berkshire hathway investment

Yes, as a matter of fact, it would.

The stock price has come back a long way in the last year or so, but it's still selling at a pretty good discount to its value.

(I estimate that it's currently worth about $130 a share, while selling at the moment for $116 and change.)

It has continued to compound its book value at roughly 9% a year right through the worst recession in 75 years.

I expect it to do a little better than that going forward.

Add a modest 'catch-up' allowance for regression to fair value at some point, and you've got a very good chance to make 10% a year, or better, for the longer term --and with substantially less risk than you've got with the broader market in general.

Yea a big paper route.

A shares cost 120k, B shares 4-6k a piece.

wall street guy wrote:

A share? Did you just get your first paper route or something?

What town is your wall street in?.....dope

B shares are $117 each. They have the same return as A shares without voting rights. It's a very good investment. Although if you are new to investing I highly recommend index funds with a very low fee.

They (like most) have significant exposure to US treasuries in their fixed income portfolio.

lkj wrote:

Yea a big paper route.

A shares cost 120k, B shares 4-6k a piece.

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Jesus, there's a lot of ignorance on this thread.

Your information's about four years old, which is when the 'B' shares underwent a 50-for-1 split.

A 'B' share used to be 1/30th of an 'A' share; now it's

1/1500th of an 'A' share.

'A' shares currently trade around $175,000; 'B' shares, as I said before, in the $116's (they will always be very close to 1/1500th the price of an 'A' share).

If you want to listen to the guy who told you to buy an index fund instead, good luck.

The broad stock market is 30 or 40 or 50% overvalued right now (as measured by it's relationship to long-term trend earnings --which is the only way that really matters).

That guarantees that anybody buying an index fund right now can expect a return that really sucks for the next 5, or 10, or 15 years.

Your most likely return for the next 10 years on SPY shares bought today is somewhere around 3% a year, nominal.

(IOW, you'll be lucky to keep pace with inflation.)

If that's what you want to do, good luck with it.

I guess it's (slightly) better than sticking it in the mattress, anyway.

What would you recommend instead? Honest question.

I feel frustrated because I know enough to know market seems inflated, but not enough to know what to do instead.

There's a lot of risk built in to Berkshire Hathaway. What happens to the stock if Warren Buffett suddenly leaves the company? First, it will scare the crap our of investors. Second, there will be a good chance, in the event, that Buffett (or his heirs or charities) will begin a long term program of unwinding his position in the company. Big time selling pressure in both the short and the long run.

alanson wrote:

There's a lot of risk built in to Berkshire Hathaway. What happens to the stock if Warren Buffett suddenly leaves the company? First, it will scare the crap our of investors. Second, there will be a good chance, in the event, that Buffett (or his heirs or charities) will begin a long term program of unwinding his position in the company. Big time selling pressure in both the short and the long run.

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More ignorance.

Buffett ALREADY BEGAN a 'long-term program of unwinding his position in the company' SEVEN YEARS ago, with the pledge of his fortune to the Gates Foundation.

As he explained then, the sale of those shares would represent a very small fraction of the total volume in the stock, and was unlikely to have any appreciable effect on its price.

The 'Big time selling pressure' you speak of hasn't stopped the stock from rising more than 30% in the last year, has it?

Secondly, "What happens to the stock if Buffett suddenly leaves the company?"

Hello? It's not an 'IF,' Einstein, it's a certainty.

He's 83 years old. He's obviously not going to be at the helm forever.

This has long been baked into the stock price.

It's one of the big reasons the stock's been so undervalued for so long.

Berkshire B, at $116 a share right now, is cheap WITHOUT Warren. The valuation takes into account the unfortunate fact that he probably won't be there that much longer.

And, if you actually follow the company closely, as I do, you know that Ajit Jain and Ted Weschler represent a better prospect for management through the next ten or twenty years than you'll find just about anywhere else.

Could the stock plunge when Warren departs?

Of course it could. Nobody knows what'll happen.

If it does, it'll most likely be temporary, and then people will quickly realize that the stock's still cheap, and BRK is very well-positioned going forward.

*Everyone* was sure Apple stock would crash when Jobs died. So what happened? It did crash... for about 10 minutes, before people realized it was stupid-cheap, and then it quickly soared to heights way beyond where it was under Steve.

My best guess is that something similar will happen with Berkshire.

Of course, you can always say, "Well, the stock's sure to crash when Buffett goes, so I'll just wait till then."

Lots of people have been doing just that for the last ten years already.

They've lost themselves a lot of money in the meantime.

The idea that 'Berkshire's risky, because of x,y, and z,... so you should just buy an index-fund' is goofy.

The index-fund you'd be buying is hugely overvalued, and you'll pay for that for the next ten years.

Berkshire is somewhat *undervalued,* and that will ADD to your return going forward.

Berkshire's vastly better-run, and better-constructed, than the random agglomeration of companies you'd be buying with the SPY, and that'll still be true after Buffett's gone.

It's also so vastly diversified in its construction (probably the single most diversified company on the planet), that the 'industry-specific risk' people like to talk about is a non-issue.

The kind of events that could seriously threaten BRK would seriously threaten the entire economy, or the world.

On the whole, I think you're actually safer in BRK than you are in an index, and you're almost guaranteed a much-better return, over, let's say, the next 5, 10, 15, 20 years.

But why bother thinking? Stick with the Conventional Wisdom.

Buy SPY, at 25 times trend earnings... and then 10 years from now, with the S&P at the same price it's at today (after reverting to a more normal 14 times earnings), you can scratch your head and say, "Man, why the hell haven't I made any money on that damn index-fund in ten freaking years?!"

Simply read wrote:

What would you recommend instead? Honest question.

I feel frustrated because I know enough to know market seems inflated, but not enough to know what to do instead.

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It's tough, because there really aren't any inexpensive asset-classes right now.

The smartest thing is probably to do what the best value investors (e.g., Buffett) have been doing their whole lives: buy solid, durable companies at reasonable valuations, regardless of what's going on in the broad market, or the economy as a whole, or the rest of the world... and be patient.

Right now, even though the broad market is greatly overvalued (exactly why you *don't* want to buy an index-fund at this juncture), there are still quite a few good, solid, durable, well-run companies selling at very reasonable prices.

Instead of buying SPY at 25 times trend earnings, you can pick up Berkshire at a *real* P-E of 13 or so (I could explain this number, but it would take forever), or Walmart at 14-ish, or IBM at 11 or 12, or WFC at 12-ish, etc.

Buy an assortment of companies you think combine *durability* with reasonable current valuation, and then sit on your a** for a long time.

It also wouldn't hurt to try and keep some cash around, so that when stock prices crash again, and you've got fire-sale bargains all around --like you did in '09-- you've got a chance to take advantage.

To LetsRun - please pay attention to the details of this guy's posts. I don't know where the hell he came from, but I wish all the investment-related threads on here would have just 10% of the wisdom shared so far in this thread.

sp2 - do you post on the Motley Fool's Berkshire board?

Thanks for taking the time to post all this.

Instead of buying SPY at 25 times trend earnings

___

what are 'trend earnings' ?

the SP trades at 19x trailing earnings according to barrons.

http://online.barrons.com/public/page/9_0210-indexespeyields.html

why do you say the number is 25? Are you using a cyclically adjusted 10 year PE?

Anyway, 19 is high enough to get worried - 25 would be very very worrying.

I have been doing really well with beat up crisis countries - Ireland, Italy, etc - CAPEs in the mid single digits rather than the low 20s in the uS.

lkj wrote:

Yea a big paper route.

A shares cost 120k, B shares 4-6k a piece.

Sell you car and get a B shares

sp2 wrote:

Simply read wrote:

What would you recommend instead? Honest question.

I feel frustrated because I know enough to know market seems inflated, but not enough to know what to do instead.

-----------------------------------------

It's tough, because there really aren't any inexpensive asset-classes right now.

It also wouldn't hurt to try and keep some cash around, so that when stock prices crash again, and you've got fire-sale bargains all around --like you did in '09-- you've got a chance to take advantage.

A sincere thank you. I am not stock-savvy, so I have been doing the low-cost index fund route (Vanguard) recommended by 'Bogle-heads' since I began making a real income four years ago---right after the '09 crash.

I am savvy in my own business though, so now I have 300k in the bank collecting .3% and I don't know what to do with it. I WISH I was in this position in '09 when the DOW was 6000.

I have been very hesitant to throw it in the over-valued stock market--your comments reinforce my thinking.

If you want cheap stocks, take a look at emerging markets

so you're saying wrote:

To LetsRun - please pay attention to the details of this guy's posts. I don't know where the hell he came from, but I wish all the investment-related threads on here would have just 10% of the wisdom shared so far in this thread.

sp2 - do you post on the Motley Fool's Berkshire board?

Thanks for taking the time to post all this.

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Sure, no prob. Thanks for the kind words.

Yeah, I post on MF on occasion. (Didn't think there would be any overlap between that board and this, but I guess you never know. Pretty funny.)

The guy asked a question about Berkshire (which I was very surprised to see on here).

I happen to know a lot about BRK, so I answered.

Then somebody chimed in with inaccurate nonsense, so I felt obliged to set it straight.

Seems to happen whenever the topic comes up.

agip wrote:

Instead of buying SPY at 25 times trend earnings

___

what are 'trend earnings' ?

the SP trades at 19x trailing earnings according to barrons.

http://online.barrons.com/public/page/9_0210-indexespeyields.html

why do you say the number is 25? Are you using a cyclically adjusted 10 year PE?

Anyway, 19 is high enough to get worried - 25 would be very very worrying.

I have been doing really well with beat up crisis countries - Ireland, Italy, etc - CAPEs in the mid single digits rather than the low 20s in the uS.

-------------------------------------

'Trend Earnings' are what current earnings would be if they accorded with the long-term trend.

They tend to give you a much better baseline on which to base a valuation than current earnings, which are often greatly distorted by short-term 'noise.'

If you look up current total earnings on the S&P 500 (I haven't looked for a while, so I'm guessing), I think you see something close to a hundred bucks, which would tell you that the current multiple is someplace around 17-18.

Most people would say that's a little high, but not terrible.

Some people would tell you it's actually *cheap,* given the current interest-rate environment. (I think that's nonsense, but that's another topic.)

The bigger problem is that current earnings are artificially inflated, for the moment, for a whole bunch of reasons that won't last.

If you draw a graph of S&P earnings over the last 60 or 80 years, and draw a best-fit line on it, you'll obviously get slopes that vary, depending on where you pick your start-point and end-point, etc., but if you try to be fairly objective about it, with that long a time-axis, your results will be fairly predictable.

This gives a much more reliable picture of where earnings 'should be,' and where they're liable to revert to, over time.

Try it. You'll get a line that intersects Today somewhere around 75 bucks.

If you look up Shiller's S&P CAPE earnings, lo and behold, you also get right around $75.

That's not an accident.

That's roughly where S&P earnings really 'should be' on a normalized basis, right now.

If you believe that the earnings are way above the long-term trend for reasons of a durable nature --that is to say that they're higher now because 'things have changed,' and they're gonna stay that way-- then you could try and argue that current earnings are more 'legit' than trend earnings, and focus on them.

(Of course, if you believe that, you're most likely not a very good investor, but I digress.)

If you believe, as I do, that current earnings are temporarily inflated for 'artificial' reasons that won't last, and that long-term trend earnings give a much better barometer of the underlying truth, then you probably should put more weight on them than on current numbers.

(That's why Shiller does what he does, and partly why they just gave him a Nobel prize.)

Using trend earnings, we quickly see that the S&P is actually selling not at 18 times earnings, but at *25* times trend earnings, which is awfully pricy by historical standards. (14-ish being the long-term average.)

A quick check of the current CAPE multiple perfectly supports that.

(Cool. I just picked that number off the top of my head, as a ballpark estimate, but it's nice to see that CAPE agrees perfectly.)

So, that's the basis for my earlier statement.

If anything, I was really too conservative before.

By this measure alone, the S&P is currently closer to

**80%** overvalued. Yikes!

(Put another way, it would have to lose over 40% of its value to get to an average multiple.)

If earnings growth continued at its historical average, that reversion alone would wipe out a good FIVE YEARS of total NOMINAL growth in one fell swoop.

In other words, the economy could do just fine, the underlying performance of the companies in the index could be perfectly swell, you could add on some average inflation,... and you'd STILL be left with exactly the same price on your index-fund *five years* down the road.

Doesn't sound too appealing to me.

I made a slight mistake there.

Looks like CAPE earnings are actually closer to $70 than $75 (even worse than I thought), which does give you a 25 multiple.

If your best-fit line put you closer to $75, as I suggested, then your current multiple would 'only' be 23 and change, not 25.

(Not really that big a difference.)