Be kinde to folk. This changeth the whole habitat.
- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 8
There have been a number of discussions wondering whether Berkshire was dumb to sell stocks which had risen , only to see them move higher.
It is obvious that they are now caching cash (waited a long to to join those two :-), presumably to deploy it at a beneficial time of their choosing.
There is an investment premise not to lose money.
Let's step back and assign whatever probabilities we think are appropriate to both the timing and the magnitude of a future downdraft in equity prices.
At some point, there is a breakeven between the likely amount which could be won by keeping the chips of the roulette table, verses redeploying the funds if the market drops. While predictions are difficult to make, especially when it comes to the future (thank you Yogi), I'm guessing the numbers hit an inflection point.
Jeff
No. of Recommendations: 35
At some point, there is a breakeven between the likely amount which could be won by keeping the chips of the roulette table, verses redeploying the funds if the market drops. While predictions are difficult to make, especially when it comes to the future (thank you Yogi), I'm guessing the numbers hit an inflection point.
Yup. Investing is hard. Buy or wait?
But one can try a back of the envelope for two scenarios: buy typical firms now, or wait in cash till a better opportunity comes along. How soon and how good would the opportunity have to be in order for the ten year returns to be better by waiting for now?
Pencil in some assumptions:
Let's assume that in the average year the T-bills make nothing after tax and inflation. (at the moment it's moderately positive, but that's a bit rare historically). So there is no expected return during the waiting time.
Let's assume that brilliant stock picking isn't really going to rescue us here. The returns on offer will be roughly those on typical large US firms at contemporary average valuation levels.
Let's assume that the average US stock in the average year at the average valuation gets you inflation + 6.5%/year, Siegel's constant. So, if you were able to buy a middle-of-the-pack firm today at an "average" valuation level, you'd make inflation + 88% in the next decade in today's money.
...but you can't. The S&P 500 is 50% more expensive right now based on smoothed real earnings than its average in the last 20 years. This is presumably why not a lot of capital is getting deployed into US equities right now. Let's simply assume that the valuation level drops to that "recent typical" some time in the next decade, but value generation continues at the usual inflation+6.5% rate. Thus a holder of the S&P might expect a real total return of around inflation + 2.3%/year over the next decade: the 88% usual total gain minus a 1/3 one time drop, annualized over a decade.
Let's say that Berkshire could find a way to deploy money at a long term rate of return of inflation + 8%/year during a market disruption when better opportunities appear. Not a very aggressive number because the amount of cash to deploy is so large.
With those assumptions (which you can change at will), Berkshire would be better off sitting on zero-real-return cash for up to 7 years before buying stuff offering 8%, than to buy the average large US firm now at today's general valuation levels. If they had to wait for 8 years before getting the buying opportunity, the ten year return would be 0.7%/year worse than buying average stuff at current valuation levels today.
Jim
No. of Recommendations: 6
With those assumptions (which you can change at will), Berkshire would be better off sitting on zero-real-return cash for up to 7 years before buying stuff offering 8%, than to buy the average large US firm now at today's general valuation levels. If they had to wait for 8 years before getting the buying opportunity, the ten year return would be 0.7%/year worse than buying average stuff at current valuation levels today.Berkshire's cash levels net of float have been above normal-ish for only a couple of years, so settle in...
(Cash + Fixed - Float)/Assets
2000 7%
2010 1%
2011 -1%
2012 0%
2013 -1%
2014 0%
2015 0%
2016 0%
2017 1%
2018 1%
2019 2%
2020 2%
2021 1%
2022 -1%
2023 2%
2024 14%
2025-3 16%
No. of Recommendations: 16
Berkshire's cash levels net of float have been above normal-ish for only a couple of years, so settle in...
True even measured in other ways.
I suppose the conclusion, if you follow the back of the envelope as well, is that management can sit on their thumbs for another five years and still have a decent chance of coming out ahead for us : )
Seriously, we need a bear market. Maybe even a secular bear. Given what has been ignored by the market thus far, it's hard to imagine what it would take. Nothing sudden would do it, as people have been trained to buy on dips with too much positive feedback for a very long time. It would take a gradual generational change in mood. Those aren't unheard of.
Jim
No. of Recommendations: 25
Seriously, we need a bear market. Maybe even a secular bear. Given what has been ignored by the market thus far, it's hard to imagine what it would take.
I’ve been wondering about this for some time. There’s just too much money floating around (see: Christie’s auctions, super yachts, etc.), and investors big and small have been trained to jump in at the slightest sign of weakness, always propping up the market, even unreasonably.
Since I don’t expect a sudden wave of “realistic valuations”, the only things I can envision are those sorts of cataclysmic events that cause momentary flights of panic: terrorist bombings in New York, maybe a nuke going off in London, or a major bank failure (and the government refusing to step in as they did with SVB) that threatens to take down the entire system.
Of course it won’t be any of those, since I predicted them, but there’s a gremlin somewhere that’s up the job, I bet.
Seriously, we need a bear. Maybe even a secular bear
My patience is starting to wear thin, I find myself fantasizing about buying things with reserved cash that in another day I would have laughed off as absurd. My one hope is that Bitcoin continues to wank off and margins get called, and, it continues to plunge, and well, you know.
No. of Recommendations: 1
“ My patience is starting to wear thin, I find myself fantasizing about buying things with reserved cash that in another day I would have laughed off as absurd. My one hope is that Bitcoin continues to wank off and margins get called, and, it continues to plunge, and well, you know.“. Space. This helps to explain why brkb is weak on market rallies, imo. If the markets rally 5-10 percent from here what goes brk do with the 300 billion plus? Continue to wait for a 25 percent sell off?
No. of Recommendations: 2
Jim's tax position is relatively rare, so the challenge is wrestling with selling at a profit (and helping finance the government with your enforced "charity") or standing pat with the hope that your profits will be sustained. The problem comes with that 25% (or whatever) drawdown from time to time and whether your psyche allows you to hold until the next hill on the roller coaster. It may be far more desirable to bite the tax bullet and buy back at the trough - with the understanding that 1) it may take an extended period of time until that event take place and (again that psyche thing) it may seem insane to take your hard-earned profits and throw them into the apparent maw of the vortex of a market crash.
Jeff
