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Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A) ❤
No. of Recommendations: 15
Just a quick update as I haven't posted much here. I made some portfolio moves after a long period of inactivity.
Taking advantage of prices and valuation in Berkshire which frankly I didn't thought I would see anytime this decade, I have reduced the size of my Berkshire holdings significantly since the beginning of the year. I have long expressed some concerns about the level of risk in having such a large portion of one's net worth in a single company and while that made sense when valuations were attractive, I could no longer justify sitting on a clearly richly valued position in such a large weightage in my portfolio. I am fortunate that all my substantial capital gains are inside a tax shelter and entirely free of tax.
I still think I have an impridently large third of my portfolio in Berkshire and if the price continues to zoom higher, I will continue to move capital out of it. This time last year, I had well over half my portfolio in Berkshire.
I have moved capital to some "growthy" names and in particular added to my holding in the Canadian company Constellation Software after it encountered a rare period of mild price weakness.
My quick and dirty conservative math for Berkshire prospective returns went like this :
- Current book value per B share - $301
Assume value creation at the rough conservative ROE for Berkshire of 9% p.a
- BV after 5 years - 466
- Assume market assigns a 1.2 multiplier then giving a share price of $555 per B, less than 5% above today's price.
So there is a scenario where there are no returns for the next 5 years given a historically unusually rich starting valuation.
On the other hand, it is likely that Berkshire will cope well with whatever the macro conditions throw at it so a complete evaporation of capital even from today is unlikely.
TLDR- The market has been offering a generous price for Berkshire and I took advantage of it to diversify the portfolio after a long time and reduce the signle stock risk in my portfolio. If the price continues to rise, I will do more of this.
No. of Recommendations: 2
Apologies for the typos.. hopefully it is still intelligible.
No. of Recommendations: 4
“I am fortunate that all my substantial capital gains are inside a tax shelter and entirely free of tax.”
TYVM ppant for sharing your always thoughtful and well reasoned analysis & giving us an update. Your points are very well made! Very glad to hear your gains gave no tax consequences. Would you make the same decision if the sell Was in a taxable account?
Our recent trims to cover several months living expenses have been only in a taxable account, as we are not eager to touch withdraw anything from my BRK dominated Roth for a decade so as to not interrupt the post-tax compounding.
We are still 70% BRK of cash/ investment assets overall, but we are not eager to pay LTCG and jump up in income tax brackets. I estimate the value of 1x BRK On Jan. 1, 2023 would now be worth 1.7x, so maybe we should just pay the dang taxes and lock in some “earlier than expected” sizable gains served up by Mr. Market with this very lofty P/B territory of 1.75. Owning BRK does not keep me up at night, at all. At least it is a good “problem” for many of us here!
We’ve been good at “holding the damn stock” but Mr. Market is being boisterous and generous with his offer.
Thanks in advance for any thoughts & commentary.
No. of Recommendations: 4
For taxable account, you could sell Jan. 2027 calls @520 for $82. You would be protected if the price stays above $440 by Jan. 2027, or lock in gains at $600 by Jan. 2027.
No. of Recommendations: 2
I have moved capital to some "growthy" names and in particular added to my holding in the Canadian company Constellation Software after it encountered a rare period of mild price weakness.
Do those growthy stocks and Constellation Software have better price to book value ratios than Berkshire has?
No. of Recommendations: 10
Do those growthy stocks and Constellation Software have better price to book value ratios than Berkshire has?
No but they are completely different types of businesses. I believe ( perhaps mistakenly) they have a higher chance of doubling in 5 years from here but the bets are more risky and therefore position sizes are very small compared to my holding in Berkshire. I'll check back in 5 years to see if the decision to use Berkshire as a source of capital when it got to $530 for these was worth it.
Just as a reference- consider the action of some of Berkshire's principal's. Ajit Jain reduced his holding by 55% at a price of $463 per B. That was also around the price where Buffett stopped buybacks.
No. of Recommendations: 3
Selling those calls, or something like it, is a very interesting idea, I'm going to look into it. Thanks!
As an aside, as I'm sure you know but perhaps others following may not: selling an ITM call on a dividend paying stock (BRK doesn't pay dividends) requires extra care. The counterparty might exercise around ex-div date to capture dividend if ex-div date is in the lifetime of your option. In fact, if you're not paying attention, you can end up having to pay them the dividend too!
