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Author: texirish Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214567  
Subject: Re: Still cheap at 4 year high Date: 10/4/2012 7:06 PM
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Your recollection regarding the speed of the late 2007 share price increase matches my own recollection and experience. It happened quickly and I did not have any prepared selling plan in place. But that's probably not the real reason I failed to sell a significant number of shares. I believe the main reason was a combination of raising my IV estimate as the share price rallied (changing to more aggressive assumptions - essentially allowing Mr. Market to influence my bullishness) and my desire to avoid paying the capital gains tax.

I was a seller in late 2007. However, I did not sell out because (a) I thought a financial crisis was near and (b) I thought WEB would put the big cash and bond holdings to work. I (far from alone) had been telling myself that WEB had been building cash for a major market downturn opportunity, and would invest heavily when it happened. This would set the stage for another big surge in stock price.

But it didn't happen as far as long lasting investments were concerned. WEB did put money to work, but only where he felt safe that the money would be returned - really via government intervention as he himself stated (TBTF). The rights to buy the stocks in the future at a set price were a nice kicker, but haven't turned out that well. The later investment in BAC has good potential and is hopefully an exception. But most of the money has been returned, as would be expected in a low interest rate environment.

I've discussed this investment mode with friends to try to judge why? Our guess is that WEB felt pressure from regulators about the big downturn in the value of equities - maybe compounded by the equity puts he had written. In other words, he was concerned about further downgrading of Berkshire's financial rating. He was prepared for hits in the insurance contracts, but not for major hits to his capital. So he was conservative - as maybe Munger has alluded. His Pearl Harbor analogy was not just relating to the market - he was also truly surprised, and cautious.

I think this failure to invest heavily in equities has had an ongoing impact on Berkshire's price versus break-up value since that time. If one refers back to Jim's plot of price versus a 1.5 book line, most of the deviation has come since the financial crisis. Have people realized that $20 billion of cash and $30+ billion in bonds are locked into no/low return investments for several years? Have they adjusted their expectations accordingly?

We're finally seeing some forward movement by Berkshire. In a post a while back I recall Jim wondering how people might react to the next price runup: http://boards.fool.com/thinking-ahead-30065587.aspx

He wondered if people might think: "Berkshire is all well and good but next time the price is halfway decent it's time to allocate capital elsewhere".

I'm guessing that this can be a factor if P/B rises much more. It's at least worth thinking about.

One's time frame also enters into the decisions - depending if one is in the accumulation/hold or dispersal stage of life. There are a lot of aging early shareholders out there.
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