if recessions and bear markets do come and go and the market overall goes up over an extended period of time, then waiting for opportune times to buy “good” companies at “reasonable” prices would be excellent…
The sentiment is not very on topic for the MI board : )
…but yes, I think so.
The hard part is picking what to buy when the the prices are crazily low.
If it is one of those very sharp super-sized panic sell-offs, the stuff that bounces most for the
first few weeks, maybe a couple of months, is the junkiest stuff that has fallen the most.
I know that, but I can never bring myself to bet on it.
I concentrate on the stuff that’s easy to value, and certain to be worth more in a couple/few years, and cheap relative to that likely future value.
This doesn’t require nailing the bottom very accurately, just knowing when it’s a good deal…good enough.
Take the time to check out the prices of some specific things during the 2009 or even 2020 market bottoms. Think about the money you could have made if you’d bought those things at those prices. Pick anything you like…GOOG at under $1050, say, 2.25 years ago. Year to date average price is $2560. Next time there’s a panic, let that greed suffuse you, not the panic that you will be tempted to feel.
Most people like to say they’ll be buyers during bottoms, but when things get scary they don’t buy. That’s when they say, “Yeah, I’ll buy when things get even worse.”
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.
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.
