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If You Only Invest in an Index, You’ll Never Beat It -- Peter Lynch


that's fine, the index will never beat you either. No shame in that.
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No. of Recommendations: 7
Sorry to be morbid but they won't be around for the next 25. Do you have the same trust in Howard, Greg, Ajit, Ted and Todd?

The balance sheet may be a fortress but sooner or later the barbarians at the gates always overwhelm the garrison. Ask Rome, China, WWII France. No non- monopoly BRK business (owned as subsidiary or stock) has a permanent moat, not even Apple, and the monopolies can only earn regulated profits. Ignoring valuations, Amazon, Tesla, Google, maybe Facebook (with Instagram and WhatsApp) have stronger moats, BRK owns none of them enough to matter.
Past performance is no indication of future results, as they say.
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Guess, which stock among FANNG has the highest return YTD?
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Howard will not be involved in any aspect of the operations or capital deployment. Warren has been very clear on this. Howard will represent Buffett’s interest to make sure nothing crazy dumb happens. Less than 1% chance, but Buffett always factors ALL possibilities. It’s that simple.

Have full faith in Greg, Ajit, Ted, and Todd who have already demonstrated their skills. Equally or perhaps more importantly, I have full faith in this BOD.

What’s MOST critical is Berkshire continues to operate superior insurance operations with disciplined underwriting as it’s done consistently the past 4 decades. The effective free leverage/float is equivalent to 1/4 its entire market cap. If you or I would ran the investment portfolio we might just outperform with that kind of huge imbedded long term advantage. Starting out with a stock price that implies a 20% discount to intrinsic value? Nice opportunity.

You’re right, past performance is no indication of future performance. BRKs next decade could be better than its past decade.
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What’s MOST critical is Berkshire continues to operate superior insurance operations with disciplined underwriting as it’s done consistently the past 4 decades. The effective free leverage/float is equivalent to 1/4 its entire market cap. If you or I would ran the investment portfolio we might just outperform with that kind of huge imbedded long term advantage.

I used to think that, then I realized that WEB never actually invests much of it. Most of it sits around in fixed income or cash, and is never invested in productive assets.

And what's free leverage worth in a very low to negative interest rate world, anyway?
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<<<And what's free leverage worth in a very low to negative interest rate world, anyway?<<<

My assumption is that world is not permanent.
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<<<And what's free leverage worth in a very low to negative interest rate world, anyway?<<<

My assumption is that world is not permanent.

Sure. But it's going to be that way for a while. Probably beyond WEB's tenure, I'm afraid.

What about that float?

This was discussed back in August, I think:

http://brooklyninvestor.blogspot.com/2020/08/is-buffett-real...

Liquid Assets = Float

Comments:
wabuffo100: If this is a case of "watch what Buffett actually does" rather than "listen to what Buffett says", then the perennial undervaluation of BRK may not be true. If one removes these non-working assets from the two-column valuation method, wouldn't the usual calculations of intrinsic value suffer as a result?

It could be that Mr. Market doesn't undervalue BRK after all and instead, correctly values it - more or less.


Brooklyn Investor: Yes, this is the point I made a few years ago when I first realized this. People said float is equity, or float is better than equity, and people argued to add float to valuation. Made me wonder. Then did a table like this and realized, hey, wait a minute... So I realized float can't be valued as or like equity so it must be discounted (even assuming zero or better cost of float).

And now with interest rates at zero, this float is getting pretty close to worthless from a valuation standpoint...


Example 5-groves IV:
Include all the cash: $250 (1.5x last known book)
Deduct float from the cash: $195 (1.2x last known book)

Darn it. I'm harshing my own mellow now.
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Everyone has a thesis, and it’s true float doesn’t have as much immediate value in a low rate environment. But Buffett is on the record in the past as saying he’d prefer a dollar of float to a dollar of equity.
Perhaps, in recent years, he thinks differently. I don’t know.

I DO know he doesn’t believe a zero rate/0.7% ten year Trez world is anything approaching permanent. IF so, the value of a dollar of free cash is essentially infinity. It’s not. I would not input those numbers in DCF calculations....making stocks infinitely valuable. So why do you CHOOSE to do such—to make float worthless??. You can’t have it both ways.

Equity is not infinitely valuable. Float is not worthless.

Skate to where the puck is going the next 10,15,20 years. Three possibilities: Higher, much higher, or much much higher interest rates/inflation. The value of float in terms of its optionality will only increase, the multiples of cash flow we play for equities will only decrease. With absolute certainty. The only unknown is by how much in both cases.
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Skate to where the puck is going the next 10,15,20 years. Three possibilities: Higher, much higher, or much much higher interest rates/inflation

Possibility 4: Japan?
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No. of Recommendations: 5
I used to like Warren and Charlie. But now, not so much. Over the past 10 plus years, John Bogle has done so much more for me than Warren and Charlie. I invested quite a bit of my nest egg in the Vanguard Total Stock Market Index Fund. A fund that charges maybe 3 basis points as expenses. I don't worry about book value, earnings, dividends or anything else that I used to worry about when all I owned was Berkshire. John Bogle gives me worry free investment options. And I like that. Berkshire's best days are way behind us now. The company should be broken up in some fashion and/or a massive buyback should be done. Warren should retire and give Ted and Todd all the equity investments to handle. I used to worry about what the stock will do when Warren retires or passes. How much will it drop? I don't worry at all about now. The only question in my mind is how much it will go up when Warren is no longer around to run things.
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I used to like Warren and Charlie as stewards of my investment funds. But now, not so much. Over the past 10 plus years, John Bogle has done so much more for me than Warren and Charlie. Years ago, I invested quite a bit of my nest egg in the Vanguard Total Stock Market Index Fund. A fund that charges maybe 3 basis points as expenses. I don't worry about book value, earnings, dividends or anything else that I used to worry about when all I owned was Berkshire. John Bogle gives me worry free investment options. And I like that. Berkshire's best days are way behind us now. The company should be broken up in some fashion and/or a massive buyback should be done. Warren should retire and give Ted and Todd all the equity investments to handle. I used to worry about what the stock will do when Warren retires or passes. How much will it drop? I don't worry at all about that now. The only question in my mind is how much it will go up when Warren is no longer around to run things. I still own a token amount of Berkshire. For posterity mostly. But it's no longer a material part of my portfolio.

Regardless, Bogle has taught me a great deal about worry free investing. Vanguard offers me all the cheap investment options I need. And I have little doubt that VTI will out perform BRKB over the next few decades. And I won't have to worry about a thing. The same cannot be said about Berkshire.
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I used to like Warren and Charlie. But now, not so much. Over the past 10 plus years, John Bogle has done so much more for me than Warren and Charlie. I invested quite a bit of my nest egg in the Vanguard Total Stock Market Index Fund. A fund that charges maybe 3 basis points as expenses. I don't worry about book value, earnings, dividends or anything else that I used to worry about when all I owned was Berkshire. John Bogle gives me worry free investment options. And I like that. Berkshire's best days are way behind us now. The company should be broken up in some fashion and/or a massive buyback should be done. Warren should retire and give Ted and Todd all the equity investments to handle. I used to worry about what the stock will do when Warren retires or passes. How much will it drop? I don't worry at all about now. The only question in my mind is how much it will go up when Warren is no longer around to run things.


For me, the point of owning BRK vs index is BRK has more downside protection than index. Just like you said, it's more likely to go up than doing down. The index, on the other hand, could easily drop 30% in a recession year, which could coincide with a year when I need the money for whatever reason. And of course one has to like Warren and Charlie. I am not as old as many on the board, but I am a big fan of the two since I started reading about them 15 years ago
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For me, the point of owning BRK vs index is BRK has more downside protection than index

I think this needs qualification. Berkshire has a real, maybe small, single company risk which the S&P does not. The S&P is also self refreshing so that the market forces it to align with the changing nature of the economy. In 2008, Exxon Mobil was a large S&P weighting and is not part of it anymore, the composition currently reflecting the changing economy which contains more dominant, capital light businesses with monopoly power without needing any conscious buy or sell decisions.


The index, on the other hand, could easily drop 30% in a recession year,

Like this year. The index dropped almost 35% between 20th Feb and 23rd March earlier this year. It was widely argued then that it was overvalued and due a fall.

Berkshire also feel 30% during the same period. The index has more than recovered while Berkshire is still 8% behind it's all time high. In your scenario or a recession, a market plunge and needing cash you would have been better off in the index than in Berkshire.
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Apologies about typos etc .. typed on a phone in a hurry !
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"In 2008, Exxon Mobil was a large S&P weighting and is not part of it anymore, the composition currently reflecting the changing economy which contains more dominant, capital light businesses with monopoly power without needing any conscious buy or sell decisions."

Exxon is still in the S&P but out of the Dow.

Shrinkage regardless which is your point.
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I think this needs qualification. Berkshire has a real, maybe small, single company risk which the S&P does not. The S&P is also self refreshing so that the market forces it to align with the changing nature of the economy.

Fair point.

As an aside:

I would add that the Nasdaq 100 Equal Weight index (QQQE) compares favourably on those metrics. But only the Equal Weight version, not QQQ.
Like the S&P 500, QQQE also can't go bust. It keeps up with changes, likely faster than the S&P 500 does.
It has lower company specific risk, as the highest weighting is 1% of assets versus 6.7% for the S&P 500 at the moment.

But most importantly the Nasdaq equal weight earnings have for a very long time grown steadily and way faster than the earnings of the S&P 500.
The price level of QQQE is bad right now, but not as bad relative to its history as the S&P 500 is relative to its own history.

Endpoints are fraught, but last 14.4 years:
SPY up 9.36%
RSP up 8.57% (S&P 500 equal weight)
QQEW up 12.08% (the older, higher fee version of QQQE)

The tech bust was terrible, but transient. Other than that, older data give similar results.
Over the long run, the evidence so far is that QQQE creates value at a much faster rate than any weighting of the S&P 500.
And not just price value, honest earning power value too.

Jim
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The index, on the other hand, could easily drop 30% in a recession year,

This doesn't make any sense. BRK has had terrible drops when the index has dropped.


In 2000 it dropped nearly 44%
In 2009 it dropped 44% compared to the index (SP500) 50%.
This year it dropped 21% compared to the index 19%

Sadly BRK doesn't provide you any protection in terms of drawdowns. You can argue about valuation but in terms of protecting you, it doesn't. I wish it was true.
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Still hard to find a "Bet Your Kids Education" chart better than this,
nice long "Up's" and a couple sharp "Down's"


https://stockcharts.com/h-sc/ui?s=BRK/A&p=W&st=1994-...

ciao
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No. of Recommendations: 10
The index, on the other hand, could easily drop 30% in a recession year,
...
This doesn't make any sense. BRK has had terrible drops when the index has dropped.



There are two kinds of price drops.
From fair value to cheap...not a big worry, it'll come back.
And from expensive to fair value...a big worry, as the one time loss may be permanent.

There are signs that the S&P 500 has some of the second kind of risk at the moment.
Berkshire doesn't.

The S&P 500 has some advantages, but at the moment that isn't one of them.

Jim
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Still hard to find a "Bet Your Kids Education" chart better than this, nice long "Up's" and a couple sharp "Down's"
https://stockcharts.com/h-sc/ui?s=BRK/A&p=W&st=1994-...


Try page 3 here for another one.
https://checkcapital.com/pdf/Current_Holdings_Website.pdf
It's always nice to have some context of value rather than just price.


Jim
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" Still hard to find a "Bet Your Kids Education" chart better than this, nice long "Up's" and a couple sharp "Down's"
https://stockcharts.com/h-sc/ui?s=BRK/A&p=W&st=1994-...... "

good chart. My daughter's college fund, which I just let compound even though she is a junior, has a large slug of Berkshire.

On the other hand, the post reminds me to lighten up next time we see 1.5x book.
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Try page 3 here for another one.
https://checkcapital.com/pdf/Current_Holdings_Website.pdf
It's always nice to have some context of value rather than just price.


Looks like Check Capital are estimating Q3 book value as:
212/1.18 = $179.66
Up from $164 at Q2 (+9.6%)
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Sorry to be morbid but they won't be around for the next 25. Do you have the same trust in Howard, Greg, Ajit, Ted and Todd?

I love my puppy. Someday I will love a different puppy.

R:)
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I love my puppy. Someday I will love a different puppy.

no doubt. And how How much of your net worth does your puppy manage? Now if only it could throw darts...
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The index, on the other hand, could easily drop 30% in a recession year,

This doesn't make any sense. BRK has had terrible drops when the index has dropped.


You are right. But when the index rebounded quickly, so as BRK. But when index took years to rebound to previous high, BRK outperformed.

And I guess my point is not that BRK won't have a drawdown. Rather, my point is that anticipating the Next Recession BRK is safer than the index, and may very well drop less - cuz index is heavily weighted with growth stocks but BRK is heavily weighted with cash.

Index is great, but BRK is safer.
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Rather, my point is that anticipating the Next Recession BRK is safer than the index, and may very well drop less

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” - Peter Lynch.
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“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” - Peter Lynch.


If You Only Invest in an Index, You’ll Never Beat It -- Peter Lynch
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If You Only Invest in an Index, You’ll Never Beat It -- Peter Lynch


that's fine, the index will never beat you either. No shame in that.
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