No. of Recommendations: 6
Another perspective is to think about what the all time high (ATH) is and when it was reached.
Well, the answer is 50.50 (adjusted for the 25% BAM spin-off) and it was reached on 2/10/22. Memories are short. 2/10/22 was not that long ago and the same Mr. Market that we are currently complaining about assigned a 60.37% higher valuation to BN.
In Feb 2022, it was a completely different macro economic situation. The Federal Funds Rate (FFR) was still 0 and the Fed was still buying mortgage backed securities at the rate of tens of billions per month. Now FFR is 5% and the market is assigning a high probability to another 25 bps hike in June. It's the fastest 500 bps hike in history and poor BN has been clubbed like a baby seal. It is down 37.64% from its ATH. For comparison, SPY is down only 12.73% from its ATH and Berkshire is down even less coming in at 11.46%. It's a completely different situation. You can get a risk free 5% in a federal money market fund. These funds were yielding zero for more than a decade.
https://www.newyorkfed.org/markets/reference-rates... Is BN's ATH of 50.50 the forever ATH? Will it never reach 50.50 ever again? Given Brookfield's growth trajectory, at some point in the future, of course ATH will be reached and surpassed. We just don't know exactly when. We also don't know what other investments will do in the same time period. So there is an opportunity cost.
Below table shows the Compound Annual Growth Rate (CAGR) we will get when BN reaches 50.50 for different lengths of time. This is from the current (5/28/23) price of 31.49. This is price appreciation only. The total return will be slightly higher given BN's modest dividend.
Years CAGR
1 60.37
2 26.64
3 17.05
4 12.53
5 9.91
6 8.19
7 6.98
8 6.08
9 5.39
10 4.84
Even if the ATH is revisited in 5 years, it's a respectable 9.91% annual return + dividends. The odds are definitely in our favor. BN/BAM or both deserve a place in our portfolios, but I would also caution against over allocation. With the sole exception of Berkshire, I don't think it's wise to allocate too much to an individual stock. Even if the eventual outcome turns out to be in the range of very good to pleasant, we don't know what the interim period holds. Severe plunges even from these already low price levels are definitely possible. Most retail investors will get screwed in the head in these situations and end up taking harmful actions based on emotion. Granted there are rare exceptions, but by definition most individuals don't qualify.
