A long time ago I proposed that the ultimate safe withdrawal rate is to liquidate no more than the amount the value of the shares has increased. Prices might go up and down, but the real value of your holding would never change. You could withdraw money forever, or at least as long as the real value kept rising. Since valuation metrics are themselves pretty volatile, I proposed using a smoothing method.

Just for clarity the amount liquidated to preserve value is of course be the amount the quote (ie. the nominal value) has gone up, minus inflation.

If Berkshire’s quote is expected to go up 8% the next several years, and you view inflation safely to fall below 4.5% then you can sell 8-4.5 = 3.5% of your shares this year without “expecting” to lose value. However this is rather speculative as you don’t know what will happen in the future, or even the next year.

A better mental model to use might be to base this “zero value loss” withdrawal goal, as calculating retrospectively, akin to the philosophy of delayed gratification, and using that concept quantitatively to guarantee that no Berkshire value is loss, and on a continual basis.

You can do this by measuring:
1. The trailing ten year average inflation.
2. The trailing ten year average change in Berkshire’s book value per share.
3. Take the difference in 2 and 1 as a pretty good proxy for the real value increase in Berkshire

Then during the current year, liquidate exactly the amount of 3.

(Sure the book value multiple representing intrinsic value changes over a decade, but it changes overwhelmingly less than the change in per share book value itself, so taking simply book value change is a very good proxy for intrinsic value rate (%) of change as observation period grows.)

Roughly speaking, this approach can be summarized as “taking out absolutely all your past ten year true profit, but no more than the profit” and doing so on a rolling basis for smoother income.

This is retrospective, and more concrete than trying to make predictions. It involves no forecasts, tacitly assumes you have been a long term holder, has adequate income stability from one year to the next, and is simple.

PS: I devised this scheme over the last 7 minutes, and on my second cappucino, and on a sunny day in Monaco overlooking yachts, whilst also eying some gelato —- so my current mood might be susceptible to delusion, thus make extra sure you do a sanity check before jumping into it.

- Manlobbi