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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 211970  
Subject: Thinking ahead... Date: 5/28/2012 8:50 AM
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Warning: this post contains almost no actual content, just ramblings.
Well, and one brash prediction.

As has been well documented, Berkshire's stock price has been unusually
attractive continuously for an unusually long time.
The value growth continues apace and Mr Market remains singularly unimpressed.
No big deal--most value investors including myself will take it as an article
of faith, bolstered by much historical observation, that this is likely to
end at some point. Market price will once again pay a brief visit to fair value.

However, I rather wonder how it will unfold.
The usual script would be that there might be some very small catalyst
like an unusually good year or quarterly report or acquisition, the
stock price starts to rise, the rise draws the attention of the
momentum investors, it builds in speed and strength, rises straight up
past fair value for a while, then peters out at some point. Rinse and repeat.

Yet...
It occurs to me though that, given the rather long stretch of continuous
undervaluation, (and a decade of book growth lower than previously)
there might be an unusually large fraction of shareholders who have shifted
their opinions to be that "Berkshire is all well and good but next time
the price is halfway decent it's time to allocate capital elsewhere".

(those willing to sell despite currently low prices have already done so!)
In other words, they are going to sell when their price targets are hit,
and many of those price targets won't have anything to do with fair value.
Put simply in traders' language, there might be a large overhang of
selling pressure, but tied to specific price targets.

This might have interesting effects. The inevitable price rise might
be longer and more drawn out than would otherwise expected, perhaps
even a bit smoother, and might last longer. Why so?
Price anchoring leads to the disposition effect: the tendency of
people to avoid taking a loss and to be inappropriately prompt to sell
once their breakeven point has been hit. If any subset of the
population of investors in a stock behaves this way, it leads to
price momentum (this falls out of the math--no empirics needed).

Historically in the past if you wanted to sell Berkshire shares it has
not paid to sell during a rally--they tend to be strong and continuous,
so waiting for a modest pullback from the recent high has worked better.
Something on the order of 3%. Maybe next time this will be less true
than usual---based on the musings above (which are no more than that),
I rather expect the next rally to be more long-lived, perhaps also shallower in slope.
Those are the rallies that appeal best to momentum investors.
If that's the case, they don't care about valuation much and one might
expect the price to overshoot into overvalued territory for a while.
Given that the rally might last longer, it might also be somewhat less continuous.
Again, due to the disposition effect one might expect flat spots around
round numbers and/or places where the price spent a lot of time in the
past as those waiting for exit targets sell when they are hit.
This would not be the case once new highs are being hit: the disposition
effect is largely gone at that point, as there by definition no
overhang of people waiting for their breakeven price before selling.

No conclusions. Just trying to imagine how it will unfold.
Barring another cliff in the world's economy and/or equities, I rather
expect a new all time price high within two years (up 27% from here).
It's hard to imagine now, but once it happens it will seem natural and obvious in hindsight.

Jim

PS
FWIW, the first time I ever sold a share because I thought the price
was getting a bit rich and I wanted to trim my exposure was 2007-11-02
at $132,200 and the last such sale was on 2007-12-05 at $147,500.
In total I cut my share count by 72% in that stretch.
Most simple estimates of value would indicate value is up 35% since then give or take.
(book up 39%, conservative intrinsivaluator up 31%, "more conservative"
intrinsivaluator up 23%. book+.7float+.75deferred tax up 38%, Tilson
"investments+K*pretax earnings" method using constant multiple 10-11 gives 30%).
So, I guess that means that for the sake of consistency my own "first sale"
target should be in the vicinity of $178000, say in the $169000-$182000 range.
That's the target for today, which should be rising at least 5.5%-7.5% per year.

J
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