Subject: Re: Value Trend
Do you have any the data as to the longer term (and the longer the better) outcome of you personally doing this assuming it is a tax free operation? It would be quite fun to have this seen.
Well, having an idea of the most likely expectation for the returns in the next year is a far cry from having a stock trading system.
An average can hide a whole lot of sins. A high valuation can be followed by a year of high returns sometimes. (see below)
I did once suggest swapping some of your stock to calls when P/B gets below 1.35.
For example, you might put half your BRK allocation into long dated calls with 2:1 leverage, giving you overall 1.5:1 leverage on your Berkshire position.
Then unwind that leverage and putting the proceeds back into plain stock again when P/B next got above 1.55.
Which might be several years later, of course.
That was a speculation, and when tested on some data was confirmed to have been not a bad "system" in the past.
The additional profits were large enough that the tax is the tail, not the dog: better to pay tax than not make more profit.
The bigger disadvantage is that once you start trading, you have to have the discipline to not make dumb trades.
To a first approximation, the average person's long run returns go down steadily with how many trades they do.
But really, the best advice would be:
(1)Whenever Berkshire stock is really really cheap, buy as much as you can. Then just never sell it : )
(2)If you have to sell some (to raise money to buy a jet, say...), try to do it when the multiples are high or at least above average.
On the subject of how good the predictor is---
Here is a slightly different table.
For start dates January 2008 to last year, what is the annualized forward return in the next 1.5 years?
For this table, I took the average (real) market price 1-2 years after the purchase date as the assumed sell price.
This gets rid of squiggles due to the randomness of the price on the precise 1.5 year anniversary.
In effect, it's the average annualized rate of return you'd get if you bought a bunch of shares on day 1 and sold 1/365th of them each day during the whole period 1-2 years later.
The addition to this table is that it show the worst, average, and best return from having purchased at each valuation level.
Start dates are divided into 25 buckets based on the starting valuation level, with equal numbers of purchase dates in each bucket.
All returns are inflation adjusted and expressed as annualized rates.
Min Avg Max
18.0% 27.7% 42.9%
10.0% 24.4% 34.1%
8.1% 19.5% 30.6%
0.8% 15.7% 26.5%
-1.8% 16.3% 23.4%
-3.0% 12.9% 22.1%
-4.4% 9.9% 21.5%
-5.4% 8.1% 20.0%
-6.2% 7.6% 16.8%
-6.8% 4.9% 15.4%
-6.3% 5.4% 14.2%
-6.7% 6.1% 13.8%
-7.1% 4.7% 13.1%
-7.4% 3.6% 12.6%
-7.7% 2.0% 11.8%
-8.9% 0.6% 9.6%
-11.6% -0.6% 7.5%
-12.4% -2.0% 3.8%
-13.4% -3.3% 2.5%
-14.8% -4.3% 1.5%
-15.7% -6.6% 0.4%
-17.6% -13.1% -1.3%
-21.2% -16.0% -2.0%
-23.3% -13.6% -3.5%
-26.1% -24.5% -22.4%
The lesson is that if you buy at a low valuation, the return you get is pretty reliably good, provided you sell on an "average" day rather than a specifically bad one.
And the reverse. (even more strongly so: there were no good returns starting from the highest valuation levels)
In the middle range, things are pretty variable.
Jim