Author Topic: 2018 Valuation  (Read 15559 times)

Dynamic

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Re: 2018 Valuation
« Reply #40 on: April 25, 2019, 11:04:08 PM »
@Lemsip - I notice those dates as periods when  Berkshire was particularly cheap within its moderately narrow range and when I also took advantage. The decline in GBP also boosted those returns.

My overall IRR with Berkshire stock alone is a little lower but still market beating when compared with total return index purchases and sales I could instead have made on the same dates for SP500TR and FTSE100-TRI, this over a period since July 2003 when I purchased around 1.6* Book Value and left the position untouched for 11.25 years. Even if I'd only held the original not-especially-cheap July 2003 position until now, about 15.75 years on, despite a P/BV decline, my CAGR on that tranche alone would still exceed the SP500TR by 0.37% and the FTSE100-TRI by 3.33% giving me $4.26 per dollar invested vs $4.04 S&P or £5.26 versus £3.25 in FTSE. That has made a solid foundation for portfolio growth as my default purchase in which I feel safer in terms of value preservation than the index yet earn about the same return or a few percent more by improving my buy and sell prices since that original purchase.


Lemsip

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Re: 2018 Valuation
« Reply #41 on: April 26, 2019, 01:46:48 AM »
@Dynamic, I have also held Berkshire from 2002 but my recordkeeping till 2015 was haphazard at best so hard to calculate the overall IRR but suffice it to say the investment has worked well and allowed me to sleep at night.

You make a crucial and often underappreciated point about the relatively small range of price that Berkshire usually experiences. In the list of stocks I follow it has the lowest range between highs and lows in the last 1 year ( a particularly volatile one in the markets) apart from Unilever ( 18% and 15%)

What this means in practical terms is that if you are a buyer or a seller, the difference between picking the absolute best time to buy or sell in any year is much less than the average stock so over the long term, you are unlikely to be penalised much for unfortunate timing, when evaluated over a 5 year period.

Finally one of the characteristics of Berkshire is that it has to be held as a 5 year+ position to evaluate performance.  It's the wrong business for quarterly excitement. It can go through long-ish periods of price stagnation and in retrospect they tend to be good opportunities to lock-in safe and significant returns.

Paarslaars

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Re: 2018 Valuation
« Reply #42 on: April 26, 2019, 02:26:05 AM »
Buffett sat down in his office for a rare newspaper interview with the FT, lasting nearly three hours.
At the outset, he was asked which would be the better investment to put in a child’s account — a
share in Berkshire, or a share in the S&P? He did not hesitate: “I think the financial result would be
very close to the same.”


Should this be taken literally, or is this under-promise, over-deliver?

This quote was taken from a recent interview that gfp posted in a different thread:
https://www.ft.com/content/40b9b356-661e-11e9-a79d-04f350474d62

Even if the return would be the same, I believe BRK would do it with less variance than the S&P, so it would still be the preferred investment.

Dynamic

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Re: 2018 Valuation
« Reply #43 on: April 26, 2019, 07:13:20 AM »
@Dynamic, I have also held Berkshire from 2002 but my recordkeeping till 2015 was haphazard at best so hard to calculate the overall IRR but suffice it to say the investment has worked well and allowed me to sleep at night.
Haha, I have a similar situation for some of the same sort of period. I've managed to piece together most of my client ledger, but I'm missing a few exact dates and prices from early trades in the the time before I switched my broker to allow non UK trading. Luckily my exact Berkshire purchases are ones I kept track of, and Yahoo Finance helped out with historical exchange rates to convert them to USD.

Mine was in an ISA so no need to keep records for tax purposes and BRK.B gave me the added advantage of no dividends to reinvest and pay withholding tax on, giving me a further advantage over an S&P500 index fund. There turned out to be other advantages over the equivalent index fund investments based on what I could fund with the proceeds in 2014-2015 when the index was lagging considerably, perhaps more by luck than judgement.

Quote
You make a crucial and often underappreciated point about the relatively small range of price that Berkshire usually experiences. In the list of stocks I follow it has the lowest range between highs and lows in the last 1 year ( a particularly volatile one in the markets) apart from Unilever ( 18% and 15%)

What this means in practical terms is that if you are a buyer or a seller, the difference between picking the absolute best time to buy or sell in any year is much less than the average stock so over the long term, you are unlikely to be penalised much for unfortunate timing, when evaluated over a 5 year period.

I agree with that and what @Paarslaars said, and would add that in addition to this, I'm happy knowing what I'm buying in Berkshire, the integrity and honesty of my business partners and the diversity of its earnings streams, with its relatively consistent IV compounding rate in all economic climates being close to that of the S&P500 long term and with the price being below a conservative estimation of IV by a relatively consistent margin over time.

With an index fund I'm less certain of that, but make up for some of the uncertainty with a little extra decorrelation among the constituents, but I feel Berkshire is the better bet for me almost all of the time (or if I feel it's a little pricey I may just wait in cash until it's in the lower part of its range). It's also why I'm entirely happy holding a 100% weighting in Berkshire for the long term.

So while BRK.B is a bedrock of meeting my long-term compounding goals, since I became more active as an investor I have also found BRK.B to be useful currency in funding rare high-conviction opportunities (e.g. 25%+ cagr) where I might want to put in, say 25% of my portfolio.

BRK.B is usually trading at a similar or lesser discount to IV than when I bought it, so I'm usually gaining around 10% a year (way better than holding cash) while I'm waiting, I'm usually paying a price towards the lower end of Berkshire's trading range, and I'm very unlikely to lose very much purchasing power in the short term even if I happen to come across that other big opportunity within months of purchasing more Berkshire.

I'd imagine I'd be very unlikely to lose more than 10-15% this way by the time it came to sell some BRK.B, and I'd be much more likely to gain while waiting, and that the margin of safety in the High Conviction Opportunity would far outweigh my low-likelihood 15% loss in any case.

So I've emotionally prepared myself to eat the loss and not paralyse myself through loss-aversion into missing out on the HCO. It's a matter of my own temperament that I've prepared my mind and twisted my thinking to overcome my loss-aversion instinct enough to relish the taking of a certain 15% loss in BRK.B over a few months as part and parcel of the process of locking in a high conviction opportunity for a much larger potential gain in the future.

I guess I give my self a little dopamine reward when I recognise I've overcome such a cognitive bias just as I do when cutting my losses (or sub-par gains) in selling positions where my original thesis has changed. I think the most loss I've actually taken on my most recent Berkshire purchase to buy into a high return opportunity is just short of a 5% loss in about a month, and far more often I've gained purchasing power (e.g. 15% in 3 months) while waiting.

I think having Berkshire as the bedrock of my portfolio doing all the compounding that I need and expect also helps me to remain focused on waiting for opportunities that truly meet my high conviction threshold instead of just buying things that look reasonably priced but don't really scream out as bargains.

Quote
Finally one of the characteristics of Berkshire is that it has to be held as a 5 year+ position to evaluate performance.  It's the wrong business for quarterly excitement. It can go through long-ish periods of price stagnation and in retrospect they tend to be good opportunities to lock-in safe and significant returns.

Yes, I'd agree that the index can go on a tear from time to time, while Berkshire stagnates, and I'd expect Berkshire's IV to compound close to or slightly lag the index when the index is rising, but to materially beat the index most times when the index is falling. There can often be a time lag between the index recovering from a down period and Berkshire's price recovering fully, so you can certainly find yourself regaining ground very much slower than the index in times like the last few months!

longinvestor

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Re: 2018 Valuation
« Reply #44 on: April 26, 2019, 07:42:22 AM »

Should this be taken literally, or is this under-promise, over-deliver?


Buffett has been saying this almost verbatim at least since the mid 80s. I wouldn't take it literally but as a prudent reminder to keep expectations modest.

I much prefer it to management teams offering confident forecasts of shareholder return of 15% over 5 years etc.

Berkshire will deliver a 10% or so return in almost all market environments over a 10 year period ( more if you enter during a weak period). Good enough for me as a bedrock holding in a portfolio.

Amidst all the criticism of Berkshire performance etc, I just did an IRR calculation on my position for the last 4 years. With significant buys in Aug-Dec 2015 and July 18-Feb 19, the IRR is 17.4% in GBP and 11.7% in USD.  And this with an endpoint where Berkshire has been flatlining since the new year, is sitting on gobs of cash and the business is chugging along well.

I'd take it anytime.

Very true indeed, the boilerplate comparison versus the index is for a mass (general) headline number. As uber concentrated investors in Berkshire, I've found it nearly impossible to not take advantage of price mislocations over the past 10 years. Like you, I've caught the bottom of every pull back over this time frame. Good news for me is that we have been in accumulation phase of our life during this time. My return has closely mirrored the index over this period but...

.. starting points for the comparison have mattered. Data from the annual letter page 2.

10 year: January 1, 2009 to January 1, 2019: BRK 13.15%; S&P 13.66%
9 Year: January 1, 2010 to January 1, 2019: BRK 14.3%; S&P 12.23%

5 Year: January 1, 2014 to January 1, 2019; BRK 12.52%; S&P 8.9%
3 Year: January 1, 2016 to January 1, 2019: BRK 16.03%; S&P 9.8%

Much of the ballyhoo about Berkshire's relative (under) performance can be explained by a wild swing back in the S&P in a single calendar year: 2010; That difference was 23.8% (2.7% BRK versus Index 26.5%). It is humorous to see how many headlines have been spawned about Berkshire's emergent underperformance.

Just wait until January 1, 2020 and the 10 year clock will be reset and the world will see clearly that Berkshire has been breaking away for a long time. 10 years to be exact! I can't wait.


« Last Edit: April 26, 2019, 07:49:18 AM by longinvestor »

Lemsip

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Re: 2018 Valuation
« Reply #45 on: April 26, 2019, 08:10:24 AM »
@Dynamic, I have also held Berkshire from 2002 but my recordkeeping till 2015 was haphazard at best so hard to calculate the overall IRR but suffice it to say the investment has worked well and allowed me to sleep at night.


Mine was in an ISA so no need to keep records for tax purposes and BRK.B gave me the added advantage of no dividends to reinvest and pay withholding tax on, giving me a further advantage over an S&P500 index fund. There turned out to be other advantages over the equivalent index fund investments based on what I could fund with the proceeds in 2014-2015 when the index was lagging considerably, perhaps more by luck than judgement.


Same here. As of 6th of April the entirety of my large BRK position is in ISAs  with a little bit in a SIPP. No capital gains ever. 
Per the BRK proxy, after my latest buying spree at a recent cost basis of $198 ( between July 18 and Feb 19), I now own more shares than one of the BRK directors !

 If I had to pay capital gains on the accumulated gains there it would be an uncomfortable amount - that is what compounding over more than 15 years and full use of ISA allowances will do for you ! I will need to sell a bit from time to time to fund living expenses from next year but fortunately do not have to consider tax consequences. So all academic studies of performance vs S&P etc notwithstanding, BRK has definitely worked very well in setting things up comfortably for me. Of course it has also hedged against the local currency shenanigans over the last 3 years as an added bonus.

Viking

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Re: 2018 Valuation
« Reply #46 on: September 08, 2019, 10:27:34 AM »
Here are links to a couple of presentations. Thanks to the original posters for providing the links (i have forgotton who they were :-). I thought it would be good to add these to this thread.

1.) Semper Augustus Feb 2019: https://static.fmgsuite.com/media/documents/9f6a56c7-a1a3-4eb2-94b3-fe89cc110254.pdf
- page 72

Semper Augustus Feb 2018: https://static.fmgsuite.com/media/documents/8e6a3c88-859d-483b-bbf0-dda6f5e24fc1.pdf
- page 45

2.) Empire (Tilson): https://assets.empirefinancialresearch.com/uploads/2019/08/Berkshire-Hathaway-analysis-Whitney-Tilson-8-21-19.pdf

3.) Check Capital: https://www.checkcapital.com/Research_Reports/BRKB_Report_0819.pdf

longinvestor

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Re: 2018 Valuation
« Reply #47 on: September 09, 2019, 07:19:33 AM »
Buffett and Munger have often decried and ridiculed the EMH. The market is often but not always efficient. Now, it won’t take a keen observer to see that the Berkshire Hathaway stock itself is evidence that EMH doesn’t apply here. Is all known financial information priced in? There’s some irony here but someone will prosper from this inefficiency! It appears that one person’s words / actions have bigger sway over Mr. Market than anything else! So much for the EMH.

Okonomen

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Re: 2018 Valuation
« Reply #48 on: September 09, 2019, 07:31:15 AM »
Can someone explain to me how BRK can pay only ~10% cash taxes annually? Should we use this as the tax rate in the valuation model instead of the more common 25%?

thepupil

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Re: 2018 Valuation
« Reply #49 on: September 09, 2019, 08:05:47 AM »
The delta between the cash paid for taxes and income tax expense relates to the increase in the deferred tax liability.

the deferred tax liability has 2 major components:

1. Increase in DTL related to unrealized gains on investments: To the extent that Berkshire defers realization of gains indefinitely on large positions (I think this applies to some, but not all of the material equity positions), we can assume that this tax expense has very low present value.

2. Increase in DTL related to the companies, primarily  Burlington Northern and Berkshire Energy.

Page 96 of the most recent 10-K shows the breakdown between the two (obviously things will change in the subsequent quarters, but it gives you a feel). $18 billion of the $60 billion DTL ( about 30% again as of 12/2018) is related to unrealized gains on the equity portfolio. About 50% ($28/$60 billion) relates to property plant and equipment. This is associated with Berkshire Energy and Burlington Northern. This is helpful
https://ftalphaville.ft.com/2016/04/29/2160510/warren-buffett-a-dream-deferred/

Essentially, the key input for determining the "correct" cash tax rate for the railroad and utility is if they are able to keep increasing their ability to re-invest. Will they keep the asset base high such that they keep running on the treadmill of outspending depreciation expense.

Burlington Northern's D&A is about $2.3 billion / year. It's capex has been $2.6B (2010) - $5.6B (2015) and averaged above $3B or so, so a delta between the cash tax rate and income tax expense rate appears sustainable for now.

Berkshire Energy's depreciation is running at about $3 billion. It's capex is running at $6 billion (2010: $2.5 billion, 2014: $6.5 billion, LTM: $6 billion). Again there appears to be a sustainable difference between capex and depreciation.

I think that explains the high level, but I could be wrong on the exact particulars.

Honestly, I don't pay a whole lot of attention to it. I just use what the market values class 1 railroads and large high quality utilities as proxies for value for each of those and assume that Berkshire doesn't sell all of its unrealized investments at a gain very quickly. My rang of intrinsic value is squishy and my sizing is non-binary so being super precise on that hasn't been an emphasis for me.
« Last Edit: September 09, 2019, 08:08:34 AM by thepupil »