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Proposed strategy
1. Holding 100% Berkshire in retirement account.
2. Selling covered calls 1 year out when valuation based on e.g. Mungo's rough estimate suggests forward returns of 10% or so. Demand 1.5% premium of call with strike price 15% over current price. So for example if stock is at 340 and predicted price is 374 in June 2024, sell covered call with premium of at least $5.1 with strike price 370.
3. If stock falls quickly and premium gain occurs quickly (like 50% gain in 1 month), consider covering call.

Has anyone examined this type of strategy?

It seems like since Berkshire is much easier to value compared to most stocks, this strategy might work quite well in a retirement account where taxes on activity are not an issue.

Of course if stock runs up past reasonable valuation and stays there for many years, you may never buy back the stock again. This however has not happened in the recent past (20 years).

Correction.
Strike price would be 390 not 370.

If you sell a june 2024 $370 call to get a $1440 premium, you risk 100 shares getting called away next year.

Compare that with selling just 4.2 shares now to get the same $1440, which you can put in savings earning about 4.7% interest until you spend it.

A quick look at the options tables shows that the $370 calls (and other high-strike price calls) have the lowest implied volatilities (which is the crappiest premiums) compared to calls at lower strike prices.

This suggests that the call premiums may not be sufficient to compensate for the risk of getting 100 shares called away next June, at what could be an unattractive price.

I guess the problem comes down to your confidence in predicting the future.

Anecdotal comments---

I've done it, and it works, but I find it often isn't really worth the bother with Berkshire.

Two reasons:
* Berkshire isn't frequently valued highly enough that you would want to add what amounts to a bearish position.
You don't want to write a covered call if it's still cheapish, because you're saying you're willing to sell at a price not too much higher.

* But more importantly, premiums for Berkshire generally aren't very high.
There is a price at which writing an option is a smart idea, and a price at which it's less so.

It also isn't very well suited to a taxable account.

I do write covered calls, but only when the valuation level gets quite good and I'd be interested in lightening up anyway.
Or I'm about to lighten up for other reasons (money to spend!) and I want to get just that little bit of extra dosh in return for some timing uncertainty.
Most recently I wrote some Jan 2023 $350 calls in March 2022 for $28.50 and bought them back for $12.05 in May 2022.
I could have done better in absolute terms by simply letting them expire worthless, but it would have been a lowish rate of return on the remainder of the term.
And of course in May it wasn't known that the price wouldn't crack $350 again for the rest of the year.


There are option strategies that do better, I have found, but they require picking different underlying stocks because of reason #2 above.
I find it's not too hard to do repeated cash-backed put writing against a group of stocks you consider cheap or fairly valued,
and end up with a rate of return that is roughly half way between [the total return on the stock in that period] and [10%/year].
The ideal candidate is a stock that isn't richly valued, ideally really cheap, but isn't going away, and stays unloved for long stretches so you can do it over and over.
I wrote repeated puts against WFC for a very long time, and did very nicely.
In years that option premiums are low, or prices too high, just don't do it that year. Do something else.
There is a price at which it's a great idea, and a price at which it's a poor idea.
You are running an insurance company. In a soft market for premiums, just cut back on writing policies.
It's a fair bit of work, though, like gardening. You have to check things regularly, culling the ones no longer offering a decent rate-of-return harvest and planting something new.

Jim

If stock falls quickly and premium gain occurs quickly (like 50% gain in 1 month), consider covering call.

Agree with all that the previous responders have said.

Additionally, if the stock goes UP more than the premium is worth, what will you do?

Let it go and forego (sp) the gains?

Or keep enough cash to buy it back? If the latter, then basically you are earning a very modest interest on that cash, in the form of the call premium. And you have to keep increasing the cash as BRK price goes up.

And what will you do with the premium anyway? Not buy more BRK I am guessing.
Sell stock if you want cash to do something else. No Damocles's sword over your head. BRK internal compounding has so far worked for Gates Foundation even with their mandated 5% selling.

To clarify.

I do buy BRK with the premium. For me, my IRA is a long term asset that won't require distributions for 15 years. I will almost certainly never need the IRA for expenses.

The hypothesis is that this strategy allows me to own more shares over that 15 years.

E.g. I recently sold some covered calls in my Roth for 8.24 with strike price 390 for June 21, 2024. I bought more BRK with the proceeds. Worst case scenario, I am forced to sell my covered shares at 390 (about 14% higher). I could always buy them back maybe at a higher price.

The theory is simply that BRK is more easy to value than S@P 500.

The hypothesis is that this strategy allows me to own more shares over that 15 years.

If your goal is to control more shares, I might suggest you look into the strategies for buying BRK Leaps. It's a little more risk for sure but a better use of your efforts valuing BRK in my opinion. Different strokes for different folks though.

Jeff

If stock falls quickly and premium gain occurs quickly (like 50% gain in 1 month), consider covering call.

Agree with all that the previous responders have said.

Additionally, if the stock goes UP more than the premium is worth, what will you do?

Let it go and forego (sp) the gains?

I find this is one of those times that "extend and pretend" is actually the best approach. Roll up and out, in the paralance.

Say you have written June covered call options.
The stock price recently has risen above the strike, so the outcome will be in a loss on a mark-to-market basis and the stock will get called away soon.
(basically nobody ever exercises a call while it still has time value left, it makes no sense to do so)

You can close that position for a loss and write new calls, say for September or January, that have a high enough time premium to overcome the loss and add a (small) profit if they expire worthless.
Longer time means more time premium.
This sounds a bit like a dumb martingale bet, doubling down on a bad bet, but not really: the higher the price, the higher the valuation multiple, and the less likely it is that the stock will go that high in any shortish time frame.
So you're doubling down, but the odds in your favour are better each time you do so.
You won't make a lot of money, since you entered your covered call too soon. But you'll likely still make money.
You also probably save the inconvenience, and perhaps tax consequences, of having to replace stock that has been called away.

Jim

The hypothesis is that this strategy allows me to own more shares over that 15 years.

Isn't it easier and simpler to do the other strategy, buying deep ITM calls with far out expiration when BRK is cheap as measured by low price-to-book? Funded by selling BRK.B stock and buying the same amount of calls. Sell when/if the price-to-book gets high. You effectively get 1.5X leverage on the BRK.B shares.

The theory is simply that BRK is more easy to value than S@P 500.

What is the range of price(s) you expect BRK and S&P 500 to be at, on July 15, 2028 i.e. 5 years from now? Ignore or include dividends. Assume Buffett is no longer with BRK.

What is the range of price(s) you expect BRK and S&P 500 to be at, on July 15, 2028 i.e. 5 years from now? Ignore or include dividends. Assume Buffett is no longer with BRK.

BRK - Intrinsic value will grow at inflation plus 6.5% per year. S&P 500 similar. Market price will correlate with that the further you look out.

Buffett not needed for those returns over the next 20 years.

BRK - Intrinsic value will grow at inflation plus 6.5% per year. S&P 500 similar.

For the S&P, the figure includes dividends paid along the way.
To get those as a percentage, you have to consider the purchase price to get a denominator for the yield.
So, strangely, just to figure out the value generation rate of the S&P you kinda have to consider the price situation. Odd.

Anyway, trend real earnings for the broad US market rose at inflation + 2.5%/year in the last 40 years. An unusually good stretch.
Dividends averaged 4.0% during the stretch 1928-2004.
Add them together and you do get about inflation + 6.5%/year, the usual long run return from US stocks, often called Siegel's constant.

But dividends are about 1.5%/year right now, so in the sense that we have to consider the starting yield to estimate value generation, it might make more sense to expect S&P real value generation of something like 2.5% + 1.5% = 4.0%/year from here as a very rough guess.

Incidentally, Siegel's constant of ~6.5%/year real total return is an interesting number, as it has been surprisingly stable for generations.
But for the longest time that was basically real trend earnings growth of around 2%/year (or a pinch less) plus dividends of around 4.5%/year (or a pinch more).
Since the late 20th century that was replaced with lower dividend yields but an added factor of slowly expanding valuation levels, still adding up to around the same figure.
As valuation multiples probably can't expand forever, this observation has implications for extrapolation : )

Jim

Hi Jim

Shouldnt we also account for the growing prevalence of share buybacks?


"But dividends are about 1.5%/year right now, so in the sense that we have to consider the starting yield to estimate value generation, it might make more sense to expect S&P real value generation of something like 2.5% + 1.5% = 4.0%/year from here as a very rough guess."

Shouldn't we also account for the growing prevalence of share buybacks?

Nope.
Since most buybacks aren't on average done at valuations below true value, they don't add value to that stock or to the index.

On average a stock isn't worth any more the day after a buyback than it is the day before. The earnings per share go up, but the cash per share goes down.
Some people look at the first one and totally forget about the second one.
Since it's true for the average stock, it's true for the set of all stocks.

There are some things that truly change the value of companies and the trend line of that value.
For example, the huge rise in US net corporate profits margins in the last 20-40 years is a true boon.
But that's baked into the index valuation method I use, which is the series of recent real profits, just smoothed.
There is a bit of lag, but US net margins have been high for quite a while now. Since 2006, except for the short sharp dip during the credit crunch.
Other than the credit crunch bungee, they haven't even dipped as low as the very highest level seen in the stretch 1951-2004.
More of GDP to net corporate profits, partly because a lower share has been going to employees. Also lower tax and lower real interest costs.

A huge broadly-based increase in corporate leverage will also boost profits, for a while at least.
The average tends to get pulled down again later on when some of the bigger companies go to zero from the added brittleness.

There are also things that don't actually add to true value, but change the amount apparent value because of higher reported net profits.
e.g., the small rise in apparent profits arising for the cancellation of the requirement to amortize all goodwill from acquisitions.

But buybacks aren't a factor.

Jim

On average a stock isn't worth any more the day after a buyback than it is the day before. The earnings per share go up, but the cash per share goes down.

Do mine eyes deceive me? That proves the EMH (efficient markets hypothesis)!
If the company buying back stock did not increase or decrease value, then they paid exactly the price that the future earnings were worth, discounted to present, per share. (Overall size of earnings and book value both decreased in a perfectly +1-correlated way.)

Just kidding. Nobody knows the future value, least of all CxOs whose compensation is tied to quickly increasing the stock price now, regardless of the distant terminal value.

Just kidding. Nobody knows the future value, least of all CxOs whose compensation is tied to quickly increasing the stock price now, regardless of the distant terminal value.

Yeah, well, I guess I was being a bit generous suggesting that buybacks were a wash on average : )
They're almost certainly done above fair value on average across time and different companies, and therefore value destroying in aggregate for continuing shareholders.
The main witness for the prosecution is how pro-cyclical the buybacks are: low buybacks when the market is low, lots when the market is buoyant and prices are over the top.

Even when buybacks are done at seemingly high valuations, and even when they ARE slightly value destroying, sometimes there isn't another really good choice.
I can't really think of anything else that (say) Apple could do with all that money. The goggles were expensive to develop, but not THAT expensive.
Buy Berkshire shares?
Even that wouldn't soak up all that spare cash flow for long.

Jim

... even when they ARE slightly value destroying, sometimes there isn't another really good choice.
I can't really think of anything else that (say) Apple could do with all that money. The goggles were expensive to develop, but not THAT expensive.
Buy Berkshire shares?
Even that wouldn't soak up all that spare cash flow for long.


I can think of one thing that could soak up a lot of cash - just pay out a massive dividend. They had earnings of $100b last year, and paid out $15b in dividends, while repurchasing shares for $89b. My modest proposal: just pay out $100b in dividends, suspending the repurchases, begun when the PE ratio was less than 10. And resume the repurchases when the anticipated ratio is, say, 20.

As a vicarious shareholder of Apple by virtue of Berkshire, I would much prefer seeing a big dividend than more share repurchases of a company that is now trading for 33 times earnings with an annual growth rate of 15% over the last 3 years, a growth rate that is, in my opinion, likely to be hard to maintain even at that level.

dtb

"As a vicarious shareholder of Apple by virtue of Berkshire, I would much prefer seeing a big dividend than more share repurchases of a company that is now trading for 33 times earnings with an annual growth rate of 15% over the last 3 years, a growth rate that is, in my opinion, likely to be hard to maintain even at that level."

I don't want a big dividend. With respect to Warren, he seems quite content for Apple to continue buying regardless of the valuation so Berkshire's ownership level creeps up. I see this as one of his contradictions in that one could reasonably argue Apple should buyback in a variable manner based on market conditions.

With respect to Warren, he seems quite content for Apple to continue buying regardless of the valuation so Berkshire's ownership level creeps up. I see this as one of his contradictions in that one could reasonably argue Apple should buyback in a variable manner based on market conditions.


Exactly. Buffett has often said that it only makes sense to repurchase when shares are trading beneath intrinsic value, and he certainly puts this principle into practice regardiing share repurchases of Berkshier. But he nevertheless regularly applauds Apple's repurchases, even if Apple's stated repurchase policy makes no reference to price.

Maybe Buffett just loves having more Apple and that happiness overcomes what should be his objection to a price-conscious approach. I don't know, but it is indeed hard to understand.

dt

My modest proposal: just pay out $100b in dividends, suspending the repurchases, begun when the PE ratio was less than 10.

That would be rational, but of course wildly unpopular.
First, the dividend would be a big tax nuisance for a whole lot of people.
(If I held Apple stock directly, I'd probably sell it before the ex-date and buy it back after)

And of course the rational dividend policy that you outline (and which I endorse) is exactly the opposite of what people want:
they want solid dividends even more when the price is low, as won't feel like selling any shares and are generally feeling poor.

A compromise which might be pretty rational capital allocation AND make people somewhat happy:
When the valuations are high, let the cash stack up.
Next time the valuations are low, blow half of it on buybacks (tender offers are nice) and half of it on a special dividend.

The problem, as always, is nobody ever knows when valuations will get low again, nor how low they might get.
I guess you could at least try a trigger rule like "cheapest in the last 4 years" on a couple of metrics.

As a vicarious shareholder of Apple by virtue of Berkshire, I would much prefer seeing a big dividend than more share repurchases of a company
that is now trading for 33 times earnings with an annual growth rate of 15% over the last 3 years, a growth rate that is, in my opinion, likely to be hard to maintain even at that level.

Indeed.
I am forever trying to get my head around the circularity of the problem caused by the intersection of large buybacks and market valuations.

Imagine a fabulous underlying business wrapped in a corporate shell which is very cash rich, more cash coming in than the great underlying business activity can deploy.
They should do buybacks: it's a fabulous underlying operating business, and they don't need the cash.
But let's say the shares are trading at a high multiple of visible profits and ostensible value.
If the multiples are high, then the very same underlying business doing buybacks is not as high quality at the overall corporation level:
Among other activities, they are allocating lots of capital at high multiples of current earnings (a low ROIIC),
into a company that isn't all that great specifically BECAUSE they are allocating lots of capital at high multiples of earnings in a business that isn't all that great specifically BECAUSE they are allocating lots of capital at high multiples of earnings in a business that...etc.
So the firm doesn't really deserve the high multiples it's getting, and the buybacks aren't all that smart after all.
The more you expect a firm to do big future buybacks at high valuation levels, the dumber buybacks are at any given high valuation level.

Yet if they were trading at low multiples, this same feedback loop makes the buybacks smarter and smarter and the business more and more valuable, and therefore deserving of higher multiples...
until they get them.

Bottom line, I guess a long run policy of large buybacks even through periods of high valuations makes sense (to an extent) only if you don't expect the high valuation levels to be permanent.
The lower the future valuations (because of future buybacks), the more sense it makes to be a buyer at current high valuations, and vice versa.
If I am going to be an indirect holder of a huge Apple position in the next decade, I sure hope the share price is horrible most of the time.

Jim

Maybe Buffett just loves having more Apple and that happiness overcomes what should be his objection to a price-conscious approach. I don't know, but it is indeed hard to understand.

There's an upside and a downside.
You might as well celebrate the upside (more ownership over the long run), since there is really nothing to be done about the downside: Buybacks at high prices aren't as good as buybacks at low prices, but still better than any other viable alternative they have.

One might argue that the best for us as Berkshire shareholders would be a huge Apple dividend, then have the cash received by Berkshire used to buy Berkshire shares.
Interesting exercise: would that benefit us more, or less, than Apple buying Berkshire shares?

Jim

If only Buffett could pull off a deal with Apple, similar to what he did with Washington Post and PG - a tax free exchange of an Apple subsidiary for some of the Apple share holdings.

I don't believe that's possible. Unusual for a huge consumer/ tech company, Apple has been very focused and has not accumulated businesses which do not fit in with the rest.

One might argue that the best for us as Berkshire shareholders would be a huge Apple dividend, then have the cash received by Berkshire used to buy Berkshire shares.
Interesting exercise: would that benefit us more, or less, than Apple buying Berkshire shares?

Intuitively, I would say that that the former is far superior to the latter.

If Apple pays a special dividend, say $100b, then Berkshire gets $5.8b of it, pays the taxes (50% of 21%?) and buys back its own shares. If you think Berkshire is worth 20% more than it's going for on the market, then using the after-tax $5.19b to buy that gets us about $1.04b of new intrinsic value.

If Apple buys Berkshire shares for an equivalent amount, then Apple gets a $20b boost to its intrinsic value, but we only own 5.8% of Apple, so we only get $1.16b's of new (pre-tax) intrinsic value.

So my intuition seems wrong, maybe just buying Berkshire shares would be a little better, as long as we intend to hold onto those Apple shares for a long time, since the difference is in the tax. IF the tax is postponed for a very long time, which I presume is Buffett's intention, then this solution would work, at least for Berkshire.

The third option, Apple using that $100b to repurchase shares (which is approximately what it is doing right now, means we get $5.18b more Apple shares and $5.18b less cash. If Apple is overvalued by the market right now, as I think, maybe by 50%, that means we have a higher Apple stake (Yay!) but we will stil have lost $1.7b in intrinsic value (Boo).

One other thing - I suppose we should start including, in these discussions, the new 1% excise tax on repurchases, which is in place since the beginning of 2023. This would tip the balance slightly away from repurchases and towards dividends (although of course if Berkshire uses its Apple dividends to repurchase its own shares, it would end up paying it anyways.

dtb

Apple's moat is not unbreachable. Also, trees, sky.
Hamburger (dividend) now. Especially as opposed to buybacks at high multiples.

"Apple's moat is not unbreachable. "

perhaps so . Their ecosystem and walled garden just grows and grows. Even Warren has taken a bit of the forbidden fruit.

Apple's moat is not unbreachable. Also, trees, sky

I think that for the next decade Apple can maintain their moat, and keep earnings per share rising in double digits, and keep a premium multiple!
I just don't think we will see extremes of any of those things : )

Analysts generally think EPS will rise at (nominal) 10.5%/year in the next couple/few years, give or take.
At current inflation rates, that might mean inflation + 6.5%.
Let's be optimistic and double that:
Let's say I pencil in a very optimistic inflation + 13% to start (over 17% nominal), but with a gradual slowdown to (say) inflation + 7% ten years out.
As you say: trees, sky. Plus they may not get high rates of return on their buybacks. Even inflation + 7% is very good.

They're trading at 33 times trailing earnings at the moment.
Per my usual rule, I don't want to assume too much optimism in the distant future, so let's say that gradually goes down to very high teens.
That's still definitely a premium multiple, just not an exuberant one any more. You might see more, but it's best not to count on it, especially as growth inevitably slows.

What would that suggest for future returns after inflation? A bit ho-hum.

Years    Real EPS      EPS     P/E  Real Price
    0                $5.89    33.0      $194
    1      +13.0%     6.66    29.6       197
    2       12.1%     7.46    27.0       201
    3       11.3%     8.31    24.8       206
    4       10.6%     9.19    23.1       212
    5        9.9%    10.10    21.7       219
    6        9.2%    11.03    20.6       227
    7        8.6%    11.99    19.7       236
    8        8.1%    12.95    19.0       246
    9        7.5%    13.93    18.5       257
   10        7.0%    14.91    18.0       268

This particular trajectory is pretty optimistic on real EPS growth but more conservative on ending multiples.
It implies the average EPS growth rate in the stretch 5-10 years from now might be inflation + 8.4%, and the average P/E multiple 19.6.
The average price 5-10 years from now would then give a return of inflation + 3.0%/year.
Add maybe half a percent for dividends, so let's say around inflation + 3.5%/year real total return for holds in the 5-10 year range from here.

That's NOT a prediction, just the result of a particular "what if".
Modify your assumptions to suit your temperament, but your expectation for returns should be consistent with your assumptions.

I think the firm will do very nicely, but I don't really expect any exciting market returns for the next few years.

Jim

My vote goes to a special Large dividend from APPL with true excess cash at this valuation. BRK would only pay 14% on the dividend in taxes as it's held within the insurance cos. I trust WEB to allocate more wisely than I do Tim, but we gotta hand it to Tim- over 40% shrinkage of share count over 10 years- pretty dang Impressive! Agree, WEB is like a teenager in love wrt Apple, Tim Cook and it's incredible sticky ecosystem so I think he does not mind the pricy buybacks here as much given he gets a larger piece of the long term pie for his partners and sees it as the Hope Diamond. Yes, call me a fanboy, but I find it quite hard to trim such a gem, even knowing it's very likely overvalued. Nearly always regret trimming my long term flowers in the garden.

<I think that for the next decade Apple can maintain their moat, and keep earnings per share rising in double digits, and keep a premium multiple!
I just don't think we will see extremes of any of those things : )>

I wouldn't say that for the high tech in general. Generative AI, VR/AR, self-driving, electric cars/trucks/airplanes, all have the potential to create huge new markets or upset old ones.

<I think that for the next decade Apple can maintain their moat, and keep earnings per share rising in double digits, and keep a premium multiple!
I just don't think we will see extremes of any of those things : )>
...
I wouldn't say that for the high tech in general. Generative AI, VR/AR, self-driving, electric cars/trucks/airplanes, all have the potential to create huge new markets or upset old ones.

You're probably right, no doubt we're about to see some shuffling in the list of "winners" at various sizes, in both business results and market caps.

My comment was purely about Apple, both moat durability and the problems of high starting valuations.

But I suppose much of the price forecasting method could be applied to the others, individually or (especially) as a group, even if their moats continue to hold water.
Average railing earnings yield for Apple equates to a P/E of 33.
Weighted average trailing earnings yield for the other six biggies equates to a P/E of 51.5.
Simple average trailing earnings yield for the other six equates to a P/E of 56.6.
So the others in aggregate have the same problem, only more so.

These are all very big firms...the biggest.
Taken as a group, they're practically a whole statistical universe.
My thought is that it will take some very high growth rates to grow into those valuations any time soon...and that's without any disruption hitting them.

I think the businesses will do fine overall, but the stock returns from here mostly look unrewarding to me without some implausibly optimistic assumptions.
And the big seven account for 27.5% of SPY, so if the broad market is a rocket ship in the next 5-10 years I wouldn't count on these being the fuel powering it.

Number 8, the next biggest firm, is of course Berkshire. We're number 7 by revenue and also by profit.
Long may she sail.
I guess that consistency in the three rankings is a demonstration that Berkshire is pretty typical of the economy in terms of things like net margins and valuation.

Jim

...but I find it quite hard to trim such a gem, even knowing it's very likely overvalued. Nearly always regret trimming my long term flowers in the garden.

After years of back and forth, I have finally come to the conclusion that for me, it makes sense to trim things that seem overvalued...
but ONLY when I have a better idea at the time for deploying that money.

Lightening up on something pricey to immediately buy something else better is fine.
i.e., to buy just as good a security (in your eyes) but with a much better return in a reasonable time frame because of a better ratio of price to near term value.
For example, if I had cash in Apple today I wouldn't feel bad moving that into Alphabet today. (based on my own assessment of relative attractiveness--others may disagree)

But selling something pricey and hoping to get back into the same security at a better entry price is much more of a challenge. It's not guaranteed to make you better off.
You never know if the drop will come, or when, or how cheap it might get.
You have to be pretty darned sure that a meaningful drop is coming, and that's rare.
And the next day of cheapness might not even benefit you in absolute terms if it takes too long: the value can grow up to meet what was previously a high price.
I still do this sometimes, but only when my assessment of plausible near term returns actually turns negative.

Jim

"For example, if I had cash in Apple today I wouldn't feel bad moving that into Alphabet today. (based on my own assessment of relative attractiveness--others may disagree)"

Jim, I'm curious about your thesis for Alphabet. I own the stock but I've been a bit concerned that Valueline has dropped their estimated EPS for the firm.

For example, in their report dated February 3, 2023, Valueline estimated that the EPS of Alphabet during the 2025-2027 will be $10.25. Given this EPS, the stock price of the firm at that time (say, between $90 to $100, going by memory) seemed quite attractive, given your rule of not paying more than 10 to 12 times the estimated EPS 5 to 10 years from now.

However, in their most recent report (dated May 5, 2023), they estimate that the EPS of Alphabet ONE YEAR LATER (i.e., 2026-2028) will be significantly lower ($8.00). Moreover, the stock price now is also higher at $122.03.

"For example, if I had cash in Apple today I wouldn't feel bad moving that into Alphabet today. (based on my own assessment of relative attractiveness--others may disagree)"
...
Jim, I'm curious about your thesis for Alphabet. I own the stock but I've been a bit concerned that Valueline has dropped their estimated EPS for the firm.


I wouldn't put too much weight on changes to short term changes in the Value Line projections.
Nor all that much in their projections in general : )

Mostly, it's a "coffee can" play. I bought some at a reasonable valuation, with the intent of forgetting about it and holding onto it for a long time.
I think their business is extremely formidable: indispensable, amazingly profitable, and still growing.
I don't think regulatory attacks or "disruptive" new technology will faze them materially.
If you gave me a cheque for (say) $500 billion, could I set up a company in competition, undercut them a bit and take away 1/3 of their profits?
My guess is "nope".


As for financial projections, I keep it simple.
Valuation levels are not obviously cheap of course, but you're buying very high quality goods.
Whatever you think the highest future multiple a firm might reasonably justify is, this one deserves it.
I imagine revenue per share will rise for a very long time to come, at rates considerably higher than the valuation multiples will need to fall from here to stay justified.
Net profit margins are forecast to expand, but 20% is fine for me.


All that being said, I know myself: coffee-canning isn't my usual thing.
If I see a new great opportunity while GOOGL is richly valued, I'll probably lighten up to seize the new one.
But I should probably just "set it and forget it".

Jim

If you gave me a cheque for (say) $500 billion, could I set up a company in competition, undercut them a bit and take away 1/3 of their profits?
My guess is "nope".

I think I'd find it nearly impossible to usurp the king in search. But luckily Alphabet's profits don't come directly from their search algorithm, but from advertising on their search results. The distinction sounds like a stupid one until you realize no one actually got better at local news than newspapers, they just stole the advertisers away.

Google search advertising is particularly powerful compared to newspapers because you tailor each ad based on what the user is searching.
I was surprised to learn (from googling it lol) that alphabet's average search revenue per user per year comes out to $349.29. Google's search is very good, repeatable, and (usually) has a low incidence of junk, but I would not pay $29 per month for it. As long as a free option remained, I think I'd pay maybe $1 to $5.

A social media site could compete because they have lots of user engagement and data. When I was less disillusioned by Telsa, I considered how interesting advertising in a self-driving car would be. Tap this button and be driven to my store, or restaurant. Sort of like a pay-per-click you get a pay per delivered person.

Anyway, it's important to acknowledge where the income stream comes from so we can be aware if something starts eating away at profits.

"First, the dividend would be a big tax nuisance for a whole lot of people.
(If I held Apple stock directly, I'd probably sell it before the ex-date and buy it back after)"

This (selling it and buying back) would be an even BIGGER tax nuisance for most people!

Today, I sold some covered calls for June 2024. 400, 410, and 420. For someone like me who won't need and doesn't plan to sell any for at least 3-4 years, this seems like a decent play.

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