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BRK correlation to market


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

 

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

 

To me the "science" and theory of value investing makes complete sense but if markets are so well correlated, does the theory play out??

Disclosure: 100% of my assets are in the "value" bucket.

 

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If you zoom out a bit the correlations change. Consider there was a prolonged market sell off or market contraction lasting 2-4 quarters.

 

Brk's robust or perhaps anti-fragile (at times when it has such a % of cash/mkt cap ratio as today) nature would shine through. Buybacks would be aggressive, acquisitions would occur for the first time in years using mostly cash (that's been earning next to nothing TTM), and cash would be put into equities at better prices/in large quantities/higher dividend yields. There would likely be some sweet heart deals. 

Additionally, brk's fcf yield is higher than the index and that cash would be put to work.

Considering the above, what would happen to the average company in the index over the same time period? Obviously people would notice the difference.

 

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

 

 

 

 

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If you zoom out a bit the correlations change. Consider there was a prolonged market sell off or market contraction lasting 2-4 quarters.

 

Brk's robust or perhaps anti-fragile (at times when it has such a % of cash/mkt cap ratio as today) nature would shine through. Buybacks would be aggressive, acquisitions would occur for the first time in years using mostly cash (that's been earning next to nothing TTM), and cash would be put into equities at better prices/in large quantities/higher dividend yields. There would likely be some sweet heart deals. 

Additionally, brk's fcf yield is higher than the index and that cash would be put to work.

Considering the above, what would happen to the average company in the index over the same time period? Obviously people would notice the difference.

 

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

 

From the 1961 partnership letter:

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

 

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

Reasonable to expect more of the same.

 

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  • 1 month later...

Following up on this trend. Six weeks ago it appeared that BRK was getting hit as hard as FAANG stocks. Today, I see that whilst most big tech stocks are 25% off their 52 week highs, BRK is down only 6% off 52 week high. So as Cigarbutt pointed out, things are as we thought - BRK would do better in a down market. I'm reassured the world is as it should be. The anti-fragile large cash holding should allow for appropriate deployment and future gains.

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  • 1 month later...

Following up on this trend. Six weeks ago it appeared that BRK was getting hit as hard as FAANG stocks. Today, I see that whilst most big tech stocks are 25% off their 52 week highs, BRK is down only 6% off 52 week high. So as Cigarbutt pointed out, things are as we thought - BRK would do better in a down market. I'm reassured the world is as it should be. The anti-fragile large cash holding should allow for appropriate deployment and future gains.

 

It looks like BRK has outperformed in the current selloff, even though the equities he owns haven’t. I also think that due to its larger industrial business, BRK is more economically sensitive than it used to be. I am quite surprised by the relative outperformance, quite frankly. FFH in the same time span has gotten absolutely wrecked.

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Following up on this trend. Six weeks ago it appeared that BRK was getting hit as hard as FAANG stocks. Today, I see that whilst most big tech stocks are 25% off their 52 week highs, BRK is down only 6% off 52 week high. So as Cigarbutt pointed out, things are as we thought - BRK would do better in a down market. I'm reassured the world is as it should be. The anti-fragile large cash holding should allow for appropriate deployment and future gains.

 

It looks like BRK has outperformed in the current selloff, even though the equities he owns haven’t. I also think that due to its larger industrial business, BRK is more economically sensitive than it used to be. I am quite surprised by the relative outperformance, quite frankly. FFH in the same time span has gotten absolutely wrecked.

 

Ajit jain just bought 20 million $ of Brk at 296.000.  That is reassuring.

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Is the market spooked (or should it be) by BRK’s large AAPL position?

 

There are other ways to look at it, but the AAPL position (~56B) equates to about 10% of BRK's market cap. So for every 10% in Apple's stock, BRK should move 1%. Meaningful? yes. Spooky? doesn't sound like that to me.

 

Then again, many on wall street have moved completely to cash in their personal accounts in December, so they are generally alarmed. I'm a buyer this month, but they do make a strong case.

 

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