This doesn’t require nailing the bottom very accurately, just knowing when it’s a good deal…good enough.
Jim
I think what Jim is trying to say here is “Buy BRK” “Now”
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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.
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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
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But it seems I’m always saying that to anybody who will listen, and many who don’t even want to.
I’m trying to love BRK as much as you do but they mostly track SPY and lag QQQ. What am I missing?
Ziggy
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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.
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I hope I am a good student and he has not to correct me too much 
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“Price (SPY) versus value (BRK)”
Can the same be said about QQQ vs QQQE, ie large tech stocks are overvalued? Seems to be a similar conundrum.
Thanks
Z
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BRK-A (or B) have performed better than the SPX and poorer than the NDX since about 2013. You can chart this on tradingview.com with:
NYSE:BRK.A/(AMEX:SPY+NASDAQ:QQQ)/2
It has performed almost exactly in line with an equal weighting of the two.
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Actually, I think my math is hosed there … But you get the idea.
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.
Jim
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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.
Might get a lot cheaper. Hard to say.
Jim
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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.
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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.
Elan
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Elan said:
“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.
Elan
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.
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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)
No, I don’t do this.
Jim
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Zeelotes wrote: It goes without saying that the six percent change in the value will fire first. The 6.00 rise in the value itself will fire later.
- The six percent rise firing a bull signal on 6/21/2022 when it rose above 21.17.
- The 6.00 rise fired a bull signal on 6/24/2022 when it rose above 25.97.
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CAGR since 1999 in those three states:
Bad -23.9%
Great +44.3%
Blah +3.2%
Thank you for sharing.
This question is purely out of curiosity so if you don’t know off hand please don’t waste your time, but did you notice any difference in this phenomena before and after the BRK valuation change you’ve noted in the past around the financial crisis?
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This question is purely out of curiosity so if you don’t know off hand please don’t waste your time,
but did you notice any difference in this phenomena before and after the BRK valuation change you’ve noted in the past around the financial crisis?
Yes and no.
There was a brief stretch during the financial crisis that it worked insanely well.
So any test really should exclude that.
I mean it worked, and I built my day-of-month model before that, but the results were so fantastic that it throws off any long-term test that includes it.
And, realistically speaking, no human would have had the nerve to follow the system through that.
You’d have gone to cash and stayed there. I would have.
Annualized rates during each state, from September 1999:
Pre-crunch returns in the three states, “bad”, “blah”, and “good”:
-25.3%
6.1%
41.5%
During the crunch returns in the three states:
-99.0%
-87.0%
1815.0%
Post crunch returns in the three states:
-8.2%
9.4%
33.4%
For the purposes of the figures above, the crunch period when it worked super well was 2008-09-26
through 2009-03-20.
But, to answer your more specific question—seems to have worked fine both before and since.
The numbers are in the right order, and relatively similar.
If you don't like that discontinuity...who's to say it wouldn't have been a discontinuity the other way?....then try this:
The first thing I mentioned was the simple "avoid the bad days" approach.
One strategy that gave quite steady returns before, during, and since the crunch:
Be long most of the time.
Except during the bad-omen days, be 37% short.
There are only 4 really "bad omen" days per month.
Market close 9th-last scheduled trading day of the month through to market close on the 5th-last scheduled trading day.
The 37% was picked to minimize risk on a particular metric, based on downside deviation.
Any percent short works, including just cash, and 37% is not insanely high.
CAGR for that strategy 17.1% versus 8.67% for buy and hold.
In round numbers, improves returns over B&H by over 8%/year at less than 60% of the risk.
For example, worst rolling year -20.6% instead of -50.1%.
Standard deviation of rolling annual returns unchanged...just a higher average.
Figures don't allow for trading costs, nor short borrow fees, but also no credit for any interest at all.
Trading costs will be low since these could all be done with MOC orders which have no bid/ask spread.
And I don't imagine Berkshire is an expensive borrow.
Jim
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