I intend to write an indepth post detailing my views on Berkshire Hathaway. Before I do that, for full disclosure it is appropriate that I place here my earlier public comments on the topic.
My Comment on 1 November 2016 at “Is Berkshire Hathaway a Victim of Its Own Success?“
Whilst I agree with your depiction of the challenges that BH faces, Tim, I am not sure that you amply discussed the nuances (which admittedly is not easily done with the brevity required in a blog article) and the favourable factors it possesses with reference to the current and likely future investment environment.
When I look at that graph of rolling 10 year performance it springs immediately to my mind that BH peaked in the early to mid 1980s coinciding with a very significant historical point in markets – the commencement of the great bull market. It’s generally accepted that there have been two periods of serious under-pricing of BH stock – when markets have become irrationally exuberant with “new era thinking” overtaking tried and tested, old-school investing (of which Buffett and Munger are the poster boys) – the late 1990s tech bubble and the euphoria running up to US property market crash.
The current very high prices for stocks makes me wonder whether we aren’t in fact experiencing another significant relative undervaluation of BH which will become apparent over the years ahead. (I know that statement might seem silly with it trading around 1.3x book but one only need consider that 30 year US treasury bills with a 13.5% coupon were not seen as a lay-down-misere in 1984, but were a hard sell, to understand how difficult it can be to see opportunity in markets.)
Perhaps a case can be made that BH stock performance displays a general inverse relationship to the level of enthusiasm towards the stock market. I realise this might seem counter intuitive initially, but on deeper reflection, perhaps not…
The straightforward, ethical, common-sense approach is not particularly amenable to hyperbole and slick advertising by ticket clippers making hay while the sun is shining brightly on a bull market.
If we also consider just how rare it is for businesses to steer clear of the wall street crowd – the $million dollar fee consultants recommending all manner of mergers/ acquisitions/ general financial shenanigans – and the fads that short-sighted executives follow (such as paying out record high proportions of earnings, or even borrowing to pay dividends, rather than investing in growing the business, as they do presently) I would tend to think that BH has a huge advantage over many capital allocators that gives their managers a better than average chance – even with all of their challenges – of outperforming for at least another decade or more…
My Comment on 7 October 2017 at “Robert Shiller Warns Us to Prepare for a Bear Market“
Long time fan of Shiller – all versions of Irrational Exuberance are on the book shelf and occasionally re-read in part or full…
So today I am milking the conformational bias for all it’s worth – yesterday I put in the sell order on my Berkshire Hathaway shares after 3 years of ownership – only disappointment the higher AUD (but proceeds will go into USD ETF to continue that exposure, as I did in my initial two-stepped purchase strategy)…
The thing that people need to realise is that timing for individuals is very different than for Fundies… the question I ask myself is what is the probability that I will be able to buy this same asset at a lower price some time in the future… if my answer is high then I will very strongly consider going to cash or choosing another asset which is likely to outperform in the intervening period…
I am unsure whether I will ever buy BRK again… I think that BRK has a massive advantage in that their credibility is so high that they have earned the right to genuinely invest with a long term view in mind – they are impervious to wall street shenanigans and pressure.. thus they are rare in the current environment (low yield) where many capital allocators are feeling pressure to maximise payments to owners rather than investing for future growth… And I am a major fan of Buffett and Munger… But that is not a basis to allocate capital, and the major nagging in my mind is that – while what these guys have done over the last few decades, every bit including up until today, will ensure that the company will perform well when they are gone, there will be inevitable turbulence when they do pass… And sadly, with Munger well into his 90s and Buffett only half a decade behind, well even their cash can not have them beating the odds for much longer – though they are a wonderful example of the benefits of their oft mentioned “healthy” diets 🙂
Back to timing, from late 2004 I was sceptical on the stockmarket and so, even though quite young (and theoretically able to withstand a significant drop in invested capital), I clamped down allocation to stocks to 50% (so didn’t get the full value of the market run up) and by 2007 liquidated and went to cash… didn’t really matter how long I had to wait, I was confident I would have the opportunity to buy those assets cheaper in the future…
Through 2008 I bought and bought equities, and by complete luck finished my buying (reached 100% equity allocation) a week or two before the trough… In 2013, after having traded in and out with some range trading, I figured that the hammered Gold Coast apartment market was significantly undervalued and invested (which again by some luck turned out to be pretty much the trough)…
Fung managers can’t behave in this way for obvious reasons… a 30% cash position, that Roger and others of the more cerebral and contrarian fundies, places pressure on them to explain this relative to the title of their fund, especially by investors who are employing their own capital allocation nouse.
But I think employing blind dollar cost averaging or the like for an individual investor is crazy, would suggest that taking a strong interest in markets and understanding that timing markets – whether broad markets or in individuals issues such as stocks (in other words buy low sell high) – is the way towards superior returns is the way to go… And as any of these generous finance thinkers who regularly publish their thoughts will tell you, if you think by timing you need to be accurate within a day, week or even a month, that might be the case for fund managers (who come under increasing pressure the longer market prevailing behaviour continues), you don’t need to be anywhere near that accurate in your timing to profit handsomely…
All that matters is what are the chances that I can buy this at a later date for a lower price if I should so choose (and yes, taking into account relative yields in the intervening period)…
© Copyright Brett Edgerton 2019
MacroEdgo 