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No. of Recommendations: 2
given Berkshire's massive leverage via float. Any other company and people would be calling for the CEO's ouster. One, five and 10 year returns below the market. WEB missed badly coming out the financial crisis as he was too slow (afraid?) to put capital to work. I've said for years the buyback policy is silly and too telegraphed. Buffett's worst trait is his stubbornness. He admittedly missed badly on businesses such as Google and Amazon which were well within his circle of competence. Honestly, not sure where we go from here but it's been incredibly frustrating continuing to hold this underperformer. Lots of things I'll never understand like why we continue to hold a loser like Coca-Cola that was something like 80 times earnings at one point and is a bloated business from a cost perspective. Don't get why a 3G can't come in and make the real change to that business it needs. Could go on and on but why bother when things aren't going to change.
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No. of Recommendations: 7
Your post http://boards.fool.com/no-bottom-in-sight-for-berkshire-3206... from 1/11/2016 was a great buy signal and my money is that this post will be the same again, principally because you are ignoring valuation and only looking at market quotes. One of the basic identities in theoretical finance derived from the Campbell-Shiller approximation is the one of the only two ways in which stock prices can reduce is via the increase in expected future returns (the other being a decrease in expected future cashflows). IMHO, the reason why Berkshire B shares have dropped from 217 to 191 is not due to any fundamental change in the business but simply because expected future returns have increased for whatever reason.
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No. of Recommendations: 20
given Berkshire's massive leverage via float. Any other company and people would be calling for the CEO's ouster. One, five and 10 year returns below the market. WEB missed badly coming out the financial crisis as he was too slow (afraid?) to put capital to work. I've said for years the buyback policy is silly and too telegraphed. Buffett's worst trait is his stubbornness. He admittedly missed badly on businesses such as Google and Amazon which were well within his circle of competence. Honestly, not sure where we go from here but it's been incredibly frustrating continuing to hold this underperformer.

If this is your view, why do you continue to hold this under-performer?
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No. of Recommendations: 36
True, it is kind of shocking.

The really interesting question that needs answering is how much has the value of the S&P 500 risen, and how much the value of Berkshire has risen.
That's the key question because price changes beyond value change are always transient.

I'm not saying it's an easy question, especially for the broad US market.
By far the most interesting question in investing right now is "How much has the S&P 500 gone up in value in the last decade?"

For one straw in the wind, S&P 500 real revenue per share went up 0.18%/year in the ten years to end 2017. (no new high in real sales in 9.5 years).
That's a reasonable valuation metric for the index, but you have to add dividends. The average yield was 2.1%.
So, total real value creation of around 2.3%/year.
Earnings have done better than sales because of unprecedentedly high net margins in the last few years...
real rolling-year S&P EPS rose 1.2%/year in the same ten years, and smoothed real EPS rose 2.5%/year.
Again, add dividends, so you get 1.2%+2.1% or 2.5%+2.1% based on earnings power value.

For whatever it's worth, real book per share for Berkshire went up 8.75%/year in the same decade, with of course no dividend yield.
My "two and a half column" valuation metric for Berkshire, after inflation, rose 8.41%/year.

So, using the highest figure for the S&P and the lowest figure for Berkshire, Berkshire generated value 3.8%/year faster than the S&P 500 in the last ten years.
That gap equates to roughly 45% more total value creation, relative to each choice's respective starting value.
One might speculate that that's how much of the recent price-driven S&P 500 real total return may prove to have been transient, relative to Berkshire's.

Jim
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No. of Recommendations: 1
The Great Bull Market that Everybody Missed by John Rekenthaler:

http://www.morningstar.com/articles/869684/the-great-bull-ma...

Why economists got it all wrong from 2009 to present.

Amazing the amount of group think today from many economists going forward with regard to diminished returns.
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No. of Recommendations: 0
S&P 500 real revenue per share went up 0.18%/year...
real book per share for Berkshire went up 8.75%/year


What is real book means? How is it different from Book Value?
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No. of Recommendations: 1
If this is your view, why do you continue to hold this under-performer?

Taxes. Paying almost a third of the sale price in taxes makes holding BRK a better option than selling ... even if you think you'll get no better than market returns over the next ten years. I'm in that position, although the current price is low enough that I expect slightly better than market returns.

Also, you don't have to love the expected return of every asset in your portfolio. My BAM, Russia and Biotech have different characteristics than BRK. I expect that each will outperform BRK over the next ten years. But, there are conditions where our fortress balance sheet will soften even the ugliest market downturn. I don't feel it's necessary to hold any cash with a big chunk of BRK in my portfolio - WEB is doing that for me.
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No. of Recommendations: 0
Don’t hold any cash with Berkshire? But what if the price is suppressed for a long period and you are forced to sell shares at a low price?
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No. of Recommendations: 1
Don’t hold any cash with Berkshire? But what if the price is suppressed for a long period and you are forced to sell shares at a low price?

Bingo! You need 5-10 years of now-non-earning cash on your own.
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No. of Recommendations: 7
By far the most interesting question in investing right now is "How much has the S&P 500 gone up in value in the last decade?",

it is interesting but I don't think this is a useful or answerable question. The simplest answer is over a long enough period, the best - if imperfect- way to measure the worth of the top 500 companies is to look at the market quotation.

The composition of the S&P 500 from 2007 is nothing like the index at the end of 2017. So to draw any inference about how much S&P has gone up in value, you have to account for the value created by firms entering and departing and the relative proportions changing in the index.

In 2007, the top 10 S&P components included GE, P&G, Walmart, At&T, Chevron, Exxon and BofA i.e a lot of highly capital intensive and some very cyclical businesses.

In 2017, it includes Apple, Google, Facebook, Amazon, Microsoft etc. i.e a number of very capital light, high ROE and margin businesses.
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No. of Recommendations: 24
I'll never understand like why we continue to hold a loser like Coca-Cola that was something like 80 times earnings at one point and is a bloated business from a cost perspective. Don't get why a 3G can't come in and make the real change to that business it needs. Could go on and on but why bother when things aren't going to change.
While I agree that Coca-Cola probably isn't the best stock from a future growth perspective, there appears to be somewhat of a misunderstanding on how the Coca-Cola system operates vs. how a typical 3G buy-out functions.

3G typically buys into companies & cost-optimizes them considerably - closing factories, consolidating operations, flattening management etc. As Coca-Cola operates a franchise system a lot of those cost-saving opportunities just aren't available - as these are typically contained within the various bottling companies. There are a few bottlers that are (temporarily) owned by TCCC/KO but these generally get sold off or spun out as soon as possible. As a result KO is valued more highly than a typical Heinz etc. per $ of earnings due to the much lower capital requirements (leaving money for buy-backs, dividends.) So in essence 3G can't afford to buy KO & couldn't cost optimize it using their typical playbook (as they'd need to buy the bottlers also.)

Disclaimer: > 20 year ex-Coca-Cola employee with plenty of acquaintances that work for the Inbev part of AB Inbev.
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No. of Recommendations: 4
Interesting (to me) - I first bought Berkshire B's 20 years ago, May 1998. I knew nothing about investing. I bought Berkshire after I read some articles and a book about Buffet. I soon realized I had seriously overpaid.

May 1998 - June 2018
SPY CAGR 6.4%
BRK CAGR 7.4%

Not so bad.

With the help of this board and the Yahoo board I figured out how to value Berkshire (book value and two column) and kept on buying when it seemed relatively cheap and I had the cash.

No idea of my CAGR. I'm up 220% and have paid zero tax so far. I think it's worked out OK.
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No. of Recommendations: 1
Interesting (to me) - I first bought Berkshire B's 20 years ago, May 1998. I knew nothing about investing. I bought Berkshire after I read some articles and a book about Buffet. I soon realized I had seriously overpaid.

May 1998 - June 2018
SPY CAGR 6.4%
BRK CAGR 7.4%

Not so bad.

With the help of this board and the Yahoo board I figured out how to value Berkshire (book value and two column) and kept on buying when it seemed relatively cheap and I had the cash.

No idea of my CAGR. I'm up 220% and have paid zero tax so far. I think it's worked out OK.


Wow. That’s almost my exact same experience. First bought in 1998 and paid way too much. Bought more in the following years at better prices as I learned a little more about valuation. My cagr over 20 years has not been all that high however because of those first ill-timed purchases. Around 10%.
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No. of Recommendations: 0
If this is your view, why do you continue to hold this under-performer?

Taxes. Paying almost a third of the sale price in taxes makes holding BRK a better option than selling ... even if you think you'll get no better than market returns over the next ten years. I'm in that position, although the current price is low enough that I expect slightly better than market returns.

Also, you don't have to love the expected return of every asset in your portfolio. My BAM, Russia and Biotech have different characteristics than BRK. I expect that each will outperform BRK over the next ten years. But, there are conditions where our fortress balance sheet will soften even the ugliest market downturn. I don't feel it's necessary to hold any cash with a big chunk of BRK in my portfolio - WEB is doing that for me.


Taxes don't make any sense. If it's short term gains, you would only be paying taxes on the gain. If you bought near zero, it's long term and 15%.

How do you come up with 1/3 of the sale price?
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No. of Recommendations: 2
No idea of my CAGR. I'm up 220% and have paid zero tax so far. I think it's worked out OK.

1996 to today for BRK.A:

Your Compound Annual Growth Rate (CAGR) is 10.403%
Better than savings account or current CDs.
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No. of Recommendations: 37
I don't think most people realise how much Berkshire has outperformed
the S&P500, because of the psychological emphasis on looking at the
change in quotes. This is understandable emotionally, as 20 years is a
long time, but it isn't instructive as to what to do or expect.

Even over periods as long as 20 years, the starting price has a dramatic
effect. Look at the change in IV, factoring dividends for the S&P500,
rather than the change in quotes.

The S&P500 earnings rise about 1.5% per year after inflation over long
periods of time, so most of the real value increase is from the dividends
paid out, but we get a small nudging up from capital gains on top of
the dividend. But after tax, the capital gains are exceedingly smaller
than what most people think. Lately, nearly all the S&P500 real capital
gains associate with the PE multiple rising, and margins temporarily rising
(they can rising like this for a while, but then at best the margins
are retained so we are back to the 1.5% real increase, or more likely,
there is some compression of margins at some point so the increase
will be less than 1.5%).

Factoring inflation, Berkshire has returned 50% (1.5 x) the rate
of value increase compared to the S&P500. Over 20 years, that
amounts to a more dramatic improvement. But the 20 year history
this moment is distorts that as the starting value for the Berkshire
was 2.5-3 x book spending on start month, and the ending value
1.3 x book, a one-time reduction of about 50% in the quote.

If you want to ignore the effect of earnings and look at the underlying
true increase in value, add up the accumulated book value and the
dividends paid out. The following chart shows the accumulated value
of Berkshire compared to the S&P500 over the last 10 years:

http://www.scotscliff.com/manlobbi/BAM%20Accumulated%20Value...

The annual rate of change of book value of the S&P500 plus dividends
is an excellent proxy for the rate of change of IV. In the end, and
over any time periods as long as 100 years, all value that we get
is increase in per share book value and the dividends paid out.

In this regard, Berkshire has given to shareholders an addition of
3 times its value over the last decade, versus the S&P500 giving
shareholders 2 times its value. After inflation, though, these
figures change to 2.3 for Berkshire and 1.5 for the S&P500.

In summary, Berkshire has produced for us 50% each year of real
value than the broad market, but we can't see it right now by looking
at quotes. This shows that even over 20 years, valuation really
really matters.

Berkshire is an excellent investment from today. I have the IV10/price
at 3.2 right now, versus 1.6 for the market - so whilst Berkshire has returned
50% more value than the broad market for a long time, from this starting
point I expect Berkshire to return more than a 50% higher CAGR
than the S&P500 because of quotations of both the S&P500 and
Berkshire reverting somewhat back to their rational value.

- Manlobbi
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No. of Recommendations: 2
Do you think when Buffett assesses the performance of Todd and Ted, he is OK with an explanation of "despite lagging the S&P over the last 5 years, my portfolio has increased underlying value more than the S&P " and promptly awards them a bonus ?

We are looking at measurement over 5-10 years which is long enough to make a judgement. Various people have opinions on the underlying value of an index ( which keeps changing composition). All such opinions are reflected in the price.

While I am a heavy holder of Berkshire and consider it a pretty good investment going forward ( between 9-11% p.a over the next decade roughly in line with the performance of the business) , I don't get the argument that the the reason for underperformance vs S&P is that the S&P is creating less value but is rewarded more by investors in aggregate ( which include people with this view ). Looking at S&P book value as an estimate of IV is flawed as the nature of companies in the index has changed appreciably.
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No. of Recommendations: 11
Berkshire produced its own value 3 times, versus the S&P500 producing its
own value 2 times over the last decade (50% more additional value) as I
wrote, however I reported the after inflation values incorrectly.

Inflation over the last decade was 2% with the individual years:
(1.021 * 1.025 * 1.014 * 0.999 * 1.016 * 1.016 * 1.029 * 1.016 * 1.026 * 1.0 * 1.043)

So that is 22% of the value being inflation. We have to subtract that (not
divide as I had done) to work out the real difference between how much value
the S&P500 produced and how much value Berkshire produced.

When looking at after inflation figures, the differences in performance between
different assets becomes more apparent.

One decade of: Additional value produced: Same, after 22% inflation (real value):
Berkshire 3 times 2.78 times
S&P500 2 times 1.78 times

So Berkshire produced 2.78/1.78 = 1.56 times the additional value than the S&P500.
In other words, if the market was actually efficient (which is far, far from
being - in fact, it is horrendously inefficient but just so long to work things
out, other than the meaningless month to month movements, that it deludes many
into thinking it is efficient) then Berkshire would have made 1.56 times the
total income (capital gains and dividends) that an index fund would have made
if selling both after 10 years.

Factoring tax, the difference is more marked again, because the S&P500 pays
out dividends which are taxed more than capital gains, and my chart of the
accumulated value is before tax for both Berkshire and the S&P500:
http://www.scotscliff.com/manlobbi/BAM%20Accumulated%20Value...

By the way, given that real earnings increase at about 1.5% per year over long
periods of time, but inflation averaged about 4%, and let's say it goes on to
average 3% for the next decade (I believe it will be slightly lower but I'm in
a minority so I'll go with consensus for this argument), do you know what your
after-tax return is for capital gains? Astonishingly this is rarely spelt out,
if ever at all. Even factoring the small advantage of deferring tax, your capital
gain over a period such as 20 years is completely removed by tax payment and
most people end with a negative real after tax return from capital gains through
index investing, and slightly positive after the after-tax dividends are paid out.

As an example, let's say there is 3% inflation for the next 20 years, and
1.5% earnings growth on top of that. That is a capital gain of 1.045^20 = 2.4 x
times your starting capital (capital gain of 1.4 times starting capital).
But let's say you pay 40% tax at the end of these 20 years, feeling good
that you deferred your tax so long. Well anyway, you pay a tax of 0.4 * 1.4 = 0.56
times your starting capital. Your after-tax capital gain is 1.4 - 0.56 = 0.94 x starting
capital. But take out inflation of 1.03^20 - 1 = 0.8 x starting capital, and
you are left with an after-tax after inflation return of 0.94 - 0.8 = 0.14 x
starting capital. So despite the deferred tax, your after tax real CAGR is
only 1.14^(1/20) = 0.6% per year. Effectively the tax in most cases eats the
entire capital gain - tricky, as they tax your post inflation return. What
you get out of the investment is not so bad considering that the dividends are
on top of this, but it is incredible how the public at large have a few of
long term capital gains being good.

The story is worse for non-productive assets like gold, which is also taxed
before inflation, and so holding gold actually has a inherent long-term real
value destructive effect that cannot be escaped, and the more inflation there
is, the worse gold in this regard contrary to the usual sayings.

This is more the reason why market outperformance over long periods of time
is crucial to actually making money in investing.

But it can be done. I believe that I'll find it easier to outperform than
I have in the past given the approaching environment of negative real
returns with the broad market, now having such an an excessive PE ratio
based on trend earnings.

I expect vastly lower personal returns nevertheless, as I will be taken
down by the tide in the midst of such outperforming. Make sure you
are swimming rater than doggie-paddling - if you are holding the broad
market, or looking at things that have been rising in value and then
extrapolating - beware. Find something that is Steadfast (earnings
predicable for 20 years), even if it removes 99% of what you see, don't
worry about the IV/price ratio - how cheap it looks at the moment compared
to the market's continuously modelled IV, but rather calculate IV10
(IV as likely to be viewed by the market 10 years out) and compared
IV10 to the price today (IV10/price). Find two or three of these high
IV10/price ratio Steadfast situations, and hold in *very* high
concentration, and wait. If the IV10/price ratio changes from the
quotes rising, move capital from low IV10/price situations to higher
ones. This is the Manlobbi Method. You will outperform the market
substantially.

- Manlobbi
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No. of Recommendations: 2
S&P 500 real revenue per share went up 0.18%/year...
real book per share for Berkshire went up 8.75%/year
...
What is real book means? How is it different from Book Value?


Sorry, I didn't mean to be cryptic.
Real = "inflation adjusted", the usual financial industry jargon
Book = book value per share.

So, change in "real book" = change in book value per share, adjusted for inflation.

e.g., in the 9.5 years from mid 2008 to end 2017:

Berkshire book/share rose 11.36%/year
Berkshire real book/share rose 9.85%/year (inflation being the difference)

FWIW, S&P 500 real sales/share actually fell in that stretch.
As of December 2017, the S&P 500 revenues per index point were still below the pre-crisis peak after almost a decade.
I imagine the rolling year figures finally hit a new high at end Q1. Break out the bubbly.

Jim
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No. of Recommendations: 1
No. of Recommendations: 2
Do you think when Buffett assesses the performance of Todd and Ted, he is OK with an explanation of "despite lagging the S&P over the last 5 years, my portfolio has increased underlying value more than the S&P " and promptly awards them a bonus ?



I can't remember the details of the arrangement but yes, I hope he rewards value creation, not share price increases. In the long run, the 2 will amount to the same thing, bUt often not in just 5 years.

If your question was meant seriously, you are definitely not on the same page as Benjamin Graham and Warren Buffett.

Regards, DTB
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No. of Recommendations: 0

If your question was meant seriously, you are definitely not on the same page as Benjamin Graham and Warren Buffett.

I was only part unserious.


- Ted and Todd's variable compensation is based primarily on their portfolio's excess return over the S&P, not on some other notion of intrinsic value of their public securities. You can read the structure here : https://dealbook.nytimes.com/2011/09/19/new-buffett-manager-...

“Both Todd and Ted will have performance pay based on 10 percent of the excess return over the S.&P., averaged over multiple years,” Mr. Buffett told me. “If the S.&P. averages 5 percent annually in the future, this means that the average hedge fund manager has received a 1 percent performance fee — 20 percent of 5 percent — before Todd and Ted receive anything.”

- Buffet's own test for Berkshire has been assessing book value growth vs growth of S&P with dividends invested.

The original topic was talking about value created by Brk vs S&P over a time frame of 10 years and my point was that I consider that sufficient time to make a judgement about the quality of investment performance. Of course, this is different from the performance one can expect looking forward.
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No. of Recommendations: 1
- Ted and Todd's variable compensation is based primarily on their portfolio's excess return over the S&P, not on some other notion of intrinsic value of their public securities. You can read the structure here : https://dealbook.nytimes.com/2011/09/19/new-buffett-manager-......

“Both Todd and Ted will have performance pay based on 10 percent of the excess return over the S.&P., averaged over multiple years,” Mr. Buffett told me.



I guess it all depends on how many years are meant by ‘multiple years’. You have said that 5 and 10 years would be adequate for market returns to be similar to intrinsic value returns. I think it is clear that over 5 years, there can be quite a large discrepancy; 10 years would often be enough, and 15-20 years would almost always be enough. The stated arrangement doesn’t really settle our disagreement.

dtb
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No. of Recommendations: 1
Find two or three of these high IV10/price ratio Steadfast situations, and hold in *very* high concentration, and wait.

Would you be willing to share the identity of any more of these gems beyond BRK and BAM?

Tom
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