Dynamic

Thanks. That's very interesting. I hadn't really got my ideas together at the time of the dot com boom/bust. And I think I may be lacking in high conviction ideas though I dare say I could come up with 5 to 7 given a bear market and much lower prices in general now that I'm back to investing more actively now. I suspect I'd go in holding quite a lot of BRK and accept a decline, but hopefully smaller than the general market decline, then trade into more deeply undervalued positions I feel I understand. I should probably prepare by studying and valuing more companies that I'd like to own ahead of time. No doubt I'll find out soon enough, and if I haven't prepared sufficiently to take advantage I expect I'll be able to earn a more than sufficient return to retire securely through my position in Berkshire alone.

Thanks, Cigarbutt. I appreciate the opportunity to discuss ideas and modes of thinking and listen to others with their own ideas and approaches and hopefully learn from them. I specifically chose to mainly focus on a 20 year horizon for my 3-7% above inflation estimate because I'm a little wary about the next 10 years being affected by a bear market, though I don't know when. I don't feel I have any real ability to predict macro events, particularly with regard to timing, though I'm aware that there will be cycles of bear markets and bull markets, recessions and booms, and I do have some sort of feeling of where we might be in the cycle but with very low certainty, especially with regard to timing. I'd be interested to know how your counter-cyclical macro focus has worked for you over time and how you use it to make decisions. Likewise, inflation and interest rates may vary, and I feel I have little ability to predict them. My tendency is to seek a return of around 10%+ p.a. from my purchase price to give a decent margin of safety, but I could change that if rates increase dramatically. That lack of forecasting ability makes me particularly reluctant to switch to cash in a big way if my positions are not overvalued, especially if I expect them to be compounding machines. For example, that logarithmic graph from mungofitch that I posted above showing the changing buyback threshold (blue line, now 1.2x BV, but 1.1x BV in ) and mungofitch's ceiling 2.5 column value and 1.55x BV lines (yellow and green lines) show that a price at the high valuation marks in 2013 is reached by the buyback threshold in 2016 (roughly three years). So even with today's BRK.B price at 1.58x BV (using Q2 BV), just above the yellow line (although BV will be adjusted upwards for Q3 shortly, likely making today's price look nearer to the yellow line). I wouldn't be surprised if we found that the buyback threshold around year 2020 Q2 or Q3 is about today's price of $188, a 32% increase, representing something like 9.5% cagr in buyback threshold and implying that the chance of losing money over 3 years would be modest. Of course, a bear market will see a mark-to-market decline in Book Value, so perhaps a little over 3 years - perhaps 4 or 5 - might be required to break even if there's a bear market. The question of how likely do I think a bear market or a significant decline in BRK.B is over the next 3 years then seems to be relevant to the question of whether I think I should sell some or all of my BRK.B and go to cash. I do think that a decline to perhaps 85-90% of today's levels (roughly $160 to $170) has a realistic but not overwhelming probability in the next year, and a decline to as low as 77% ($145 - my rough estimate of 1.2x BV for 2017Q3) is pretty unlikely unless we have a bear market in the next few months or something happens to Warren. Otherwise, I could see 1.2x BV exceeding $150 within about 6 months from now, making $145 really very unlikely to ever be seen again. If BRK at $145 to $150 were available now, I would almost certainly go back to a 100% BRK.B weighting in my portfolio (currently at 56%) unless I had to sell something even more undervalued to do so, at least. Perhaps contrary to what I've been posting in this thread lately, I tend to try to view my portfolio usually from a mildly pessimistic view based on my own "low-end valuation" which is a figure I estimate based on fundamentals, more than the market price. I do that especially when I project my future returns. I usually assume that the low-end valuation of my portfolio will grow at 3.5% above inflation in the long term (hopefully not an unreasonable expectation, especially given that the Low-End Valuation of my portfolio is currently 74% of the Market Valuation and that BRK seems to be growing Book Value at about 8-10% in recent times, albeit assisted by a run up in mark-to-market gains on stocks held). That Low End might decline somewhat in the short term, especially if the low-end valuation of a particular stock is based on a multiple of unusually depressed earnings, less so for the portion based on 1.2x Book Value of BRK.B, but I'd hope it's a more consistent estimation of real value than a market price affected by the emotions of Mr Market. However, when considering whether to sell, I'm either: • looking to obtain a lot more value by switching from a more fully valued stock to a cheap one (and thus, usually to increase my low-end valuation as well as my expected intrinsic valuation) • or I'm considering that it seems a bit pricey even in a moderately optimistic scenario, and thus I should lighten up my position or sell the lot. • ...or if I felt I could predict it, I might sell now in the anticipation of buying back considerably cheaper in the future. So, sometimes I will consider the 'average expectation' of what my stocks could be worth, or even an 'optimistic' valuation, as well as the 'low end' valuation which is closer to my 'buy price' where I think the margin of safety is high, the probability of permanent loss of capital is low, and the probability of outsized returns is fairly high. But I am somewhat reluctant to give up fairly certain attractive long-term gains (e.g. BRK's compounding machine applied over a decade or two) for the hope of juicing my returns by trading in and out. I have done some value-trading however, selling a large chunk of my BRK.B stake in May 2016 at $142 to take a 25% position in AAPL at $95, which I felt was the maximum exposure I could take in AAPL. Apple is up 76% and BRK.B is up 33% since then, giving a 43% apparent advantage to having made that trade to date (based on Market prices alone). It might not take too much decline in BRK.B or too much increase in AAPL to consider the gap in my perception of value to be sufficient, and the increased security against loss in holding BRK.B to be worth a partial or complete switch out of my AAPL position into BRK, even if I still think they're both somewhat undervalued.

Speaking of Bull and Bear Markets and so on, I was riffling through the Motley Fool BRK board for interesting posts I hadn't been keeping up with. One thread from August 2017 started with an article put out by a Fund Manager to say why the bull market isn't likely to end soon, which looks too much like cherry picking the data to suit your preferred conclusion to me (not that I'm calling an imminent bear market either - I'm simply saying I don't know, and that's why I'm staying invested to participate in the compounding of intrinsic value for quality companies priced below IV, but waiting to put new cash to work until I find compelling value). Jim 'Mungofitch' - one of my favourite contributors on the Fool BRK board when I find the time to visit them - made an interesting reply about a metric he follows - trading days since latest market index High (he uses it more to avoid jumping in too early before buying on every little price decline than to really use momentum as a strategy rather than valuation and margin of safety). http://boards.fool.com/i-was-hoping-to-see-someone-makes-a-post-related-32814108.aspx I'll quote just a little, but click through to see his series of figures which present a remarkably smooth gradation relating Number of Days since broad-market high to the subsequent 6-month return of the market index (converted to annualised CAGR) excluding dividends. I'd love to have seen the standard deviation on those averages too, or the percentage of occasions the return was positive or negative for each line, but it seems a bit late to resurrect the thread. There was another great post of his about the trading range of Berkshire Hathaway, which might be of interest to those wondering about the 'soft floor' of the buyback threshold and apparent upper bounds of the trading range. He posted about a Decade Chart about a year-and-a-half ago at http://boards.fool.com/decade-chart-32224907.aspx linking to this interesting chart, showing how prices compared to various changing valuation metrics: http://stonewellfunds.com/BuybackChart.jpg And after 2017Q2 he posted about his latest 2.5 column valuation here: http://boards.fool.com/two-and-a-half-column-32801095.aspx This shows 2017Q2 BVPS or BRK.A to be $182,814 and his 2.5 column valuation to be $280,490 (1.53x BVPS). Today's price is $282,810, though 2017Q3 has ended and both valuations are likely to be elevated accordingly once the 10-Q comes out, but it's certainly looking like it's near the top of the trading range that has been evident since about 2006. That doesn't mean that BRK won't be a good long-term investment from here or that we should sell. The 2.5 column valuation is still a price that capitalizes earnings at 10% and it's only slightly above the average Price/Book ratio seen since year 2000. To quote 'mungofitch': The "two and a half column" figure below uses 1 times investments per share + 10 times adjusted earnings before tax - .3 times float per share for the cash drag. In the chart, the fall in Book Value and 2.5 Column Value lag slightly behind the market crash in 2008-9, which isn't shown, but is essentially at the same time BRK's market price drops. Both of these values incorporate the Market Price of the Securities Portfolio held by Berkshire Hathaway, so when the market drops suddenly, the next quarter's Book Value figure will be marked to market similarly. There might also be other items marked to market such as those long-duration redeem-on-expiry derivatives that were repriced each quarter against various market indexes (under GAAP/FRS rules) despite being nowhere near expiry, causing the reported GAAP earnings and BV to fluctuate along with market swings. I think they looked at the time, when he received the premium in advance with no need to post meaningful collateral, to be a good bet on the future of stocks when many were fearful and wanting insurance against a decline over the next decade or more, and really underlined that Buffett thinks long term and doesn't care about quarterly numbers. This FT alphaville articles shows the mark-to-market's oscillating effect on reported earnings: https://ftalphaville.ft.com/2013/12/19/1729152/the-buffett-difference-derivatives-edition/?mhq5j=e6 Anyway, I thought they were an interesting collection of posts, even though we might see BRK exceed mungofitch's 2.5 column value meaningfully if, for example, people are prepared to pay a good deal more than 10x earnings by capitalizing at lower rate of return, which is possible though certainly not a sure thing given the low interest rate environment. Edit: Another question I'd have is trying to determine whether shock events would cause a more sudden market collapse after a recent market high, e.g. what if North Korea bombed South Korea or something similarly terrible? Sep 11 2001 isn't a simple example, as the markets had reach their bottom in roughly March 2001. I was able to make some great quality purchases at good prices in Oct 2001, but it was already a fairly bearish market after the dot-com exuberance disappeared. It's mostly academic interest. I'm not going to change my investing significantly based on geopolitical matters.

My personal impression is that Berkshire Hathaway's long-term internal rate of compounding, its forward rate of growth in Intrinsic Value (and by proxy, Book Value) is probably going to be around 8-12% for the next decade or two assuming general inflation of around 2%. In other words, I could see it growing IV and BV at about 6-10% compound annual growth rate in real terms. The low end is perhaps if opportunities to deploy cash are rare, and the top end is if great opportunities arise to deploy large amounts of cash at highly attractive rates of return when the company is awash with cash, perhaps 2 or 3 times over 20 years. I'd say that the SP500TR's growth rate over similar time scales is likely to be 5-9% assuming 2% inflation, or 3-7% CAGR in real terms (which I prefer to use for my calculations). Due to the long time scales, I'm thinking that changes in the ratio of Market Price to Intrinsic Value of the SP500TR would be negligible to the CAGR, though they could quite possibly have a -1% to -2% affect on Market Price CAGR over 20 years depending on interest rate and inflation environment, given that the market is arguably a little pricey right now. (0.99^20 = 0.82, 0.98^20 = 0.67, so I'm allowing for a reduction in general market multiples of maybe up to 33% over 20 years). Looking into my crystal ball regarding the Market Price of Berkshire, I'd guess that the Market Price to Intrinsic Value ratio of BRK after 20 years might fall in the range of about 0.75x its current figure (-1.4% CAGR due to "multiple contraction") to 1.20x its current figure (+0.9% CAGR due to "multiple expansion"). It could also be a moderately bumpy ride, given that the death or retirement of Warren Buffett is virtually inevitable during the next 20 years, though I'd be very surprised to see market value drop below 1.1x Book Value or 1.2x Book Value for more than a few months, and would personally think such prices would be a steal even without Warren at the helm. Back in 2003, I thought it much more likely than not that Warren would still be in charge 10-15 years later. Now, I'd say it's a little more likely than not that he won't be in charge in 10 years, and very much more likely than not that he won't be in 15 years, but that doesn't materially affect my margin-of-safety valuation of BRK. The recent past growth rate in Market Price of BRK isn't way above the growth rate in SP500TR (and sometimes dips below it), so people aren't likely to be 'excited' enough about BRK's prospects to pay anything like the premium they would have been willing to pay in previous decades. Likewise, the 1.2x Book Value provides a fairly well-known soft floor and valuation yardstick, so even amid stock-market turmoil I'd be very surprised to see BRK.B fall far below $145 at present (and that floor is likely to compound upwards at 8-12% per year, meaning it will catch up with the price you pay in a few years). In a bear market the BRK look-through stock portfolio might decline, hitting reported Book Value a little more than Intrinsic Value and adding to potential price declines in BRK. Nonetheless I see the potential percentage market price decline in a bear market to be less for BRK than for SP500TR starting from present valuations, giving the opportunity to trade BRK for more deeply discounted stocks to enhance portfolio return. That does make BRK look more attractive than SP500TR for me, and the graph shown seems to support the idea that SP500TR is potentially a little pricey right now, is likely to revert to mean at some point, and isn't such an attractive prospect in future. Looking at the 5-year moving average 'alpha' graph from that Motley Fool article, I'd probably expect it to oscillate around an average of about 2-4% or so over the next 20 years, reflecting my view that BRK is likely to outperform SP500TR by about that amount on a CAGR basis over 20 years. In bull markets, BRK is likely to oscillate toward values below that range, and in bear markets and perhaps in recovery phases after a bear market, my guess is it will move above that range, subject to the time-delay on that moving average. This pretty much accords with the value investing ideas that we tend to outperform in bear markets and underperform in bull markets.

I agree with the feeling of security holding BRK in a downturn, and in seeing BRK making big bold very profitable investments at times of crisis. Likewise, I felt very confident holding BRK during big years for megacatastrophes (e.g. Katrina), knowing that its demonstrated ability to pay out promptly and the strong prospect of hardening insurance rates would be very good news for Berkshire for years to come, even if they had a major impact on current-year earnings. I was also assured that the losses to any one megacat were limited to about $10bn. It is important to compare other approaches against this in a variety of conditions. While on the subject, I'll quote a post on the Tesla thread: I really enjoyed that podcast interview. The podcast is called "Invest Like The Best" for anyone who wants to search for the feed on their podcast app. I think Tim Urban's one is the best of the three or four episodes I listened to yesterday. They also had an interesting one from the guy, Seides, on the 'wrong side' of the famous 10-year long-bet with Buffett - whether the S&P500 or a 5 Funds of Funds would win after fees over 10 years ending later this year. Interesting even though I tend to disagree with him on the whole. He was of the opinion that he would have won if the S&P500 hadn't had such an unusually strong run. He also made comments about the behaviour of typical investors reviewing fund performance quarterly or annual - be they individuals or treasurers/trustees for institutional funds - would have been more likely to sell the S&P500 early on in the bet after a 50-60% haircut during the GFC based on recent performance, but might have stuck with the funds of funds who had lost less (maybe 30-50%) thanks to their reduced direct long exposure to the market, so would have overcome their self-destructive instinct to "get out before they lost even more" at precisely the wrong time. So he argued that the real world experience of many investors taking the active approach would have been superior to that of those taking the passive approach. He made a comment towards the end that appears to be correct - he had a feeling that BRK.B's stock performance over the 9 years or so, had lagged that of the S&P500 Total Return Index. I did a quick look up, and it seems to be right, though it's not what the bet was about. d/m/y date format 1/1/2008 BRK-B=$ 94.80, SP500TR=2273.41 at open 1/1/2017 BRK-B=$164.34, SP500TR=4303.12 at open, BRK-B factor=1.733 (cagr=6.3%), SP500TR factor=1.893 (cagr=6.7%) 24/10/17 BRK-B=$189.78, SP500TR=4989.56 at close, BRK-B factor=2.002 (cagr=7.3%), SP500TR factor=2.195 (cagr=8.3%) For a counterfactual, looking at the timeframe from my own original purchase of BRK-B, BRK-B comes out well ahead, showing how the price you buy at matters, even though I didn't think I bought BRK-B especially cheaply, just reasonably cheaply, in my 2003 purchase when the market was working its way out of a bear market: 15/07/03 BRK-B=$ 31.24, SP500TR=1448.02 at open, BRK-B factor=4.584 24/10/17 BRK-B=$189.78, SP500TR=4989.56 at close, BRK-B factor=4.584 (cagr=11.3%), SP500TR factor=3.446 (cagr=9.1%) And of course, BRK-B only lagged the S&P500 by a little, so handily beat the fund of funds over the almost 10 years of the bet.

Thanks, Cigarbutt. An aside: I am aware of Wayne Gretsky in much the way that non soccer fans are aware of Lionel Messi, David Beckham or Pele, even though I usually see nothing more than Olympic ice hockey (and for that matter Olympic field hockey). The "skate where the puck is going" idea is easy to understand in many sports, but less easy to achieve. I'm also well aware of Buffett's analogy with that baseball player who divided the places the pitch could arrive into a grid to choose which pitches to swing at and of how these apply to investing and circle of competence, no called strikes etc. I've been to two baseball games in my life but the analogy applies pretty well to cricket too, where game theory actually throws in interesting complexities where riskier behaviour is rational - but I won't discuss the brilliant Duckworth-Lewis Method here! The Marketwatch story of fund investors and their psychological biases causing them to buy high and sell low and project the recent past "performance" into their assumption of the future, and more biases besides, is interesting. I think investing as a whole is a positive sum game (as the underlying companies do earn profits and make distributions to shareholders). Also, given the risks involved it is expected that equities would be priced for a higher yield than low-risk investments. However, I do understand the point you're making is that the concept of the obtaining alpha* (or at least excess return over and above the market return) is essentially a zero-sum game where we as investors attempt to act when the odds are in our favour, which is usually when the majority of market participants are acting in ways we perceive to be irrational (including investors withdrawing from funds or individual stocks when markets have dropped lately and piling in when they've risen to extraordinarily high levels lately) I agree that I suspect a lot of the psychological shortcomings evident in the study do indeed carry across to individual stock-pickers as well as fund investors. And I agree that participant on this Board seem to be obtaining market-beating absolute returns over long periods at least, mainly thanks to having a rational variant perception of stock prices and values, their movements and what they represent compared to the perception that the market participants on aggregate seem to act upon, presumably misled by less rational heuristics and emotional responses. *Technically as most of you know, alpha actually applies to risk-adjusted return, where risk is considered to be linked to beta, a measure of short-term volatility versus broad market volatility in the recent past. I reject this concept of risk as a long-term investor aiming for high total return over a much longer time period, and would happily accept and ride out short-term volatility in exchange for beating the broad market in the long run, though I have no intentional bias for or against volatile stocks, so wouldn't deliberately choose them over slightly higher quality companies than might happen to have less volatile stock, though the low prices occasionally brought about by volatility might produce an unintentional selection bias. I happily accept broad-market volatility too, as a source of opportunity to buy or sell at favourable prices, as well as volatility in individual stocks or sectors giving an opportunity to trade high-price-to-value securities for low-price-to-value securities. Some market participants may attempt to maximise alpha while aiming for a lower beta (often because they've been asked about their risk profile and have a different meaning of risk in their minds), perhaps using the CAPM to achieve this, usually by placing part of their portfolio exposure into less volatile instruments such as cash, commodities, real-estate or short-term bonds, but possibly at times by using 'defensive' equities that are less correlated with the broader market or by using long-short hedging. Nonetheless, the equity portion of their portfolios contributes to the equity markets and participates in the zero-sum game of seeking excess returns that Cigarbutt refers too, but also the positive sum game of investing in equities and receiving their distributed profits over the long term.

The first thing the sprung to my mind was Pampered Chef. I had no idea it was MLM until I watched Penn and Teller Bullshit on YouTube. To be honest I'm still not sure how the business works. I'm aware that people hold parties and it uses the bonds of friendship to encourage people - mostly women - to buy just like Tupperware and Ann Summers (UK - which now has a lot of shops too). What I'm not clear on is whether it's truly multi level like a pyramid where each seller becomes a distributor or whether there is a fixed distribution system of wholesalers and retailers like a normal business. At least the wares being sold are useful and are often sold for a huge markup in cook shops.

The Intelligent Investor mentions three general types of stock price drivers. I don't recall the exact wording, but these are: A. Stock-specific drivers - perhaps newsflow, shifts in sentiment or financial results specific to the company in question change people's opinion. B. Sector-specific movements - newsflow and shifts in sentiment relating to the majority of companies in a certain industry. For example, tobacco stocks, tech stocks, oil & gas, banking have all had well-known positive or negative sentiment swings and sometimes a sector-wide crisis. C. Market-wide movements - General market over-optimism or panic, political of fiscal influences (e.g. inflation, interest rates, war fears etc.) and sometime a rush of new market participants entering or exiting positions. You might imagine it as three levers driven by opinion, all exercising a degree of influence on an individual stock price. At one time such as the Global Financial Crisis bear market, market-wide movements may have been huge, but equally sector-specific worries were hitting the banking/financial sector very hard indeed, and specific rumours about a company's danger or resilience against certain risks could affect a specific company even more or limit the decline compared to its competitors. The whole thing can work the other way too, such as during the dot-com boom or other bull markets. When market wide movements dominate there may be a rush to or from non-equity assets like cash and precious metals. If you're in equities, having so-called 'defensive' stocks is believed to limit your upside in 'good times' but protect you in 'bad times' perhaps letting you switch into more beaten-down sectors. The other choice is to switch to cash ahead of perceived trouble, but potentially missing out on gains or dividends by doing so, especially if you turn bearish far too early. When individual stocks or sectors are in-favour or out-of-favour there can be opportunities for value trading from an over-valued position to an under-valued position (or a low-dividend yield to a higher yield). The danger is in getting the long term valuations wrong and trading out of a position set for strong fundamental compound growth and into a position set for weaker growth whose relative IV we have not estimated well. (Or for switching for yield just before a dividend cut). And when we have cash, we can just wait for great opportunities offering margin of safety however they arise. As I'm in the saving phase, this is almost a permanent position. And when we hold stocks that get to nosebleed prices offering presumably small gains looking forward, we can sell and hang on to the cash. (I've never really done this - I've always switched to another equity position almost as soon as I've sold, but I am prepared to do so). And if we seek to spend our invested savings, such as in retirement, we could have a blend of three sorts of options: 1. Look for healthy dividend yield to automatically withdraw some of the earnings stream rather than reinvest it. 2. Look to sell some of our positions - either spread across our portfolio or strategically, perhaps avoiding sales of things we feel are deeply undervalued or focusing sales on positions that are more fully-valued or even overvalued. 3. Sell most or all of our equities and obtain lump sums to make large purchases such as property or buy annuities. I'd be interested everyone's thoughts about downturns. Perhaps we should include how we think about preparing in advance and what actions if any to take. Perhaps the options depend on whether we have specific information such as realising the state of mortgage delinquencies leading into the GFC (which Prem Watsa and others worked out how to profit from), or just a general feeling that valuations are too high or that all the gains in the market are concentrated in a small number of stocks such as the FAANGs and that this is predictive of an imminent bear market (was it Semper Augustus's letter that took this as a strong bearish sign?). And then, we could discuss what to do once the downturn has taken hold. Should we go for the most troubled beaten-down sectors (e.g. banks in 2009) or just look at our circle of competence and wait for good margin-of-safety opportunities within our usual universe of stocks? Should we actively try to learn about the beaten down sector if we don't already know so that we're armed to make reasonably good decisions? My only active downturn: The only downturn I was fairly active in was October 2001 a month after 9/11 attacks. Fear of war and potential inflation was in the air, and a number of quality companies I'd been looking at in the London market reached my buy price. I had accumulated a good deal of cash, and pulled the trigger on quite a few, sowing the seeds of a reasonable portfolio. The argument that resonated with me at the time was a sort of Buffett/Phil Fisher one that inflation if it came as a result of war spending would erode the purchasing power of cash over time, but quality companies with moats sufficient to let them raise prices in line with inflation should be able to increase their profits in line with inflation, so at these reduced prices offering FCF yield of maybe 8.5% of more and decent dividend yields, that was a good time to buy. I had accumulated a fair amount of cash awaiting investment by then at the maximum saving rate then allowed into UK ISAs and had an idea of minimum position size to keep my dealing costs and other frictional losses down, so I was able to make quite three of four decent purchases in Oct 2001 to add to the purchases I'd previously made without sufficient regard to valuation and margin of safety. I think some of these gained about 30% in around a year, and by then I wasn't so convinced about the quality and resilience of their moats in a couple of cases. I'd also saved some more money by then and developed my strategy for buying more, so while I retained Halma (highly resilient moats that compounded my return at about 14%p.a. over 14¼ years) and Johnston Press (mostly local newspaper monopolies I couldn't see the internet destroying) I sold a couple of positions to end up with 50% of my portfolio in PIZ (Pizza Express) at 299p amid reduced sales in the City of London, hit by the bear market. My badly priced purchase of my smaller stake at 655p a couple of years earlier meant that my average price was about 390p, so I roughly broke even by the time of the management takeover at 387p in July 2003. By that time I had switched to a broker that allowed me to buy US stocks in my ISA and I decided to buy Berkshire Hathaway with the proceeds, plus cash, and I also sold a high-risk low-probability position, being content with a high certainty of a good return in the long run (BRK.B) rather than a low chance of a great return (TRK.L). As an engineer/physicist I liked that company and saw it had about a low probability of making some serious money over a 10-15 year window of opportunity before patents expired and before I imagined electric cars might make it obsolete, but you don't get rewarded for degree of difficulty in investing, unlike in Olympic diving, as Warren Buffett says. It turns out they're now valued about 1/160th of the 2003 share price I sold at, so I'm very glad I took the loss and didn't try to make it back the way I lost it! By this stage, the bear market was over and I then stayed quite passive due to the family business and having no new money to invest in stocks. I passively watched the GFC bear market in 2008-9 and sat tight. I had a few corporate actions to raise funds for the local newspaper company, and wasted some of my accumulated dividends there. I finally saw the writing on the wall in 2014 as I took more control of my investments and closed that thankfully modest position at a loss, probably having lost 80% of the money I'd ever put into it, thankfully dwarfed by the gains in Berkshire and Halma.

In 2008/9 when markets were in chaos, I had my main holdings as BRK.B (the majority) and Halma HLMA and I was pretty much working all hours in the family business with little time to look into other investments. Halma was still doing OK in various fields of engineeringm and BRK.B which was poised and ready and was busily making great opportunistic long-term investments amid the chaos. I just sat there watching and thinking how much the positions in Goldman Sachs, Bank of America etc. were going to be worth in the long run. I don't think I felt very comfortable in valuing banks at the time, so I'm sure I did miss out on some really beaten down stocks. And there was more besides. I suppose BRK.B held up pretty well, being one of the more defensive stocks. I was also on these boards, mostly lurking as I have since the MSN days, reading about Fairfax and Prem's wonderful bet against the CDO/Property bubble. I continue to watch FFH from the sidelines. So I'm sure I missed out on quite a bit of opportunity that I might have been able to capitalise on if I'd been better prepared, but also felt as though my main investments would come out of the carnage even more valuable, which turned out to be the case. I think I ended up outperforming the markets by just sitting there, but I'm sure I could have enhanced my returns if I was as prepared as I am now.

Interesting topic, and it shows some of the differences across the Value Investing spectrum. 1. Graham/Dodd situations where a stock is underpriced relative to some tangible fundamental and the aim is to buy it and wait for that value to be recognized by the market. If the value is recognized fast enough, the annualized return for the brief period of ownership is OK or great even if the business does not provide good returns on equity or assets and is unlikely to offer compound growth to long term investors. A deep discount margin of safety is required in case it takes a long time to out the value. For example, if you typically bought 50 cent dollars and sold at 75 cents, you'd get 15% annualized returns if waiting for 2.9 years and 8% annualized if waiting for 5.25 years to out the value. 2. Special Situations in merger arbitrage etc. you typically have a defined timescale and a reasonable handle on the probabilities and the likely market price if the merger goes through or doesn't. This allows a probability-weighted annualized expected return to be calculated given both the expected return and the timescale. If the probability of the positive outcome is high, the potential loss from the negative outcome is small, and the timescale to realise the return is short, the margin of safety or discount to expected value can be modest yet still provide an significant annualized expected return. This reminds me of Charlie Munger investing every penny he could lay his hands on into a near-certain Canadian Government takeover. 3. Long-term high quality compounders or other long-term growth stocks look different and invite many different ways to evaluate IV, depending on how far into the future you project the compounding. A rational price can look high based on trailing or forward P/E (or E/P earnings yields or FCF yields) if the internal compounding machine is sound and sure to keep working for many years. What seems like a fair multiple for most average companies could be represent a huge margin of safety for a great compounder with a good future. Buying at an apparently 'fair price' which actually represents a good margin of safety considering the internal compounding in this way can sometime provide rapid gains of perhaps 30-70% in a year or so (e.g. BRK.B at $124 in Feb 2016, AAPL at $95 in May 2016 both demonstrated this) and will probably go on to compound internally at perhaps 8-10% per annum, so can be held quite profitably for many years even if they reach moderately low earnings yields (moderately high P/E ratios). 3a. Trading IV If one long-term high quality compounder is trading at a rich valuation while another is very cheap, there is the option of selling some or all of the position in the former and buying a position in the latter (sometimes using cash awaiting investment too). This way one is hoping to trade a position with a smaller Intrinsic Value for one with a higher IV currently available for the same money. But if you trade a 20% internal compounder for a 10% internal compounder, you could sorely regret it in years to come unless you get an extremely rich valuation for the 20% compounder you're selling. Even more so if you have a high rate of Capital Gains Tax to pay on the sale. To some extent this is also possible when one stock is moderately cheap and the other is very cheap, especially if there's no tax due on the sale (as is the case in my UK ISA and my wife's for which no tax is payable on Capital Gains of any duration, and I only seem to pay foreign withholding tax on my US dividends). I feel the need to have quite a lot appearing to be in my favour to pull the trigger on this sort of trade. For us, we held about 90% of our portfolio in BRK.B priced at $142 per share in May 2016, having topped up to almost 100% at $124 in Feb 2016 (I consider BRK.B sufficiently diversified internally to happily hold 100%). With AAPL at $95 that May, I felt it was a steal with a 9.5% trailing earnings yield and $10.04/share in cash, yielding 10.5% trailing earnings on the non-cash portion of its price, and that I could justify a 25% position and still feel sufficiently diversified, especially as I could see new iPhones being introduced soon and that the extremely good sales from 2015 wouldn't long make 2016/17 look so bad in comparison for much longer. In the 17 month since then BRK.B has gained 31.5%, but I don't feel too sore, as AAPL has gained 64%. That doesn't mean I was right in the long run, but I do still feel comfortable holding AAPL without profit-taking. I think the scales were weighted in my favour at the time I made that trade thanks to the extra large margin of safety in AAPL at the time compared to moderate margin of safety in BRK.B at $142 in my opinion. I think Apple's internal compounding machine can probably match or exceed BRK.B's for the next decade, though it has higher uncertainty and might yet 'do a Nokia', so I'm happy to maintain my position knowing that if it does go south, BRK.B should reliably preserve value and provide for my retirement. If the AAPL P/E reached 25-30 or AAPL came to represent 40%+ of my portfolio, or if BRK.B went on sale at $150 or some combination of similar swings creating a similar disparity in valuation, I might seriously consider at least lightening my AAPL position if not selling entirely (given I have no tax to pay), but I think the margin of safety of one position over the other would have to be quite significant before I'd pull that trigger. So the upshot of that is that I think I am still cautious to avoid buying without a reasonable margin of safety, so I'm happy to accumulate cash while waiting for fairly high margin-of-safety opportunities. Another lesson from my past is revealed by the notes that in recent years I have put alongside my copy of my account's Client Ledger, some of which were informed by forum posts I made years ago outlining my thinking. I'm not sure how this UK-specific corporate action compares to what's permitted elsewhere in the world, but it highlights another value in Margin of Safety: 4th July 2003: Sold PIZ at 387.53p after fees. NOTES & COMMENTS: Pizza Express Takeover at 387p was imminent and confirmed, so made a fraction above takeover price and kept the proceeds in the ISA. I had purchased originally at 655p for a small stake (before I really understood margin-of-safety), then when it fell below 300p about Sep 2002, I bought a large holding at 299p after costs, bringing my average purchase price to about 390p and having half my portfolio in PIZ. That 299p earned 32% in 10 months, roughly making up for the loss on the smaller stake purchased at 655p. Valuable lesson learned. You don't control takeovers, a good margin of safety helps you make a reasonable return even if you get taken over below your estimated intrinsic value. Also I should have sold moderately undervalued PIZ a few months previously to buy Halma HLMA below my entry price (8.5% FCF yield). Still did well on HLMA, but could have had a much larger position. I ended up buying my original long-standing position in BRK.B 11 days later (equiv $49.71/share post-split) with the proceeds of this PIZ position making up 45% of that BRK.B purchase, newly added cash about 36%, plus 19% from another two positions of which I had changed my opinion (or thought them inferior to BRK.B). I then became quite an inactive investor for most of the next 10-11 years just keeping up with the annual filings of 2 or 3 positions, adding no new money to my account and selling one position at a loss after its multiple local newspaper monopolies were eroded by the internet in 2007-9. I think my do-nothing returns averaged about 10-12% annualised for that period. Then we put the family business up for sale in 2014 and I got a more normal job and got married and began to save more cash (eventually a LOT more) and invest more actively. Then in Feb 2016 we went almost 100% BRK.B at $124: HLMA (ex div) sold for 808.2406p (GBX) or 3.46% EPS yield, P/E = 28.8. in Feb 2016 to fully load-up on BRK.B at $124 along with saved cash in both mine and wife's accounts. So going through all those decisions and lessons, I still feel the need to have margin of safety, but if, say, AAPL was trading at $220 with BRK.B at $186 right now I might start to be getting nervous about AAPL and be willing to contemplate switching some back to BRK.B even if BRK.B isn't deeply undervalued. I'd probably still ride it out until it was much more of clear-cut switch though, again underlining that I cannot let go of Margin of Safety.

When looking through Giovanni Franchi's Twitter feed I came across something he posted which I thought could be illuminating in the discussion over waiting for well-priced opportunities (timing the market or pricing the market) versus investing continuously over long periods. https://seekingalpha.com/article/4113710-timing-market-time-market-part-2-revenge-bargain-hunters It compares various strategies for investing a portfolio to which $2,000 per month (adjusted for inflation) is added and which holds only cash or the S&P500 index. Donna is stricty Dollar-cost-averaging, investing her new cash in the S&P every month without fail. Peggy buys if the index P/E ratio is below its historic median and otherwise holds onto cash until investing it all when her criterion is met. Teddy has a strategy based on 10-year Treasury yield + inflation being lower than the sum of long-term EPS growth and dividend yield for S&P. Hugo, Heidi, Henry, and Helga buy High at 10-year, 5-yr, 3-yr and 1-yr highs respectively Lisa, Linda, Larry, and Lucas buy Low at 10-year, 5-yr, 3-yr and 1-yr lows respectively The results are clearly in favour of one strategy over the others in general. Most of the buy-low crowd didn't do a lot better than the rest, with only Lisa (buying only on 10 occasions on 10-year lows) and amassing a lot of cash in the meantime showing the second best total return to Teddy (not by much) and a best risk-adjusted return (by a large margin, if you believe 'volatility'=risk) of the group for a period starting in the mid 1990s and ending in 2017. All of them did very nicely, growing their $0.79mn total cash investment to $1.75mn to $2.25mn over the period. None of them ever sold shares, so while Lisa-10 held only a growing pile of cash until 2009 and Teddy held a growing cash pile until 2003, after that their portfolio values followed the markets up and down in a similar way to the others, who were mostly slightly ahead of each of them by the time they made their first purchases, meaning they had to catch up by losing less on future dips. The buy-high strategies with short-term horizons probably avoided buying the dip too soon, but waited until the decline had run its course more often than not. I suspect the shorter buy-low strategies caused people to invest all the accumulated cash before the market had reach the bottom of the dip. Only Teddy's strategy really considered any fundamental valuation metric at all. The rest all looked at timing-based metrics based on various length of previous market history. Obviously, these approaches and the use of the S&P500 and of timing-based metrics are different from opportunistically buying concentrated positions within a small universe of perhaps 10-30 companies that meet high quality criteria when they reach a sufficient discount to IV, as many Buffett-influenced investors prefer. But it might inform discussions about whether, for example, it might be better to have more time invested in a compounding stock such as Berkshire by being willing to invest in it without such a huge discount, versus the option of letting cash accumulate waiting for the next big opportunity to invest cash representing perhaps 20-35% of your portfolio in one hit. Here's a worked example scenario of investment in a company growing IV at 8% CAGR: 5 years of 8% compounding amounts to 47% growth, 1.47x the original price. To get 47% growth after sitting on the sidelines for 5 years and missing out on compounding at 8%, you need to find a position at 68% of its typical valuation and have it return to typical valuation. Holding from the point of typical valuation you'll typically enjoy 8% compounding from then on. 10 years of 8% compounding amounts to 116% growth, 2.16x the original price. To get 116% growth after waiting 10 years you need to buy at 46% of its typical valuation and have it return to typical valuation, enjoying 8% compounding from then on. 15 years of 8% compounding amounts to 217% growth, 3.17x the original price. To get 217% growth after waiting 15 years, you need to buy at 32% of the typical valuation, an extremely steep 68% discount, and have it return to typical valuation, enjoying 8% compounding from then on. And you've got to go into this position with opportunistic conviction to make up for the time on the sidelines. So the sort of discount to IV you demand can determine how long you tend to sit on the sidelines (along with how closely correlated the various companies in your candidate group may be and how likely it is that any will encounter temporary setbacks that you can identify as non-permanent impairments). It's a difficult balancing act to avoid spending too long in cash and missing out on time compounding value. Demanding a reasonable discount to IV reduces likelihood of permanent loss of capital and can lead to rapid gains. Demanding a deeper discount can lead to more rapid gains when opportunities arise. Demanding a deeper discount still can see you sitting on the sidelines without benefiting from the dramatic long-term compounding machine you turned down years before at a price that seemed too steep. But with many different moderately uncorrelated stocks to consider, you'll have more times for them to reach your buy price and more opportunities to trade something more fully-valued for something more deeply discounted and hopefully increase the intrinsic value of your portfolio significantly by such a trade. If the whole market crashes 30-50% however, you may lose out compared to if you'd held cash before the crash, but your intrinsic value probably won't have declined markedly even if the current quotation has. I could see my portfolio losing about 25%-30% from current levels in a crash but probably not a heck of a lot more (with my 9.63% cash growing to around 13% if the stocks lost 25-30%, at which point I'd surely invest that 13% in those cheap stocks). That's probably helped by both AAPL and BRK.B (the bulk of my portfolio) having lots of cash themselves and not being enormously high valued.

If you see wind turbines not turning there are usually three reasons. 1. They're being serviced or installed and must be turned off for the safety of the engineers. 2. They have rotated to follow the wind too much and have to rotate to 'untwist' the high power cable that runs up the column. 3. There is too much power generation at present - e.g. more solar than can be used by the grid. At such times the instantaneous cost per kWh may well have gone negative.

Haha, I sometimes despair at SA writers though! An article came up yesterday I think about why we should consider Bank of America and it said "Why would Buffett swap a 6% yielding preference share for a 2% dividend yield?" then proceeded to talk about growth prospects of BoA as if that were the reason. Fortunately the first commenter provided the obvious answer that 6% of $5bn is less than around 2% of $18bn after exercising the warrants by trading in the prefs.

I don't know how this would be taken by its recipients. Who are you to tell them and what is your record. Why would following your advice suit their investing style, tolerance or quotational losses, financial goals or temperament? Would it impair your relationship with them? Certainly I'd fix a few typos - Buffett has two Ts (you misspelled it twice) and you say "(who is sitting on 50% cash right)" and presumably mean "right now". You say recessions are almost every 10 years on the dot. I'd be surprised it's that predictably regular. It could be a good deal longer quite easily, and you ought to acknowledge the degree of uncertainty over timing to yourself as well as to your recipients. I'd also be surprised if a recession or market crash in the US didn't also coincide with similar turmoil in most world markets, including those in Europe, so how much is it worth spreading investments geographically? Likewise, you say "Europe is expected to continue doing well in the future relative to the U.S." - but by whom, over what length of time, and by what sort of margin, and why should I give credence to this opinion? I can certainly see both pluses and minuses to various aspects of business and government in both the US and Europe and would anticipate that good businesses in both parts of the world would do fine over the long term. If I was likely to spend most of my retirement money in USD I'd be happy enough to be largely denominated in USD and invested in companies largely able to raise prices alongside USD inflation, though I wouldn't weight that too strongly in my decision-making. (I'm almost entirely US invested right now, yet live in the UK and may retire there and/or in Mexico in a decade or so). Also I'm happier investing in companies I understand. If I don't know how people use banking services in Poland, say, will I be able to spot when Erste Bank has temporary difficulties versus permanently impaired business? I might understand a US bank better and be able to manage my investments better in the long run. Expectations held widely would typically be reflected fairly well in the market prices, though if there's a specific popular delusion at play, those expectations may be very wrong. How sure are you that you're not cherry-picking opinions that agree with your own opinion or expectation and disregarding opinions that differ? Even if you turn out to be right this time, were you just a lucky bear or were you smarter than the average bear? And returning to the second paragraph, does it matter if they suffer quotational loss for a year or two during a bear market when they're retired already and may have no need to sell or exit positions during that time? One approach, once managing a portfolio in retirement, might be to aim to hold a buffer of at least 18 months' living expenses in cash (possibly a little more) on the assumption that I'd expect to receive a reasonable stream of dividends flowing into that buffer while I withdraw my living expenses from it, even if those dividends are somewhat reduced during a recession, so that in all likelihood I could ride out a recession or bear market during retirement without becoming a forced seller at the bottom of the market. I could also cut back on the more expensive luxuries and vacations for a year or two if the cash reserve was running low. If I did have to sell shares in a long bear market eventually, I'd probably only be eating about 3% to 4% of the depressed total value of my portfolio per year in either dividends or sales and selling it at perhaps 60%-70% of what I'd normally hope to sell for, so perhaps I would lose 1-2% of the intrinsic value of my portfolio per year, only after I deplete my cash buffer about 3-4 years into a pretty long bear market. I'd then hope to replenish my cash buffer gradually over the course of a decade or so as markets recover and selling shares becomes less painful as they hopefully get closer to intrinsic value. Holding a very large position in cash is debatable too. Some predict an imminent crash, but some admit they cannot predict the timing of crashes and believe that selling investments somewhat below their intrinsic value to switch to cash (which will lose value in real terms over the many years it might take for the crash to happen) might cause them to miss out on gains, or inflation-protection that holding companies that can raise their prices with inflation offer in the long term. It's quite tough to weigh these two competing concerns unless you have a good deal of certainty about the timing and depth of the bear market versus the potential for 5-7% compounded annual gains for a few years, which do not take many years to compensate for a potential crash of 30% or so. I certainly think stock recommendations for fairly priced quality companies with a reasonable thesis are fine, and may well be kindly received as options worth looking into. And I think it's fair to forewarn them that they should expect to have to ride out a bear market with at least 30-50% losses in the quoted price of their investments and somewhat reduced dividend streams every decade or two at unknown times in the future, without panicking and selling good investments or feeling that they've permanently lost money. I'd rather give them the mindset that they should be prepared to ride these things out, that investments might spend 5-10 years without showing positive returns from time to time, so keeping a buffer of at least 18 months' living expenses available in cash deposits or similar (and maybe more if you live somewhere where an uninsured medical emergency would cost you a lot of additional cash) is probably something that will give them peace of mind and allow them to meet their goals and enjoy a happy and financially secure retirement, without reducing by too much the amount they have profitably invested and earning them returns in the long run. I'd just be really wary about making specific predictions about the timing of a crash. If Buffett cannot predict the timing of such things, I really would feel I'd need a very compelling thesis to go around giving predictions of when to sell so generally. Buffett instead has a tendency to accumulate more cash when prices are too high for him to have many buying opportunities at attractive prices and tends to spend a lot of it when prices are low enough to give him ample buying opportunities at attractive prices. I view it that he does not TIME the market, he PRICES his purchases carefully instead, insisting on a return that provides a reasonable margin of safety. And indeed he doesn't, by and large, sell his positions to raise cash in frothy markets, he just happens to have many businesses that spew out cash prolifically with few opportunities to reinvest the excess at high returns, so it builds up sometimes for many years when he has few opportunities to make suitably-priced investments. His cash building isn't so much strategic in his predicting crashes as it is merely symptomatic of sustained periods of generally high valuations, giving him few opportunities to deploy the cash sensibly. I'd just think very hard before placing a detailed prescription about what to do in front of someone whose wellbeing you obviously care about. In your shoes, I'd rather ask them if I could bounce some ideas off them, given that they've achieved retirement and that I'd like to plan ahead for how to manage mine. I can then present my ideas and perhaps spur some good ideas in them if they agree with me. And I wouldn't come across as a know-it-all.

That look-through dashboard snapshot looks great, Slow Appreciation. I'd be very interested to see how it develops.

The other thing is that those subsidiary businesses without good places to deploy the capital are encouraged (including by their managers' compensation packages, I believe) to return it to Omaha to be deployed by HQ. Those who find a good opportunity for capital allocation can also call HQ with the details and get sound plans to deploy it approved quickly. As such Berkshire frees each unit from the growth imperative. For example, an expansion of See's Candy nationwide would not produce good returns on incremental invested capital, yet if it were a public company See's would probably face pressure to invest in growing the top line or expand by acquisition, rather than simply paying almost 100% of its free cash flow out to its owners. BH Energy, on the other hand, may do well reinvesting virtually all profits and supplementing them with cheap debt not secured against Berkshire Hathaway, generating a regulator-approved return of as much as 12%, allowing it to compound its growth substantially, while competitor utilities feel compelled to maintain healthy dividends. I can well imagine that Berkshire will find it harder to deploy excess capital at market-beating returns in coming decades, and so return of capital to shareholders in one way (buybacks, dividends or spin-offs) or another is eventually going to happen, but I also suspect it could be later than many people with a dividend fetish who post on the internet seem to think. For me, the later the better, especially as I get taxed on US dividends and not capital gains in my main accounts, and as I can thus sell shares if in future I want to generate an income.

Wow, a fascinating insight, Cigarbutt I looked back to 2003 Q2 and there seemed to be 4,019 + 24,425 $mn in cash & equiv, coming to $18,529 per A share. 2017 Q2's 10-Q gives 20,142 + 66,008 + 4,962 + 1,314 + 7,323 = 99,749 $mn in cash & equiv, coming to $60,653 per A share. The ratio is 3.27x in 14 years, a CAGR of 8.84% in cash and equivalents per share. I make the CAGR of the S&P500TR index (including reinvested dividends), 9.00% from 15 July 2003 to 5 Oct 2017, which is very similar.

As suggested above once or twice, I've copied the Berkshire discussion to the Berkshire Hathaway sub-board into its own thread, which you can find here. http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/berkshire-buying-position-size-cash-(from-generalwhat-are-you-buying-today)/ For general comments like "I bought more BRK.B today", keep posting here, but the stuff about position sizing and whether BRK cash is better than actual cash etc., perhaps move the discussion to the thread linked above.

There has been quite a bit of Berkshire discussion over on General Topics/What Are You Buying Today? that probably ought to move over to this board, so I've used the Quote button to copy/paste the relevant discussion here, and perhaps people would like to reply here (but if you reply to this first post by quoting it, please edit down the 'Quote' as it's an enormous post to quote back 2 or 3 more times! - otherwise just hit Reply instead of quoting. Here goes: Me 2 because it's the 1st trading day of the month. This is my 2nd month in a 12 month plan (equal amounts every month.) Just layin' the strategy out for any lurkers. It's kind of liberating 2 have 1 company 2 buy regardless of price (might break me of chasing 1/8's & 1/4's on stuff I plan 2 hold semi-4ever...) I believe Berkshire itself does something like this when building a position. Only that their buy parameters are a little different from ours; a % of trading volume, daily buying, and of course a shitload more quantity of stock until they get to just under the 10% ownership of the entire damn company (we start to sweat when it gets close to 10% of our portfolio) ;D I look at BRK's BV & it amazes me. Could anyone take Berkshire's mkt cap in cash & re-create the company? I don't think so. I'm not counting on a re-rating by markets over the next decade or so but... Just what, exactly, holds BRK at such levels? I feel comfortable dollar cost averaging over the next year. The 1/8's & 1/4's thing is really stupid (kinda like playing Lunar Lander on an old punch card machine) & I'm just not gonna do it any more. I range from 3% to 6% positions & will prob wind up with 10% or more in BRK (call it a capitulation of sorts.) Remember that if you're replying please don't quote everything above!

Thanks, Phil Fisher's is a useful way to look at it. I'm happy to be highly exposed to two companies I feel should do well in my time horizon at the moment (and a few dribs and drabs in other positions). I guess I feel I have sufficient exposure to BRK to meet my needs 15-50 years out and AAPL too, though I am less certain of the truly long-term future in the latter company. I'm willing to leave some more on the sidelines to give me optionality and some ability to trade relative valuation from one company to another, and from cash to a fairly deeply undervalued stock in future. I do realise that the latter part of value-trading is a zero-sum game, so I hope that my interpretation of discount to IV will be right more often than it's wrong and that I'll get enough opportunities to play within the universe of stocks I'm comfortable owning.

Not quite 20 years, but I can look back 14 years, when I made my initial purchase of the old BRK.B at $1,562 or the equivalent of $31.24 post-split on 15th July 2003 in a tax-exempt UK ISA account. I probably invested about 80-90% of my portfolio in BRK.B at the time, knowing I had less time to check my portfolio in the coming years and being comfortable with BRK representing so much of my main 2-stock portfolio to which I wouldn't be adding cash for a few years at least due to investment of money and time in a family business. I realise that I didn't buy it really dirt cheap in 2003, unlike say my purchases at around $125 in Feb 2016, where I went to almost 100% position at a bargain price and felt very comfortable doing so. Being 'reasonably priced' much like today, rather than 'dirt cheap' like in Feb 2016 I was hoping to slightly beat the index and comfortably outpace inflation in the long run, and not expecting anything like the 19-20% annualised returns of the previous 30+ years. As it turns out, inflation since then has been much lower than it averaged in the previous 30+ years. Today, 14.25 years later, at $185.41 that initial investment is a 4.48x bagger (11.12% annualized), while the S&P500TR (Total Return index) is a 3.39x bagger (8.96% annualized). That's annualized outperformance of 2.16% for BRK.B. (all in USD) That still represents sustained outperformance compared to the index (with no fees), and significant growth above inflation. Now, you might perhaps argue that the S&P500 today is overpriced by a factor of, say, 1.3 while BRK is correctly priced, so the 'adjusted' performance of S&P500TR should only be 2.61x bagger (6.97% annualized), meaning BRK.B outperformed by 4.15% annually in 'adjusted' terms, perhaps giving a better indication of the 'economic' outperformance rather than the quotational outperformance. I think much more than that as an assumption of BRK's outperformance would be a stretch, but I'd be happy to hear your thoughts if you disagree. If whichever level of outperformance can be expected to continue, how much more should BRK.B be worth? I guess that depends on how long you think it will continue. Perhaps 5 years outperforming by 4.15% would justify a premium of 22.5% = 100 *(1.0415^5 - 1) or 10 years outperforming would justify a premium of 50.2% = 100 *(1.0415^10 - 1) over the index, but a lower premium might be justified on a risk-adjusted basis. I suspect that in the eyes of the market, they wouldn't wish to pay much of a premium for a few percent per year of 'boring' growth, when they could have glamorous and exciting companies showing recent growth of 20, 30, 40% with a commensurate record of recent stock 'performance' to get them excited about rapid gains quarter by quarter. Equally, there may be other factors making the broader market shy away from BRK. I suspect the current ages of Buffett and Munger and the potential for a sudden decline if one of them died or hit serious ill-health is one. The reported GAAP P/E looks relatively high (about 21 today, unless you use look-through earnings instead, bringing it to about 16 today). These could serve to put the casual market participant off for fear of short-term quotational loss. Plus Buffett rightly warns that Berkshire cannot continue to compound at 19%+ per annum given its size. For those who can look through the reported numbers and see the value, BRK seems to trade at a very reasonable price now, while the S&P500 seems pretty fully valued, but I don't think we who view BRK this way constitute a large proportion of the market and so we get to continue to have opportunities to purchase a great company at a reasonable price compared to the market at large. So would I be buying now at $185? The answer for me is no, but because of my exposure, not because of valuation. Reason: The deliberately concentrated portfolio I manage now has exposure to BRK.B just under 60%, and cash just under 10%, so I'm not inclined to add much right now unless the price drops quite a bit further to real bargain prices, even though we expect to add more cash in the next year. I think a price close to $150 at the moment would encourage me to weight BRK.B as much as 100% of our portfolio again. That's about 15% more than the $130 or so I would have been willing to pay in Feb 2016 when going almost all-in, reflecting mostly the growth in IV I perceive to have occurred in the meantime, with a similar discount to IV applied to my all-in buy price. I might also consider increasing exposure to as much as 100% at higher prices than $150 if another holding such as AAPL gets very high-priced or represents an uncomfortably large percentage of my portfolio (currently almost 27% of my non-look-through weighting at about $154 or 29.5% of my look-through exposure, which is comfortable to me as a concentrated investor still expecting to invest a lot of additional cash over the next 15 years). I did the opposite trade in May 2016, selling a good chunk of BRK.B while still undervalued at $142 to buy a 25% position in AAPL, even more deeply undervalued at $95 and with good prospects of outing some of its value. While BRK.B is up almost 31% since I sold that chunk, AAPL is up almost 62%, and both are a lot less undervalued now and I've added a lot more new cash to the portfolio too, keeping AAPL's weighting from getting out of hand. I can only think of maybe one stock I'm comfortable with other than BRK.B that I might hold more than 60% of my portfolio in were it cheap enough (and that stock, HLMA.L is at least 2.7x the price for which I'd risk that exposure right now having sold it at just about 2.1x my buy price to max out my BRK.B exposure back in Feb 2016, getting a lucky 15-20% USD:GBP currency boost on top later that year by going 100% USD before the Brexit vote). HLMA.L earned me over 14% annualized total return over about 14.35 years as a simple buy quality dirt-cheap and hold position. Of the companies I know, only in BRK.B would I hold a 100% weighting. I'm sure I'm happy being a lot less diversified than most would be comfortable with, but I think people with 7-10 stocks and cash to invest could happily keep adding to BRK at current prices up to a 15-25% position, recognising that it has hidden value that GAAP misses and do pretty well over 5+ years. Although my spouse and I do have some modest pensions invested in index funds, one of which we add to monthly through payroll at the level to get an employer match, I think I'd rather invest additional money in BRK at $185 if we weren't already so heavily weighted.

The long term focus and patience - and the acceptance of lumpy profits or profits that don't get reported on the bottom line, has often seen a boost to Berkshire's true underlying future prospects when all seems doom and gloom for many other companies. I would tend to anticipate 1 and 4 may add noticeable value in the next year or two, and be very unsure of the timing of events in 2 and 3. Anyone who has held or watched BRK for a decade or more may recall a number of such occasions: 1. I'm not aware of any major US Corporate Tax Reform in the last couple of decades, but it could provide a one-off boost to the visible figures fairly soon and provide more tax-efficient flexibility in capital allocation depending on the specific details of the reforms. 2. Large cash piles turning into a huge deal has certainly happened many times, BNSF and Heinz being the biggest to date, and PCP being fairly significant, and numerous great deals during market or financial meltdowns (e.g. BAC 6% preferred+$7.14 warrants and other 'shows of belief' to repair balance sheets of sound enough companies or to provide funding for takeovers - e.g. Mars), but I wouldn't care to guess when the elephant gun will next be fired - I could see it taking anything from next week to 3-4 years before a huge acquisition putting $40-100bn of BRK cash to use, depending on whether lofty market valuations and low interest rates persist and keep more companies priced a little too richly compared to BRK's willingness to pay. 3. Again, I'd be less inclined than I guess you might, Valuehalla, to guess that a crash is imminent, though like you I hope it is, but we saw good value purchases after the dot-com/Y2K bubble burst and brought more valuations into sensible or cheap territory. 4. It could possibly happen this year or next if the hurricane season causes sufficient insured damage within the US. I've welcomed in the past, expectations of a 'hardening' market for reinsurance after megacats like hurricanes, giving at least a few years of rates where BRK can write a lot of reinsurance business at sensible prices and make up for the reduction in the current year's profits. Over the years we've also seen opportunities like taking on long-tail risks from distressed Lloyds Names, getting a long time to invest the float before paying out claims in future currency. I always feel that BRK is best prepared for the storm in terms of financial strength, underwriting discipline and risk limitation and can be opportunistic in picking up the pieces after the damage of statistical clustering hits its poorly-incentivised competitors. I'd be happy to see a large acquisition tomorrow, or a broad market setback that makes prices more attractive. Regarding the coming market crash, I read, I think it was the Semper Augustus letter about the thinning market, where only a handful of TMT stocks accounted for the index gains before the dot-com bubble finally burst. This time it seemed to be mostly the FANG stocks, but the imminent crash doesn't seem to have followed just yet. I liked their ideas and reasoning and thought it was plausible and worth making their clients aware of, but I just can't seem to predict when highly optimistic valuations will suddenly turn more realistic across the broader market. This market doesn't feel like the go-go year 2000 where everyone says they're making so much in tech stocks.

Thanks for the feedback on how overwhelming it is to look at. I'm so used to my layout that I can just jump to the info I need, but I can see it would be useful to add a summary worksheet that appears first, showing much simpler more digestible information. A project for the future perhaps. I'll try to post a new topic if I complete that so that those reading the forum would know about it having changed. Dynamic

I looked at the Annual Report p84 and section 'Insurance—Investment Income' then used the figure for Dividends received which I sanity checked by calculating a yield against the equity portfolio valuation that seemed reasonable. That number goes in the first part of the formula in cell AH3 where the formula divides it by equivalent number of shares of BRK.A in circulation which is in cell AC6. Might be worth me looking up the dividends paid by the investees representing 85-90% of the weighted portfolio value to verify it's about right or even the whole lot. It's a shame GoogleFinance functions don't include dividends. I realise I had the 2015 figure originally and still needed to lower it just a fraction to match 2016's and should do so every February when going through all the blue cells. The 2016 figure is 3,552 in millions of dollars and had been 3,662 in 2015 so I was able to search the 2016ar.pdf for exactly that string of characters to find the number for the next year. I'm crazy busy at work after a week off but hope to update the look through sheets soon with this figure. There will be discrepancies if I include the BAC holding in the EPS but not the dividends as it had been warrants and preference shares previously. I haven't worked out how significant they would be, though these calculations aren't the main purpose of the spreadsheet.

Thanks for your comments, LongTermView The Earnings of the investee companies includes anything they distribute as dividends. The retained earnings would be = earnings - dividends - stock buybacks If we can ignore the buybacks we have a ratio of (4.16 - 1.48)/1.48 = 2.68 / 1.48 = 1.81 Expanding the top line you can write it as: (4.16/1.48) - (1.48/1.48) which simplifies to (4.16/1.48) - 1 so my answer is always 1 less than your formula. The original ratio you showed was Total Earnings / Dividends. So you can say that for every $1.00 of investee dividends received at Berkshire Hathaway in 2016 there's about an additional $1.81 retained which should eventually accrue to Berkshire as a combination of capital appreciation and increased future dividends. This means that for each $2.81 of total investee earnings, only $1.00 was received as dividends and reached Berkshire's GAAP earnings bottom line in 2016, while the remaining $1.81 was retained by the investees to fund future growth or buybacks which should increase the value of Berkshire's shareholding over the long term. If you want to get more accurate you could look up the trailing 12 month dividends of the investees and apportion them to the look through number of shares held so that the timings are roughly within the same quarter instead of half a year out.