Author Topic: BRK correlation to market  (Read 870 times)

investmd

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BRK correlation to market
« on: October 11, 2018, 03:08:06 PM »
As much as it makes complete sense to me to choose stocks based on metrics advocated by Value teachings, how does it work when markets are so correlated? Yesterday, there was a correction and DOW was down 800 points. Pundits have been calling for a correction. Primary reason for market correction being tech and FANG stocks in particular had increased dramatically and trade at  high P/E multiples. Makes sense.

What I'm confused by is BRK fell approx 4.5% yesterday and Facebook also fell by 4.5%!! The general idea behind holding BRK instead of FB is that BRK has underlying value (assets) and is likely to steadily grow revenues over time. Fair enough. However, if BRK suffers the same fate as FB in a "correction" how does holding BRK pay off?

To me the "science" and theory of value investing makes complete sense but if markets are so well correlated, does the theory play out??
Disclosure: 100% of my assets are in the "value" bucket.


John Hjorth

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Re: BRK correlation to market
« Reply #1 on: October 11, 2018, 03:16:04 PM »
investmd,

It's discussed in depth in this topic within the last week or so.
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

flesh

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Re: BRK correlation to market
« Reply #2 on: October 13, 2018, 08:53:20 AM »
If you zoom out a bit the correlations change. Consider there was a prolonged market sell off or market contraction lasting 2-4 quarters.

Brk's robust or perhaps anti-fragile (at times when it has such a % of cash/mkt cap ratio as today) nature would shine through. Buybacks would be aggressive, acquisitions would occur for the first time in years using mostly cash (that's been earning next to nothing TTM), and cash would be put into equities at better prices/in large quantities/higher dividend yields. There would likely be some sweet heart deals. 
Additionally, brk's fcf yield is higher than the index and that cash would be put to work.
Considering the above, what would happen to the average company in the index over the same time period? Obviously people would notice the difference.

In a normal economic contraction/sell off I expect the price of brk in it's current form, would be more uncorrelated the further the price of the indexes went down, over time that is, conversely it would not be true in acute days/weeks/month's.




Cigarbutt

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Re: BRK correlation to market
« Reply #3 on: October 13, 2018, 09:02:07 AM »
If you zoom out a bit the correlations change. Consider there was a prolonged market sell off or market contraction lasting 2-4 quarters.

Brk's robust or perhaps anti-fragile (at times when it has such a % of cash/mkt cap ratio as today) nature would shine through. Buybacks would be aggressive, acquisitions would occur for the first time in years using mostly cash (that's been earning next to nothing TTM), and cash would be put into equities at better prices/in large quantities/higher dividend yields. There would likely be some sweet heart deals. 
Additionally, brk's fcf yield is higher than the index and that cash would be put to work.
Considering the above, what would happen to the average company in the index over the same time period? Obviously people would notice the difference.

In a normal economic contraction/sell off I expect the price of brk in it's current form, would be more uncorrelated the further the price of the indexes went down, over time that is, conversely it would not be true in acute days/weeks/month's.

From the 1961 partnership letter:
"I have consistently told partners that it is my expectation and hope (it's always hard to tell which is which) that we will do relatively well compared to the general market in down or static markets, but that we may not look so good in advancing markets. In strongly advancing markets I expect to have real difficulty keeping up with the general market."

Given the historical record, would say that hope and expectations have tended to converge with reality, with a premium.
Reasonable to expect more of the same.