No. of Recommendations: 47
As I've mentioned before, I have a fair bunch of money in T-bills at the moment. I hope to deploy a bunch of that into Berkshire, but I do hate to add to my position at the recent seemingly above-average valuation multiples. Even if the valuation level is not MUCH above average, and despite what Mr Buffett seems to have buying. So I wait.
I'm earning some interest, and this amount, though not huge, is actually higher as an annualized rate than what I expect from Berkshire in the next 6-12-18 months if things are "normal". By normal, I mean real trend value growth and valuation multiples typical of the last 15 years or so. Same old, same old. Sure, the price could explode upwards, but that's pretty unlikely: I try to plan things based on the apparently most likely outcomes, merely making sure nothing bad happens in the less likely ones.
So, also as I've mentioned before, it could make sense to write some cash-backed puts at lowish strikes that give a price I'd be willing to pay. The rate of return on these isn't that great, but on the other and, unless/until they are exercised, I'm making the rate of return from the options PLUS the rate of return on the cash backing them up. This is decidedly higher than what I expect from Berkshire's stock in the next while.
I bring it up again because there is another factor at work: since the stock price has been pretty flat the last ~5 months, and the value of a share keeps rising on trend, the re-entry prices that looked ho-hum are now looking not quite so bad. Consequently the rate of return on the put options at the target “fair price” levels are now a little bit more interesting.
Ignore all the false precision in the following, I'm just pasting from spreadsheets to avoid making typos when rounding things off. Think of it as a mere illustration.
So, what's a relatively "normal" expectation for Berkshire from now until early next year? In this exercise I (unusually) want to err just a tad on the side of optimism, so I don't overestimate the chances of a good low re-entry price a long time from now.
We know March book per share, $397,627 or $265.08 per B.
I have a rough guess as to June book per share, $421,100 per share or $280.73 per B from here
https://www.shrewdm.com/MB?pid=474517153 That itself might be a bit optimistic and unrepresentative of trend due to the recent Apple pop, but let’s go with it.
We could guess that quarterly nominal book per share might rise 2.5% per quarter. Think of that as nominal 10.4%/year, minus 3.0% inflation, or inflation + 7.4%/year. A good but fairly normal year. That gives us Q3 book of $431,628 or $287.75 per B, and year end book of $442,418 or $294.95. (do recall that I have the goal that these numbers be slightly optimistic--I do not count on these values)
The average ratio of price to known book in the last 15 years has been 1.371. Let's use a nice round 1.4, partly for our theme of "slightly optimistic" and partly because multiples have been a bit higher just lately.
With that multiple, and our pencilled in book per share figures, we can estimate a possible future nominal price trajectory, from the "slightly optimistic" department.
Around/after end Q2: A "normal" price might be around 393 per B
Around/after end Q3: A "normal" price might be around 403 per B
Around/after end Q4: A "normal" price might be around 413 per B
One quick conclusion from this exercise is that almost any entry price under $400 some time in Q4 would probably constitute a pretty sound investment.
So, back to options: yesterday I wrote some December $400 puts for a premium of $10.60. If assigned, that would give me a (re) entry price of $389.40, which per the observation above should work out pretty well. That's only 1.32 times my (slightly optimistic) year end book estimate.
If not assigned, I get a cash rate of return of 5.65%/year. This is in addition to what I'm making on my T-bills and cash backing up the puts in the mean time, which is a weighted average of 5.198%/year. The puts could be assigned at any time, cutting off the interest income from time value erosion, but in practice they never are until the time value is near zero. So, for now I'm making 10.64%/year rate. That is quite a bit better than what I expect as a return in the next year if I were merely to buy Berkshire stock today.
Downsides to all this? Interest rates may fade, and Berkshire's stock price may rise without a dip. I miss getting the stock assigned and get a higher re-entry price when I ultimately cave in and plow back into Berkshire stock, but the "cash while you wait" benefit of interest in the mean time fades. Still, that isn't exactly a wipe-out, and I'll be happy making over 10% this year on that cash. It seems likely that some day there will come a time that things are once again on sale, and having cash and T-bills at hand will seem fortunate.
A key point is that getting back into Berkshire at a higher price than today's isn't necessarily bad...it depends on how much interest I earn between now and then. If the stock price were to rise only a bit over (say) the next year or more, it would still be a pretty good plan.
Jim
