Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 1
While I too am in awe of Jim's knowledge (depth and breadth), the above is well known investment wisdom.


Well, knowing something from an academic point of view is completely different than knowing it in lived experience.

Common sense is actually quite rare in practice.

A firm grasp of the obvious is often genius.


If you subtract say one or two standard deviations of past total returns of the stock, from the predicted return, is Berkshire still the best investment around?


What are you talking about??

Take the best of the return away from Berkshire, then it under performs the index??
Print the post Back To Top
No. of Recommendations: 3
If you're bearish on Berkshire Hathaway and believe that Warren Buffett and Charlie Munger have lost their edge, why would you still own Berkshire Hathaway stock? Just sell the stock, pay your taxes, move on, and buy something else.

Because it's not a terrible stock to own, just mediocre. Plus if Buffett reads this board as he allegedly used to, how is he going to learn how to invest better unless we tell him how to?
Print the post Back To Top
No. of Recommendations: 25
If you're bearish on Berkshire Hathaway and believe that Warren Buffett and Charlie Munger have lost their edge

I think this is the wrong way to look at an investment decision in Berkshire.

An investment in Berkshire today is not based on Buffett's or Munger's capabilities. It has to be based on the future of the business and that will only involve them for a limited period. Munger in any case has not been involved in capital allocation at Berkshire for a long time.

A company that keeps piling up earnings in cash without finding opportunities to reinvest ot returning excess capital is not going to be a great compounder of wealth. That has indeed been the case over the last 5 years.

Based on how the allocation has panned out over the last 5 years my expectations from the future are less than I would have anticipated. The lack of succession or transition of the allocation function has been poor governance on the part of the board in my view. The odds that on any given day, Ted and Todd could instantly be in charge of 25 times the capital they have ever been trusted to manage get higher by the day. The nightmare scenario is a huge acquisition which misfires.

Having said that, I see Berkshire increasingly as a bond substitute with a core 7% coupon with limited growth. I reduce my holding when I find other opportunities that promise better risk adjusted upside. In a low interest world a 7% return in more than enough for my needs and in my view expecting higher returns regardless of the strategy followed is to set oneself up for disappointment.
Print the post Back To Top
No. of Recommendations: 45
A company that keeps piling up earnings in cash without finding opportunities to reinvest to returning excess capital is not going to be a great compounder of wealth. That has indeed been the case over the last 5 years.

So, let's assume this means that the cash should really have been deployed sooner if they'd been doing their jobs.
It's hard to buy big companies at a reasonable price, so presumably the idea is that they should have bought more stocks.

But...
Berkshire's equity portfolio size as a percent of investments per share is at a 20 year high.
It was 53% at end of last quarter. No year end 1999-2017 was that high, average 42%.
It was only as low as 53% at Q2 because of this year's stock price changes...the equity allocation was over 60% at year end.

The reality is that the cash pile isn't unusually large these days.

It just seems that way to some observers because---
* people forget how much bigger the company is now compared to 5, 10, or 20 years ago, meaning a bigger number can be a smaller percentage, and
* The big change is really the fall in the fixed income allocation.

Equivalently, you can (and probably should) think of the cash as just the short duration end of the fixed income allocation, so the only change is shortened average duration.
That has been combined with a fall in the total allocation to fixed income of all types (cash + bonds).
Both of which make sense given the poor prospects for returns from long bonds.
In short, more in stocks and less in cash+bonds.

So...if the cash pile isn't unusually large, it's hard to see an overlarge cash pile as good evidence of an inability to invest skilfully.
Shareholders' equity is up $93 billion in the last three years, book per share up 34.5%, so the machine doesn't seem very broken.
For a sense of scale, Alphabet's shareholders' equity is up $59 billion in the same stretch.

Jim
Print the post Back To Top
No. of Recommendations: 15

So, let's assume this means that the cash should really have been deployed sooner if they'd been doing their jobs.
It's hard to buy big companies at a reasonable price, so presumably the idea is that they should have bought more stocks.

No one is saying they should have bought stocks for the heck of it. However, judged over 5 years you have to objectively assess how they allocated capital generated from earnings between the range of options available including acquisitions and returning excess capital.

Yes it is hard to buy good companies at reasonable prices but that's the job description. If that's not feasible due to size, the capital should go back to shahreholders. as capital keeps growing, this is certain to get harder not easier.

The opportunities were certainly there with stocks in the last 5 years. In fact they did score a big win with Apple.


So...if the cash pile isn't unusually large, it's hard to see an overlarge cash pile as good evidence of an inability to invest skilfully.
Shareholders' equity is up $93 billion in the last three years, book per share up 34.5%, so the machine doesn't seem very broken.
For a sense of scale, Alphabet's shareholders' equity is up $59 billion in the same stretch.


Rather than just absolute book value growth, I prefer to look at how incremental cash generated from earnings ($20-25b per year)is reinvested in the business over 5 years. A large part of the rise in the shareholder equity in the last 3 years is due to a single investment. The total gain on Apple alone is $57b at the end of last quarter.

To be fair, Alphabet has not been great at capital allocation either. However they have a product base with a huge moat, a large user base and lots of opportunities to invest behind where capital allocation is the core reason for Berkshire's existence in its current form.

Finally the absolute amount of the cash hoard matters. Above a certain amount, size precludes meaningful deployment due to a combination of inability to move quickly enough when markets tank ( Q4 2018 and march 2020) and a small universe in more normal times. In that case cash is best given back to shreholders who have a better opportunity set. Buffett has quoted a figure of $150 billion in the past as this limit and I would not be surprised if this has been breached when we see the latest results next week.

Building cash has been a conscious decision versus larger buybacks, stock market activity or acquisitions. At a time when the stock has been cheap and sometimes extremely cheap, this does seem to be excessively cautious given the healthy state of the business in general and that to me is subpar allocation.
Print the post Back To Top
No. of Recommendations: 0
Finally the absolute amount of the cash hoard matters. Above a certain amount, size precludes meaningful deployment due to a combination of inability to move quickly enough when markets tank ( Q4 2018 and march 2020) and a small universe in more normal times. In that case cash is best given back to shreholders who have a better opportunity set. Buffett has quoted a figure of $150 billion in the past as this limit and I would not be surprised if this has been breached when we see the latest results next week.

Sure, but it ain't $150 billion available for acquisitions. It's clear to me (and Mr. Market) that WEB will not dip very far into that float ($130 billion). Best hope is he'd "borrow" from it temporarily to make a large deal.

Available cash without float is about $35 billion. That's about 15% of the stock/cash portfolio.
Print the post Back To Top
No. of Recommendations: 0
"Sure, but it ain't $150 billion available for acquisitions. It's clear to me (and Mr. Market) that WEB will not dip very far into that float ($130 billion). Best hope is he'd "borrow" from it temporarily to make a large deal.

Available cash without float is about $35 billion. That's about 15% of the stock/cash portfolio."


oh....this makes my head hurt.

jk
Print the post Back To Top
No. of Recommendations: 0
oh....this makes my head hurt.

jk


Please tell me where/why I'm wrong.

I'd love, love to be wrong.
Print the post Back To Top
No. of Recommendations: 8
Sure, but it ain't $150 billion available for acquisitions. It's clear to me (and Mr. Market) that WEB will not dip very far into that float ($130 billion). Best hope is he'd "borrow" from it temporarily to make a large deal.
Available cash without float is about $35 billion. That's about 15% of the stock/cash portfolio.


The float isn't the cash. The cash isn't the float.
They're two different things.

But our expectations may not differ much.
Fixed income (cash + float) is unlikely to fall very much below its usual cyclical lows of (say) 85% of float without a good reason.
Ten year average is 110%, latest figure 127%.

But I do think that there is certainly room for a big purchase.
As Mr Munger mentioned last year, $150bn would be doable.
The difference is that the borrowing can be quite a big deal.
Berkshire's gearing is always very conservative, but it's quite a lot below the usual even for Berkshire.
Historically they have been comfortable with recourse debt at cyclical highs after a big purchase of over 17% of shareholders' equity. It was 9.7% at end Q2.
Even 17% is not exactly at the outer reaches of leverage.
A lot of the dry powder is in the form of untapped borrowing power.

Jim
Print the post Back To Top
No. of Recommendations: 1
If you're bearish on Berkshire Hathaway and believe that Warren Buffett and Charlie Munger have lost their edge, why would you still own Berkshire Hathaway stock? Just sell the stock, pay your taxes, move on, and buy something else.

The more relevant question is why are you bullish on Berkshire ?

Last 15 years of underperformance, a substandard succession plan, a 90 year old CEO and a 96 year old partner in the middle of a global pandemic and Board that is derelict. Combine that with dud investments in DAL, OXY, KHC, BAC and Gold.
Print the post Back To Top
No. of Recommendations: 26
"The more relevant question is why are you bullish on Berkshire ?"

"Last 15 years of underperformance"


Well there is no argument here! The chart isn't pretty. However, overall operating earnings, float, cash, and portfolio value just keeps growing. If this wasn't the case, I'd be alarmed. But this is of no interest to you.


"a substandard succession plan, a 90 year old CEO and a 96 year old partner in the middle of a global pandemic and Board that is derelict."

Well, last we heard, there were two people ready to step in tomorrow. So if two guys were hit by the proverbial bus today we'd have a new CEO in the morning. I'm not sure how many fortune 500 companies are in that position. Not to mention each business unit has there own CEO. I can't reconcile this fact with a "substandard succession plan". So I'd argue we have a rather strong one especially in the midst of a pandemic. But this is of no interest to you.


"Combine that with dud investments in DAL, OXY, KHC, BAC and Gold"

I really don't understand this reference. It's so shallow and just demonstrates a profound lack of business understanding in general that I can't distinguish this as a true belief or just normal trolling behavior. All businesses have bad bets. You just need to make sure they don't kill you. Have you heard of the the amazon fire phone? amazon wallet or their music importer? You can google any company and see bad bets. But again, this is no interest to you.

Some advice. You do your best trolling when you stick to the charts. I mean, there is no argument there! You really need to avoid straying too much by delving into "explanations". Not too long back you went off script and to express your opinion on float. It demonstrated such a brutal ignorance of the subject that it even undermined your superiority to us. I should be "stung" by your posts and not be laughing at them. Stick with what you know best for heavens sake - it's easier. Others call it circle of competence. And finally, this is of no interest to you.

happy posting
jk
Print the post Back To Top
No. of Recommendations: 0
Fixed income (cash + float) is unlikely to fall very much below its usual cyclical lows of (say) 85% of float without a good reason.
Ten year average is 110%, latest figure 127%.


Fixed income (cash + bonds?)...

Let me see if I understand:
If fixed income is currently $166 billion,
and float is $131 billion,
the amount of fixed income available for a large acquisition would be:

166 - 131*0.85 = $55 billion.
Print the post Back To Top
No. of Recommendations: 32
The more relevant question is why are you bullish on Berkshire ?

Not directed at me, but a few thoughts---

Value still keeps on rising about 10%/year, give or take a bit.
Unusually safe.
Far more predictable than most investments.
Cheaper than it usually is.

Underwriting was profitable in Q1. And in Q2.
Rails profitable in Q1. And in Q2.
Utilities profitable in Q1. And in Q2.
Manufacturing/service/retailing profitable in Q1. And in Q2.
Not so bad, given an tough year.
The money rolls in.

Berkshire will never be the top performing stock in a given year.
But the range of plausible outcomes is atypically narrow, which is not true of the things that will end up doing better.

Jim
Print the post Back To Top
No. of Recommendations: 5
Well there is no argument here! The chart isn't pretty.

There is a reason why BRK the stock keeps on underperforming. Blind cultish appreciation of WEB is not going to help.

Insurance is more or less run as a charity as most of the float is kept in cash earning ~0%.
BRK business are underperforming from Lubrizol to Iscar to Railroads to Jewelry to Furniture.
Capital allocation is faltering.

BRK was a wound up spring 15, 10, 5years ago but S&P still keeps beating it and beating it.

It is the bitter truth. You can choose to live in fantasy and and preach "tech is bad investment" gospel.

The reality is that BRK is a lackluster company run by a 90 year old with a screwed up business model and a mess that the new CEO has to unravel.

Mr. Market speaks loudly and clearly. There is a reason why BRK the stock keeps on underperforming.
We all see what we see.
Print the post Back To Top
No. of Recommendations: 23
sigh...

"There is a reason why BRK the stock keeps on underperforming."

A gem.

"Blind cultish appreciation of WEB is not going to help."

We are in agreement here! Well done.

"Insurance is more or less run as a charity as most of the float is kept in cash earning ~0%."

Berkshire insurance operations usually provide $2B in earnings. I think last year was over $7 due to investment income. Not quite charity like, but this fact is not helpful to your narrative shtick.


"BRK business are under performing from Lubrizol to Iscar to Railroads to Jewelry to Furniture."

The business argument presented and the underlying inter-connectivity you suggest is eye opening.


"It is the bitter truth. You can choose to live in fantasy and and preach "tech is bad investment" gospel.'

Well it's not fantasy. BRK is north of 20% tech now.

"The reality is that BRK is a lackluster company run by a 90 year old with a screwed up business model and a mess that the new CEO has to unravel."

I don't think there are 20 companies in the world that make more money than BRK. Something is screwed up.

"We all see what we see."

The irony here is rich. Can you see it? LOL


jk
Print the post Back To Top
No. of Recommendations: 4
A large part of the rise in the shareholder equity in the last 3 years is due to a single investment. The total gain on Apple alone is $57b at the end of last quarter.


If you review the history of Berkshire Hathaway--or simply understand the basics of a concentrated investment strategy--you'll see that most of Berkshire's outperformance since day one is due to a handful (well, maybe two) of investments. If you can routinely avoid striking out or hitting pop ups, hit a fair number of singles, and occasionally hit a home run, you will end up with a great record.
Print the post Back To Top
No. of Recommendations: 10
The more relevant question is why are you bullish on Berkshire ?

Last 15 years of underperformance, a substandard succession plan, a 90 year old CEO and a 96 year old partner in the middle of a global pandemic and Board that is derelict. Combine that with dud investments in DAL, OXY, KHC, BAC and Gold




Maybe the most facinating question is why those who so clearly believe that Berkshire is an obviously inferior investment waste precious time from their oh-so-limited life on an internet board devoted to that inferior investment.
Print the post Back To Top
No. of Recommendations: 10
Jim said:

“Value still keeps on rising about 10%/year, give or take a bit.
Unusually safe.
Far more predictable than most investments.
Cheaper than it usually is.

Underwriting was profitable in Q1. And in Q2.
Rails profitable in Q1. And in Q2.
Utilities profitable in Q1. And in Q2.
Manufacturing/service/retailing profitable in Q1. And in Q2.
Not so bad, given an tough year.
The money rolls in.

Berkshire will never be the top performing stock in a given year.
But the range of plausible outcomes is atypically narrow, which is not true of the things that will end up doing better.“

That’s about my exact thesis for having the bulk of my equity investments in Berkshire. I’m retired and not looking to hit the cover off the ball, but if I can eek out a 7-10% return with a fairly low risk of going broke, I’m happy.
Print the post Back To Top
No. of Recommendations: 3
Bears, consider the following:

“Berkshire earned $81.4 billion in 2019 according to generally accepted accounting principles (commonly called “GAAP”). The components of that figure are $24 billion of operating earnings, $3.7 billion of realized capital gains and a $53.7 billion gain from an increase in the amount of net unrealized capital gains that exist in the stocks we hold. Each of those components of earnings is stated on an after-tax basis.“-WEB 2019 Report

Not too shabby and the “gift” that keeps on giving since 1965 and built to last! Of course I do drink the WEB and CMT Kool Aid and they readily admit they have always and will make mistakes. That predictable 35-40B in annual look thru earnings matters even more.
Print the post Back To Top
No. of Recommendations: 9
Berkshire will never be the top performing stock in a given year.
But the range of plausible outcomes is atypically narrow, which is not true of the things that will end up doing better.



It takes a wonderful mind to wrap so much wisdom into two such seemingly simple sentences.
Print the post Back To Top
No. of Recommendations: 9
It is the bitter truth. You can choose to live in fantasy and and preach "tech is bad investment" gospel.


It is the bitter truth that you can waste your life...on the Berkshire board endlessly whining that Buffett doesn't run the business like you would.

I love to go to Italian restaurants and give them suggestions on Indian cuisine. Almost as much as going to the opera and yelling that they should do some country music.
Print the post Back To Top
No. of Recommendations: 0
Berkshire will never be the top performing stock in a given year.
But the range of plausible outcomes is atypically narrow, which is not true of the things that will end up doing better.

--------///////--------
It takes a wonderful mind to wrap so much wisdom into two such seemingly simple sentences.


While I too am in awe of Jim's knowledge (depth and breadth), the above is well known investment wisdom.
The reason stocks have had historically higher returns then bonds, it's because they're more unpredictable. The more predictable the outcome, the less return you will get, because everyone else has also figured it out a safe investment, thus driving up price.
If you subtract say one or two standard deviations of past total returns of the stock, from the predicted return, is Berkshire still the best investment around? Compared to an index?
Maybe, you say, past prices do not matter. Which is very true. So how about some multiple of earnings or book value as a proxy for price, substituting earnings growth or book value growth for total returns of the stock?
I have not done the math, but I believe that the index will come out ahead of BRK on these metrics.
Print the post Back To Top
No. of Recommendations: 1
While I too am in awe of Jim's knowledge (depth and breadth), the above is well known investment wisdom.


Well, knowing something from an academic point of view is completely different than knowing it in lived experience.

Common sense is actually quite rare in practice.

A firm grasp of the obvious is often genius.


If you subtract say one or two standard deviations of past total returns of the stock, from the predicted return, is Berkshire still the best investment around?


What are you talking about??

Take the best of the return away from Berkshire, then it under performs the index??
Print the post Back To Top
No. of Recommendations: 2
The irony here is rich. Can you see it?

Speaking of iron, here are the numbers. They don't lie.

Time..... S&P.... BRK
-------------------------------
1 YR....10.5%.... -6%
3 YR....12.4%.... 02.2%
5 YR... 13.7%.... 07.8%
10 YR....13.8%.... 09.5%
15 YR....09.1%.... 08.5%

I am not saying that BRK is a bad company and all WEBs decisions are bad.
However, I am saying that WEB is making capital allocation mistakes repeatedly and is 90 years old.

BAC is the latest one that stands out. Unfortunately, there is no way to prove/disprove
other than wait for a few years.
Print the post Back To Top
No. of Recommendations: 7
Speaking of iron, here are the numbers. They don't lie.

Yes, Berkshire's price performance has been lower than that of the S&P 500 over many lookbacks ending now.

Just to be clear, you're advising that we extrapolate that result?
You see the bad price performance ending now as evidence that the Berkshire the business has done worse than S&P500 considered as a business, and will continue to do worse?

Do you therefore recommend the S&P over Berkshire as the higher performing investment choice starting here for the next 1,3,5,10,15 years?

Jim

(for the record, BRK/A at $301147, S&P 500 at 3303.70 as I type)
Print the post Back To Top
No. of Recommendations: 0
#'s don't lie

#endWEB'sBROOKLYNDOUBLETALK
Print the post Back To Top
No. of Recommendations: 10
Time..... S&P.... BRK
-------------------------------
...
15 YR....09.1%.... 08.5%


Out of curiosity, I pulled up a 15-year chart on Yahoo (see below) comparing S&P500 Total Return to BRK-A, and I see that you're right, Berkshire has underperformed, but only for the past six months. Prior to that, BRK-A was ahead for almost all of the measurement period. And, if we see a 10% recovery to where prices were a month ago, Berkshire could easily be back in front of the benchmark.

In a US taxable account, many investors would have been worse off owning SPY or an equivalent dividend-generating ETF rather than Berkshire with its earnings fully reinvested.

The question then becomes, if making a choice between these two vehicles today, which is better positioned for good returns going forward? If history is a guide, and Berkshire can keep up with the index even when the index is getting more expensive and Berkshire is getting cheaper, it suggests a range of outcomes from one where Berkshire continues to be out of favor but still generates acceptable returns, to a better one where it comes back in favor and generates superior returns.

Rob

https://finance.yahoo.com/chart/%5ESP500TR#eyJpbnRlcnZhbCI6I...
Print the post Back To Top
No. of Recommendations: 2
I am almost afraid to ask but what is "Brooklyn double talk" and how is the Oracle of Omaha, Nebraska connected to Brooklyn?
Print the post Back To Top
No. of Recommendations: 3
Just to be clear, you're advising that we extrapolate that result?
You see the bad price performance ending now as evidence that the Berkshire the business has done worse than S&P500 considered as a business, and will continue to do worse?

Do you therefore recommend the S&P over Berkshire as the higher performing investment choice starting here for the next 1,3,5,10,15 years?


1. We know that S&P500 is very hard to beat over the long term.
2. We also know that S&P500 has beaten BRK over the last several years.
3. We also know that WEB is old.
4. We also know that BRK is not well organized like Apple or Microsoft or Google.
BRK is a collection of whatever business WEB wanted.

Why listen to me when you can hear it from WEB:

Becky Quick: (03:08:37)
I got a number of variations on this next question, some more polite than others. This one’s right about down-the-middle. But this is from [Mark Blakely 00:03:08:44] who writes in from Tulsa, Oklahoma, and he says “Like many, I’m a proud Berkshire Hathaway shareholder. However, in comparing the performance of Berkshire with the S&P 500 over the last 5, 10 or 15 years, I’ve been disappointed in Berkshire’s under-performance. Even year to date, Berkshire is trailing the S&P 500 by 8%. To what would you attribute Berkshire’s under-performance? While I can’t imagine ever selling my Berkshire stock at some point, money is money.”

Warren Buffett: (03:09:11)
No, I agree with everything that, I forgot his name, but just said. I mean the truth is that I recommend the S&P500 to people. And I happen to believe that Berkshire is about as solid as any single investment can be, in terms of earning reasonable returns over time. But, I would not want to bet my life on whether we beat the S&P500 over the next 10 years. I obviously think there’s a reasonable chance of doing it, and we’ve had periods, I don’t know how many out of the 50 55 years we’ve been doing it or, I don’t know how many we’ve beaten or not. I mentioned earlier that 1954 was my best year, but I was working with absolutely with peanuts, unfortunately. And, I think if you work with small sums of money, I think there is some chance of a few people that really do bring something to the game.
But I think it’s very hard for anybody to identify them. And I think that when they work with large funds, it gets tougher. And it’s certainly gotten tougher for us, with larger funds. And I would make no promise to anybody that we will do better than the S&P500. But what I will promise them is that I’ve got 99% of my money in Berkshire. And most members of my family, may not be quite that extreme, but they’re close to it. And I do care about what happens to Berkshire over the long period about as much as anybody could care about it. But caring doesn’t guarantee results. It does guarantee attention.
Print the post Back To Top
No. of Recommendations: 2
"We know that S&P500 is very hard to beat over the long term."

This is not the sesame street board. we get this.

"We also know that S&P500 has beaten BRK over the last several years."

We've seen your chart.

"We also know that WEB is old."

no sh$%

"We also know that BRK is not well organized like Apple or Microsoft or Google.
BRK is a collection of whatever business WEB wanted."

....but we are 20% apple so we by default have to be somewhat organized, yes? how about an atta boy for the old man for moving in the right direction!


remember stick to the charts, less words = less embarrassing posts.

jk
Print the post Back To Top
No. of Recommendations: 0
"..but we are 20% apple so we by default have to be somewhat organized, yes? "

more like 25% apple therefore very organized.
Print the post Back To Top
No. of Recommendations: 26
Just to be clear, you're advising that we extrapolate that result?
You see the bad price performance ending now as evidence that the Berkshire the business has done worse than S&P500 considered as a business, and will continue to do worse?
Do you therefore recommend the S&P over Berkshire as the higher performing investment choice starting here for the next 1,3,5,10,15 years?
...
1. We know that S&P500 is very hard to beat over the long term.
2. We also know that S&P500 has beaten BRK over the last several years.
3. We also know that WEB is old.
4. We also know that BRK is not well organized like Apple or Microsoft or Google.
BRK is a collection of whatever business WEB wanted.


There isn't much to argue about any of those things.
But you didn't actually address the question I raised.
Are you saying that we should expect more of the same, that because X happened in the past it will, ipso facto, continue in future?
Is this your stance:
The S&P 500 will continue to be the winner starting here, it will keep getting more expensive, and Berkshire will keep getting cheaper, because extrapolation of recent trends is reliable?
Therefore future returns from the S&P 500 will be higher than those from Berkshire starting here, regardless of today's starting valuation levels?

The future is more important than the past, and returns starting here depend on a lot of things, one of which is price.

Is there any reasonable metric at all that would suggest Berkshire has got more expensive over the last 10-15 years?
Is there any reasonable metric at all that would suggest the S&P 500 has NOT become more expensive over the last 10-15 years?
Is there any reasonable metric, other than market price, that would suggest that the S&P 500 has risen in value as much as Berkshire has in that time period?

If valuation multiples of the S&P 500 stop rising, or if valuation multiples of Berkshire stop falling,
the forward results could skew strongly in favour of Berkshire for quite a while even if we assume the S&P has caught up to Berkshire's value generation rate.

Jim
Print the post Back To Top
No. of Recommendations: 12
My view, and again I've played this game a lot-lot-lot longer than most if not all of you, is that Jim is correct as to BRK vs S & P. What I'll add is simply that the situation could get meaningfully more skewed toward in the S & P's favor before it reverses.

But my thinking is that if your timeline is flexible then BRK is going to significantly outperform the S & P in a timeline of your choosing if, and only if, you are patient.
Print the post Back To Top
No. of Recommendations: 4
But you didn't actually address the question I raised.

I did answer. WEB has also answered.
You are refusing to listen.

Probability of S&P outperforming in next 15 years is far greater than last 15.
S&P adapts intrinsically. The next FB, GOOG, TSLA will get added to S&P and pull it up, like it has always.
Other than Apple, capital allocation has been mediocre to put gently.

The S&P vs Hedge fund bet that WEB had is an example. BRK's own 1,3,5,10,15 returns are evidence.
You are refusing to listen.

Heck, BRK may not even exist in 15 years. There is a good chance that BRK may unravel after WEB is gone and infighting ensues under a new CEO if there is a crisis.

Very few of you may even be here in 15 years. This is not a prescription or a prediction but just a realistic probability.
Print the post Back To Top
No. of Recommendations: 16
It has to be nearing 20 years now, but there was a frequent poster who use to inform us how poor the BRK model was. He would pepper the board espousing the superiority of the GE business model and how it sheds its poor businesses investing in the others. He doesn't come around here anymore. This board has been around a good while, we deserve savvy trolls instead we get the court jester.

jk
Print the post Back To Top
No. of Recommendations: 0
I remember him from the late 90’s, I think it was Woozler or close to that. Div may be his reincarnation!
Print the post Back To Top
No. of Recommendations: 0
Woozler- yes! I'm envious of your memory.

jk
Print the post Back To Top
No. of Recommendations: 3
oh yeah, the good old days..

Meanwhile today's reality - BRK stock today is languishing at the level what it was on Dec 2017.
In the same time period, S&P 500 has appreciated 32%.
This after proclaiming that S&P was overvalued then and BRK was undervalued.

Why don't we all put our head in the sand and pretend like its 1990 and upvote each other ?
Print the post Back To Top
No. of Recommendations: 31
In the same time period, S&P 500 has appreciated 32%.
This after proclaiming that S&P was overvalued then and BRK was undervalued.
Why don't we all put our head in the sand and pretend like its 1990 and upvote each other ?


Or pretend it's 1999 and the S&P rising in price level without end is a sign that you should buy more and more?
The 20th century called, and they want their bad reasoning back : )

Whenever anything rises in price faster than it generates value, the risk rises and the prospective return falls.
There was a very insightful sentence in The Economist this week.
"It is difficult to make a lot of money buying an asset that everybody likes."


Spot check if that might be the case:

S&P real sales per share since the average in the five year period end 2004 - end 2009: up inflation + 1.1%/year.
Add 2.05%/year dividend yield in that stretch to get a proxy for the total rate of real value creation, on the order of 3.2%/year.
Not a perfect metric, but probably in the rough ballpark.

For comparison, S&P 500 price based real total return since the same starting era: inflation + 21.8%/year compounded.
It seems to be a lot more expensive than it used to be.
The starting date range you choose doesn't change the conclusion at all.

Whenever any security rises in price faster than it generates value, the risk rises and the prospective return falls.
What the wise man does in the beginning, the fool does in the end.

Jim
Print the post Back To Top
No. of Recommendations: 3
Excellent response, Jim. Very well said. Love the conclusion in the last sentence. :-)

A quick question: Most models of value generation I've seen use EPS growth rate + dividend yield + inflation.

You have used growth in sales per share in lieu of EPS growth rate. Are these two metrics close substitutes?

Just curious and trying to learn. That's all. I did note your disclaimer that it's "not a perfect metric".

Thanks!
Print the post Back To Top
No. of Recommendations: 0
The 20th century called, and they want their bad reasoning back : )

LOL. Enough to get my rec.

John
Print the post Back To Top
No. of Recommendations: 1
The 20th century called, and they want their bad reasoning back : )

There you go.
Bring up the Y2K CSCO story when all else fails and pat each other on the back
as BRK continues to underperform the S&P500.

Wound up spring theory again ?
Print the post Back To Top
No. of Recommendations: 3
Whenever any security rises in price faster than it generates value, the risk rises and the prospective return falls.

Either that or those who are calculating the value are making a mistake in their valuation and/ or the other participants of the market are valuing more correctly.

Simple case in point, the above line is repeated ad nauseam for tech companies' valuation.
Print the post Back To Top
No. of Recommendations: 1
The Economist this week: "It is difficult to make a lot of money buying an asset that everybody likes."

I am not sure about that anymore. Maybe the best way to make A LOT of money is to buy exactly such, while being fully aware that it's stupid, with that awareness hopefully enabling one to leave the ship before unavoidably it's sinking.

I intend to play this "Who is the most stupid one, climbing on board as the last one?" game next time around with a little money. Unfortunately it's so much against my mentality that when the herd pushes up company xyz to idiotic heights probably I will be too cowardly to follow my own recipe, thinking with every "little" 10% rise "Too late, tomorrow it's over".
Print the post Back To Top
No. of Recommendations: 1
Jim,
I too am curious what EPS growth looks like, not sales growth. As we all know the returns frim a stock come from dividends, EPS growth and P/E expansion. Let's assume current P/E of 25+ for S&P 500 will some day contract to 20, that's a 20% fall. But if earnings have been rising at 10-15% then that's only a 1-2 years' wait to return to the current "overvalued" level.
Print the post Back To Top
No. of Recommendations: 29
But if earnings have been rising at 10-15% then that's only a 1-2 years' wait to return to the current "overvalued" level.

...
Bring up the Y2K CSCO story when all else fails and pat each other on the back
as BRK continues to underperform the S&P500.
Wound up spring theory again ?


I think the thing to realize is that for a broad collection of firms like the S&P 500, earnings can
do very well for short stretches, but can not grow faster than the broad economy over time.

Earnings can (and do) rises 10-15%/year...for brief stretches...but they also fall a lot sometimes.
Almost all of those moves turn out to be transient squiggles.

Overall, real earnings for the S&P 500 and its predecessors have historically risen around inflation + 2%/year.
A little less in most of the twentieth century to the 1990s, a little faster since then, but around that number.
Unsurprisingly, that's similar to GDP growth.
The recent rate of earnings growth should never be extrapolated, for better or for worse.
The current earnings say little about what something's worse...it's the future average that matters.
And we know that the future average (both temporally and across firms) won't rise faster than real GDP does over long periods.
Lastly, we know that real GDP is unlikely to rise materially more than it did in the past.
Since most of the value of any equity is far in the future, the earnings at this point in a given business cycle is almost entirely irrelevant.

Note, this real 2% figure for growth in trend earnings is NOT the same as the return from owning those firms.
You get the earnings, PLUS the increase in earnings.
Your income isn't just your raise, it's your salary plus your raise.
That's why the broad US market has typically returned around inflation+6.5%/year even though earnings have risen at only about inflation+2%/year.
The "inflation + 2%/year" figure is, however, a pretty good general idea of what the value of the S&P index rises each year over long time frames.
Give or take up to about 1.5% depending on which particular decade you're talking about...some are luckier than others.

So, it's not a "wound up spring" theory saying the market price is wrong and is about to crash.
Multiples might stay this high or higher forever. Beats me.
But it does mean that returns from here will necessarily be poor.
Why so?
The crudest approximation of your likely return from owning a broad index is the cyclically adjusted earnings yield the day you buy.
If you buy a grocery store making $5000/year for $100k, you're likely to make roughly 5% on the investment, right?
Unless and until you sell at an unusually lucky or unlucky time in future.
Since the broad market earnings yield is a pretty low number these days, forward returns are necessarily going to be pretty poor even if market multiples remain this high forever.
If you pay twice as much (twice some future average level) for any given fixed stream of future earnings, your earnings will be half as big forever.
If those assets trade in future at their average price level, your realizable wealth will also be half as big forever.

As for how this relates to the cyclical popularity of indexing these days:
The S&P 500 has done very well in recent years.
But the price performance has wildly outstripped the value performance, no matter how you measure it.
Essentally all of the value ultimately comes from future net earnings. (people rarely gain much from the assets of liquidating firms).
And those trend pretty well over time, because they track GDP so closely over time.
The S&P's price level, relative to smoothed real earnings, is about a third above its average just since 1990.
It's true that cyclically adjusted real earnings have risen amazingly quickly lately, about 3.6%/year in the last decade due to factors like tax cuts, but not the ~20%/year that market returns have offered.
In other words, recent results came to a large extent from rising multiples, not rising value.
Prices are now high, and earnings yields are low now.
The two most likely outcomes are:
* Weak long run returns from here because of the low starting earnings yield, or
* That, plus very weak medium run returns from here from a one time fall in market multiples in the direction of something more usual.
Either of those might be prefaced by short term good performance depending on what the market does in the next year or two, something about which I have no opinion.

Berkshire has returns about the same as the S&P over many time frames ending recently.
But none of that was accomplished by getting more expensive.
Unlike the broad market, there is no risk of a stretch of weak returns from cyclically falling multiples.
Even if the value generation of Berkshire lagged that of the S&P by 1%/year in the next decade, which I doubt, it's likely that Berkshire would still be the investment winner starting from here.
That's simply because there is no risk of a price hangover, which counts for a lot.
Assuming that at the end of that stretch the market multiples for each choice are vaguely near their future average levels.

Jim
Print the post Back To Top
No. of Recommendations: 1
Thanks Jim,
there is a lot to unravel in your post so I will start with one crucial point:

The crudest approximation of your likely return from owning a broad index is the cyclically adjusted earnings yield the day you buy.
If you buy a grocery store making $5000/year for $100k, you're likely to make roughly 5% on the investment, right?


No, it is still the dividends + growth in earnings + P/E expansion. Companies get the earnings, not the shareholders. What shareholders get depends on whether the companies pay dividends, or reinvest for growth, and what the market thinks of all that.

Not related to your post but made me think if this:

Let's all forget Siegel's constant now and forever. You cannot use up all of your data to draw a trendline. That's as stupid as saying a 30 YO grows at 1.7" a year but a 40 YO at 1.3" a year, because both went from being 20" long babies to 71.5" adults.
Print the post Back To Top
No. of Recommendations: 0
I have been pondering over this issue too, as it is widely known that the return you can expect from a stock is EPS growth rate + dividend yield + any difference due to expanding or contracting P/E.

However, a book value based prediction of the return you can expect from a stock is dividend yield + (change in book value = old book value + retained earnings) x any difference due to expanding or contracting P/B.

As an example, for Berkshire the dividend yield is zero. So the return you get for the period you own the stock is the difference in book value x any difference due to expanding or contracting P/B.

Why does the P/E based prediction not take into account earnings + increase in earnings, whereas the book based prediction does?

I'm sure I'm missing something, but I'm not able to point my finger to it.

Thanks in advance for any insights.
Print the post Back To Top
No. of Recommendations: 2
Why does the P/E based prediction not take into account earnings + increase in earnings, whereas the book based prediction does?

Because P/B has absolutely no relation to P/E (and sometimes neither has any relation to reality :-))
Book value does relate to retained earnings as you say. But how the market reacts to them in terms of expanding or contracting P/E or P/B is not always clear.
Typically earnings growth drives higher P/E (so an amplifying effect on the price, whether justified or not). It probably drives a higher P/B as well, but maybe not as much by percentage. Even higher earnings growth = higher P/E is not always true. For example, the market knows that some industries are cyclical, so P/E contracts when earnings are growing and expands when earnings growth is negative.
Print the post Back To Top
No. of Recommendations: 0
I think the thing to realize is that for a broad collection of firms like the S&P 500, earnings can
do very well for short stretches, but can not grow faster than the broad economy over time.


There is a fundamental lack of understanding of how businesses works and should be valued.

You have a PE hammer in your hand all you see are nails.

"BRK is undervalued, S&P is expensive." - Rinse and repeat.

Meanwhile reality is BRK underperformance over a short and long term relative to S&P.
The stock is languishing for a reason and it is likely going to get worse.
Print the post Back To Top
No. of Recommendations: 1
Because P/B has absolutely no relation to P/E (and sometimes neither has any relation to reality :-))
Book value does relate to retained earnings as you say. But how the market reacts to them in terms of expanding or contracting P/E or P/B is not always clear.
Typically earnings growth drives higher P/E (so an amplifying effect on the price, whether justified or not). It probably drives a higher P/B as well, but maybe not as much by percentage. Even higher earnings growth = higher P/E is not always true. For example, the market knows that some industries are cyclical, so P/E contracts when earnings are growing and expands when earnings growth is negative.


Interestingly, the two ratios are actually a simplification of the exact same DCF model and can be used interchangeably. Now, some companies are better understood when the multiple is expressed as P/B vs. P/E, but the end result is still the same. If someone presents a valuation using different multiples and the TEV of the company using both approaches isn't equivalent, an underlying assumption in the DCF was changed for one of the multiples (growth rate, margin, tax rate, etc.). While I don't agree with everything he presents in the deck linked below, Damodaran does outline the mathematical equivalency of multiples, no matter which one you use.


http://pages.stern.nyu.edu/~adamodar/pdfiles/country/relvalA...

-RoyalScribe
Print the post Back To Top
No. of Recommendations: 16
Why does the P/E based prediction not take into account earnings + increase in earnings, whereas the book based prediction does?
I'm sure I'm missing something, but I'm not able to point my finger to it.


A simple reason is that what works for a broad market doesn't necessarily work for a single company and vice versa.

Earnings growth for the broad market is essentially known...it will track real GDP over long period very closely, and that is quite a small number, on the order of 2%/year.
Sometimes over 3% for a while, sometimes flat for a while, but in that zone.

So, when trying to estimate equity returns, simply using the trend earnings yield directly works (somewhat) for the broad market for two reasons:
(1) With slow earnings growth, the earnings growth factor doesn't matter as much to any prediction.
(2) The trend line of real earnings is pretty stiff over the long run, so the current smoothed real earnings
level correlates extremely well with the future integral, which is pretty much the definition of true value.
Thus so the crude rule that you'll get the (cyclically adjusted) earnings yield isn't so bad.


You can certainly do better for a quick rule of thumb for future returns, though.
Cylclical mean reversion of market multiples is a powerful force.
When things are cheap, you not only get a high earnings yield, but you can also expect a one time boost from prices rising up to normal levels.
Unfortunately we don't know what the multiples will be in future to which things mean revert.
Still, one can guess. Markets have been generally expensive compared to deep history since the 1990s, so that might count as the "new era".
A very good rule in the last 25 years has been this:
The return you get in the next ~7 years will be five times the CAEY on purchase date, minus 15%/year.
I estimate the CAEY to be about 3.23% right now (calculated the same way that generated the rule of thumb),
meaning that if market multiples in the next 4-10 years average near the multiples 1995 to date,
then buying SPY today you'd expect a real total return around 1.14%/year in the next 7-or-so years.
If multiples in the next decade average higher than in the last 25 years you'll likely do better, and vice versa.

It's good to remember these axioms of equities, the investing laws of thermodynamics:
Returns from stocks can't outpace their value growth plus dividend yield, except in a cyclically transient way, because multiples won't rise forever without bound.
Over time, value growth can't outpace earnings growth. (other than funds, most firms are not usefully valued on assets)
Earnings growth can't outstrip sales growth except in a transient way. Net margins can rise only so far.
Aggregate corporate sales can't outstrip global GDP except in a transient way. This is also roughly true for US companies and US GDP.

Most of those things aren't hard to estimate.
US cap-weight dividend yields are around 1.75%, and are quite high cycically.
Long run real earnings growth for the broad market will presumably remain around 2-3%/year, though maybe slowing a bit.
If market multiples stay this high, about the most you can hope for long term from the broad market is the sum of those two.

This reasoning works for the broad equity market, but not for an individual stock.

Jim
Print the post Back To Top