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Half my BRK stake in my wife's Schwab account. Feeling frothy at $428 and her account is tax free as there are no capital gains in Hong Kong. I'm figuring we'll have an opportunity to get back in at a lower price at some point in the not to distant future. Full disclosure- I usually screw these things up but figured I'd give it a whirl one more time :-)

i sold a little. Just to keep myself busy

I just sold January $430 calls.
Bid on those is $24.50 right now, with the stock around $429.70.

Two possible outcomes. I don't know which I'll get, but it will be whichever one looks worse in January, so I have to be happy with both.

(a) I sell some shares at a net exit price of $454.50
(b) I get a cash return of $24.50 on top of my share returns. You could think of that as lowering my long term breakeven on those underlying shares by that amount, or you could think of it as increasing the rate of return I'm getting on my cash pile, or you could think of it as money for beer and pizza this year.

Jim

For whatever it's worth, if near term valuation levels and business results were to resemble those typical of the stretch since January 2008, then from the current price of $432.19 per B share, the one year forward return might be expected to be around inflation - 13.6%. If inflation were to come out at 3.25%, that would mean an expected market price of $385.50 in a year.

That's the average of a six different models all looking only at data since the crunch, range of predictions inflation - 18% to inflation - 6.9%.

Of course I hope for more, preferably because the company's underlying businesses prosper more than I have expected.

Current ratio of price to peak-to-date known book is 1.630 (97th percentile since 2008).
If June book per share is about where I've estimated, then the current price is about 1.54 times that (91st percentile).
Average price-to-peak-known-book since 2008 has been 1.361.

P/B isn't perfect as a metric, but so far it's about as good as it ever was.

Jim

Don’t tell your wife

What shares I have left are in a taxable account where I’m not interested in paying capital gains taxes. I took a gamble selling some calls against a smidge of my taxable holdings. I sold the Dec 455s for $11.75 which is a $466.75 exit in December. That would be 1.65x my expected Q2 bv of $283 and 1.57x my current useless estimate of Q3 bv of $297 currently.

I had been selling cash backed puts across Aug through Dec in my tax free accounts and opted to close all of those today. I managed to pocket 55-90% of the premiums received depending on the contract. My CAGRs ranged from 5% to 77% but the overall average was in the mid teens. As others have said, it seems a little frothy here and I’m content pocketing a little beer money and waiting for another opportunity.

Jeff

As others have said, it seems a little frothy here and I’m content pocketing a little beer money and waiting for another opportunity.

I think of it this way: to me, it seems unlikely in the extreme that today's price is the lowest we'll ever see in future.
The thinking is really only for tax sheltered accounts, of course.

Strangely enough I still have deep in the money long calls. In theory it would make sense to sell those and buy plain stock, because who needs leverage starting at today's prices? And I have a good-sized cash pile. But the rate of return embedded in the calls that I could realize is lower than the rate of return I'm currently making on that cash.

Jim

I'm seeing the P/B as 1.6.
I closed out my DITM calls at the end of January with BRK-B at 383, when the P/B first got to 1.55.

I did sell a 425 covered call against BRK the other day, but now it's zoomed past that.

Dang, this investing stuff is hard.

I did sell a 425 covered call against BRK the other day, but now it's zoomed past that.
Dang, this investing stuff is hard.


Don't sweat it. If someone is in the style of doing multiple trades per year, the result on any one trade is not that important. Is the average good? Did they all make sense given the information at the time they were entered? (the two answers are usually the same)

Besides, if you are both sorta-long and sorta-short the same thing, one side will *always* look like a loser. And that will be true in pretty much every time interval. So look only at the total, or you'll go crazy.

My short calls did terribly today. But I'm up for the day, because I have a bigger long position. You're probably in the same boat.

Jim

"If inflation were to come out at 3.25%, that would mean an expected market price of $385.50 in a year."

Jim, I have no quibbles with your assumptions about inflation. However, your models' expected market price of $385.50 in a year is interesting.

In a different thread, you have predicted book value at the end of Q2 2024 to be $280.67 for a B share ($421,100 for an A share).

https://www.shrewdm.com/MB?pid=474517153&wholeThre...

You have also projected an increase in book value of 2.5% per quarter, at least for the foreseeable future. Hence, the expected book value per B share in a year (to be precise, at the end of Q2 2025) should be approximately $309.80.

Since your models are predicting an expected market price of $385.50 in a year and projected book value per B share at the end of Q2 2025 is $309.80, the equivalent P/B is 1.24.

Is your central assumption that Berkshire will trade at a P/B of 1.24 in a year?

An alternate view:

If Berkshire trades at a P/B of 1.4 (very slightly higher than the average since 2008, but nothing extraordinary, especially given that the cash pile has now started earning something) the expected price in a year is
1.4 x 309.80 = 433.72 (i.e., approximately flat from this point).

The above projection is very simplistic and does not utilize any of your (likely complex) models. So I welcome your thoughts on the difference.

You have also projected an increase in book value of 2.5% per quarter, at least for the foreseeable future. Hence, the expected book value per B share in a year (to be precise, at the end of Q2 2025) should be approximately $309.80.

That sounds like something I said. That 2.5%/quarter or 10.4%/year annualized is nominal, not inflation-adjusted, so it implicitly includes a guess about inflation. 7% real growth plus 4.4% inflation? 8% plus 3.4% if you're optimistic?

Since your models are predicting an expected market price of $385.50 in a year and projected book value per B share at the end of Q2 2025 is $309.80, the equivalent P/B is 1.24.

That also sounds like a logical consequence of what I said.

What can I say? Two different models.

The later forecast is based on several models of the same general form:
* For starting dates since 2008 with a certain starting P/B (or price-to-value ratios based on a different metric), what were the average forward real one year returns?
* Divided those starting valuation multiples into 10 or 20 buckets, and fit a curve through the graph to get a formula
* Run that formula on today's price-to-book or price-to-value ratio.


The $385.50 used a guess of Q2 book, but I didn't make a guess for Q2 "two and a half column" value.
If I do that too, the average of the sundry models gives a slightly higher prediction of maybe $391 a year from now, still assuming 3.25% inflation.
Which, no matter how you slice it, would still represent a darned low price to book ratio, or a darned low rate of growth of observable value.
e.g., average P/B since 2008 has been around 1.37, so a forecast of $391 per B or $586500 would suggest book at around 428000, less than 2% above my current estimate even before adjusting for inflation.

The only thing I can think of without delving too deeply is that, in the last 16.5 years, higher valuations led to particularly poor years...overshoots?
Or I have a really bad bug somewhere.

I'll have a look at it further when I get a chance.

Jim

Thank you, Jim. Your conjecture of overshooting is quite plausible. That theory does reconcile the discrepant predictions.

I appreciate the detailed response.

Your conjecture of overshooting is quite plausible. That theory does reconcile the discrepant predictions.

I had another look. That does seem to be a factor.

* First, note that P/B values have not been very high for very much of the time since January 2008. So, the sample size is small--any observation you have gets an outsize importance even if its result was a bit random.
* And yes, it seems that, on the few occasions that valuation multiples have been high since then, we have seen overshoots.

For context:
The average ratio of price to peak-to-date known book since January 2008 has been 1.361. Median among those days has been 1.368.
I think market close today was $434.42 per B.
That is 1.639 times currently known book. Definitely higher than has been common in recent years.
The average price-to-peak-known-book one year after any date with price-to-peak-known-book over 1.60 has been 1.182 (!). Technically, that's the situation today. Below average = overshoot in the few instances we've seen. But book value is out of date, and that was only 3.9% of the time.

If we plug in a roughly plausible estimate of Q2 book, say $421,000, we get P/B of 1.548. If the book estimate is good and the price doesn't change in the next few weeks till the statements come out.
Still, we see overshoots in the past on average:
The average price-to-peak-known-book one year after any date with price-to-peak-known-book over 1.53 has been 1.252. 8% of the time.
The average price-to-peak-known-book one year after any date with price-to-peak-known-book over 1.50 has been 1.296. 11.4% of the time.

So: few examples in the past, and in those few situations there was an overshoot, so the method that I used to construct the post-2008 models implicitly concluded that an overshoot was the norm after a valuation level among the top ~10% of samples.

It's more reasonable to assume that P/B will be at least 1.36, and assuming 1.4 wouldn't be a stretch. At the moment even higher numbers seem plausible, but intuitive perceptions of "normal" change with the stock price.

A much simpler prediction method might well be better.
Predict book per share a year ahead, measured in today's dollars. It has grown at around inflation + 7.3%/year for ages. (this millennium).
Predict P/B a year ahead. The average since the crunch has been around 1.37, give or take.
Divide by today's price and you get a one year real total return estimate.
Add your inflation estimate and you get a nominal return estimate, if you want to know the likely nominal price. (important for options, for example)
Not perfect, but a very plausible central estimate unless you have better information. For example, I think Q2 book may come in a little ahead of trend, so I might knock off a percent.

Jim

I wonder who has made more money in Berkshire.
Those who trade in and out, or those who just bought and held.

(Discussion not applicable if you either keep jumping in, ie accumulate; or out, ie sell to raise cash to spend.)

Jim,

Thank you so much for your detailed and insightful response. I truly appreciate the effort you put into explaining the nuances of your models and the historical context. Your analysis of the overshooting phenomenon is particularly enlightening and does help reconcile the differences in predictions.

Thanks again for your thoughtful response and for sharing your expertise.

"you could think of it as money for beer and pizza this year."

Jim,

Do you drink beer and eat pizza?

Sincerely,
BHH

<< I wonder who has made more money in Berkshire.
Those who trade in and out, or those who just bought and held >>

I can state with a reasonable degree of confidence for myself, if I
were to jump in and out ... it would have a detrimental effect on my
wealth. However, I do find the options discussions interesting, and I
do occasionally take advantage of strong buy recommendations for
Berkshire when the stars are aligned.

I'm currently wondering if Berkshire is simply a legacy holding that
I'll eventually pass onto the next generation ...

-Rubic

Thank you so much for your detailed and insightful response. I truly appreciate the effort ...

Ha! You're the one who figures out that my numbers made no sense. You get the thanks.


The simple notion at the end of my post is worth considering.

A much simpler prediction method might well be better.
Predict book per share a year ahead, measured in today's dollars. It has grown at around inflation + 7.3%/year for ages. (this millennium).
Predict P/B a year ahead. The average since the crunch has been around 1.37, give or take.
Divide by today's price and you get a one year real total return estimate.
Add your inflation estimate and you get a nominal return estimate, if you want to know the likely nominal price. (important for options, for example)
Not perfect, but a very plausible central estimate unless you have better information. For example, I think Q2 book may come in a little ahead of trend, so I might knock off a percent.

It still suggests one might reasonably expect a negative real return in the next year.

e.g., the estimate of Q2 book I posted a while back was $421,100.
Add 7.3% for a typical year's real growth and you get 2025-Q2 book (in 2024-Q2 dollars) estimate of $451,840.
Multiply by 1.37, the average multiple in the last ~16 years, and you get $619,021 in today's dollars next August on/after when the statements come out, or about $412.70 per B share.
As I type, B shares are trading at $436.75 in pre-market, suggesting a "likely" real loss of -5.5%.
Adjust your assumptions to suit.

Jim

Do you drink beer and eat pizza?

Indeed I do. Though beer is not my preferred tipple unless it's cask conditioned (real) ale, which is pretty scarce outside the UK. It is to preserved and carbonated stuff as freshly baked bread is to Wonder Bread. Wonder Bread is fine if you've never tasted real bread.

And I do love a pizza.

But oddly enough, never the two together. I like Chianti with pizza.

Jim

I'm currently wondering if Berkshire is simply a legacy holding that
I'll eventually pass onto the next generation ...

Good for you, nice discipline. I'm not like that, I'm flighty. I just sold some of my long term deep-in-the-money calls. I realized a useful amount of remaining time value, so the realized price worked out to a breakeven of $680321 per share.

Jim

I'm calling myself out with this post on the Retirement Investing forum:

https://www.shrewdm.com/MB?pid=281891000

I didn't post here as it's off-topic, but I didn't want to leave an
impression that I never sell any Berkshire shares.

-Rubic

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