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Let's say I believe Berkshire Hathaway is the solidest, best run, shrewdest company ever.
Doesn't most of its revenue come from heavily regulated businesses with capped profit margins? Why would it outperform a higher risk / higher reward collection of companies in the long run, which is what the US or world cap-weighted indices represent? You don't expect a utility ETF to outperform a healthcare ETF.
It might outperform one time based on relative valuation of the two. But BRK is already overvalued, if somewhat less so than SPY/VTI/VT.
tl;dr: number go up slower.

So will swap your BRK for a collection of higher risk / higher reward collection of companies?

You don't expect a utility ETF to outperform a healthcare ETF.

                          1Y        5Y
VPU : Utility ETF         +12.94%   +40.75%
VHT : Healthcare ETF      - 0.51%   +29.93%

tecmo
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But BRK is already overvalued, if somewhat less so than SPY/VTI/VT.
tl;dr: number go up slower.


When you buy a stock you are not required to hold it forever - and you can choose what price you are willing to buy and sell at. So this is a straw man argument. One of the nicer things about BRK is that it trades in a predictable range; which allows for opportunities to juice the long term results.

tecmo
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Why would it outperform a higher risk / higher reward collection of companies in the long run

Arguably there is a fallacy built into the question, depending on your definitions of risk.

The worst definition is price volatility. On that front, ENH is backwards and always has been within the equity world...low volatility stocks outperform high volatility stocks over time.

High risk investing (in the meaningful sense...permanent loss of capital) can work well, but only when managed in the "dhandho" way...heads I win, tails I don't lose much. That's one of the reasons I like option contracts. If you're going to be long plain stock, be long something that isn't full of hot air.

Jim

>>One of the nicer things about BRK is that it trades in a predictable range; which allows for opportunities to juice the long term results.<<

One of the nicer things about BRK is it does NOT trade in a predictable range, has less correlation with the index than most of the other 499 companies, and its stock performs on the upside in a comparatively unpredictable, lumpy manner often with big spikes in short terms and long periods of stagnation…not an accident: management offers no guidance and no price support and no BS. The risk of being OUT of this stock for even very brief periods can risk missing most of the progress —even long term. Management likes the owner this behavior attracts. It’s not guidance/analyst driven and it frustrates the hell out of people who want to turn this into a casino table game.

Berkshire’s management behavior discourages alleged “investors” who seek predictable, forecastable wiggly line movements —its behavior encourages people who seek the far more predictable and far more odds-favored long term investing.

It might outperform one time based on relative valuation of the two. But BRK is already overvalued, if somewhat less so than SPY/VTI/VT.
tl;dr: number go up slower.

Sure, it's not like 2000, when SPY was in a bubble and Berkshire was at book value, and a lot smaller.

Berkshire does have all that "cash". I guess that's what we are all waiting/hoping for - a great opportunity comes along - $10B lemonade stands won't do - that they can grasp that really moves the needle.

Been waiting a long time.

“$10B lemonade stands”

That is a fantastic descriptor! Who would ever thought of a 10B operation as a lemonade stand…? But standing next to BRK it is appropriate.

Good one!

One of the nicer things about BRK is it does NOT trade in a predictable range, has less correlation with the index than most of the other 499 companies, and its stock performs on the upside in a comparatively unpredictable, lumpy manner often with big spikes in short terms and long periods of stagnation…not an accident:

What I meant by the comment is that its often trades in a range of 1.3x book to 1.6x book - and it does so often so its easy(ish) to know when you might add or subtract from your position.

tecmo
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Doesn't most of its revenue come from heavily regulated businesses with capped profit margins?

Let’s say, as a thought experiment, that your margin is capped at 10%.

Let’s also say you are smart and have found a way to increase your sales dramatically, either by finding new customers, getting more business from current customers, or stealing customers from competitors. For the sake of math, pretend you can double sales over 5 years - with the same margins.

Should your company be worth in the stock market than it was before, the same, or less?

Yes, insurance margins are capped. Many railroad rates are set by regulation, that doesn’t stop UP and NS from combining to try to win increased volumes from truckers or other competitors (BNSF!), and we look at Geico and Progressive market share to see how they’re doing, no?

What I meant by the comment is that its often trades in a range of 1.3x book to 1.6x book - and it does so often so its easy(ish) to know when you might add or subtract from your position.

Yes, that is obvious and the extremes easy to use. So much that I made a lot of money using that predictable range especially this year with puts options. Jim too. Surely quite some others here also, even if they are wise enough to not talk about it.

“Yes, Insurance margins are capped.”

That’s why I’ve favored investing in conservative Excess & Surplus (E&S) Specialty Insurance. E&S carriers do not have to file their rates and forms (policy language) with state regulators for approval. (e.g. KNSL).

Grateful Always,
PaulnKC

That is a fantastic descriptor! Who would ever thought of a 10B operation as a lemonade stand…? But standing next to BRK it is appropriate.

While it's true that one $10B lemonade stand won't appreciably move the needle, if you can find 10 $10B lemonade stands, and 1 does great, 1 does terribly, and the remaining 8 do okay, that's also good enough. And will move the needle appreciably.

Let’s say, as a thought experiment, that your margin is capped at 10%.

Let’s also say you are smart and have found a way to increase your sales dramatically, either by finding new customers, getting more business from current customers, or stealing customers from competitors.

Is that realistic for a giant insurance-utility-railroad company?

One thing I neglected to mention, of course, is leverage due to float, which should goose up the stock portfolio performance. But that can only happen if the money is in stocks and not accumulated as cash. I realize that valuations are once again in nosebleed territory, and Berkshire would probably get a much better opportunity to invest in that cash. Nonetheless, that would be a one time boost. The motley collection of stocks that Berkshire holds, assuming they don't swap out most of them, is again unlikely (IMO) to outperform the entire universe of US or world stocks.

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