 65 and 66, it’s definitely in the zone.
Which is probably a pretty good deal for a core position.
Real earnings have risen something like inflation plus 7.2% to inflation plus 8.2%/year.
Generally near the upper end of that range…the lower figure is from about the most pessimistic trend line I could justify.
That’s the rate of rise in value for the index. Add about a half percent in dividends.
mungofitch said: So we find ourselves in the odd situation that * Berkshire is quite a bit cheaper than usual right now * The S&P is quite a bit more expensive than usual right now
So, what are you thoughts about holding a hedged BRK position (by shorting equivalent S&P500 futures) vs. unhedged position?
If the spread between the expected return of the two is higher than the expected return of BRK, then hedging would be clearly preferred, right?
But even if BRK expected return is modestly higher, hedging can still be advantageous due to lack of correlation with the overall market (or the typical portfolio). A market-neutral position would especially important if the current bear market ends up of the 2008/2009 not the 2020 variety.
But even if BRK expected return is modestly higher, hedging can still be advantageous due to lack of correlation with the overall market (or the typical portfolio).
A lack of correlation is an incorrect assumption in this case.
“But even if BRK expected return is modestly higher, hedging can still be advantageous due to lack of correlation with the overall market (or the typical portfolio).”
A lack of correlation is an incorrect assumption in this case.
Lack of correlation of Long BRK / Short SPY with the overall market is an incorrect assumption? Perhaps not negatively correlated but I wouldn’t think there will be significant positive correlation.
A lack of correlation is an incorrect assumption in this case.
Lack of correlation of Long BRK / Short SPY with the overall market is an incorrect assumption? Perhaps not negatively correlated but I wouldn’t think there will be significant positive correlation.
Sorry, I thought you meant there’s no correlation between BRK and the market.
Yes, if you hedge Long BRK / Short SPY, you remove the correlation. But you also remove most of the potential return.
Yes, if you hedge Long BRK / Short SPY, you remove the correlation. But you also remove most of the potential return.
BRK and SPY are highly correlated, I have no doubt. But, given price and earnings trends in recent decades we are at a place where BRK is priced significantly below typical valuation, while SPY remains priced significantly over typical valuation. The pairing of long BRK, short SPY would seek to exploit the return to mean valuation of both. Of course that can take a long, long time, and that mean valuation is something of a moving target for both. If SPY rises in the near term you bear the expense and anxiety of shorting the shares in a rising market, and could be forced to take a loss.
I’d be careful about the shorting SPY part if I were a trader who considered such things (I’m not). Consult full array of market and sentiment indicators to try to find an optimal time (i.e. not right after a bottom detector just fired, as it did recently), and have a conservative, well-defined exit point.
Yes, if you hedge Long BRK / Short SPY, you remove the correlation. But you also remove most of the potential return. … The pairing of long BRK, short SPY would seek to exploit the return to mean valuation of both. Of course that can take a long, long time, and that mean valuation is something of a moving target for both.
Slightly tongue-in-cheek post
If you want a trading system for Berkshire, two notes—
Historically I’ve done better just buying a lot when it’s cheap, then sitting on my hands.
If you really want a trading system, Berkshire seems unusually prone to the month end effect.
Not so much the great performance around month end, which it has, but also the lesser known bad period just before the good period.
Consider 3 states:
Bad period: market close from 9th-last trading day of the month to close on the 5th-last trading day of the month, 4 trading days, about 1/5 of the time.
Great period: starting market close 5th-last trading day of the month to market close 3rd trading day of the next month. 7 trading days, which is 1/3 of the time.
Blah period: market close 3rd trading day of the month to 9th-last trading day of the month.
(if there are unusual market closures, use the originally scheduled trading days, not the actual ones).
CAGR since 1999 in those three states:
Bad -23.9%
Great +44.3%
Blah +3.2%
Quick test of one strategy: long the great days, short the bad days, cash (no return) the blah days.
So, you have no position at all 20% of the time.
CAGR 10.5% better than buy and hold with 42% of the risk using rolling-year downside deviation with MAR=10%.
CAGR 19.22%, and 93.5% of rolling years positive.
(I didn’t include any short borrow cost, but neither did I include any interest on cash, so it kinda sorta cancels out)
