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Just some random observations.

A year ago today, BRK.B hit it's peak close ($359.97). A year ago tomorrow, it hit its all-time peak ($362.10). In today's dollars, that's close to $382 and $384, respectively. Without the inflation adjustment, we'd need a 20% return to hit the previous peak. With it, we'd need about 27%.

Including the dotcom bust, I count five times BRK has not hit a new nominal peak within the year: 06/1998 - 11/2003 (~5.4 years, including the first year); 04/2004 - 8/2006 (~2.4 months); 12/2007 - 2/2013 (~5.2 months); 12/2014 - 11/2016 (~1.9 years); and 03/2022 - TBD.

If my numbers are right, the Price to Book ratios at "Peak" and "Return to Peak" for each of these periods were as follows: 2.9/1.73; 1.87/1.49; 1.93/1.33; 1.51/1.43; 1.57/TBD. I have the Price to Book for the valleys as 1.07, 1.55, 0.98, 1.29, and TBD.

Apologies for any errors, and there are probably a few, but it should be roughly right.

I don't have any particular insight, and don't place any substantial reliance on these figures, but I glanced at the numbers, and thought I'd share.

I was a bit surprised at just how long BRK has had the status of "hasn't hit a new peak", even if one ignores all of the time periods in which a new peak was hit within a year.

Given what I was looking at, and especially the built in time periods involved (minimum 1 year from past Peak), it was less surprising that a new peak was inevitably hit with a P/Book ratio substantially lower than the first peak. A testament to BRK's ability to steadily grow its Book.

I suppose another unsurprising insight is to stay away from options if this thing hits 2.9 P/Book again.

To the extent I'm wagering on it, and I sort of am, I think it is more likely than not that we hit a new nominal peak in 2024.

It seems pretty reasonable to assume, as in the past, that any security with an intrinsic value rising over time will
(a) see new high prices from time to time, and
(b) see waits between such fresh highs that get only so long

However, I like to note that the time it takes to hit a new high is pretty dependent on what the valuation was like the LAST time it hit a new high.
If Berkshire had traded at twice book a year ago, it would make sense to be prepared for a much longer wait for a fresh all time high.
Conversely if it had been bouncing along the bottom of its valuation multiple range for a while, the wait is likely to be shorter.

A potentially more predictive metric along the same lines:
How long has it been since price-to-peak-book was over 1.4?
That has only ever exceeded 1.2 years once in the past, the longest-ever wait being 2.1 years in the stretch ending almost exactly 10 years ago.
At the moment we're at 1.2 years and counting.

Jim

Amazing how many recs you can get for a typo--sorry.

It was supposed to say this:

How long has it been since price-to-peak-book was over 1.4?
That has only ever exceeded 1.2 years once in the past, the longest-ever wait being 2.1 years in the stretch ending almost exactly 10 years ago.
At the moment we're at 0.9 years and counting. (not 1.2 years and counting).

Specifically, the last close above 1.4 times peak-to-date nominal book per share was 2022-05-04
That was not long after the most recent peak closing multiple of 1.586 on 2022-03-28
We fans always think multiples like that are deserved so we never really think there will be price pull-back.


Jim

"We fans always think multiples like that are deserved so we never really think there will be price pull-back." lightened up in my IRA"


I sucked my thumb but could have easily lightened up in my IRA

'I sucked my thumb but could have easily lightened up in my IRA'

Curious, if you had 20/20 hindsight that that time was a relative peak and lightened up (and did Not truly need the funds but were just being prudent), what % trim would you have considered-5/10/15%? I ask as we have never sold a share but it will be necessary in the next couple years as we are now living off cash and investments. I am leaning towards 5% unless there is a highly unlikely melt up. Thanks!

' Curious, if you had 20/20 hindsight that that time was a relative peak and lightened up (and did Not truly need the funds but were just being prudent), what % trim would you have considered-5/10/15%?'

Very good question. And of course there may be hindsight bias w my mind. I was thinking a 50% reduction in the IRA when book hit 1.5x approximately. I would not consider this in my taxable account

Curious, if you had 20/20 hindsight that that time was a relative peak and lightened up (and did Not truly need the funds but were just being prudent), what % trim would you have considered-5/10/15%?

It's easy to sell a bunch when you think the valuation is a bit rich.
What's impossible is deciding rationally when to get back in.
Say the price dips a bit from where you sold. Will it dip more?
Or will it turn around and rise and never again visit even the level of this modest dip?

Since you can never know that it will reach any given level of cheapness, the only rational response is to buy back in again pretty promptly.
Meaning the round trip gain probably isn't going to be that great.

FWIW, I sold 44% of my BRK positions through March last year.
But I was already buying a lot of it back in May.
I made money on the round trip. It kept me off the streets. But the profit wasn't life changing.

Jim

FWIW, I sold 44% of my BRK positions through March last year.


A similar reduction in total shares controlled for me due to all the leaps I sold off through late March last year. I even sold some covered calls against part of my remaining holdings during that period. I was lucky and able to capture about 50% of the premiums on the covereds by late May. By end of June I had bought back all the leaps and controlled more shares than when I started the year.


Now the tax man cometh.

And it's time to decide what to do with the June23 calls in a much higher interest rate environment. Implied interest rates on all expirations have dropped nicely over the last few weeks with lower rates predicted by year end from most market guessers. I already have a slug of Jan24s I'll have to do something with so maybe a Jun24 roll is in order for me. Or maybe just straight shares and back away from the leverage party. But where's the fun in that!

Jeff

Instead of selling BRK, I sold covered calls. All at strike prices in the 400's up to $440. Options prices were about $5 per share. Was highly confident that they would not be exercised, pockets $100K+ for my efforts.

Instead of selling BRK, I sold covered calls...

This is a good alternative.
Unlike selling high and buying back low, it does not require making any predictions about how far or for how long a price dip might last, and thus no anguish about when to buy back in.
If your stock is called away you can generally buy it back that same day.
It's a profit if the price has moved above the strike by less than the time value you garnered, which is the norm in this situation.

The main way you can "lose" if if the stock price soars suddenly, before you have made much time value.
When the price soars, buying back your calls is expensive.
But of course, if your stock is called away after the soaring, and it's an all-in price at which you'd have been willing to sell anyway, it's merely foregoing some upside you wouldn't have had anyway.

The old rule is worth remembering:
If writing any option, be sure you're pretty much equally happy with both outcomes no matter what you think of their relative likelihood.
Because sure as shootin' you'll get whichever outcome looks worst on the day it happens.

Jim

Looking out at Jan. 2024 expiry-Selling 1 contract of a BRK covered call with a strike of 360 appears it would price around $5.55. I suppose it would be a 'good problem' to have some shares taken away and a new BRK high (up 17%) from here, especially if a trim would be in the forecast anyway as it re-approaches its upper P/Peak BV range. Is this a reasonable 'sweet spot' of return, strike price & expiry for more experienced folks here? Thanks in advance!

Looking out at Jan. 2024 expiry-Selling 1 contract of a BRK covered call with a strike of 360 appears it would price around $5.55....
Is this a reasonable 'sweet spot' of return, strike price & expiry for more experienced folks here?

The best time to consider such things is when the share price seems rich, even toppy.
The moments when you remember that phrase: "When Mr Market offers you a really good price, you should hesitate before turning him down".

That doesn't seem to describe today's situation.

Jim

I sell covered calls all the time. One piece of advice. Whatever strike price you get zeroed in on, choose one a little higher. You won't give up much in premium but you reduce the probability of triggering an event. Also, focus on tax implications if they get exorcised. I sell at much higher strike in accounts where I could be forced to take a large gain if exercised.

When stock move, up or down, the moves can easily be 20% within months.

I have been selling covered calls for years. Right now I have only $400 or higher strike prices. Also I am waiting for BRKB to pass $320 b4 I sell any more. Could happen in a week. BRKB was up approximately $10 this week.

FWIW

I have:

GOOGL calls $127.5 - $140
MSFT $340 - $350
PCG $20
AAPL $180 & $195 (Which looked far away when I sold)
DHR $330+
OXY $85 - $95
CVX $220+
WFC $57.5
BAC $40

I hope and expect all of these to expire worthless.

I sell covered calls all the time.

So do I. It usually pays for my living expenses, including a journey to Tuscanny tomorrow ;-)

At the moment I have only $370 June remaining. Looking forward to write some with higher strikes

Instead of selling BRK, I sold covered calls...

This is a good alternative.

I have not been as lucky, I decided a while ago to go long BRK by buying in the money calls.

The problem with this is that as inflation has risen (or more directly interest rates have risen) the price of calls has dropped a bit since the leverage they provide has become more expensive.

So writing covered calls means you are SHORT calls instead of LONG them like me, and that interest rate rise works in your favor, hastening the decline in the value of your covered calls that you are counting on to make you money.

But my calls don't expire until January 2024 so we'll see if I can make some money anyway.

R:

A warning about trading covered calls.

There is no magic in harvesting the time value of covered calls. In order to make money trading covered calls you need to consistently open your positions when the stock price is relatively higher, and close them when your stock price is relatively lower. If you don't do this you can do no better than break even vs just holding your long stock.

And of course if you are opening your positions at relatively lower stock prices than you are closing them at, you are paying money to engage in your covered calls program.

I became very interested in options based strategies a few years ago and ran a lot of monte carlos many using actual stock price time-series (and monte carlo on the options strategies). And the thing that stood out is long is long, short is short, and you only make money on long trades when you open low and close high, and you only make money on short trades when you open high and close low. Remarkable how reliable gravity is.

R:

Max, Gator, Jim, Bluehorseshoe and others: When selling BRK covered calls how far out expiry dates do you usually chose?

So writing covered calls means you are SHORT calls instead of LONG them like me, and that interest rate rise works in your favor, hastening the decline in the value of your covered calls that you are counting on to make you money.

It might be closer to a wash when you consider that, other things being equal, a 5% price rise to a covered call strike is more likely in a higher inflation world than in a lower inflation world.
Once you take out the cyclical squiggles, equity prices are roughly inflation adjusted on average.
Other things being equal, average equity prices rising at a nominal 6% in a 1% inflation environment will tend to rise at 10% in a 5% inflation environment.

Not true when inflation gets so high or so low that the economy breaks, but those situations are thankfully pretty rare.
And not necessarily true for specific individual firms, some of whom will be unusually sensitive (for good or ill) to inflation rates.
But for the average firm in the average year, earnings and prices tend to adjust for inflation trends.

Jim

'' When selling BRK covered calls how far out expiry dates do you usually chose?'' a few, heads up. Brk options are not liquid hence large spreads. I try to sell puts on big sell offs, sell calls into rallies which improves your chances of getting decent fills. I'm currently short the June 2023, 285 puts sold when brk was 296. I'm short the June 2023, 330 calls, sold when brk was 310 a month ago. It's much easier to do this with spy or, a stock with liquid options, if you are a stock picker. Good luck.

When selling BRK covered calls how far out expiry dates do you usually chose?

This may be highly specific to my situation, but here is my view.

My sale of covered calls against my holdings last year was the first time I had sold covered calls against my BRK holdings I believe. I really do not want to have shares called away that would cause me to incur a painful tax event so I was only selling covered calls in my non-taxable accounts. As the price of BRK was increasing in the first quarter of 2022 it was reaching multiples of book value,and my view of intrinsic value (IV), that I have rarely seen. In my estimates it was
in the upper decile of historical comparisons at the time.

I have moderate confidence in my ability to predict IV 12mo in the future but not much further other than to say it will most likely be steadily higher. I felt like a fair forecast for end of 2022 IV for BRK was ~$350 at the time and BRK has rarely traded above my view of IV. In Q1 2022 I was selling Jan23 covered calls that would have netted me a price between $360- $365. As Jim and others have said, when trading options always be prepared for the least desired outcome to be the one you face at expiration. It was a bit like a limit sell order for an acceptable future return if called away, or a nice return boost if the calls were bought back at lower prices or expired.

The outcome was not optimal but I quit chasing perfection long ago. I was able to buy the calls back in May and capture about 50% of the premiums. I used those profits to fund a portion of the deep ITM calls I purchased in June when the share price continued to fall. It certainly wasn't life changing but was a pleasant boost.


Jeff

"How long has it been since price-to-peak-book was over 1.4?
That has only ever exceeded 1.2 years once in the past, the longest-ever wait being 2.1 years in the stretch ending almost exactly 10 years ago.
At the moment we're at 0.9 years and counting. (not 1.2 years and counting).

Specifically, the last close above 1.4 times peak-to-date nominal book per share was 2022-05-04
That was not long after the most recent peak closing multiple of 1.586 on 2022-03-28
We fans always think multiples like that are deserved so we never really think there will be price pull-back."

Thanks Jim, as always.

I believe the run of 1.4 price-to-peak-book expired this week, if not a bit before. So no record this time.

BRK's relative predictability is a godsend.

I believe the run of 1.4 price-to-peak-book expired this week, if not a bit before.

Based on closing price I believe you are correct that the 1.4 level was finally broken on 4/18.

I also think there is a high likelihood we see a new peak book value when we get Q1 numbers at the annual meeting. The buybacks in Q1 might be high enough we won't see it yet though.

If we were to close Q2 today I believe it would certainly be a new high, but that's just fools gold.

Jeff

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