No. of Recommendations: 18
When is 2:1 leverage appropriate?

The prudent investment advice answer: never.

My greedy risky answer: when you're sufficiently confident that the price is so low relative to value that it's a slam dunk that the price will be higher in a couple/few years.

(And that the value isn't going to fall, and that the leverage is cheap, and that the loan built
into the leverage can be renewed for as long as you need it, and that you'll have the money to pay for that leverage).

In the real world, I think Berkshire is worth going 2:1 when the price to (most recent) book ratio is near or below 1.25, as it was at Christmas.
Maybe even up to 1.3, if you're OK for cash and don't have other solid investment choices with good prospective returns from current prices.
Today's figure is 1.317.

This presupposes that the investment strategy matches your temperament.
If you start at a cheapish valuation level you know pretty much for sure you're going to do well
on average in the next few years, but you have no idea which specific years it will happen.
My philosophy is that you can have at most two of: high returns, safe returns, and steady returns.
This approach is, say, >95% safe, high, and not at all steady.
You can go four years making nothing. The fifth year will likely then be spectacular.
I made more on Berkshire in 2013 than I did in the prior six years combined.
The P/B at end 2012 was only 1.20, so the odds favoured a good stretch coming.
The same had been true at end 2011 at P/B 1.18, but the good stretch didn't arrive in 2012.
The cheaper it is, the more likely you'll see a good payoff soon, but sometimes patience is needed.

I've owned Berkshire for 17.5 years. The method of investment and the position size have varied, but I've always been long.
I overpaid a bit when I originally bought, at P/B 1.67. Buy and hold return since then has been 9.05%/year.
My IRR has been 20.1%, due to some successful buying on dips, some judicious leverage, and occasionally some injudicious leverage.
I haven't let it fully compound...on a fairly regular basis I take money out and spend it.

Jim
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