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https://seekingalpha.com/article/4673927-why-i-sol...

https://seekingalpha.com/article/4673927-why-i-sol...


That's a fairly thoughtful bearish case, much more nuanced than usual. The writer actually knows something about the company, at least.
The conclusion is pretty well stated, given his bearish case:
"The last thing I wanted to do was sell Berkshire and write a big tax check to various governments. Actually, that's the second to last thing I wanted to do. The last thing I want to do is give back a significant portion of a big gain, and I think that's a likely outcome from here. I can deal with a stretched valuation. I can deal with some structural business headwinds. But the combination of both usually leads to capital loss."


I would quibble with the way he views some things, but that's normal, I quibble with everybody.

Notably, he seems inappropriately concerned about Berkshire's consolidated debt, dismissing the headline cash number as largely meaningless because it's not that much bigger than the debt. (while simultaneously decrying the record level of cash! Which in any case it isn't, as a fraction of the firm)

But...no. That's not the way the debt works.
The railroad and utilities holdings are in effect "arm's length" subsidiaries, like any of public stock holdings. An existing company was purchased, with economics that worked in part because they had their own debt and leverage and credit rating and regulatory reporting already built in. By buying (say) BNSF and letting it keep its debt, it's the purchase price that matters, not the "enterprise value". This is for the critical reason that Berkshire is not on the hook for debt at BNSF, it's non-recourse. If that debt defaulted, the creditors would not get the cash pile.

By exact analogy, if I buy shares in Hershey for $187, I don't consider my portfolio to have additional debt of $37 because of the $37 per share of debt that Hershey has. Hershey's debt per share doesn't wipe out or in any way invalidate $37 of my cash pile each time I buy a share. That's because I am not on the hook for Hershey's debt. What matters to me, for both risk level and cost basis for calculating returns, is the $187 cost basis.

Yes, Berkshire itself does have debt, but the appropriate number is $42.69bn, not the $128bn that the writer quotes. That's because my shares in Berkshire head office are not guarantors of the $85.6bn in debt inside the railroad/energy division.


The meaningful discussion to have would be about whether the bear case is fundamentally sound - which more than anything else comes down to whether the good times are in effect permanently over within the rails and utilities. And secondarily whether management can pull at least one more needle-moving investment idea out of the bag before slowly becoming a glorified cash cow. But I don't have answers to those good questions, so I can't add them here.

Jim

I wasn't as nimble as you the day after earnings but I took my entire IRA to Treasuries.

Longtimebrk…I always took you to be a very long term holder of Berkshire, like from the 70’s…

Could be wrong on that…you sold all your Berkshire in your IRA?

not from the 70s.... I'm only 65 but yes I have traded my IRA over the years and it worked out very well. No tax consequences as you know.

This was not an easy decision since it is a 8 figure IRA. Not quite Ted like but substantial.

I still hold a ton of Berkshire in my regular Brokerage. Not selling those shares since eventually my heirs will get the set up basis unless laws change.

“I took my entire IRA to Treasuries.”

Wow LTB, that had to be tough to pull the trigger! At what P/B or price would you start buying back BRK in the IRA? Or are you thinking of simply keeping the large position in your brokerage account only going forward?

Will be interesting to hear what your next move is in the IRA if you elect to share. Glad you still have skin in the game!

From the article:

Thinking like an owner, Berkshire's current $900 billion valuation buys you:

$370 Billion in Equities, but with the caveat that you can't sell your large holdings for anywhere near the quoted price. Your basis is low so you'll owe taxes, and both the size of your sales will negatively impact the price. This isn't a hypothetical challenge. Look what happened when Berkshire panic sold the airline stocks in 2020.

$167 Billion in Gross Cash, $39 Billion Net Cash, but again with the restriction that you have to keep a lot of it on hand, regardless of what the prevailing interest rates are.

$363 Billion in Operating Companies - These operating companies produced $27 Billion in Earnings (14x) and $20 Billion in FCF (18x) on the back of an extraordinary year in insurance underwriting. If we normalize this for an "average" underwriting year with a $1.5 billion profit, we have $23 Billion in Earnings (16x) and $16 Billion (23x) in FCF.


Equities: $354bn, take some off for taxes. Say $307bn.
Cash: Jim explained the debt. Cash + fixed income $187bn. Take $50bn off for reserve. $137bn
Earnings: $25.5bn at 16x = $408bn.
Total $852bn

A Share equivalents: 1,441,483

$591/A
$394/B

Make your own adjustments.

Other methods:
Look through: $388/B
Shareholder Equity + Float + 1/2 Deferred Taxes: $349/B
Highest buyback: $367/B

Berkshire is overvalued by 10-20%?
If I sell, I get hit with a 20%+ tax bill.

Wake me up when it's 2x book.

"At what P/B or price would you start buying back BRK in the IRA? Or are you thinking of simply keeping the large position in your brokerage account only going forward?"


Certainly an intriguing question.

My decision was influenced by Warren's dour outlook on Utility rate recovery and litigation AND my personal work experience. He literally stated that he made a mistake not considering this.

As a young man (early 30s) I was the Chief Information Officer at a large regulated utility in NJ. I remember the CEO of one of the Operating Companies boasting "isn't is great we have a business where we have a guaranteed 15% return on our rate base?" I looked him in the eye and said "Yes but what happens if the regulatory environment gets less friendly?" He didn't like that question and by the look on his face I am certain he never considered it. He started as a Lineman in the Utility Company. Being a young and somewhat brash Executive in the Utility business was pretty rare. I used to joke and call it the Futility Industry.


That was 30+ years ago and not only has the regulatory environment changed but now there is a real threat of Federal litigation.

I left shortly thereafter to join a tech company and had a great and prosperous run.

Back to BRK - I just don't know at this point on swinging back in. I don't think it is a straightforward as Price to BV or another metric but certainly that will matter.

I will probably wait until the Annual Meeting to get more color on this and the poor performance of the rail business.

I will probably wait until the Annual Meeting to get more color on this and the poor performance of the rail business.

Wouldn't that be nice?
Maybe we'll just get "Hi, I'm a 13 year old from Pensacola with $87 to invest, how can I get as rich as you are?"
There are usually a few comments that you can read between the lines of. But rarely anything "useful" in terms of actual information about the economics of the various business.


Re the rails, staff are getting better pay it seems.
With benefits, average about $160k...

From December 2022:

https://raillaborfacts.org/news/bargaining-status-...
"The railroads have concluded agreements with all twelve unions in national handling, representing a total of more than 100,000 employees. Eight unions ratified those agreements. The remaining four unions are now covered by agreements that became effective pursuant to H. J. Res. 100, which was passed by Congress on December 1, 2022 and signed into law by President Biden on December 2, 2022.
"All of the new agreements increase wages by 24 percent during the five-year period from 2020 through 2024, with a 14.1 wage percent increase effective immediately. The agreements also include five $1,000 annual lump sum payments, adjustments to health care premiums, and health benefit enhancements, and an additional personal leave day for all employees. A portion of the wage increases and lump sum payments are retroactive, resulting in more than $11,000 on average in immediate payouts to employees.
"The wage increases in the new agreements are the most substantial in decades – with average rail worker wages reaching about $110,000 per year by the end of the agreement. When health care, retirement, and other benefits are considered, the value of rail employees’ total compensation package, which already ranks among the highest in the nation, would average about $160,000 per year. "


An interesting thing about staffing further down:
" claims that employees are quitting in droves are not accurate. In the first part of 2022, each individual carrier’s voluntary attrition rate was between 2.0 percent and 3.7 percent. This is just a fraction of the 13.1% quit rate during the same time period reported in the Bureau of Labor Statistics’ JOLTS survey for the transportation, warehousing, and utility sector. "

To some extent, it seems that railroad employees LIKE working at the railroad, at least compared to some other workers.

Jim

"Wouldn't that be nice?"

I think Warren or Abel will have to comment on the utility recovery and litigation. If not, then on to the inane questions. I haven't been to an Annual Meeting since 2001.

Thanks for sharing your thoughts, concerns & experience.

Btw, my grandpa retired as a PR exec from Carolina Power & Light during the Nixon era. They were acquired by Progress then Duke Energy. Fond memory- he gifted a few shares to us grandkids which I still own today, given the connection to him. The small quarterly dividend back then was worth a couple weeks allowance and started a nascent interest in what investing and owning pieces of businesses was all about.

"They were acquired by Progress then Duke Energy"

This brought back a funny experience.

I was at a Utilities Conference that was well attended. I forget the two Electric Utilities that announced a merger that morning but the first guest Speaker was Tom Peters.

He says- "Imagine that - two bloated monopolies merging"

That got the fur flying

Equities: $354bn, take some off for taxes. Say $307bn.
Cash: Jim explained the debt. Cash + fixed income $187bn. Take $50bn off for reserve. $137bn
Earnings: $25.5bn at 16x = $408bn.
Total $852bn
A Share equivalents: 1,441,483
$591/A

FWIW, my method comes up with $603,300 for end-2023 in end-2023 dollars, not so different.

I make no attempt to get the "right" bottom line value number by obsessing over multiples, merely to get a method which is consistent through time and rises at the same rate of "true" value.
With that caveat in mind, it is calculated as follows:
Last four quarters net after-tax income in rails, utilities, manuf/service/retail including Pilot and non-controlled, and a cyclically adjusted estimate of underwriting profit. Sum of those four as stand-in for ALL subsidiary earnings, as the "other" category is small and volatile and investments covered elsewhere.
Each quarter inflation adjusted independently lately!
I slap a multiple of 15 on those earnings.
Investments per share generally at market value, but most equity positions capped at the greater of (21 times earnings) and (half current market value). Mainly this affects Apple.
A penalty of 30% of float as a proxy for the lower returns from having to have a lot of cash all the time. (not a proxy for the amount of cash)
My current estimate of cyclically adjusted underwriting profit is $1.757bn/year after 21% tax. A lot lower than the actual value this year, but a lot higher than the actual value last year.

Jim

On a book value basis I've got 360-390per B pencilled in as fair to fully valued. So probably a c5-10% premium atm. Unless of course the market re rates for some reason and it starts to trade to higher multiples despite deteriorating fundamentals in the operating businesses as discussed. I can't see that so it's market exuberance IMO. Think it'll just trade sideways for a year or two.

We've seen this happen on numerous occasions before.

To some extent, it seems that railroad employees LIKE working at the railroad, at least compared to some other workers.

A couple lifetimes ago, I did some work for Union Pacific as a contractor doing some rehabilitation work on tunnels. Most of those guys did like their jobs and were planning on staying to retirement. The pay is good and the work isn't bad. The government had some sort of program to encourage hiring Native Americans off the reservations, and those guys really liked their jobs and were grateful to have them. But it isn't the kind of work everybody can or wants to do.

As aside, I learned part of the reason why railroad CAPEX is so expensive: The trains need to keep running. So everything we did had to be completed in between trains. Some days we barely got anything done at all.

But...no. That's not the way the debt works.
The railroad and utilities holdings are in effect "arm's length" subsidiaries, like any of public stock holdings. An existing company was purchased, with economics that worked in part because they had their own debt and leverage and credit rating and regulatory reporting already built in. By buying (say) BNSF and letting it keep its debt, it's the purchase price that matters, not the "enterprise value". This is for the critical reason that Berkshire is not on the hook for debt at BNSF, it's non-recourse. If that debt defaulted, the creditors would not get the cash pile.

By exact analogy, if I buy shares in Hershey for $187, I don't consider my portfolio to have additional debt of $37 because of the $37 per share of debt that Hershey has. Hershey's debt per share doesn't wipe out or in any way invalidate $37 of my cash pile each time I buy a share. That's because I am not on the hook for Hershey's debt. What matters to me, for both risk level and cost basis for calculating returns, is the $187 cost basis.

These are debatable statements at best and naïve at worst. If BNSF defaults on its debt, Berkshire will take a large reputational hit. I cannot prove it, but I am sure the interest rate that BNSF gets has some discount due to Berkshire ownership.

If you buy shares of Hershey, you are absolutely on the hook for its debt. If Hershey defaults, then the creditors can put it in bankruptcy and recover the money from your equity. Not the $187 that you paid but the book value of Hershey, which will affect the stock price.

I tend to agree that Berkshire has run into some headwinds. The over picked assets and size issue is preventing new oaks with good prospects from making up for older trees that have matured. That is a fundamental problem because Berkshire buys for life and no tree grows to the sky.

I feel a little sorry for Buffett. He did these mostly incredible deals a long time ago now. BNSF and BHE. They have worked out brilliantly if looked at over their time in Berkshire. It’s obviously a rare business that can keep growing earnings indefinitely. And it’s even more unusual to achieve continuous growth if you are buying giant mature businesses. Would be unfair to paint Buffett as having lost his touch and no one is saying that.

The investment mistakes in recent years are a reflection of just how hard it has become.

The climate change problem and the political tectonic plates shifting are concerning. BHE was up until a year or two ago, an important opportunity for Berkshire to deploy large amounts of capital. That growth opportunity, made it a valuable business and a significant part of Berkshire’s intrinsic value. That value appears now to have be impaired and that is an issue when the share price is riding high.

However, Berkshire is not returning the cash. Presumably because they remain optimistic that opportunities will come along again.

I would have expected the share price to have declined a little more than it has. But maybe that takes time. That in itself would of course open the buy back door.

BHE events are disappointing. Not Buffett’s mistake in my opinion.

Still holding a large percentage of my portfolio in Berkshire but nothing like the 90% allocation from 2020 when it was 1x book and things were not so difficult. The world keeps on changing and the next crash is never far away…

However, Berkshire is not returning the cash. Presumably because they remain optimistic that opportunities will come along again.

That got me to thinking on how much Berkshire has returned through repurchases.

FWIW:

Repurchases:
2020 $24.7
2021 $27.0
2022 $8.0
2023 $9.0
Total $68.7

Non-insurance operating earnings:
2020 $16.6
2021 $20.7
2022 $24.4
2023 $22.4
Total $84.1

Over the last four years Berkshire has "paid out" over 80% of non-insurance operating earnings.

These are debatable statements at best and naïve at worst. If BNSF defaults on its debt, Berkshire will take a large reputational hit. I cannot prove it, but I am sure the interest rate that BNSF gets has some discount due to Berkshire ownership.
...
If you buy shares of Hershey, you are absolutely on the hook for its debt. If Hershey defaults, then the creditors can put it in bankruptcy and recover the money from your equity. Not the $187 that you paid but the book value of Hershey, which will affect the stock price.

Sorry, no, you've entirely missed the point.

My account holds one share of Hershey at $187, and $100 in cash. Hershey has its own debts of $37 per share. Nothing, NOTHING, that happens at Hershey with its debt will allow those creditors to get any of my $100 in cash. I am not in the situation that $37 of my cash is at risk because Hershey has its own borrowings, and never can be as a result of owning that Hershey share. You are 100% wrong in saying that I am "absolutely on the hook for its debt".

By exact analogy, a default at BNSF does not give the creditors of BNSF the right to a claim on any of Berkshire's cash. That's what "non recourse debt" means. Some people think that US law should not work that way, but it does work that way. It is one of the key tenets underpinning the entire bank holding company and utility holding company model.

You point out quite rightly that something big and bad happening at BNSF would be bad for Berkshire and its reputation. But...well, that's pretty obvious, and a pretty different question. The creditors do not have the right to claim Berkshire's cash pile, which is the original point.

Jim

"" Over the last four years Berkshire has "paid out" over 80% of non-insurance operating earnings."" In his never ending quest to keep up with his self imposed bogey, spy. Wrong hurdle, obviously something like VIG would be more appropriate.

On the matter of DTB having sold all his BRK (but keeping the ticker :) , LTB and others having sold a good part: Tempting, yes, of course. But: If you are

A) in investing in the longterm-buy-and-hold game
and
B) are not convinced Berkshire's economics did permanently change for the worse

but simply of Jim's opinion that it's growth will slowly asymptotically come down to that of the average S&P firm's: Does it then really make sense to sell because it's fully valued currently?

Let's assume the price goes nowhere for 1-2 years. With profitable operating businesses it then will be again in the lower half of it's typical range of price versus value. So you may buy again.

But what do you do with the proceeds from your sales in the meantime? Ok, Jim spends them for a nice Amp. But otherwise? Will you invest them in a clearly overvalued S&P? Are you a talented stockpicker who knows equally surefire investments which are undervalued (if so: Congrats!). Or will you simply wait and receive some % from bonds during those 1-2 years? And does the latter really matter in the grand scheme of things if you are in for another 20+ years?

So I think
- if you are in for the long-term
- and if you don't need to sell a little from to live for your livelihood
- and if you are not a talented stockpicker (then you should have sold and used your skills for trading long ago already)
- and if you are not convinced the good times for our company are over

if none of those "IF's" do apply that then selling because Berkshire at this moment in time is fully valued does not really make sense, and that any eventually high price and "great selling opportunity" should simply be ignored and met with inaction (or by selling covered calls).

Great post. For clarity my large sale was in an IRA. no tax consequences clearly

Let's assume the price goes nowhere for 1-2 years. With profitable operating businesses it then will be again in the lower half of it's typical range of price versus value. So you may buy again.

But what do you do with the proceeds from your sales in the meantime? Ok, Jim spends them for a nice Amp. But otherwise? Will you invest them in a clearly overvalued S&P? Are you a talented stockpicker who knows equally surefire investments which are undervalued (if so: Congrats!). Or will you simply wait and receive some % from bonds during those 1-2 years? And does the latter really matter in the grand scheme of things if you are in for another 20+ years?

Holding cash to wait for a good opportunity to present itself can create major boosts to returns. Note: This is not "timing the market" (at least how I define it); but rather waiting for good ideas to arise. I am very confident that at least 3 or 4 good opportunities (better than holding BRK at current levels) will be available in the next 18-24 months.

tecmo
...

So I think
- if you are in for the long-term
- and if you don't need to sell a little from to live for your livelihood
- and if you are not a talented stockpicker (then you should have sold and used your skills for trading long ago already)
- and if you are not convinced the good times for our company are over

if none of those "IF's" do apply that then selling because Berkshire at this moment in time is fully valued does not really make sense, and that any eventually high price and "great selling opportunity" should simply be ignored and met with inaction (or by selling covered calls).

===


Holding cash to wait for a good opportunity to present itself can create major boosts to returns. Note: This is not "timing the market" (at least how I define it); but rather waiting for good ideas to arise. I am very confident that at least 3 or 4 good opportunities (better than holding BRK at current levels) will be available in the next 18-24 months.




I think there is a good argument to be made on either side of this debate, and there is no clear answer which is better.

In my case, by said's criteria, I am in for the long-term (have owned Berkshire for over 20 years), I don't need to sell for day to day living (I work full time and save some of my income anyway), am not a particularly talented stockpicker, so I'm 3 for 3, so far. But as for #4, it's harder for me to say. I think there is a real possibility that the good times for our company are over, or at the least, that it will be much harder for Berkshire to beat the index, if its float can not be invested in profitable new ventures. I had thought, until this year, that at the worst, almost capital could be plowed into the railroad and, especially, the utilities, with low returns but with these returns fairly certain, and with a certain amount of leverage from the fact that the float is other people's money being invested to our advantage. After reading Buffett's letter, I am much less confident that these 2 sectors, which account for over as much as 40% of Berkshire's operating earnings, will be good places for Berkshire to invest new capital (throwing good money after bad, in Buffett's words.)

So what about the other 60%? Apple has been a homerun, of course, but that's because it was available at 10 times earnings for a company with good growth. At 28 times earnings for a company with stagnant growth, I'm not so sure.

And then when I look at other recent big acquisitions, like Pilot, or Precision Castparts, I'm even less convinced that Berkshire really has good opportunities for investment.

If Berkshire was not itself trading towards the top of its range of the last 20 years, I probably would have kept a smaller stake, but the high price gives me a good chance to exit and see if I can't do better. And if the general market, or Berkshire in particular, got significantly cheaper, the cash from selling Berkshire this week will be available, the tecmo strategy.

I can't be certain that we will see that price drop, and for someone who is still confident in Berkshire's ability to outperform the general market, I think holding on to their shares is probably a better idea than hoping for a better price in the future. But I don't have that confidence any more, or at the least, I feel like I now need a lower Berkshire price to be confident in outperformance.

Great discussion here and am enjoying this thread. Excellent points raised by longtimebrk, Said, Tecmo, DTB, and of course, Jim. I think there is a 5th option that can be added to Said’s considerations. Sell some, especially in tax-deferred accounts, simply because there may be a need for some of us to diversify away from a single stock holding and adjust an asset allocation mix that is getting overly concentrated in BRK. This may be as good a time as any to do so. That’s me in a nutshell!

I’ve held BRK through thick and thin, over 25 years ago with my first lots in 1998. I have never sold a single share, and never gave it a thought that I might eventually do so. If I loaded all 76 lots correctly into the formula on google sheets, I’ve enjoyed a little under 12% IRR, using a strict buy and hold, buy and add process. I have used no leverage and no market timing aside from backing up the truck, along the way, on fairly significant downdrafts. As I got older, wiser and more disciplined, I became more patient. I wanted purchases at 1-1.15 or so BV, and committed a boatload of cash during those brief periods, more so in the latter half of these last 25 years. In recent times, just checking my Roth IRA as one data point, Berkshire shares acquired in 2018 are up 15% or so, last I checked.

After perusing the annual report, I’m probably more sanguine than most who are understandably concerned about recent developments in the rails and energy, as well as the challenge of moving the needle with BRK’s size, coupled with successorship uncertainty. I have not given up on my steadfast position to stay anchored in BRK for much of my net worth in my remaining years. BUT, for the first time ever, I am seriously considering selling all BRK in both my 401k and ROTH IRA, with no current tax consequences. The reason has more to do with my heavy concentration. I’m all in with 82% of net worth in BRK, (aside from a small position in DLTR, up 75% in 2.5 years roughly, THX JIM!). If I were to do that, I could reduce exposure to about 60% or so of net worth by holding BRK only in my brokerage taxable account. I will probably just put the proceeds in cash and wait for a better day, most likely indexing at some point, since I am more loathed than ever to pick stocks as I once did when I was a younger man.

One thing I will not do however is to sell those taxable shares. The substantial embedded cap gains would kill me in taxes (I’m talking an 8 figure account). Average cost basis in there I see is around $67/share. I already have two pensions, and will begin heavy RMD’s in 3 years, another unwanted outcome, along with some final ROTH conversions with even more taxes. To make a check to the IRS for that much money, on an interest free loan, only to deploy the proceeds in cash, and then ultimately in some other equity index one day, which will only generate even more income taxes, with dividends, is just too unpalatable for me to stomach — doesn’t make any sense! Fidelity advisor has hinted at his great services in managing that pot of gold, and I jokingly told him that charity will be best to receive that cash on my demise, instead of handing it over to a costly wealth manager, and you will have to pry those shares out of my dead hands when I’m six feet under. 😂

So, for the first time in my life, I think I will deviate from my discipline and diworsify away from my position in BRK. I can hear Charlie on my shoulder telling me, just as he did in answer to the question about leaving to the heirs, paraphrasing, “Tell them not to sell the damn shares!” Unfortunately, I’m not as nimble footed as Jim, and I missed that opportunity in the pre-market trade, so here I am procrastinating and vacillating once again. I’m approaching 70 this November, and although I sleep ever so soundly with my significant concentration in BRK, I think I will sleep a tad bit better by adjusting my asset allocation at this point in my life. Who knows what I’ll do? I’ll report back if and when I do pull the trigger.

Sell some, especially in tax-deferred accounts, simply because there may be a need for some of us to diversify away from a single stock holding and adjust an asset allocation mix that is getting overly concentrated in BRK.

That is exactly what I have done. I sold all of it in the IRA's, The taxable nest egg is now 90% BRK so I feel good about diversifying a bit. The IRA's are getting tax free 6.0-8.5% dividends from various bond and preferred stocks and funds, and might add another 2-6% CG in the next year or so if interest rates come down.

So, for the first time in my life, I think I will deviate from my discipline and diworsify away from my position in BRK...

Interesting thread, as you say.

FWIW
Though I have certainly expressed opinions about valuation levels being high higher than usual, I haven't actually SOLD any shares or deep the money calls lately, except for the one "bonus" trade I entered at the end of October last year.

I have written some calls (turning part of a long position into a covered call position), but historically I have had a position called away only once...I expect them more than likely to expire worthless, or close them early. So it's really just a minor pass-time quite aside from my long term position.

For those who are selling out, it's a pretty big move. I admire the conviction. I presume it's a thing one wouldn't do merely because valuations are a little higher then average, but rather because of either a perception of a true material hit to intrinsic value, or an expectation of a material deterioration in the future prospects.

For myself, I really hope to be back on a big dip, and with a bigger position than ever. One can but hope.

All that being said, if you're thinking of deworsifying, drop me a line. Like my late mom, I am never at a loss for an opinion : )

Jim

"Though I have certainly expressed opinions about valuation levels being high higher than usual, I haven't actually SOLD any shares or deep the money calls lately, except for the one "bonus" trade I entered at the end of October last year."

I thought you sold some shares in pre market on Monday?

Anyway,

I sold about 1/2 of my IRA holdings yesterday and bought 6 month T bills. I also have quite a few covered calls. However, BRK is still a huge position for me and I have not sold any in taxable accounts. Main reason being tax issues and I do not think current valuation is terribly high but it certainly isn't cheap.

Bottom line - I expect 10-20 year returns from here to be better than current short term treasury yields.

For those who are selling out, it's a pretty big move. I admire the conviction. I presume it's a thing one wouldn't do merely because valuations are a little higher then average, but rather because of either a perception of a true material hit to intrinsic value, or an expectation of a material deterioration in the future prospects.

Reading between the lines here, do I hear Jim channeling Munger? I think as I tried to explain, it’s not so much perceptions about relatively higher value or hits to IV, but rather looking for a good exit point to lower my concentration from 82% net worth down to 60%. That’s still a significant holding in one stock. It’s more asset allocation consideration for me, and not so much valuation perceptions. I think I remember you saying something awhile back that you lowered your holdings down to 65%, and more recently, 45%? I will kinda be in that ballpark too, if I pull the trigger. What I do with the proceeds after laying in cash for awhile will be the next challenging consideration. Swoop back into Berkshire or wait for opportunities in QQQE, RSP? etc…I’m leaning towards the latter, if for no other reason that I don’t believe I want to be fully invested up to 90% in BRK as I gracefully age…won the game, or keep playing, and all that stuff?

"Though I have certainly expressed opinions about valuation levels being high higher than usual, I haven't actually SOLD any shares or deep the money calls lately, except for the one "bonus" trade I entered at the end of October last year."
...
I thought you sold some shares in pre market on Monday?

Yup, that's the one "bonus" chunk I bought Oct 27--the valuation level seemed compelling. It was cash I really shouldn't have tied up, but good valuation levels usually work out reasonably quickly.

Jim

but rather looking for a good exit point to lower my concentration from 82% net worth

Also a perfectly valid reason.

I think I remember you saying something awhile back that you lowered your holdings down to 65%, and more recently, 45%?

Yes, true, but not 45% of portfolio. 45% of the Berkshire share count I considered "baseline" for a long time. A lot of the reduction was actually a while ago, the 2021/2022 rally, not on the current rally. And of course a share is worth more than it was then, so the dollar allocation isn't down as much.

In any case, my numbers probably aren't suited to being a guide to anything, including my own views...my moves are often based on other things going on in my life. I'm particularly cash heavy at the moment more due to a real estate sale than any perception of market opportunities. The pricing level of market opportunities is merely what's preventing me from reducing the cash allocation : )
I really hoped for a nice BRK price crash this quarter. 1.3 times book would be nice. Is that so much to ask? It can be brief!

Jim

Ah…ok, gotcha. I see the subtle difference now. Sometimes, I wish I could live under a Monaco tax free district, but on the other hand, having a taxable account with embedded cap gains may turn out to be a damn good disciplinary and behavioral incentive to avoid hasty and frequent selling activity.

I want to correct something in my earlier post to avoid any misleading confusion. In my ROTH I bought a boatload of BRK in 2018, and that stake is up 115.54 percent, not 15% (average cost basis of $188.75/share). 15.4 plus percent is what the 5 yr annual return is what my performance statement is indicating. Sorry about that.

We more or less all agree that with a price of around 1.6x BookValue (BV) Berkshire is richly valued right now, at the upper end of it's typical valuation range of 1.2-1.6x BV. We also agree that for the next 1-2 years we therefore can't expect higher prices and have to rather expect the price to be flat.

At first glance selling now therefore makes sense. But is that so? How big a difference in $ would it really make over the long term? I just created a little Excel sheet to answer that question for myself, with 2 scenarios over 20 years:

A) Inaction vs. Selling:
Selling BRK-B now for $400 and investing the proceeds in company X which - as I assume for Berkshire - is a constant grower and grows (in value and price) 8%/year.
Result: At a typical valuation (Price = 1.4x BV) 20 years from now he BRK-B portfolio would have a value of $1631. Replacing it now with company X would result in $1864 instead.

B) Inaction vs. clever Trading:
Selling and investing for 2 years in that constantly 8%/year in price growing company X, while Berkshire's price remains flat over those 2 years. Then, after 2 years, selling X and buying back Berkshire for the same $400 where it's now, resulting in then with the proceeds from the sale of X buying 1.17x shares of BRK-B for each share sold now.
Assuming 10 years later Berkshire's price again gets "over the top", again is richly valued and that trade will be repeated: Swapping a richly valued Berkshire share whose price remains flat for 2 years for shares of a company X whose price constantly rises 8% during those 2 years, and selling X and buying back Berkshire after that.
Result: While the inaction Berkshire portfolio after 20 years still would habe a value of $1631 (see above) the trader's portfolio would have a value of $2219.

Link to the spreadsheet "Berkshire - Trading when overvalued.xls":
https://docs.google.com/spreadsheets/d/15c0dr0mbfg...

Explanation:
- I assume for both, Berkshire and company X, 8% growth in value and - apart from the two times in those 20 years unusually high valuation of Berkshire - in price (cell E1)

- Column B is the resulting development of Berkshire's BookValue, starting with it's current BV of around $250

- Col C is the price at a typical valuation of 1.4x BV

- With Col. E it gets interesting: I assume that the current price of a BRK-B of around $400 stays flat for the next 2 years (in other words: As earnings increase it gets cheaper again). After that it's valuation again is in the middle of it's normal range, at 1.4x BV, resulting in a price of $441. In year 11 it again is very richly valued at 1.6x BV and again the price stays flat for the next 2 years.

- Col. G: In Year 1 (now) BRK-B is sold for the current $400 and replaced by a share of company X for the same $400. X grows in price 8%/year, resulting in Year 21 in $1864 instead of $1631 without that swap of companies.
Is that really worth it? $230 more = 15% more after 20 years compare with inaction? Worth saying goodbye to the most bulletproof company I know of? For me clearly not.

- Col I is the really interesting one: After the 2 price wise flat Berkshire years one sells company X which during that time did grow in price 8%/year and with the proceeds buys back into Berkshire which still is at $400, resulting in now owning 1.17 BRK-B shares versus the 1 BRK-B share without any action. Well done!

In Year 11 one does the same trade again: "Knowing" that BRK-B's price of then $864 will remain flat for the next 2 years one sells and buys with the proceeds shares of company X, "knowing" that contrary to Berkshire's price X's price will constantly rise 8% during the next 2 years. And after them one sells those shares of X and with the proceeds buys BRK-B shares again, for still unchanged $864.

Result: For each BRK-B sold 2 years ago one again gets 1.17 shares now. So thanks to those absolutely perfect(!) trades every 10 years when Berkshire was very high valued instead of 1 share BRK-B one now has 1,36 shares, resulting after 20 years in them being worth $2219 instead of $1631 in the inaction scenario, 30% more.

Please note my apostrophs around the word "knowing". To make those additional 30% more profit after 20 years you have to have perfect timing, have to "know" that Berkshire's price remains flat for 2 years and to "know" that company X's price will constantly rise during that time. Good luck!

If you are convinced that Berkshire's price will remain flat for 1-2 years but not which company's shares will constantly rise duringm that time you may prefer to stay in cash during those "lean Berkshire years" --- but then you can't calculate with an increase of that cash of 8%/year and the difference to inaction will be even smaller after 20 years.

Two more comments:
- I had to find my once great Excel skills because of "inaction" in this area are rusty. My apologies in advance for all eventual mistakes that little sheet might contain.
- A while ago I posted another link to my Google drive, to a photo of "Berkshire Rd." close to Perth, Australia. That link did not work at least for our member Aussie, so I try again:

Berkshire Road.jpg:
https://drive.google.com/file/d/1sCn6Et2kFxk8W-mnu...




.

At first glance selling now therefore makes sense. But is that so? How big a difference in $ would it really make over the long term? I just created a little Excel sheet to answer that question for myself, with 2 scenarios over 20 years:

I think you are overthinking things. If you like to fiddle (as I do) with your portfolio - you are very likely to find some nice opportunities in the next 12-24 months - and having cash available for those will be nice to have. If you aren't a fiddler then just keep it simple.

Recent Fiddling

* DIS - bought a little in Sept 2023 at $81.85 - (I also bought some in the $130s earlier) - so far "ok"
* DG - was discussed at length, doubled down at $103.11 in October (from initial purchase at $117) - so far "pretty good"

Again this is just in the last 6 months, I am 100% certain that more opportunities will come up again. These last two "fiddles" depleted my cash position; so I sold some BRK and created some more powder. I generally keep about 10% of my portfolio in "fiddle" position and try and juice my overall returns 2% - 5% with this. Its worked out well the past 10 years or so; making 2-3 investments per year.

5 YR : $18.08% vs 14.76% (Index)

Note: I keep ~50% of my portfolio in the index, and ~15% (or so) in BRK.

tecmo
...

thank you for that post.. I could have written it ! ..but only in the sense of identical factors, and struggling with identical concerns nd questions. I am not (yet) at the point of selling down..BRK's been good to me, probably mainly in the sense that it prevented me making major mistakes on my own. ! I play in the margins mainly in nsemi's (I know the sector a bit) but it can be rough....so on that basis, a tidy solid brk holding is still a benefit to me. and yeah.. those fidelity advisors :-(

I have owned Brk since 2013, and was buying new shares almost every year.

I am not sure it’s a good idea to sell when a stock is slightly “over valued”. I made that mistake too many times.

Look at Costco. It’s was “over valued” at half of current price not long ago.

Maybe Brk is finally being appreciated. Now will be the time to hold steady and ride it. There’s really not many alternative investments out there. I think money from the big 7, bitcoins, housing prices will be flowing in.

When Brk is truely overvalued, I trust Buffett will start paying dividends.

Look at Costco. It’s was “over valued” at half of current price not long ago.

The stock causes me pain every time I think of it. A few years ago it was trading down and I wanted to get it around $320 or whatever. Didn't quite make it and the next thing I knew it was well over $400 and now it is just crazy.

I'm trying to figure out how much longer to hold onto Facebook/Meta. That one was a nice boost to the portfolio despite my hatred of the company.

My wife was sick of me “not making any money” in the market for the last two years(as of late 2023, Brk was almost at the same level as in March 2022), so she started a game stock account. She used two strategies: 1. Buy some meme stocks she heard on Bloomberg radio (ie. PLTR), and 2. Buy stocks that I sold to take profits

Her account is doubled in a few months.

<My wife was sick of me “not making any money” in the market for the last two years(as of late 2023, Brk was almost at the same level as in March 2022), so she started a game stock account. She used two strategies: 1. Buy some meme stocks she heard on Bloomberg radio (ie. PLTR), and 2. Buy stocks that I sold to take profits

Her account is doubled in a few months.
>

Maybe it's time to unlearn and relearn.

It makes sense to have a small account to make “lottery ticket” bets. Something you are OK with if you lose it all.

In my “lottery ticket” account today I bought an online sports betting company Flutter Entertainment which owns Fan Duel. May as well make some money off the punters guaranteed to lose to the house.

It is a UK company which dominates online sports betting along with Draft Kings, but unlike the latter has earnings. It also has international businesses in UK, Europe, Australia etc.

Company will move primary listing in May to US from UK which may be a catalyst.

Stock down 9% today on disappointing guidance of 17% revenue and
EBITDA growth of 30%. Stock trading at PE of 29, maybe a bit rich for some, but a lot more growth than say Apple.

https://seekingalpha.com/news/4083524-flutter-ente...

I used to call that "my little flyers"..now its more like hit and run or smash and grab....and any proceeds into my core holdings, mainly BRKB. Most recent was COIN.

I actually cashed out $220K. I figure that's roughly enough to cover my son's tution fees coming up in three years. I don't live in the states so their are no vehicles for college savings. I plan to put it T-bills for three years and just have this on the side done and dusted. I don't like selling but sometimes you gotta do the prudent thing!

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