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Is BRK getting overvalued?

Nope.
At most, that mysterious range a little above the average valuation multiple and below fair value.
Price to peak book is 3.2% above its 10 year average, which has been pretty cheap.
Nothing to write home about.

Price to trend real book is under 1.33. i.e., even peak real book per share is below its trend at the moment.
Maybe the old trend will hold, maybe not.

Jim

Always interested in Jim's vision on how the current Berkshire stands relative to history & to the general market.
I have used his past "Buyback" chart to either lighten-up or add some deep in-the-money LEAPS.
The last version of this chart was last updated 1 yr ago,

http://www.stonewellfunds.com/BuybackChart2022.png

Not to add more workload....:) but any chance you have an updated version of this chart?

Cheers , ciao

I am very happy to hold at these levels, but will consider selling when price is 20% above book plus float. Call it 370.

I'm happy to hold steady where I am, and I moved from stock to some 2025 options before the annual meeting. Using the Shareholders Equity for the end of Q1, and the share count as of April 25, I get a book value of 232, so the yellow 1.55 times book value line would coincide with a stock price of 359.60.

With Berkshire trading at 332.82, 1.55 times book value is only 8% higher. 1.2 times book value is 278.40, and that's 16% below where the stock is trading now.

A share is 2.2% overvalue than B share

I have to admit I liked BRK more when 1.7-1.8 book value was considered average. This 1.3 stuff isn't as much "fun."

I also plan a trim around 370, but the quandary there is it will be at an all time high, and Jim has taught us price tends to keep trending up for a while. Often an extra bit of patience may be further rewarded.

The case for value is made not only relative to Berkshire's past, but also relative to 'what else is on offer'.

It's arguable that with cash/short/medium-term bonds returning a decent amount, the case for Berkshire is reduced a bit.

Particularly for an older investor, if you can now get returns on bonds that are entirely adequate to your needs, then BRK might be arguably too much risk in the short-to-medium term at this price, rather than good value.

I mean, B's have been under $270 in the last 9 months and well under $200 in the last 3-and-a-bit years, under various circumstances that could well recur.

Even if BRK just sails along flat for a few years (as it has done in the past, sometimes), coiling up the value spring, well, cash accounts will be going up during that period.

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Consider too, things change with inflation (doubly so with taxable assets during inflation).

From Buffett's own writing (1979 letter to partners):

"One friendly but sharp-eyed commentator on Berkshire has pointed out that our book
value at the end of 1964 would have bought about one-half ounce of gold and, fifteen
years later, after we have plowed back all earnings along with much blood, sweat and
tears, the book value produced will buy about the same half ounce. A similar comparison
could be drawn with Middle Eastern oil. The rub has been that government has been
exceptionally able in printing money and creating promises, but is unable to print gold or
create oil."

https://www.berkshirehathaway.com/letters/1979.htm...

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Regarding 'value relative to other things'. Berkshire is up 27% from its lows last year.

There are many other quality stocks in the SP500 which are not up 27% from their lows last year.

A few large companies are flat or even down since BRK last hit recent lows.

Some of those companies are sufficiently high quality that they've been bought by Buffett himself, (and at far higher prices!).

BAC and VZ, to name but two.

Particularly for an older investor, if you can now get returns on bonds that are entirely adequate to your needs, then BRK might be arguably too much risk in the short-to-medium term at this price, rather than good value.

The way I look at it, bonds were a terrible deal a couple of years ago---and are now worse.
The reason is that inflation has risen more than the yields, so the real return is lower now, not higher.

This assessment depends on how long you think inflation will stay where it is and the likely average inflation rate during the term of the bond.
But that's the calculation you have to do.

Meanwhile, I still expect a return of inflation + 7% from Berkshire over time. A bit more if I'm lucky, almost certainly not worse than inflation + 6%.
I don't know of any bonds with anticipated real returns anywhere near that level.

Sample arithmetic:
AA corporate bond yields are running around 4.8%. Until better data come in, I'm expecting short/medium term inflation in the 4.0-4.5% range.
With a 25% tax rate, that 4.8% yield would then be a real yield between -0.4%/year and -0.9%/year.
Not very attractive.

Jim

How about preferred stocks? You can fairly easily get a safe 7%.

10 year TIPS have a real yield of 1.4%. Their tax treatment makes them unsuitable for taxable accounts, but maybe an option for deferred/ nontaxable accounts.

How about preferred stocks? You can fairly easily get a safe 7%.

Yes, you probably can, but you lose to inflation.
Assuming no change in market price of the preferred, both your real capital value and your real coupon value will erode at the rate of inflation.

Conversely, when you get a certain earnings yield from equities, it tends to be inflation adjusted on average over time.
If nominal earnings are rising at 5%/year in a 2% inflation environment, you can generally expect nominal earnings to rise at 7%/year in a 4%/year inflation environment.
To a first approximation, equity earnings yields are on average inflation adjusted: changes in inflation do not hurt your wealth.
That's assuming you are using a cyclical adjustment--obviously both earnings and prices do go up and down in the short term.

The exceptions are
* when inflation is so high that the economy breaks, but that's pretty rare.
* Some specific firms are unusually sensitive to inflation, and others are unusually resilient or even "antifragile". But on average it's a wash.

If there is any inflation over ~2% in future, a 5% earnings yield from a slate of equities is much more valuable than a 7% coupon from a fixed income instrument, whether bond or preferred.
Value Line currently covers around 240 stocks with P/E under 20, projected EPS growth rate over 10%/year, and projected annual total returns over 15%/year.
I would not put much faith in any of those numbers, but it seems not too hard to put together a broad portfolio with an earnings yield over 5%.
Your slate might not beat the broad market, but you'd be relatively immune from the risk of permanent capital loss from having a wildly overvalued portfolio--and the risk of inflation.

Jim

As a 69 year old who lost parent by mid teens and inherited a little...

What Jim just wrote is correct. At my age? Here's the theme:

In 1973 the newspaper was sold, dad owned 20% of it and I was one of four, that's 5%. So time passes and the other owners/sellers of the newspaper went to fixed income to make it through life as is the proper method according to...well, you know it is the common path of older age.

None of their chidren and grandchildren have anything and when I write that I mean they are house-debt-free but that's basically it. Those of us who stayed in business/equities? I have a few 100 baggers and I am not, read NOT, a great investor.

I have dividends in a few stocks that exceed what I inherited (from the total of those stocks).

And I write this because we do come here for long term investing, at least a few of us do. Not everyone "trims" Google when it goes up 10-15% from where it was an incredible bargain and one of the best businesses in the world.

Reminds me of WEB's clarity in discussing investing as 'equity bond with coupons.' Stocks have a bunch of coupons that you have to figure out but if it averages 10-12% ROE vs. fixed 3-5% with LT government bonds, the govt. bonds are just much less appealing. The longer you own stocks the less risky they become and the longer the maturity of the bond the more risky it becomes!

dealraker wrote:

In 1973 the newspaper was sold, dad owned 20% of it and I was one of four, that's 5%. So time passes and the other owners/sellers of the newspaper went to fixed income to make it through life as is the proper method according to...well, you know it is the common path of older age.

None of their children and grandchildren have anything and when I write that I mean they are house-debt-free but that's basically it. Those of us who stayed in business/equities? I have a few 100 baggers and I am not, read NOT, a great investor.

I have dividends in a few stocks that exceed what I inherited (from the total of those stocks).


dealraker, I just wanted to chime in how much I appreciate your posts about your history of investing. I find it inspiring and a wonderful counterweight to all the chatter about lightening up on BRK when price/book goes over 1.4, switching to options at 1.2, etc ... I mean, more power to those who can pull it off and add value, but I don't trust myself to consistently make good decisions as the overall environment changes with its inevitable psychological ups and downs. I've had some spells of outperformance with shifting my allocations, but I'm sure overall I've hurt my performance over just sticking to a stock-dominant diversified portfolio.

Just for curiosity's sake, what are your 100 baggers? My mom invested a lot like you, it seems, buying stocks she thought a good deal and keeping them forever. She's had some huge winners over the years with Exxon, Home Depot, TJ Maxx and BRK, along with a lot that have done alright, some few tanked, but overall the results are amazing for a school teacher, and yeah, dividends plus SS give her all the income she needs and more.

Ben, of the ones I inherited in 1975:
Coke
Pepsi
Berkshire
The above in a trust until I turned 30, I was a teenager in 1975.

Norfolk Southern
Norfolk inherited from granny, who outlived here husband (who bought the stock) and my mother and father. I got the stock in 1976.

I have posted through the years on the Berkshire forums about this, probably as far back as the mid 1990's. Each time I do I get both doubters and those exclaiming "Well, while I didn't inherit huge amounts...I made my way on my own..." and such. A good thing before stating such about me (should anyone decide to go this route) would be to check the stock price of Berkshire in 1975. My BRK inheritance was tiny...even back then.

But in any event a man named Marshall Johnson (obituary posted below) put all his clients into Berkshire. A story I have told here many times: I went to work for Marshall after college as an insurance and bank analyst and one day he says excitedly, "Update the legal sheet (we put out research on an electric typwriter on legal paper) on First Citizens North Carolina...that 'crackerjack' Buffett has just bought a slug of the stock from the trust department (which Marshall handled) at High Point NC Bank and Trust at 50% of tangible book value." Yep, same bank in the news today.

I have a 100 bagger too (now sold) in Enphase, but that was bought just a few years ago. I also have a 100 bagger in Old Dominion Freight Lines (the CEO was at one time in my investment club) and have a couple more stocks near 100 baggers such as Lowe's and AJ Gallagher.

I also have some gone to zero stocks including Bank of Granite, whose CEO Buffett had stand up in the late 1990's at the annual meeting. Buffett praise him, which he should. John Forlines was his name. John retired and his long (30 year) 2nd in command Charles Snipes became pres. Charles bankrupted Bank of Granite in 5 years or so.

Rambling, have a good day.

https://www.legacy.com/us/obituaries/greensboro/na...

I did not think of that, but I think you are right. I think inflation must compound, so even at 2%, pretty soon, you are behind inflation with preferreds.

Jim, you must have analyzed historical data to conclude that, in general, nominal earnings tend to keep pace with rising inflation, with a few exceptions that you have mentioned. (as you always seem to make opinion based on historical data rather than on hunch)

Here is my dilemma.

Considering the essay written by Buffett, (http://csinvesting.org/wp-content/uploads/2017/04/...), does it not imply that earnings fail to keep up with inflation?

From a layman's perspective, as I think of simple cases, it seems challenging for companies to maintain earnings growth. Let's take the example of a bottle of shampoo that used to sell for $10 say at Walmart. with Walmart's net profit being around 30 cents (3%). If the price of the shampoo increases to $10.50, it is likely that the profit margin may stay at 3% or even decrease. Walmart is unlikely to aim for more than 30 cents in profit from the increased prices. Alternatively, are you suggesting that increased revenue leads to profit growth, even if the margin remains the same? To counter than, I would think most companies would not possess such pricing power.

In any case, would love to hear your thoughts as there are always fun and has depth.

Considering the essay written by Buffett, (http://csinvesting.org/wp-content/uploads/2017/04/...), does it not imply that earnings fail to keep up with inflation?
From a layman's perspective, as I think of simple cases, it seems challenging for companies to maintain earnings growth. Let's take the example of a bottle of shampoo that used to sell for $10 say at Walmart. with Walmart's net profit being around 30 cents (3%). If the price of the shampoo increases to $10.50, it is likely that the profit margin may stay at 3% or even decrease. ...

Well, regarding Mr Buffett's famous essay, bear in mind that it is not his finest work.
Truthfully, there is some very muzzy thinking in there, but let's ascribe it to infelicitous phraseology.
The biggest obvious one is the conflation of price and value, not a distinction you would normally expect Mr Buffett to blur.
But a key part of his argument is that the typical equity return on equity is very nearly a constant 12% (no reason at all to think that to be true),
and does not allow for the notion that even if true, it would be the return on the true current real value of those assets, not the mis-stated book value of the equity that has shrunk in real terms because of inflation.
Inflation will drive down the apparent book value of physical earning assets in real terms, but that is no reason to suppose that those assets will have any lower real return.
In effect, inflation will (on average) cause reported ROE and ROA to rise. (same real return on same real assets, but understated asset value).
If a machine makes 20 widgets an hour, then the price of everything (including new widget machines) doubles due to inflation, it can still produce 20 widgets, not 10.
The real return on that asset is unchanged. The apparent return (naively calculated ROE in nominal dollars) doubles.

A much better line of reasoning goes like this: assume we have broadly-based inflation of (say) 10%.
The purchasing value of a currency unit falls. Everything goes up in nominal price, but the real price of everything stays the same.
All salaries go up a nominal 10%. All product and service selling prices go up a nominal 10%. All energy and material input prices go up a nominal 10%.
The inevitable consequence is that profits will go up a nominal 10%, and margin percentages will remain unchanged.
So, it is clear than in the case of evenly distributed inflation, real profits will be unaffected.

So the things to concern yourself about are only the company specific exceptions, and the smaller effects.
The main company specific exception is debt, which is fixed in nominal terms.
Companies with net debt will benefit from the erosion of the real value of their debts, and companies with (say) bond ownership will take a hit.
There are also effects because changes in inflation hit different companies at different speeds, which mean inputs and revenues may mismatch for a while.
This is largely a function of pricing power...everybody will raise their prices, but some companies will feel free to do it sooner than others.

Some companies will have distortions in their reported earnings, quite separate from possible distortions in their real earnings.
Railroads are the usual example: they have massive long-lived assets requiring maintenance capex, so their accounting depreciation will substantially understate their real economic depreciation:
the replacement cost of a worn-out piece of track might be a big multiple of its old depreciating book value in current nominal dollars.
In other words, reported profits will be higher than true profits (owner earnings). A lot of what looks like expansion capex will really be maintenance capex.
Another accounting quirk is the book value of real estate, which will cause firms with land to have book assets lower than their true real value.

But, the base line situation is inflation is pretty much a wash for real corporate profits, with the caveats mentioned above.
(on average across the economy but not every specific firm, after cyclical adjustment, and not inflation so high that the economy fails)
A rise in inflation often coincides with or precedes an earnings recession, but that will pass.
Once the dust settles, companies in general keep on making real profits on about the same old trend.
This makes sense in theory--if everything else goes up in price the profits will too--and matches the historical data.

Jim

What Jim just wrote is correct.

But if you reinvested the dividends from the preferreds, I think you would beat inflation.

But if you reinvested the dividends from the preferreds, I think you would beat inflation.

Maybe.
Receive dividend, pay tax on it, purchase more of those preferreds probably well above par...
Assuming no change in market price of the paper, you lose the inflation rate on all your capital every year.
So you might beat inflation, but not by a whole lot.

A random example, WFC/PL is often mentioned here.
Currently trading at $1137, pays $75/year, indicated nominal yield 6.60%.
Let's say there is a steady rate of 5% inflation, the market price of the security remains unchanged, and you're paying 25% tax on the coupons.
Figures in today's dollars:
After a year your $1137 of capital is now worth $1080, and you have received $72.63 in coupons on which you paid $18.16 in tax for a net of $54.47.
Your total return after a year is -0.21%.
That's a negative real return.

If you use each coupon (assuming you pay tax as you go) to buy more shares, you can buy 0.0124 more shares each quarter.
After four quarters you own 1.0504 shares worth (today's dollars) about $1080, for a total value of $1134.43 in today's money. You're down $2.57 in total return.

Obviously the result depends on the yield of the security when purchased, its price trajectory, your tax rate, and the future inflation numbers. (and its default likelihood)
But one can generalize a bit:
Buying a high coupon security (which is usually picking a poorish security for solely that reason) just to reinvest the coupons is not generally very sensible.
Better to buy a better quality security without a coupon, or with a much lower coupon.

By extension, in general DRIPs are a pretty bad idea.

Jim

"Not if the coupon-paying security is held in a non-taxable account such as an IRA or 401K, which is the logical place to hold coupon-paying securities. "

Unless you plan to someday retrieve any of the money. Then you pay tax at ordinary income rates for all of it - contributions, capital gains, interest, qualified dividends etc.

Those non-taxable accounts are just deferred tax accounts (Roth IRA is the notable exception, but you have to pay ordinary income tax to convert to the Roth - or contribute directly from taxed money)

Not if the coupon-paying security is held in a non-taxable account such as an IRA or 401K, which is the logical place to hold coupon-paying securities.

Depends where you live, among other things.


But I disagree with you on one point: it wouldn't make sense to own a high-coupon security in a tax sheltered account*.

Securities with biggish coupons are generally lower quality long term investments, which are purchased only because of the large coupon.
You give up a good long run total return because you're getting regular cash coupons which (for whatever reason) you like or need, and figure it's a reasonable trade-off.
Consequently you'll only want a large coupon if you're going to spend it. Most tax sheltered accounts are for longer term capital appreciation, so it's not a good fit.

As mentioned, it's generally not sensible to choose a high-coupon security for long term capital appreciation.
Reinvesting coupons is a bad idea all around, and low- and no-coupon securities are almost invariably the better investments in terms of total return over time.


In case anybody wonders about my rule of thumb that high coupon securities are usually poor picks over time, a random spot check:
Of the companies currently covered by Value Line with at least ten years of total return history:
Average 10 year annual rate of total return of companies currently with no dividend: 9.30%/year
Average 10 year annual rate of total return of companies currently with high dividend: 6.18%/year (top half of dividend payers)
(In this particular stretch the low-dividend firms were the best choice, but that isn't necessarily always true)

At the extreme, common stocks with indicated dividend yields over around 8-9% have average negative total returns over time.
Those yields never last: either the stock price rebounds or the dividend gets cut. Usually the latter.

Jim


* An exception might be a post-retirement account where you're required to make regular cash withdrawals.
Or not, if you still want decent capital appreciation from it because it's big enough and/or your life expectancy is long enough that the rate of return makes a meaningful difference.

I buy mine in tax deferred accounts, so taxes are not an issue, and I usually get closer to 7%, so I beat inflation slightly. I am very careful and only buy ones that won't default. For me, it is just a bond substitute, not a stock substitute. The real appreciation occurs in stocks.

I understand your preference for securities that do not pay dividends due to the greater total return. But total return is only part of the picture. There is also the risk in terms of draw downs

Sorry, I can't see that at all.
If you're accumulating wealth in a retirement portfolio, the only thing that matters is the rate of return during the time you were saving for retirement. That's it.*

Draw downs aren't a risk, they're just a thing that happens.
Those who find them emotionally unpleasant and therefore pick poor performers that they THINK will be a smoother ride can almost certainly find a much cheaper way to increase their happiness.

Neither the earnings nor the share price of Berkshire is particularly smooth.
We've all been taught to look past the short term squiggles on this stock, so we have to take that lesson to other securities and portfolios.


What if you needed some income in 2022 to pay for your child's tuition at college or medical expenses?

That's not a retirement portfolio. Separate discussion.
If you have a block of assets that may have an unexpectedly shortened investment time horizon, it has to be allocated appropriately.
Cash, TIPS ladder, whatever.

For withdrawals spread over time, a typical use of a retirement portfolio when the time comes, price volatility doesn't matter.
Some small sales will be done at good valuations, some at poor valuations, but on average you'll get the average...which is all you could reasonably expect anyway.

Jim



* we'll take it as read that the securities you choose aren't doing illegal or odious stuff, dividends or not.

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