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I wonder if with Greg certainly driving improvements in the operating companies profits, can we just assume an average of 10% return on equity or better and a 2% LONG TERM return on float? Together those would deliver some massive returns.

There will never be another Warren or Ajit but perhaps steady as she goes will deliver superior results.

I wonder if with Greg certainly driving improvements in the operating companies profits, can we just assume an average of 10% return on equity or better and a 2% LONG TERM return on float?

If inflation if 4%, yes.
If inflation is zero, no.

It's probably better to ask what after-inflation rate of growth is plausible.

For the whole company combined, they have managed roughly inflation + 8% growth in value per share for over 25 years, remarkably steadily. I'm pretty sure that era has finally come to an end...it was managed in recent years only because of the Apple trade, which can never be repeated, and Mr Buffett is not going to be there to disprove the efficient market hypothesis yet again.

If you merely don't play too much in bubbles, a monkey with a dartboard can probably achieve inflation + 6.5%/year in equities. I expect the same from Berkshire...average return from public and owned businesses. Add a bit from leverage, subtract a bit because of the drag from always having some cash allocation, maybe those two cancel out.

So I would still pencil in growth in value per share of around inflation + 7%. Maybe 7.5% or 8% for just a few more years on trend if things go particularly well, for example some big allocations during the next bear market, but I wouldn't count on that.

It's possible that one would have to subtract a bit from that 7% figure if the US dollar falls materially and no longer makes a stable yardstick for *an* portfolio even with a US-CPI adjustment. Not expected, but possible. Despite the recent slide, the US dollar level is still 25% above is average 10-20 years ago. There is no currently visible stampede of ex-US capital flowing into US markets to chase sure-fire returns. If the flow slows to under a trillion a year, the current account deficit, the dollar will fall.

Jim

it was managed in recent years only because of the Apple trade, which can never be repeated,

Disagree, I believe it’s *possible.* I’ll admit it’s unlikely, but there are enough unicorns happening these days to make it at least “thinkable.”

I was surprised to find BRK investing so heavily in Apple, given the predilection for low volatility, low tech, long-time earners - but there it was. With Warren’s influence fading (and let’s face it, no two people are ever going to replicate each other’s style) I think it’s conceivable that there will be another magic carpet ride.

When I think of all the corporations that have come from nowhere to sector leading influence (and associated market position) I am amazed at how many I can name just off the tips of my brain: AOL, Tesla, Nvidia, Yahoo, Uber, AirBnB, Palantir, ByteDance, Facebook, Xiaomi, WeWork, even Amazon. That some of them have later collapsed doesn’t sway me, so did GE and Walgreen’s and Silicon Valley Bank, which got in trouble because: too many US Government bonds!

No, I am not advocating taking BRKs cash pile and throwing it every silly startup that comes along, but maybe Amazon could have been a pick 20 years ago? Or Facebook a decade back? Heck, we were into Chinese auto making in EVs back when that seemed a pipe dream.

Frankly, as I look at the list of newbie superstars I kick myself, because I missed so many of them, even as I said to myself “that’s gonna be something.” Ah well. I even thought of putting a mere 10k into Apple when Jobs was rehired, just as a vote of “welcome back” but didn’t. Ah, the dreams of days gone by.

No, I am not advocating taking BRKs cash pile and throwing it every silly startup that comes along, but maybe Amazon could have been a pick 20 years ago? Or Facebook a decade back? Heck, we were into Chinese auto making in EVs back when that seemed a pipe dream.

The AAPL trade is not only impressive in the % returns, but more importantly in the absolute $ returns. I agree investments that generate similar % returns are possible (likely even), but finding an opportunity that can generate the similar $ returns will be very difficult.

For example, it would probably take a $50B investment growing 10x, finding those opportunities is very challenging. Could BRK have invested $50B in AMZN 20 years ago?

tecmo
...

I don't pretend to have the ability to peer into the future, but a while back I did buy shares of three of the Japanese companies which Berkshire dipped into - with satisfying results (exceeding what Berkshire stock did). It is good that BRK is no longer being myoptic and can possibly exceed the results that simply staying domesticly would result in by dabbling abroad.

Jeff

The only other clear cut opportunity similar to Apple that Buffett may have invested in a decade ago at an attractive valuation was Microsoft I think.... as you say rare opportunities to invest at scale in dollar terms.

If you merely don't play too much in bubbles, a monkey with a dartboard can probably achieve inflation + 6.5%/year in equities.

Do you know where I can get one of those monkeys?

Is there an appropriate prompt that will enable ChatGPT to duplicate what one of those monkeys would do?

Inquiring minds want to know.

R:)

If you merely don't play too much in bubbles, a monkey with a dartboard can probably achieve inflation + 6.5%/year in equities.
...
Do you know where I can get one of those monkeys?

The figure is merely what the average US stock returned in the average year in the 20th century. Things did get gradually more expensive, so that might be a slight overestimate, but probably not by much.


As for the monkey, a pair of dice ought to do it.

Use them to pick (say) 30-100 stocks in any handy index. Buy equal dollar amounts of the stocks it picks. Reconstitute the portfolio every year or two, selling stuff no longer in the index.

Minor improvement: Always use an index list that's at least 6 months old, and don't trade around end June (Russell index reconstitution date). New additions to major US indices are statistically horrible performers for 6-24 months, and newly ejected stocks have on average been outperformers for months afterwards.
The method above should beat the S&P 500 handily over time, with very high odds, for a variety of reasons.

For those insisting on buying an index fund, a reasonable expectation for your forward real total return is the initial nominal dividend yield, plus the real GDP growth rate during your period of ownership, [plus or minus a one-time amount for the valuation change between your start and end dates, annualized across that period], minus about 1%/year. The 1% is the drag from the way US cap weight indexes are constructed and reconstituted, and a few basis points for fund costs.

Jim

As for the monkey, a pair of dice ought to do it.

Use them to pick (say) 30-100 stocks in any handy index.


This is actually the way most of us invest, with the added theatre of actually guessing future prospects, pretending to do some calculations, using some other heuristic like quality of management, etc. Then we get the average 6.5% a year and think we're stockmarket tycoons.


For those insisting on buying an index fund, a reasonable expectation for your forward real total return is the initial nominal dividend yield, plus the real GDP growth rate during your period of ownership, [plus or minus a one-time amount for the valuation change between your start and end dates, annualized across that period], minus about 1%/year. The 1% is the drag from the way US cap weight indexes are constructed and reconstituted, and a few basis points for fund costs.


By index funds, I'm sure Jim means funds where the index is weighted by market cap, meaning ALMOST all index funds. There are also index funds that are equal weight, like S&P 500 Equal Weight Index Fund, Nasdaq 100 Equal Weight Index Shares, and Russell 1000 Equal Weight Index Fund. For these, you would not need to subtract the 1%/year, but you would likely need to add a small amount for the management fee, since they require a bit more work (rebalancing every quarter, for instance.) As an example, the Invesco's S&P 500 Equal Weight Index Fund (ticker:RSP) has a management fee of 0.2%, whereas the market cap weighted fund SPY has half the management fee (0.095%), and Schwab's version (SWPPX) has a fee of only 0.02%. Still the equal weight feature is probably worth enough (about 1%) to justify giving back 0.18%.

dtb

Berkshire is principally a collection of dozens of operating companies driven by its best-on-planet Insurance operations.

I'd have no problem Indexing the stock portfolio or mirroring it as best as possible over time given the obvious tax consequences. Or if we want to keep what we got intact--that's OK. It's just not the key for Berkshire going forward imo. I don't think stocks will be a lot smaller than cash--as they are now. But they will NOT be nearly as important as in the past. I'll take being in the top 1/4th or 1/5th or so where the index or index hugging gets you.

THE KEY DRIVERS: Insurance float will continue to provide cheaper than free cost leverage -and the op cos, if run effectively should, hopefully, marginally outperform the index. That should be Abels focus and he's the right guy at the right time!. Thats the hope and really that's what matters in the Berkshire that Buffett has designed this century.

Overall, I think we can top the index by a couple points longer term, with far less risk that a stocks-only portfolio. If we only match the index with the risk profile I'm assuming--I'll be OK with that.

Remember what Warren says is the key to happiness? Low expectations.

Berkshire is principally a collection of dozens of operating companies driven by its best-on-planet Insurance operations.

I'd have no problem Indexing the stock portfolio or mirroring it as best as possible over time given the obvious tax consequences. Or if we want to keep what we got intact--that's OK. It's just not the key for Berkshire going forward imo. I don't think stocks will be a lot smaller than cash--as they are now. But they will NOT be nearly as important as in the past. I'll take being in the top 1/4th or 1/5th or so where the index or index hugging gets you.

THE KEY DRIVERS: Insurance float will continue to provide cheaper than free cost leverage -and the op cos, if run effectively should, hopefully, marginally outperform the index. That should be Abels focus and he's the right guy at the right time!. Thats the hope and really that's what matters in the Berkshire that Buffett has designed this century.


I think a key metric is how much excess cash the operating companies are generating that could be used for additional investment. This also assumes that we still believe that market beating returns can be generated from those investment opportunities - at the scale that would be required. I have no doubt that on a $10B base they could easily beat the market - but on $100B less sure.



tecmo
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I'm sure Jim means funds where the index is weighted by market cap, meaning ALMOST all index funds. There are also index funds that are equal weight.... For these, you would not need to subtract the 1%/year...

Actually over a quarter of my rule-of-thumb 1% "cap weight index" drag for the S&P 500 is due to the reconstitution problem: changes are (a) ill advised, and (b) pre-announced and therefore front-run.
(a) is a problem because recent winners tend to get added while recent losers tend to get demoted, and there is on average mean reversion.
(b) is a problem because the index underperforms the actual stocks. It lets funds track the index accurately, at the expense of the holders of the funds in a hidden way.
Both problems are substantially mitigated simply by using an index list that's at least 6 months old, preferably 12 or more. (minus anything actually delisted since then, of course, most often from M&A).
The Russell has similar, perhaps bigger, problems: their methodology is entirely prescriptive, and always takes place on a single date per year at end June, so it's extremely easy to front run it.

An article about the S&P 500 effect notes:
"On average, from October 1989 through December 2017, additions underperformed the market by 128 bps in the 12 months after the effective date, and discretionary deletions outperformed by 2,044 bps. An investor could have adopted the very simple strategy of implementing the additions and deletions to the S&P 500 with a delay of 12 months and in doing so would have outpaced the S&P 500 by 25 bps a year!"
https://www.researchaffiliates.com/publications/ar...

A follow up looking at the specific case of the Tesla addition
https://www.researchaffiliates.com/publications/ar...


Use them to pick (say) 30-100 stocks in any handy index.
...
This is actually the way most of us invest, with the added theatre of actually guessing future prospects, pretending to do some calculations, using some other heuristic like quality of management, etc. Then we get the average 6.5% a year and think we're stockmarket tycoons.

Though I do appreciate the insight and its irony, this may not be the case. It is very likely that people trying to pick above-average firms will end up picking below-average firms more often than not, as it is extremely hard to avoid biases--recent good results tend to colour one's views too much. So merely "average" might do better. This has been the reason that quant investors are advised NOT to use quant list to generate individual stock ideas: the few you pick by hand from the screen results are pretty likely to be *worse* than the average of that screen's picks. In either situation, dice might work a lot better than discernment.

After all, for anyone to out perform the market over time (which some investors plainly do), someone else has to underperform. Those are probably people doing their very best to pick individual winners.

It is quite likely that Mr Buffett's advice on amateurs sticking to index investing has been excellent advice for the recipients, but not great for Berkshire's portfolio results--we need a large population of losers : )

Jim

" It is quite likely that Mr Buffett's advice on amateurs sticking to index investing has been excellent advice for the recipients, but not great for Berkshire's portfolio results--we need a large population of losers : )

Jim"

Good morning, for the past ten years have Buffett or his two hand picked , stock pickers, beat the SPY index? Thank you.

Actually over a quarter of my rule-of-thumb 1% "cap weight index" drag for the S&P 500 is due to the reconstitution problem: changes are (a) ill advised, and (b) pre-announced and therefore front-run.

Would a "Total Market" fund pretty much get over that problem?

e.g. Vanguard VTI, holds 3564 stocks
Lagging S&P500 etf VOO by 0.75% over 10 years, but that's likely due to holding all those mid and small caps during the large cap growth bubble.

Good morning, for the past ten years have Buffett or his two hand picked , stock pickers, beat the SPY index? Thank you.

Mr Buffett certainly has. Some company that makes phones, can't remember the name...
I guess it depends on whether you count the cash and fixed income portion of the portfolio, or just the equities.

And managed without taking on the risk taken on by so many fans of this still bubbly market. The BRK stock portfolio always has a substantially higher earnings yield than the broad market. That has a nice side effect: Berkshire's traditional superpower is not so much having big gains like that, but never having a big loss. No realized loss over 1% of portfolio, something I sure wish I could say.

Jim

" No realized loss over 1% of portfolio, something I sure wish I could say.

Jim"


I love you bro, if you only take gains and never actually REALIZE a loss, you are batting 1000%? As long as he doesn't sell 1 share of oxy, he's pitching a near perfect game?

BTW, note as usual my question for Buffett, Why not disclose quarterly which trades are yours, wasn't asked, again, go figure. Perhaps Greg will be asked next year? Thanks.

No realized loss over 1% of portfolio, something I sure wish I could say.
...
As long as he doesn't sell 1 share of oxy, he's pitching a near perfect game?

He could sell it all today and still keep the record.

Current estimates of Berkshire's average cost basis for OXY are in the $51-54 range. Dividends push breakeven down to around $49-52. Current market price is $42.65, but if for some reason they decided to realize that mark-to-market loss, it would be a loss around $1.6-2.4 billion, considerably less than 1% of the stock portfolio.

But of course there is no reason to sell at a loss. OXY's price moves around, but they do generally make a profit. I expect the dividends to stack up nicely over time.

Jim

Actually over a quarter of my rule-of-thumb 1% "cap weight index" drag for the S&P 500 is due to the reconstitution problem: changes are (a) ill advised, and (b) pre-announced and therefore front-run.
(a) is a problem because recent winners tend to get added while recent losers tend to get demoted, and there is on average mean reversion.
(b) is a problem because the index underperforms the actual stocks. It lets funds track the index accurately, at the expense of the holders of the funds in a hidden way.
Both problems are substantially mitigated simply by using an index list that's at least 6 months old, preferably 12 or more. (minus anything actually delisted since then, of course, most often from M&A).


Another theoretical advantage of the equal weight system, (although I don't know what the empirical evidence is), is that the index is rebalanced every quarter. True, that means new editions get put in at high prices, but it also means that stocks whose prices have gone down have to be purchased, to keep the equal weight, and stocks that have gone up have to be sold.

If that is true, here's a question, taking the rebalancing to an extreme: what if you could rebalance more frequently? For instance, if every stock in the RSP had a weight of 0.2% at rebalancing, what if you sold any stock whenever its weight was more than 0.21% (i.e. a relative 5% move up in weighting). Ignoring transaction costs, would you expect such a strategy to outperform the RSP? Has anyone (I am of course thinking of Jim) done such a simulation to see if it would work?

dtb

I am wondering if the magic to cap-weight indexing in today's climate of gorilla game companies isn't putting more money into the the fast growers even if it looks expensive isn't the best strategy. Owning the 10 companies that will dominate, even if they look expensive, is all that matters. Nobody really knows who they are going to be.

Water the flowers and let the weeds wither and dry.

Who is to say there are not more winner take all companies coming our way?

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