Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 29
I find it useful to make simple projections regarding Berkshire over the next decade in an attempt to understand the range of plausible investment results given the current stock price.

At the current price, Berkshire is trading for roughly 1.4x stated book value at 3/31/2013 (although the current P/B is definitely lower due to equity portfolio gains and operating income quarter-to-date).

I created a simple matrix that attempts to project Berkshire's price per A share in ten years based on two variables: Annual growth in book value per share and the terminal price/book ratio. For example, if book value per share grows at a 9% annualized pace and the terminal P/B remains at 1.4x, we can expect Berkshire's shares to trade at almost $400,000 ten years from now. Not surprisingly, this results in a 9% return to someone buying Berkshire shares today because the P/B ratio would be the same at the time of purchase and at the end of the forecast period.

The following matrix shows the range of potential prices of Berkshire in ten years based on a range of annualized book value/share gains between 6% and 12% and a range of terminal P/B between 0.9x and 1.8x book value:

http://www.rationalwalk.com/wp-content/uploads/2013/05/BRK20...

In terms of looking at the plausible outcomes, I would argue that the terminal P/B will correlate with book value per share growth over time. In other words, if book value per share grows at only 6% annualized, I view a terminal P/B of 1.1 or 1.2x to be more likely than 1.7x or 1.8x. Similarly, if book value per share grows at 12% annualized, I would view a terminal P/B of 1.6x or 1.7x to be more plausible than a terminal P/B of 0.9x or 1.0x. The market will eventually assign a higher P/B to Berkshire if compounded gains in BV/share are higher, and a lower P/B if compounded gains in BV are lower.

The next matrix shows the annualized rate of return shareholders can expect if they purchase Berkshire shares today at $168,600 and we see various combinations of BV growth and terminal P/B ratios:

http://www.rationalwalk.com/wp-content/uploads/2013/05/BRK20...

If you look at the column with a terminal P/B of 1.4, you will see that returns to shareholders will exactly match book value growth. This makes sense given that with the starting and terminal P/B the same, the only gains to shareholders will be derived from actual growth in book value.

The green cells in the matrix are those that show an expected annualized return of ten percent or greater which is an arbitrary hurdle rate I selected (every investor will probably have a different hurdle rate). In this case, the investor is saying that he demands a 10% return to commit funds. Therefore, the scenarios that are acceptable are those shaded in green. The white cells will be considered unacceptable. Of the seventy cells, only 23 are green.

As with the first matrix, certain cells are more plausible than others. The idea of Berkshire compounding BV/share at 12% but ending with a 0.9x P/B ratio seems ridiculous to me (but maybe not to the guys at Loews who have delivered such returns only to see their stock languish below book ... ). And the idea of Berkshire compounding book at only 6% but ending with a 1.8x P/B seems unlikely as well.

If someone wants 10% annualized from Berkshire, it is necessary to either believe that BV/share can grow at that rate OR expect P/B expansion if growth in BV/share falls short of 10%.

I find the matrix helpful when looking at Berkshire and considering the long term prospects for my investment. I personally have a goal of compounding my money at 15% annualized if I'm going to be putting time and energy into the process. I do not see Berkshire providing 15% annualized from here in ANY of the plausible scenarios I see for the company over the next ten years. However, I do see 10% annualized as quite plausible and simply holding Berkshire requires zero effort (other than perhaps 20 hours/year reading and analyzing each of the quarterly filings and the annual report).

For the majority of passive investors who are familiar and comfortable with Berkshire, I think that the company is more likely than not to outpace the S&P 500 by a "modest" amount over the next decade. I view Berkshire as my opportunity cost. Not only does another prospective investment require at least the prospect of 15% annualized but it comes at a cost of giving up what I consider a fairly safe 8-10% return from Berkshire. That is a MUCH higher bar than those who make investments based on the fact that the cash in their bank account is earnings nothing. People who make decisions where their perceived opportunity cost returns 0% will make different decisions than those who view 8-10% to be the opportunity cost.
Print the post Back To Top
No. of Recommendations: 7
RW,

There is a conceptual problem with looking at BV growth and P:BV multiples as independent variables, assigning returns for the various combinations of these, and looking at the proportion of cells that outperform a given hurdle rate. As you point out, the two are likely to be correlated, with high BV growth rewarded by high P:BV multiples, making one diagonal of your matrix highly likely and the other highly unlikely.

More fundamentally, as you also point out, long-term returns are likely to closely mirror book value growth. So the whole question is, how high that BV growth will be: is it 20% as in the past, or 8% as in the last 10 years or so, or were the last 10 years anomalously low, or will it keep dropping even lower? That is what we need to know. I'm not sure how assuming a variety of answers and looking at the possible returns, given these answers, gets us any closer to the answer. Unfortunately, I don't know what the answer is, but I suspect that a company heavily invested in US securities and US operating cos may be in for a slowdown, and that that 12% rate of growth of book value will not be achieved, and therefore your 15% hurdle is unlikely to be met, and perhaps even your 10% hurdle. If I had to take the over or under 10%, I would reluctantly take the under.

Regards, DTM
Print the post Back To Top
No. of Recommendations: 1
I'm not sure how assuming a variety of answers and looking at the possible returns, given these answers, gets us any closer to the answer.

In my opinion, the first step is to have an opinion on the likely trajectory of book value/share growth over time and to consider the most plausible outcome. We have growth of the operating companies within Berkshire as well as the likely growth of securities in the investment portfolio to consider. I view 8-10% annualized growth to be quite likely over the next decade. Taking the middle of this range and assuming that the market will view Berkshire as it does today in terms of P/B would result in a $400K stock price in ten years and compounded growth of my investment of 9%.

If someone put a gun to my head and forced me to predict the most likely outcome, I would select the cell where the 9% BV/Growth and 1.5x Terminal P/B intersects. That would result in 9.8% annualized returns from the current price. I would not be disappointed with that outcome for an investment requiring minimal time and effort to follow. It would, however, be a disappointing outcome for an investment portfolio actively managed with perhaps 20,000-30,000 cumulative hours of time investment over a decade.

... your 15% hurdle is unlikely to be met, and perhaps even your 10% hurdle. If I had to take the over or under 10%, I would reluctantly take the under.

I would agree but I doubt it falls short by too much.
Print the post Back To Top
No. of Recommendations: 9
All appreciated, ratioanl walk you have contributed so much here. thanks.

Ole susan sees it as, I like BRK management and am not worried abou the new MGMTcoming some day. I like their bisunesses. I like the US economy not teh chinesee or French or or or..

Berkshire, purchased not too far abouve book, I think has high odss or earning VGood returns risk adjsuted, VG!!

Th economy or natural or financlkai disasters are beyond my predicting.

SO BRK ggoeth forth and deopending on econ growth in general, disaster data points, natural and manmade, will earn X on equity or lose X over 10 yrs.

And what ever that outcome is, by beiing asn owner, I can expect nothing more, or less .
Print the post Back To Top
No. of Recommendations: 2
We have growth of the operating companies within Berkshire as well as the likely growth of securities in the investment portfolio to consider. I view 8-10% annualized growth to be quite likely over the next decade. Taking the middle of this range and assuming that the market will view Berkshire as it does today in terms of P/B would result in a $400K stock price in ten years and compounded growth of my investment of 9%.


Fair enough, but we're back to the importance of the assumption of a 9% growth - almost everything hangs on that, plus a smidgeon from whatever the multiplier does, divided by the number of years we're talking about. Knowing your long-term perspective, if P:B goes from 1.4 to 1.6 over ten years, it hardly moves the needle, we'll get 9%+(1.6/1.4)^(1/10)-1 = 9%+1.3%.

Hussman makes a strong case that US equities are overpriced by about 70%, and that if we get earnings that revert to their long term average, we can only expect 3.2% from equities over the next 10 years, from current prices. With about a third of Berkshire's market cap in its equity portfolio, that would mean that for book value to be up 9%, we would need the rest of the company to be up about 12% per year. It might happen, but I think 8% is slightly more likely, i.e. the standard boring 5% outperformance over the index.

I certainly agree that it's a pretty safe, effort-free place to put part of my portfolio, but I have cut my stake back to 20% in the last few days. I am unlikely to touch that unless Berkshire seriously outperforms the index for another few months.

Regards, DTM
Print the post Back To Top
No. of Recommendations: 2
I certainly agree that it's a pretty safe, effort-free place to put part of my portfolio, but I have cut my stake back to 20% in the last few days.

I wouldn't disagree with that approach at all. It just depends where the funds are going. I am completely certain that many companies and investors will make returns to Berkshire shareholders over the next decade seem paltry in comparison. I believe that it is a fair assumption that anyone who can compound at greater than 10% has at least a 75% chance of outperforming a passive Berkshire holding over the next decade.
Print the post Back To Top
No. of Recommendations: 2
I am in awe of the posters on this board who can dissect apart BRK and come up with mathematical models for what BRK will be worth etc. As you know, I am a "Black Swan" type and realize that "Predictions are difficult, especially about the future".

I believe that it is absolutely impossible to determine what something will be valued or priced in the future.

I think that the safer approach is to say "I just don't know". I bought and continue to hold BRK because I think that it is a great company for all the reasons that have been expressed over and over again by many posters on this board.

However I do believe that some unforeseen event can happen and make my investment drop like a rock and who knows then, whether in my life time it will come back?

My real question then is, How to hedge this position? Is it really possible to hedge the unknown? I read lots of books and have yet to find the answer.

Dr. Steve
Print the post Back To Top
No. of Recommendations: 8
Rationalwalk, another way to approach your target is to set your
benchmark as (market return + 5%) instead of 15% and measure this
over rolling 5 year averages. Over time this will work out to
about 15% but it will allow you to behave rationally when the
market is overvalued and undervalued.

This will also avoid getting into unnecessary knots as Berkshire's
likely 10 year forward expected return is lower than 15% while
simultaneously the forward returns for everything else is also less
substantial than usual. It is more sound to use a target that encourages
the best decisions available at each iteration.

- Manlobbi
Print the post Back To Top
No. of Recommendations: 13
However I do believe that some unforeseen event can happen and make my investment
drop like a rock and who knows then, whether in my life time it will come back?
My real question then is, How to hedge this position?


My view is that the only sensible approach is a combination of
(a) Sufficient cash to carry you a few years, preferably in a mix of currencies.
Swans are sometimes currency-specific.
(b) Patience to wait for the market value to reach fair value from time to time.
It's the axiom of all value investing that this will happen at least
once every several years (my rule of thumb is 5-7 at most).
Axioms can be false, but this principle has held up pretty well through the centuries.
Thus, if you live at least another 5-7 years your "price risk" worries should be unfounded.

Berkshire is particularly resilient; it is unlikely in the extreme that
the shares will be worth less in a decade in real terms.
The share price might be lower, but the true value won't be.

Speaking as someone who does a lot of fancy hedging, and ran a hedge fund for 6 years...
Don't bother.
If you're good at it it might even work, but it's probably not worth the trouble, and is very easy to get wrong.

As Mr Graham once said, the ONLY risk in equity investing is a material deterioration in the prospects of the underlying business.

Jim
Print the post Back To Top
No. of Recommendations: 0
Thanks for your thoughtful reply. I would like to add another parameter to Grahams truism. This is a very dangerous world that we are living in and if our leaders don't have the forethought (sp?) to help guide us, world wide, in the proper direction, business decisions etc will take a back seat to something that could be very bad.

Dr. Steve
Print the post Back To Top
No. of Recommendations: 8
if our leaders don't have the forethought (sp?) to help guide us, world wide, in the proper direction, business decisions etc will take a back seat to something that could be very bad.

Dr Steve

I see this sentiment expressed often and as a Public Service Announcement, I would sincerely like to say "DON'T WORRY ABOUT IT."

It's irrelevant to investing (even if true, which is debatable.) Why?
- Its consequences are unpredictable, so you cannot invest based on it, only speculate
- There is no valuation method to account for it
- The "leaders" are not static. Hard to believe but they are people too. And in democracies, very slowly and after lurching like a drunken sailor, things do move in the right direction.
- Most importantly, people want to live and raise families and that will never change. That is the true safety net for equities. You need businesses to fulfill needs. Not the tax laws, the central bank, the five-year plans (remember those?) Economy doesn't come about due to the government.

Buy some insurance, guns and gold for peace of mind, if you wish, but let's keep those purchases out of the realm of investment.
Print the post Back To Top
No. of Recommendations: 1
"Most importantly, people want to live and raise families and that will never change. That is the true safety net for equities. You need businesses to fulfill needs. Not the tax laws, the central bank, the five-year plans (remember those?) Economy doesn't come about due to the government."

Well said.
Print the post Back To Top
No. of Recommendations: 9
Most importantly, people want to live and raise families and that will never change. That is the true safety net for equities. You need businesses to fulfill needs. Not the tax laws, the central bank, the five-year plans (remember those?) Economy doesn't come about due to the government.

This may be "well said", but it's almost certainly wrong. People in Somalia want to live and raise families, and that may not change there, either, but government policies have everything to do with their economy. Too extreme an example? How about Argentina in the 1970's? Lords of Finance (Reichsbank, Banque de France, Bank of England, NY Fed) post World War I? Cyprus a year ago? Japan in the 90's? The US in 1979? The Eurozone today?

Who doesn't think tax laws, central bank competence or lack thereof, or even "planning" doesn't play into the economy? Of course economy has much to do with "government."

if our leaders don't have the forethought (sp?) to help guide us, world wide, in the proper direction, business decisions etc will take a back seat to something that could be very bad.
...
- Its consequences are unpredictable, so you cannot invest based on it, only speculate


Well, unless one theory of economics is correct and the leaders are following a different one. Back to "Lords of Finance" and today's Eurozone. It's entirely possible to invest based on it. Indeed in my view that's exactly what business owners in Europe are doing by their lack of investment. (Their motivation may not be so macroeconomic, but their microeconomic decisions are surely influenced by the policies which are causing their continuing economic shrinkage.)
Print the post Back To Top
No. of Recommendations: 2
This is fairly similar to a projection I did about 6 months back.

http://www.flickr.com/photos/90843665@N05/8267557732/in/phot...

That links to a graph I made showing the 1.2x book value buyback "price floor", over the next decade, at various book value growth rates. (4%,7%,10%,13%, and 16% for the next decade, multiplied by 120% (1.2x bv)

Disclosure: Long BRK.B at $79.83, since June 2012, and sleeping very well at night.
Print the post Back To Top
No. of Recommendations: 1
I personally have a goal of compounding my money at 15% annualized if I'm going to be putting time and energy into the process. I do not see Berkshire providing 15% annualized from here in ANY of the plausible scenarios I see for the company over the next ten years.


If by "from here", you mean purchased at today's price and held for a decade, absolutely.

If you want a significantly higher return, the main way I see that happening is to wait for the price to drop substantially relative to IV (maybe when Buffett step down?).

As far as whether or not Berkhsire can fit into a plan of having personal investment gains of 15%, I think it can. Not by itself, but in combination with other more aggressive investments. For example, rather than having cash as the place to park your assets while waiting for highly-enticing investments that might yield far more than 15% (not necessarily for a full ten years), one might use Berkshire shares for that role...with the amount allocated to Berkshire inversely proportional to the availability of very-high-return possibiliites (which, after all, are not too commmon).

I to have aimed for investment returns similar to what you've targeted, and I think one of the big mistakes I've made is 1) feeling like each and every position has to make it big, and 2) being too impatient waiting for the truly fat pitch. Yet knowing that your money is "safely" making 8-9% a year in Berkshire while waiting could make the waiting much easier to live with. Same idea as keeping cash around as dry powder, just super-charged. You give up the no-downside-on-an-absolute-basis, yet are much more likely to not lose purchasing power by dollar devaluation over time.
Print the post Back To Top
No. of Recommendations: 1
I believe that it is absolutely impossible to determine what something will be valued or priced in the future.


As far as absolute return? Or relative return?

If you think both are "absolutely impossible", then you certainly should not be actively investing. Just dollar-cost-average into a low-cost worldwide index fund.
Print the post Back To Top
No. of Recommendations: 1
The "leaders" are not static. Hard to believe but they are people too. And in democracies, very slowly and after lurching like a drunken sailor, things do move in the right direction.
- Most importantly, people want to live and raise families and that will never change. That is the true safety net for equities



Wow. You've read a much cheerier account of human history than I have.
Print the post Back To Top
No. of Recommendations: 0
Who doesn't think tax laws, central bank competence or lack thereof, or even "planning" doesn't play into the economy?


The U.S. seemed to create wealth quite well before there was a central bank...and minimal central planning.

How about Switzerland today?

There is no question that big centralized governments can greatly affect the economy. Whether they help create wealth is another matter entirely.
Print the post Back To Top
No. of Recommendations: 0
As far as whether or not Berkhsire can fit into a plan of having personal investment gains of 15%, I think it can.

Sure, it depends on what else is in the portfolio. As I expanded on in the post, you also have to look at risk (not beta but actual business risk) when looking at prospective returns. 9-10% from the current price with Berkshire's underlying business risk is a pretty good proposition.

But the main point remains: someone buying Berkshire here cannot really expect 15% annualized over long periods of time without baking in significant multiple expansion.
Print the post Back To Top
No. of Recommendations: 0
But the main point remains: someone buying Berkshire here cannot really expect 15% annualized over long periods of time without baking in significant multiple expansion.



Then again, that's true of virtually every business that has any sort of predictability/certainty in its business model and prospects.

Except for rare exceptions, if you're hoping to attain more than 15% "annualized over long periods of time", you either have to get substantial multiple expansion, or else take "bets" on businesses whose range of possible profit outcomes are quite wide. Or have access to zero-cost float :)
Print the post Back To Top
No. of Recommendations: 1
Except for rare exceptions, if you're hoping to attain more than 15% "annualized over long periods of time", you either have to get substantial multiple expansion, or else take "bets" on businesses whose range of possible profit outcomes are quite wide.

I agree that it is very rare to find businesses that can compound intrinsic value at rates in excess of 15%.

Investors who would like to compound at 15% must essentially choose between companies that are temporarily undervalued and expected to recover to intrinsic value over a reasonable period of time but lack compounding ability at 15%+ or identify securities that may be at fair value or somewhat undervalued but can grow intrinsic value at 15%+ over time.

If one could choose between these two types of companies, it is clearly far superior to purchase a 15% IV compounder even if it must be purchased at or only slightly below intrinsic value. Buying temporarily undervalued companies and then selling them, rinsing and repeating, is not a bad strategy either but requires much more work and can have significant tax consequences over time. Also, it requires making a sell decision in addition to the buy decision. Internal compounders only require one buy decision and then hopefully many years or decades or compounding thereafter.

Obviously the difficulty is forecasting which companies can compound IV at 15%+ over time and currently trade at reasonable valuations. Buffett eventually moved from the Graham approach (buying temporarily undervalued securities) and toward the Munger/Fisher approach. He would be far poorer today had he never moved toward Munger's point of view.
Print the post Back To Top
No. of Recommendations: 2
BTW, 15% is an entirely arbitrary number. But it is a convenient number because it means that you double your money over five years. It is also a rate at which it would be almost impossible to not get extremely wealthy assuming a reasonably long lifespan and starting with even a modest portfolio. If one can start with a less modest portfolio, sustained 15% returns over several decades is certain to result in being among the ranks of the super-rich NetJets crowd and I'm not exaggerating at all.

This is obvious to most everyone here but it is worth repeating:

Compounding effects of 15% annualized (actually 14.87%) with a starting portfolio value of $100,000:


Year Portfolio Value
-----------------------------
0 $100,000
5 $200,000
10 $400,000
15 $800,000
20 $1,600,000
25 $3,200,000
30 $6,400,000
35 $12,800,000
40 $25,600,000

It should be a requirement for high school graduation for every student to understand compounding! It is a colossal failure of the eduction system that most people are totally unaware of the miracle of compound interest. As Munger would say, going through life without understanding compounding is like being a one legged man in an ass kicking contest.



Print the post Back To Top
No. of Recommendations: 0
It should be a requirement for high school graduation for every student to understand compounding! It is a colossal failure of the eduction system that most people are totally unaware of the miracle of compound interest. As Munger would say, going through life without understanding compounding is like being a one legged man in an ass kicking contest.


I agree it should be taught.

But I doubt it would matter much. There are millions and millions of people who could make a 100% return in a second, with zero risk. But they don't take advantage of it. 401 K's with matching funds.

Even worse, millions of Americans are on exactly the opposite side of compounding: credit card and other debt. Then instead of being a miracle, it's a menace.




Compounding effects of 15% annualized (actually 14.87%) with a starting portfolio value of $100,000:


Year Portfolio Value
-----------------------------
0 $100,000
5 $200,000
10 $400,000
15 $800,000
20 $1,600,000
25 $3,200,000
30 $6,400,000
35 $12,800,000
40 $25,600,000




Well, the Berkshire board has to have one of the most intelligent grouping of investors on the internet. How many here have compounded their wealth 32x or 64x over? Raise your hands.

I'm not saying it's not worth shooting for, and it's not impossible. I know there are a few here who have done it. But it is crazy hard to do it for long enough to get those kinds of returns.
Print the post Back To Top
No. of Recommendations: 0
I'm not saying it's not worth shooting for, and it's not impossible. I know there are a few here who have done it. But it is crazy hard to do it for long enough to get those kinds of returns.

No doubt about it. Almost no one will be able to do it. But some will and it is fun to try with one important caveat: It is MUCH easier to compound at 8-10% than 15%. In the quest for 15%, it is critical to not take business risks that could result in much worse than the 8-10% that can be obtained in a reasonably certain manner.

Also, each individual needs to determine whether it really matters enough to justify the effort. If someone knows that they can be comfortably rich compounding for the next 20-30 years at 8%, going for 15% may not make sense if (a) the individual has no material desires that would go unfulfilled compounding at 8% rather than 15% or (b) the individual does not enjoy the process of investing enough to want to spend the time required to improve returns to that degree.
Print the post Back To Top
No. of Recommendations: 3
There are millions and millions of people who could make a 100% return in a second, with zero risk. But they don't take advantage of it. 401 K's with matching funds.

This is true but I think most people approach it from the perspective of saying that they would rather spend the $5,000 (or whatever) now rather than wait until retirement even if they can get an extra $5,000 match from their employer.

They are looking at the $5K today, not the fact that $5K would transform into $100K in 40 years compounding at ~8%.

I have found that people either get it or they don't. When I spend $100 today, I am mentally spending what I believe to be a very sure $200 in ten year's time. Most people are not like that. Their minds do not operate in a manner where they see consumption choices today in terms of what they are giving up in 10, 20, 30, or 40 years.

Of course, a few people I know consider it to be almost a mental illness to think like this about money.
Print the post Back To Top
No. of Recommendations: 0
There's one other issue about this whole trying-for-15% thing. Besides that it is so darn hard.

It's that in the very process of reaching for--or maybe I should say grasping for--a high return, one can very easily end up with an inferior one.

Buffett has said (paraphrasing): Rule number one: never lose money. Rule number two: don't forget Rule number one.

There is a subtle--yet critical--difference in looking for investments you think will hit a home run, versus looking for investments that are so attractive they seem to have a vanishingly small chance of a bad outcome. Thing is, when one finds an investment in which a rational determination suggests a near-zero chance of long-term loss, the wonderful secondary benefit is a very high rate of return, as the investment eventually regresses to the mean of a normal risk/reward ratio.

Berkshire's B's at $90 a short while ago were a good example of the latter. (At $113, not so much. Which is different than saying it's overvalued)

In contrast, I can speak from (painful) experience that Apple last September at $704 was an example of the former. Oh, that I would have moved my position in Apple at $704 to Berkshire at $85 back then!
Print the post Back To Top
No. of Recommendations: 0
It's that in the very process of reaching for--or maybe I should say grasping for--a high return, one can very easily end up with an inferior one.

This is true particularly when overreaching results in permanent loss of capital. Investors really need to build a record where they have convincing proof of ability to create value and to not lose money permanently before embarking on an attempt to compound anywhere near 15%. I'm sure we have all experienced permanent losses of capital to varying degrees. As long as such events amount to a bee sting rather than being bit by a cobra, long term damage can at least be minimized.
Print the post Back To Top
No. of Recommendations: 0
No doubt about it. Almost no one will be able to do it. But some will and it is fun to try with one important caveat: It is MUCH easier to compound at 8-10% than 15%. In the quest for 15%, it is critical to not take business risks that could result in much worse than the 8-10% that can be obtained in a reasonably certain manner.

rationalwalk,

Are your return assumptions for Berkshire (~8%-10%) and for Markel (~15%) nominal figures or are they real (inflation-adjusted) figures?

Bernhard
Print the post Back To Top
No. of Recommendations: 3
Are your return assumptions for Berkshire (~8%-10%) and for Markel (~15%) nominal figures or are they real (inflation-adjusted) figures?

Nominal.

To be clear on Markel, I believe that 15% annualized is possible over the next five years based on my valuation model. I believe that book value could grow to around $750 and if P/B is at 1.5 at the end, we could have a stock price in the neighborhood of $1,100 - roughly a double from here.

I am not counting on Markel growing book or intrinsic value at 15% annualized over the next five years since I also assume some multiple expansion. Markel should have an easier time compounding BV/IV at 10-12% than Berkshire which is probably going to be in the 8-10% range. But there is a possibility that Markel could surprise on the upside significantly while I think this is less likely for Berkshire.

Berkshire is much more diversified, much safer, and much less likely to produce a poor result than Markel so in a sense investors will be getting paid for taking on a somewhat higher level of business risk if Markel works out as I expect it will.
Print the post Back To Top
No. of Recommendations: 3
The "leaders" are not static. Hard to believe but they are people too. And in democracies, very slowly and after lurching like a drunken sailor, things do move in the right direction.
- Most importantly, people want to live and raise families and that will never change. That is the true safety net for equities

••••••••••••••••••••••••••••••••••••

Wow. You've read a much cheerier account of human history than I have.


That's an interesting line of thought. Presumably, over the long term, leadership derives from those who are led. At times this has spawned dynasties spanning hundreds, even thousands, of years. Bounty or disaster wrought by happenstance promotes or upends leadership.

Even so, at all times and in all places, evolving culture is the progenitor of average experience. It seems it cannot be otherwise. Surely it's a matter of perspective. Human evolution now culminates in the varied societies, infrastructures and technologies of our ever more ubiquitously shared world.

Even so, experiences of joy and sorrow are likely to have been just as crisp in Homo Habilis.

I guess it comes down to whether or not one regards the evolution of humankind as positive in retrospect. Are we better off on average than people living in the middle ages? Is our lifestyle superior to that of Cro-Magnon, all things considered? It seems to me that at any point in time it could boil down to the properties of a particular family, clan and environment—the luck of the draw that Buffett so often refers to. Even today, one born in Somalia encounters a very different world than one born in New York or Monaco. And not necessarily worse. Consider the gruesome case of that little girl who's been raised in a cage in Cleveland with her captive mother and two other women.

So if you think the average human living today is better off than those living a hundred, a thousand, and a hundred thousand years ago, then by your own standards, human history is positive. The notion that "the true safety net for equities" is the fact that "people want to live and raise families" is perhaps not so far-fetched.

Tom
Print the post Back To Top
No. of Recommendations: 30
I know that I don't have very much credibility when it comes to investing. That being said.... it seems many people here are getting a little carrried away with their dreams of becoming mega-millionaires.
Yes, the stock market has gone up, and with it BRK, MKL and just about everything has gone up with it. So, if you invested in anything, you are prbbably congratulating yourself on being such a good stock picker and manager of money. So now that you made some dough, instead of breathing a sigh of relief, you are extrapolating out how rich you are going to be by compounding your money at 8%, 10% and even 15% for the next few decades.

Wake up you guys! This is real life!
Print the post Back To Top
No. of Recommendations: 0
whoa, you starting a hedge fund, bb?

put me down for a million on credit.

thx!

SD
Print the post Back To Top
No. of Recommendations: 5
Hey Smurfdog,

It's 2:30 am. What are you doing reading the Motley Fool BRK board at this god awful hour?
I was reading Google news and saw that Carole King won the Library of Congress songwriting award.

So I started listening to her old songs, then James Taylor's old songs.

James was a depressed heroin addict that ended up singing at President Obama's inauguration.

So, who knows? Maybe a middle aged depressed ER doctor who can't ever invest correctly might end up as a successful hedge fund manager.
Print the post Back To Top
No. of Recommendations: 0
Wake up you guys! This is real life!

Well, yes. But so were the 1990s (I think it was), where it was quite possible to make around 20% for a while if you did not do anything too stupid. Of course, by the end of that period, you could lose 20% also. The biggest mistake back then was to assume things would continue like that.

/Sarcasm on/ But it is different this time. /Sarcasm off/
Print the post Back To Top
No. of Recommendations: 1
Yes, the stock market has gone up, and with it BRK, MKL and just about everything has gone up with it. So, if you invested in anything, you are prbbably congratulating yourself on being such a good stock picker and manager of money.

Of course, you can only congratulate yourself if you've beat an appropriate benchmark over multiple market cycles which would demonstrate skill rather than luck. Everyone has to make an honest assessment of what they being to the table.

I don't see anyone getting carried away here. Personally I was much more optimistic about the markets and my investments two years ago than I am today.
Print the post Back To Top
No. of Recommendations: 7
Wake up you guys! This is real life!

I've had my entire net worth in equities since September 1987. I was a focus investor from the start putting my entire net worth $10k into the Fedelity Magellan Fund then run by the great Peter Lynch. You can see the date and know what happened to me a few weeks into my investing career. I did not even think of selling at that point but wanted to get more money somehow to get more shares for 50% less than I just paid a few weeks ago! I've arrived at a place by sticking to this attitude where I could lose 50% of my money and it wouldn't hurt me one bit. And yes, in 20 years from now my money will have compounded 8 - 15%, I don't really care which.

"It's simple but no easy".
Warren Buffett
Print the post Back To Top
No. of Recommendations: 1
I did not even think of selling at that point but wanted to get more money somehow to get more shares for 50% less than I just paid a few weeks ago!

Like Buffett says, it is like an inoculation ... Most people are thrilled with lower prices on things they buy regularly except when it comes to investments. I make my share of errors but one problem I've never had is to feel better about paying $1 for $1 worth of assets vs paying 50 or 60 cents.
Print the post Back To Top
No. of Recommendations: 0
"I have found that people either get it or they don't. When I spend $100 today, I am mentally spending what I believe to be a very sure $200 in ten year's time. Most people are not like that. Their minds do not operate in a manner where they see consumption choices today in terms of what they are giving up in 10, 20, 30, or 40 years.

Of course, a few people I know consider it to be almost a mental illness to think like this about money."


Couldn't have said it better!

I consider myself very lucky to think about money in the way you mentioned above.

Cheers to that point of view!
Print the post Back To Top
No. of Recommendations: 0
$1000 compunding at 20%pa for 63 years, equates to $97,000,000 - makes you think twice about that nice weekend away or expensive suit, lol
Print the post Back To Top
No. of Recommendations: 2
$1000 compunding at 20%pa for 63 years, equates to $97,000,000 - makes you think twice about that nice weekend away or expensive suit, lol

Anything can be taken to the point of absurdity.

The fact remains, however, the compounding is incredibly powerful even at relatively modest rates of return. Few investors will sustain returns anywhere near 15% over time to say nothing of 20%. But it has been done and will be done again in the future by a small subset of investors.
Print the post Back To Top
No. of Recommendations: 0
I've had my entire net worth in equities since September 1987. I was a focus investor from the start putting my entire net worth $10k into the Fedelity Magellan Fund then run by the great Peter Lynch. You can see the date and know what happened to me a few weeks into my investing career. I did not even think of selling at that point but wanted to get more money somehow to get more shares for 50% less than I just paid a few weeks ago! I've arrived at a place by sticking to this attitude where I could lose 50% of my money and it wouldn't hurt me one bit. And yes, in 20 years from now my money will have compounded 8 - 15%, I don't really care which.

"It's simple but no easy".
Warren Buffett


"Well sir, you have larger cojones than I."
Goofyhoofy, anytime somebody says they can take a 50% haircut and want more.
 
Print the post Back To Top
No. of Recommendations: 29
<<f you invested in anything, you are prbbably congratulating yourself on being such a good stock picker and manager of money. So now that you made some dough, instead of breathing a sigh of relief, you are extrapolating out how rich you are going to be by compounding your money at 8%, 10% and even 15% for the next few decades.>>

Amen, amen, amen. The first bubble of my investing life yielded me quick millions. I remember thinking I had something to do with it. I did not. I was lucky. I was a lucky boy, in a lucky situation, born exactly in the right place and time to get lucky. That I subsequently lost almost all that quick fortune in the deflating of the asset bubble was a matter of course. I remember thinking I had an aptitude and that I would be worth 50 million by 40 years old... Nope. Here I am 13 years later and I am barely clawing my way back to my own personal high-water mark which was achieved in the first bubble. 50 million by 40 aint happening.

The punch card investing system is probably the best. Every once in a while a great opportunity comes along and you invest heavily in it. I add this advice though. If it works out, do something with a portion of the money. Buy your home, set your kids up for the best education money can buy... take something off the table to enjoy, so that you can feel alright waiting for the next big dislocation.

After the last crash my investments in WFC, WFMI, DPS, and BEAV did REALLY well. I bought my home outright and am glad I did. I did not need that extra capital on the imaginary table compounding at an imaginary 15%.

I have 90 per cent annual return (before tax) over the last year to date. I know the unique combination of Jefferies getting silly cheap and there being an equity bull market had everything to do with that result, so I am going to take something off the table... Just in case I got a 10 to 13 year waiting period to the next big opportunity. I am looking at farms, which has been a dream ever since I was child.

I wish I had bought one when I was 24 and had all that luck at my back. Looking back on it now, the worst thing that ever happened to me was getting lucky in the stock market. I became obsessed with it and complacent in my own life. I used to think I would have my kids start at age 14 like I did. Now I am not so sure about that. Getting focused on wealth and investing at a young age is a HUGE advantage at the game of wealth and investing, but it can be a very, very dangerous mind-set. My two cents written with own blood.


You are absolutely right in your post, though.
Print the post Back To Top
No. of Recommendations: 0
I bought my home outright and am glad I did. I did not need that extra capital on the imaginary table compounding at an imaginary 15%.

Everyone should do what they feel is best for their own circumstances. However, if someone wanted to take away my 2.75% mortgage, they would have to pry it out of my cold, dead hands. I'll probably cry a little on the day that it is finally paid off. This debt is very modest as a percentage of my total invested assets, can never be called based on security prices falling, and generates a modest tax benefit. If I can't generate a net benefit based on this leverage, I have no business in this line of work.

There is nothing imaginary about compounding. It does not occur in a smooth line like in the table (obviously) and high rates of compounding are very, very difficult to achieve for almost all investors. That doesn't mean that some investors won't be able to do it. Nor does it mean that compounding at more modest rates is not worthwhile as well.
Print the post Back To Top
No. of Recommendations: 11
Ravi,

I am talking about punch-cards, self-percetion/deception, and what I do when times have been good (most of my compounding has happened in relatively few situations over relatively short periods of time in my 20+ years at it), as well as some personal reflections over the effects of a 20+ year investing career. I am not saying mortgage loans are bad, I am just saying I am glad I took money off the table when I did, and I am glad I bought my house with it. I like the feeling of owning it outright. Plus, I use no debt in my life.


Mortgage loans are a great source of cheap, secure leverage in many cases for many people. You are right about that. But they are not for everyone.


On a related note about relativity, another thing about compounding is that time is the exponent in the compounding growth equation. Time matters for compounding, but it also matters for other things too. In the 23 years I have been investing many people I have known have died. They could have compounded away with every bit of their property, but presumably if they were lucky enough to know the material things that mattered to them, they would have enjoyed spending it at times when they could before they died. It gets to the point: why do this at all? Different people have different reasons and goals.

Anything I write is but one voice among billions of voices. Same thing goes for you too.

Best,
William
Print the post Back To Top
No. of Recommendations: 0
It gets to the point: why do this at all?

I barely, just barely forced myself to sit through Philosophy 101 so I'm probably the last person to have the answer to that question if the answer is something other than getting and/or staying rich.
Print the post Back To Top
No. of Recommendations: 14
I'm not really understanding the argument here.

I don't think anyone on this board is shortsighted enough to ignore the idea that life must be lived and that real life will make stew of your best-laid plans to compound a fortune in an orderly fashion.

However, I believe it is the role of this board to discuss matters of investment and if we aren't hoping/ shooting for better than average returns then why are here?

I assume everyone here has lives outside of posting here. But we're all being polite and not sharing the pictures. That's what Facebook is for.
Print the post Back To Top
No. of Recommendations: 3
I
Print the post Back To Top
No. of Recommendations: 0
I`m here to find / discuss quality companies that can be held to compound for the long term.

Then I simply watch and wait, when valuations become attrative I buy stock, if you can buy such a company below 15 PER that is good but get excited below 10/12 times earnings. Buying in at these levels ensures a much higher compounding rate in the long term.

I only have 20 companies to choose from as I gradually learn about these and look for others. They are all companies I would be happy to hold long term and I feel will not blow up.

Mix Mungerism with thinking about Equity Bonds and you have a solid approach to develop long term wealth IMO.
Print the post Back To Top
No. of Recommendations: 2
"It gets to the point: why do this at all?"

Because money = freedom.
Print the post Back To Top
No. of Recommendations: 3
Because money = freedom.

Buffett obviously loves his work but its pretty clear from his biographies that he got into the business to achieve financial independence which equals freedom to do what you want, when you want, and associate only with people you want to associate with. This is priceless, much more so that what the money can actually buy. Buffett achieved freedom for himself and his family half a century ago and keeps on going so obviously other factors are driving him to continue. Investing is an attractive field precisely because it can provide financial freedom and because it exposes the investor to a huge variety of businesses. For those who find business fascinating, it is also somewhat addictive work.
Print the post Back To Top
No. of Recommendations: 1
I bought my home outright and am glad I did.

So did I. But it is not as great as it sounds. My property tax now is about the same as the Principle and Interest and Property Tax were when I still had the mortgage. So instead of the bank owning my house, now the state owns it.

Of course it would be even worse if the mortgage had not been paid off some years early.
Print the post Back To Top
No. of Recommendations: 0
William,
You mentioned a mortgage loan as good cheap leverage, and I believe you've said in the past you live in Austin. I wonder what you may think about the idea of an equity loan on my mortgage to invest in another property for my business. I have a small chocolate business and would like to expand with a permanent location. Thoughts appreciated.
Thanks,
Tom
Print the post Back To Top
No. of Recommendations: 1
Black Swans anyone?

Warren Buffett’s Billions at Risk; Berkshire Hathaway Is Lowest-Rated on Sustainability

http://hipinvestor.com/news/warren-buffetts-billions-at-risk...

HIP Investor's Sustainability Summary of 100%-Owned Operating Companies of BERKSHIRE HATHAWAY (BRK.A,BRK.B)

http://hipinvestor.com/wp-content/uploads/BerkshireHathaway-...

Tim
Print the post Back To Top
No. of Recommendations: 1
If I had my way, the number of articles that refer to "Black Swans" would be reduced by 99.5%. Most of the people using this term have no idea what it means. They use it as a synonym for "unlikely" or merely bad but predictable outcomes. That is not what a "black swan" is as defined by Taleb.
Print the post Back To Top