Brk A vs S&P 500

[twacowfca]

Here's a log chart (showing % change) of BRK A (darker line) vs S&P 500 for 2009.  Is there any correlation of increased sales of BRK by the Bill and Melinda Gates Foundation and the divergence between the graphs beginning in April, 2009?  If not, this may augur relatively well for BRK in 2010 because BRK tends to underperform when the S&P makes a strong upward move (as in 2009) and substantially outperform in other years.  

[beerbaron]

I believe BRK is cheap because of the Santa Fe Railroad acquisition. A lot of people see it as a bad investment. From my point of view, judging by BRK's size, it's a good acquisition. I love when the market judges Warren's actions... if I were to argue against the most intelligent investor in the world I might think I'm right but its most likely not the reality.

 

BeerBaron

[jasonw1]

The selling by Gates foundation is 3~5% of daily volume for the past several months, I think the consistent selling has had a negative effect on the share price, not sure how much though.

 

Why would they sell so much? It's not that foundation needs the cash now, and Gates has said something like he sees BRK share price go much higher. 

[Zorrofan]

My preference would have been for the Gates foundation to hold the shares, thus ensuring the "BRK Culture" is not swayed in the future, and have BRK pay a small dividend to meet the legal requirements of the foundation. I believe WEB was going to originally have a foundation set up and pay out something like a 5% dividend.

 

cheers

Zorro

[bookie71]

Insert Quote

The selling by Gates foundation is 3~5% of daily volume for the past several months, I think the consistent selling has had a negative effect on the share price, not sure how much though.

 

Why would they sell so much? It's not that foundation needs the cash now, and Gates has said something like he sees BRK share price go much

higher.

.

.

I think they are required to distribute a certain % (5%?) of assets each year, by law, as they are a private foundation.  I think WEB requires they spend a certain amount each year also.  Since BRK has no dividend this requires sales. 

[value-is-what-you-get]

The selling by Gates foundation is 3~5% of daily volume for the past several months, I think the consistent selling has had a negative effect on the share price, not sure how much though.

 

Why would they sell so much? It's not that foundation needs the cash now, and Gates has said something like he sees BRK share price go much higher.  

 

WEB's gift required they sell it this quickly.  He specifically doesn't want a foundation set up to distribute little drips of money in perpetuity.  Foundations set up in this way become prone to the usual human errors over time (pet projects, annual program funding increases, lack of results accountability . . . ad infinitum).  His specification was and is to get it out there working now.  Help the most people fastest.  That is why he chose the Bill and Melinda Gates Foundation because he figured they were smart enough to invest such large sums in humanity in the time frame he laid out.  He also liked their model which is to help those who need it most irrespective of location, color, religion etc.  I expect he also liked the fact that Bill & Melinda have contributed a great deal of their wealth to the foundation.

 

If you're a net buyer of stocks over the next 5-10 years, then any depression in share price as a result of Foundation sales is simply the gift that keeps on giving!

 

Here it is straight from the source:

http://video.google.ca/videoplay?docid=515260011274566220&ei=ihBCS8HDGM7_lQfV-_S7Dw&q=bill+gates+warren+buffet+charlie+rose&hl=en#

[djcattlco]

Thanks for the link to the video,  always good to go back and hear what was said.  I absolutely agree that if a net buyer this is a good thing, because a relentless (501-c3 imposed) selling of 3-5% will takes it toll and depress stock....however the 50-1 split (which is not contingent on the BNSF deal) should add significant volume and may more than offset.  Question Value-is-what-you-get...why 5-10 years time frame?  Is that the period WEB's shares will be gifted?  Thanks.

[value-is-what-you-get]

Question Value-is-what-you-get...why 5-10 years time frame?  Is that the period WEB's shares will be gifted?  Thanks.

 

Thanks for the question -

 

The 5-10 year window was something I picked out of the air and in retrospect it is a dumb estimate arrived at by sheer laziness!

 

The correct and accurate answer is:

The annual sales volume is 5% of remaining shares gifted.  Originally it was 10,000,000 Class B.  

Therefore the maximum share volume was sold between August 2006 and July 2007 (500,000 shares).

The volume then decreases each year by 5% of last years gift since the base number of shares is 5% less.

Half of the gift will be sold by about 2019, that is 13 years after the gift was made.  At that time there will still be a selling bias of 2.5% of outstanding shares as a result.  27 years after the gift was made, about 75% of the shares will have been sold leaving a selling bias of 1.25% of outstanding shares.  The drag will be there forever and in decreasing amount of 1/4 of 1% of outstanding shares per annum. In fact after 100 years, that is in 2106, there will be a selling bias of 59,196 shares.

 

This is a great lesson in compounding!  

 

The average increase in per share book value for the S&P 500 since 1965 when present management took over Berkshire has been 8.9%.  The long term average inflation rate in the US since 1913 has been 3.43%.

The difference is 5.47%.  Berkshire should continue to match or beat the S&P 500 average, so it is probable that in 2106 (100 years later!!) the 59,196 shares will yield more inflation adjusted dollars for the Gates Foundation than the 500,000 shares sold netted in 2006!  

 

My perception of the donation was the $37 billion that we hear in the media.  I had not fully understood the scope of this gift and that it may well surpass $1 trillion.  The arrangement is great - BRK will look after the compounding, Gates Foundation can focus on getting it out there. 

 

Thanks again for the question!!

 

Here is the link to the Gates Foundation info on it:

http://www.gatesfoundation.org/about/Pages/implementing-warren-buffetts-gift.aspx

 

 

[twacowfca]

WOW!  Thank you, Value-is-what-you-get, for refreshing my memory of the salient features of the plan.  All things considered, it really is a great plan for other shareholders:

 

Using a scientific concept, the "half life" of the foundation's holding is 13 years.  Compare this to the half life of the average mutual fund's holding: about a year or less.  Our shares really are in good hands with Bill and Melinda. :)

 

The execution of the plan, however, could be improved by using a commonsense rule of thumb.  For example, if BRK's PR/BV is< 1.3 and also< the PR/BV of the S&P 500 during the first 9 mos. of the calendar year, simply suspend sales of BRK until the ratio rises above 1.3 or through the end of Sept.  Then, make up the required sales under the plan during the remainder of the year, regardless of what the ratio is then.  :)

 

 

 

 

 

 

 

 

 

[ERICOPOLY]

The average increase in per share book value for the S&P 500 since 1965 when present management took over Berkshire has been 8.9%.  The long term average inflation rate in the US since 1913 has been 3.43%.

The difference is 5.47%.  Berkshire should continue to match or beat the S&P 500 average, so it is probable that in 2106 (100 years later!!) the 59,196 shares will yield more inflation adjusted dollars for the Gates Foundation than the 500,000 shares sold netted in 2006!  

 

The rate of inflation after 1965 is far higher than that of the period from 1913-1965. 

 

In other words, it would make far more sense to only count inflation post 1965.  In doing so, it will alter your outcome quite a bit I think.

 

[value-is-what-you-get]

 

The rate of inflation after 1965 is far higher than that of the period from 1913-1965. 

 

In other words, it would make far more sense to only count inflation post 1965.  In doing so, it will alter your outcome quite a bit I think.

 

 

Good point!  The most pessimistic calculator I found puts it at 4.4% for the period from 1965 to present.  That is an absolute difference of .97% but a relative difference of 28%!

 

So the hurdle is 9.4% compounding of BV by Berkshire going forward in order to maintain the 1.6 Billion or so per annum in inflation protected dollars. 

 

Most simply, BRK BV performance has to beat the annual inflation rate by 5% per annum. 

 

What I did notice from the data though is that we have not topped annual inflation of 4.4% since 1991 and even WEB has stated he can't really see any way around increasing inflation in the future if printing presses are used to pay debt.  This places an upward bias on inflation going forward.

[twacowfca]

Here is an update of the log chart of BRK-A (Darker Line) vs the S&P 500 for January 2010 through the close on January 28th.  :)

[twacowfca]

Here is a log chart showing % change of BRK-A (Darker Line) vs the S&P 500 since the close of the market on January 19, 2010 (the day shareholders approved the stock split) through today’s close. 

 

Interestingly, BRK’s outperformance compared to the S&P 500 during this same period, which includes the January 26, 2010 announcement that BRK will be included in the S&P 500, has been +21.15%. :)

 

[arbitragr]

Here is a log chart showing % change of BRK-A (Darker Line) vs the S&P 500 since the close of the market on January 19, 2010 (the day shareholders approved the stock split) through today’s close. 

 

Interestingly, BRK’s outperformance compared to the S&P 500 during this same period, which includes the January 26, 2010 announcement that BRK will be included in the S&P 500, has been +21.15%. :)

 

 

The index funds and pension managers probably had to buy up BRK since it's now part of the S&P500, technically speaking.

 

Bloomberg FYI - You know you could just type "GRAB" then press "GO" --> a screen will pop up and let you enter your email address, ---> type your email address then 'send'.

This will give you your charts in a GIF or picture file.

Instead of producing a pdf all the time.

 

[twacowfca]

Here is a log chart showing % change of BRK-A (Darker Line) vs the S&P 500 since the close of the market on January 19, 2010 (the day shareholders approved the stock split) through today’s close. 

 

Interestingly, BRK’s outperformance compared to the S&P 500 during this same period, which includes the January 26, 2010 announcement that BRK will be included in the S&P 500, has been +21.15%. :)

 

 

The index funds and pension managers probably had to buy up BRK since it's now part of the S&P500, technically speaking.

 

Bloomberg FYI - You know you could just type "GRAB" then press "GO" --> a screen will pop up and let you enter your email address, ---> type your email address then 'send'.

This will give you your charts in a GIF or picture file.

Instead of producing a pdf all the time.

 

 

 

 

Thanks.  We'll take the short cut next time.  :)

[arbitragr]

 

 

 

Thanks.  We'll take the short cut next time.  :)

 

Try it out now if you want. See how it looks. Instant feedback.  :)

[goldfinger]

I do not think that index funds did their buying ahead of schedule: too much risk involved with the uncertainty (even if there was almost none) of the acquisition. They do their buying after the fact, that's their function. Tomorrow might be interesting.

[shalab]

The total volume of A+B shares has been large enough since the split announcement that I dont expect a significant price hike at close tomorrow or early next week.

 

It is an easy trade otherwise, buy this week and sell at the close. Also, short at the close so when everyone dumps next week, cover the short. Also, there is going to be a good supply of new shares early next week as BNI deal closes some of which will no doubt change hands soon.

 

I expect the index funds to buy at close tomorrow so they dont lag the market come Monday. I am sure they have made their arrangements to get the amount of shares they need. They have been through this exercise many times to mess it up.

 

[goldfinger]

Remember there is a need for around 14B US$ worth of stocks. But other funds may have to buy it depending on their strategy.

There is not a lot of float out there and a majority of Berkshire shareholders know their stock.

A majority of BNI shareholders wanted BRK stock instead of cash.

I think there is much more buying to come as of tomorrow.

Hey, I am not betting on it but it is kind of fun to watch...

[twacowfca]

I do not think that index funds did their buying ahead of schedule: too much risk involved with the uncertainty (even if there was almost none) of the acquisition. They do their buying after the fact, that's their function. Tomorrow might be interesting.

 

 

Actually, the index funds do most of their buying on the day the new listing joins the index.  This will be Tuesday.  There is no trading Monday.  Tuesday may be even more interesting than Friday.

    Cheers!