Trading BRK-B

Investing Strategies Mechanical Investing
1

On 11/23/2021 I posted how to manage risk in the Saul Picks here: https://discussion.fool.com/managing-risk-in-volatile-picks-3498…

Holding seven of the Saul Picks resulted in a bull market peak a few days later, and has dropped over seventy percent since then. In that thread I discussed using overbought / oversold indicators to identify points of transition. I mention that now regarding BRK-B because you can do the very same thing with these holdings. I simply obtain the stocks Berkshire holds regularly and use that basket of stocks to determine a composite of when they are overbought or oversold. When they are overbought it produces a sell signal, and when they are oversold it produces a buy signal.

Here are the values for 2022 - Caution is the overbought consensus of the holdings, and the Sum column combines the Buy and Strong Buy values - oversold consensus of the holdings. The signals are based on an overbought reading of 13% or greater, while the oversold sum hits 60% or higher. I tweak these signals slightly with another indicator I use, but basically, these are the final signals.

**Date       Caution  Buy     Strong Buy  Buy Sum  Signal**
1/3/2022   2.22%                        0.00%    
1/4/2022   26.67%   2.22%   2.22%       4.44%    BEAR
1/5/2022   13.33%   2.22%   4.44%       6.66%    BEAR
1/6/2022   6.67%    4.44%   6.67%       11.11%   
1/7/2022   15.56%   8.89%   4.44%       13.33%   BEAR
1/10/2022  22.22%   6.67%   17.78%      24.45%   BEAR
1/11/2022  6.67%    2.22%   6.67%       8.89%    
1/12/2022  8.89%            4.44%       4.44%    
1/13/2022  4.44%    2.22%   6.67%       8.89%    
1/14/2022  4.44%    4.44%   15.56%      20.00%   
1/18/2022  6.67%    6.67%   26.67%      33.34%   
1/19/2022           8.89%   28.89%      37.78%   
1/20/2022           11.11%  28.89%      40.00%   
1/21/2022  2.22%    15.56%  44.44%      60.00%   
1/24/2022           11.11%  60.00%      71.11%   EXT_BULL
1/25/2022           6.67%   42.22%      48.89%   
1/26/2022  2.22%    8.89%   28.89%      37.78%   
1/27/2022  2.22%    4.44%   37.78%      42.22%   
1/28/2022           4.44%   31.11%      35.55%   
1/31/2022  2.22%    4.44%   4.44%       8.88%    
2/1/2022   11.11%   2.22%               2.22%    
2/2/2022   6.67%                        0.00%    
2/3/2022   4.44%            6.67%       6.67%    
2/4/2022   2.22%    2.22%   2.22%       4.44%    
2/7/2022   13.33%           4.44%       4.44%    BEAR
2/8/2022   15.56%           6.67%       6.67%    BEAR
2/9/2022   13.33%                       0.00%    BEAR
2/10/2022                   4.44%       4.44%    
2/11/2022                   6.67%       6.67%    
2/14/2022           2.22%   11.11%      13.33%   
2/15/2022  2.17%    2.17%   2.17%       4.34%    
2/16/2022  13.04%           2.17%       2.17%    BEAR
2/17/2022           4.35%   2.17%       6.52%    
2/18/2022  2.17%            8.70%       8.70%    
2/22/2022  2.17%    4.35%   13.04%      17.39%   
2/23/2022  2.17%    10.87%  17.39%      28.26%   
2/24/2022           21.74%  30.43%      52.17%   
2/25/2022                   2.17%       2.17%    
2/28/2022  2.17%            6.52%       6.52%    
3/1/2022   4.35%    4.35%   21.74%      26.09%   
3/2/2022   4.35%    10.87%  17.39%      28.26%   
3/3/2022   10.87%           15.22%      15.22%   
3/4/2022   6.52%    4.35%   39.13%      43.48%   
3/7/2022   2.17%    13.04%  50.00%      63.04%   EXT_BULL
3/8/2022   2.17%    8.70%   50.00%      58.70%   
3/9/2022            4.35%   4.35%       8.70%    
3/10/2022  2.17%    8.70%   23.91%      32.61%   
3/11/2022           2.17%   21.74%      23.91%   
3/14/2022  4.35%    6.52%   21.74%      28.26%   
3/15/2022  8.70%    6.52%   15.22%      21.74%   
3/16/2022  4.35%    2.17%               2.17%    
3/17/2022  10.87%   4.35%               4.35%    
3/18/2022  10.87%   2.17%               2.17%    
3/21/2022  8.70%    2.17%               2.17%    
3/22/2022  6.52%    2.17%               2.17%    
3/23/2022  2.17%    2.17%               2.17%    
3/24/2022  6.52%            2.17%       2.17%    
3/25/2022  17.39%                       0.00%    BEAR
3/28/2022  17.39%                       0.00%    BEAR
3/29/2022  32.61%                       0.00%    BEAR
3/30/2022  8.70%                        0.00%    
3/31/2022  6.52%            4.35%       4.35%    
4/1/2022   2.17%    4.35%   4.35%       8.70%    
4/4/2022   6.52%    4.35%   6.52%       10.87%   
4/5/2022   4.35%    4.35%   2.17%       6.52%    
4/6/2022   6.52%            10.87%      10.87%   
4/7/2022   15.22%           13.04%      13.04%   BEAR
4/8/2022   19.57%           10.87%      10.87%   BEAR
4/11/2022  2.17%            6.52%       6.52%    
4/12/2022  4.35%            8.70%       8.70%    
4/13/2022  4.35%    2.17%   10.87%      13.04%   
4/14/2022  6.52%            10.87%      10.87%   
4/18/2022  2.17%    4.35%   19.57%      23.92%   
4/19/2022                   6.52%       6.52%    
4/20/2022  13.04%           6.52%       6.52%    BEAR
4/21/2022  13.04%           10.87%      10.87%   BEAR
4/22/2022           17.39%  26.09%      43.48%   
4/25/2022           19.57%  39.13%      58.70%   
4/26/2022           15.22%  47.83%      63.05%   EXT_BULL
4/27/2022           4.35%   52.17%      56.52%   
4/28/2022           8.70%   23.91%      32.61%   
4/29/2022           13.04%  45.65%      58.69%   
5/2/2022            8.70%   63.04%      71.74%   EXT_BULL
5/3/2022            2.17%   36.96%      39.13%   
5/4/2022            4.35%   19.57%      23.92%   
5/5/2022                    23.91%      23.91%   
5/6/2022            4.35%   50.00%      54.35%   
5/9/2022            8.70%   54.35%      63.05%   EXT_BULL
5/10/2022           2.17%   54.35%      56.52%   
5/11/2022           10.87%  54.35%      65.22%   EXT_BULL
5/12/2022           6.52%   60.87%      67.39%   EXT_BULL
5/13/2022           6.52%   4.35%       10.87%   
5/16/2022                   17.39%      17.39%   
5/17/2022  2.17%            4.35%       4.35%    
5/18/2022           4.35%   28.26%      32.61%   
5/19/2022           2.17%   50.00%      52.17%   
5/20/2022                   43.48%      43.48%   
5/23/2022                   17.39%      17.39%   
5/24/2022                   17.39%      17.39%   
5/25/2022  4.35%    2.17%   13.04%      15.21%   
5/26/2022  8.70%            6.52%       6.52%    
5/27/2022  13.04%           2.17%       2.17%    BEAR
5/31/2022           2.17%               2.17%    
6/1/2022   2.17%    4.35%   2.17%       6.52%    
6/2/2022   4.35%    2.17%   2.17%       4.34%    
6/3/2022   4.35%            2.17%       2.17%    
6/6/2022   8.70%            2.17%       2.17%    
6/7/2022                                0.00%    
6/8/2022   4.35%            2.17%       2.17%    
6/9/2022            4.35%   2.17%       6.52%    
6/10/2022           10.87%  23.91%      34.78%   
6/13/2022           15.22%  63.04%      78.26%   EXT_BULL
6/14/2022           8.70%   78.26%      86.96%   EXT_BULL
6/15/2022           6.52%   34.78%      41.30%   
6/16/2022           8.70%   76.09%      84.79%   EXT_BULL
6/17/2022           2.17%   58.70%      60.87%   EXT_BULL
6/21/2022           2.17%   4.35%       6.52%    
6/22/2022                   13.04%      13.04%   
6/23/2022                   13.04%      13.04%   
6/24/2022  4.35%            6.52%       6.52%

Here are the trade results using this approach from 2018 to present. I’m comparing trading BRK-B and SPY following the signals. As you can see, they are nearly the same. The top three go short during sell signals, while the bottom three move to cash when the signal is sell.

Results           ROI       CAGR     GSD    Sharpe  DDD3   BBW       Signal  % of Time  Drawdown  Index CAGR  Positions
Combined Results  2302.28%  103.52%  20.62  3.78    0.04%  1,233.34  98%     100.00%    -8.58%    5.48%       Both
BRK               2403.96%  105.42%  23.28  3.49    0.20%  390.29    95%     100.00%    -10.03%   5.48%       Both
SPY               2163.71%  100.84%  20.76  3.64    0.05%  568.63    95%     100.00%    -9.23%    5.48%       Both
Combined Results  569.35%   52.95%   14.66  2.92    0.06%  268.51    95%     63.14%     -8.58%    5.48%       Longs
BRK               564.22%   52.69%   16.71  2.63    0.24%  137.31    95%     63.14%     -8.75%    5.48%       Longs
SPY               567.61%   52.86%   14.96  2.82    0.01%  398.76    95%     63.14%     -9.23%    5.48%       Longs

The last two years have seen a return exceeding 50% using this approach - long and short. The other option is to trade SH for the sell signals.

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2

Nice.
The correlation with the broader market–or something as staid as Berkshire–is interesting.

Just to be clear, the signals are generated using a consensus/vote on the set of Saul’s top 6-7 picks?

Would I be correct in speculating that you’d probably generate very similar signals using the highest beta X% or highest volatility X% of the Nasdaq 100?
(or a broader Nasdaq set)

Since it’s to generate signals for other things, I’ll further speculate that beta might be better than volatility…correlation is a good thing in this situation.

Jim

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3

Jim asked: Just to be clear, the signals are generated using a consensus/vote on the set of Saul’s top 6-7 picks?

For the previous post regarding Saul Picks it was based on Saul Picks, but for this analysis it is based on the holdings of Berkshire stock - i.e. about 46 stocks at this time.

Would I be correct in speculating that you’d probably generate very similar signals using the highest beta X% or highest volatility X% of the Nasdaq 100? (or a broader Nasdaq set)

I’ve not tried that. I doubt it!

Since it’s to generate signals for other things, I’ll further speculate that beta might be better than volatility…correlation is a good thing in this situation.

No idea on this either. The point of this method is that sometimes things fall so much or rise so much that they stretch like a rubber band outside what is normal or reasonable. This propensity to do this forces a reversion to the mean.

One thing I should point out, however, is that I personally only use something like this when my long-term bearish indicators are screaming a bearish bias like now. When they are silent, or my bullish indicators consensus value is very high it is best to just be long the underlying investment and NOT trade it like I’ve described here. In other words, you need to have some sense of the overall bias of the market at the time.

On this forum I’ve posted on many of the indicators I track for this sort of thing, but the key is combining them into a consensus value. This way you can determine a “bias” and that “bias” is what drives when and when not to “trade” an investment.

In my experience BRK-B holdings tend to dance to their own tune. In other words, the signals produced by this method will not match with the Saul Picks, or with the Nasdaq 100 components - another that I also aggressively track.

The point is that even the absolute best and safest investment (i.e. BRK-B) can be traded to a significant advantage if you can handle the short-term capital gain taxes.

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