Why did so many smart investors miss making a killing on BRK stock?

[rkbabang]

1 hour ago, gfp said:

 

Thanks - that's a great charting tool - bookmarked!

 

Seconded.

 

Also, I don't know why the guy in this thread way above got so pissy and started freeking out, but I basically agreed with his first post.  BRK has not really knocked it out of the park in a long time.  I've always held some since around 2002 or so, but the last 10 years or so I haven't had a large position.   I bought Apple in 2014 (a large position) and held it until I sold most of it last year about where it's still trading now.   Sure BRK holds AAPL too, but I don't think you can look at this chart and think:  I should have just stuck with BRK.  And I don't think this chart even included dividends for AAPL, I had dividend re-investment enabled on my account the entire time I owned it.

 

 

[DooDiligence]

3 hours ago, Munger_Disciple said:

 

 

For the benefit of at least one of the newer posters on this board who seems to think he knows everything, I would just say this: @gfp is one of the best posters with deep knowledge of the companies he comments on. I truly respect, enjoy and look forward to reading his posts and I always learn something new from him. There are very few posters on this board board I feel this way & @gfp is one of the best. 

 

Seconded. He's been a very gracious poster and responder. I've learned a lot.

 

3 hours ago, Munger_Disciple said:

 

I consider it an honor to be muted by you. 

 

[Parsad]

4 hours ago, Gmthebeau said:

lol, he cant do basic math.  you are now muted too.  most of you are clueless.  this much is obvious.

 

Not sure why you are muting people.  Posters make mistakes from time to time.  I've been running this thing for 23 years, and I've found that a little humility goes a long ways.

 

Telling people they are clueless or ignoring them, not sure it keeps your mind open to the opinion of others. 

 

Believe me, I've had my fair share of confrontations over the years, but I think I was much better off listening and formulating my own opinion, rather than telling others that their thoughts are inane.

 

Unless you're worth well over $100M and did it without any inheritance, I would think about taking my advice.  

 

Cheers!

[Parsad]

4 hours ago, Jaygo said:

I’m guessing Viking was wondering if we are going to become rich off of Fairfax.  Is buying ffh today like buying brk in the 70’s. 
 

I honestly can’t say, if the structure is similar it may work out but I think WB has an edge on capital allocation that is almost unrepeatable for others. I really hope for all of our sakes ffh performs as well, so 20 years from now I could say I was part of that great run. 
 

I don’t feel as comfortable with ffh like I do with brk but that is some very biased thinking with hindsight. 
 

I have purposely put my long term holds into my taxable accounts so I’m less likely to trade and that group now sits with 78 shares of Fairfax. Here’s hoping we all do well. 

 

My opinion is never fall in love with a stock...even if it is BRK or FFH.  Love your portfolio and how you can compound it while sleeping at night. 

 

What you own is less important than making sure you apply Buffett's margin of safety and use intrinsic value for your purposes to compound capital.

 

If I only owned BRK, then I would never have benefited each time from the huge discounts I bought other stocks at...including FFH, OSTK, M, Odyssey Re, META, GE, etc.  I did better than BRK and the S&P500 by doing so since I started buying stocks in 1999.  

 

Cheers!

[dealraker]

I'm too a gfp admirer.

 

One of the things that's in the past been pretty cool for those of us four decade plus owners of the Berkshire stock is that we've developed an almost - but not entirely - foolproof model for times to buy the stock that almost guarantee you a starting point that's quite good.  And while that model is somewhat based on price to book, or was based on that, it mostly just involves buying Berkshire when the stock has lagged the market...and generally lagged by a whole lot.  That's available because the businesses overall  within Berkshire provide something we understand and have some fairly accuracte predictive abilities with.

 

Will this situation sustain?  Who knows?

 

 

 

Rambling.

Edited February 29 by dealraker

[Munger_Disciple]

4 hours ago, gfp said:

My average cost basis on FFH in CAD is $686 and for FRFHF is $569 - which isn't particularly low - because I never stopped adding shares.  It is a better outcome than if I had just admired my pristine low cost basis and never made the position larger.

 

@gfp If you don't mind sharing, what % of your portfolio is in FFH? And what do you expect the book value to compound at long term (not the next couple of years)? Any thoughts on relative performance you expect vs BRK going forward? Thanks

 

 

[longlake95]

Welcome Charlie 

[hasilp89]

Well said @charlieruane agree on both fronts. And great 1st post.

most folks won’t take into account risk and when they do it’s measured by volatility (which is incorrect).

Edited February 29 by hasilp89

[valueinvesting101]

15 hours ago, charlieruane said:

Hi folks. Longtime lurker, first-time poster here. Just wanted to chime in with a few comments, some general, some related to the topic of this thread. 

 

First, I want to echo those who have highlighted gfp's contributions to this board over the years. This forum is home to many of the most thoughtful value investors I know of, but I think gfp is in a class of his own. Just wanted to say thank you for your thoughtful posts—I hang on every word. (I'm grateful to all the members of this forum, I should add!)

 

Re: the topic of this thread, a comment that Seth Klarman made in an old issue of Outstanding Investors Digest (at least, I think that's where I found it) comes to mind. An interviewer asked Klarman about his hurdle rate, clearly expecting his answer to be some crazy nominal figure like 20%/yr. Klarman emphatically replied that he never targets nominal returns, only risk-adjusted returns. I agree that that's the metric to target. 

 

I would hazard that Berkshire has pretty much always (and maybe literally always, but I won't go that far) offered at least plausible risk-adjusted returns, including over the past two decades. As gfp mentioned, the key is not to interrupt quality  compounding, and the easiest way to avoid interruption is to own low-risk assets that you know intimately. 

 

The stock's decent risk-adjusted prospects hold even today. Compare owning (an admittedly slightly pricey) Berkshire now with owning the S&P 500 at a Shiller P/E of 34 and with after-tax corporate profits/GDP near all-time highs, not to mention a degree of concentration that Ben Inker of GMO argues  all but ensures underperformance in megacap stocks. 

 

So, has Berkshire "killed it" since 2000? On a risk-adjusted basis, yes, and it has a good shot of continuing to do so for the next ten+ years, especially if its dividend policy holds.

 

My 1991 shares have done 14.46% p.a. for 33 years, my 2011 shares have done 15.04% for 12 years, and my 2020 shares have done 25% for four years. If you bought conservatively over the past three decades, you probably killed it in non-risk-adjusted terms, too.

 

Anyway! Nice to meet all of you. Looking forward to many exchanges on this forum. 

Welcome Charlie!! Great first post and hopefully many more to come.

Wow!! 85 bagger over 33 years! 

Nice returns of 4 bagger and 2.5 bagger for 12 and last 4 years. 

Not sure how much of net worth people felt comfortable putting in Berkshire in early years especially when Buffett was hitting it out of the park but Berkshire investment had key man risk. Not sure if I would have felt tempted to reduce position after great returns over 5-10 year period. 

@charlieruane How did you made decision about holding Berkshire during 1998-2000 period? Was just ignoring daily prices or potential taxes or investment opportunities after paying taxes of gains were not interesting?

I started holding it from 2015 and slowly built it over last few years. It seems much less risky to own it now as even in 2015 Buffett was playing in his extra time. I felt comfortable about it succeeding beyond Buffett as well. 

[Dynamic]

Welcome, @charlieruane, what a good post. I agree with much of what has been written in this thread and also appreciate the likes of @gfp and @Viking to name but two for their valuable and insightful contributions over many years.

 

I now actually track my portfolio against the index and tech and periodically record how many shares of BRK.B my total portfolio value is equivalent to, as a way of confirming if trades other than my default options of Berkshire or the S&P500 Index are adding value. If not I ought to wait for fatter pitches or give up trying to beat them.

 

I consider Berkshire to be my default investment for up to 100% of my portfolio, internally diversified with trustworthy management, likely to perform at least about as well as the SP500TR without frictional costs (which for me include withholding tax on dividends), likely to outperform in bear markets and something where I understand Intrinsic Value and can buy with margin of safety, unlike the index.

 

My original core holding from July 2003 when I switched accounts to be able to buy US stocks has grown each dollar to $8.23 with no costs, compared to $7.61 for the SP500TR before costs, a 0.42% beat in terms of CAGR and a huge beat compared to my local FTSE100-TRI benchmark. I've added over the years at higher prices, but with much greater margin of safety than my original purchase and very few substantial dips below my most recent buy price.

 

Having to look better than Berkshire has been a tough hurdle for other investments and has helped me reduce underperforming mistakes to an insignificant level, outweighed by outperformers.

 

As for Fairfax I finally made myself comfortable with it last year and bought an initial position. Now with the Muddy Waters opportunity I've gone to a full concentrated position, and even though I consider it cheap, with margin of safety and great prospects for at least 3 to 5 years, I have to limit the initial position size to perhaps 20-30% of my portfolio (again as someone willing to run a highly concentrated portfolio).

 

I'm trying to plan ahead to prepare to hold on to Fairfax and let it compound for me over at least a decade, preferably longer, where I anticipate a lumpy 15% rate of compounding or maybe even a little better. I'm trying to envisage different scenarios and how to think about them in advance. For example my most likely expectation is for it to double in 4 to 5 years, maybe 3 years with luck and a rerating, which might even make it exceed 50% of my portfolio within 5 years and feel a little tempting to reduce (which I intend to resist), but still with better compounding prospects than Berkshire and the index. It's also possible that bad catastrophe losses at any time could impair it's book value dramatically especially due to the inherent float leverage, though I would expect such circumstances to lead to a hard market allowing it to write a lot more well priced business afterwards. I expect Fairfax might suffer a substantial price decline but if it's after say 2026, it's likely to still be well above my buy price this year. I'm trying to prepare myself to react rationally to whatever the future holds and only sell if I'm convinced that Fairfax is permanently impaired or I have a considerably better prospect elsewhere.

[Michael Campbell]

7 hours ago, charlieruane said:

old Graham-school money manager

Looking at your handle, Charlie, I couldn’t help but wonder if your “old Graham-school money manager” was Bill Ruane, friend of Warren’s and founder of the Sequoia fund. Are you any relation?

[ValueArb]

On 2/27/2024 at 3:40 PM, dealraker said:

So in my investment club which began in 1954 there are of course no original members but I'd guess that all the original guys (it is and has always been all men) owned Berkshire and I know for certain all 25 (it has always been 25 men) current members own Berkshire.  And none trade it.  Most have owned it for 35 plus years, we are an old bunch.  My family (brother and sister) and family business (all my 1st cousins)...everybody individually has owned Berkshire for decades and the business too.

 

Online?  Well, I'm aware of a couple of long term owners but not many.  Most online investors are obsessed with beating Mr. Market while I haven't heard that term from any of my family or anyone in the club.  We do compare ourselves to the market in the club over time and individually but there's no outward effort expressed to beat Mr. Market.

 

I'd say online investors communicate and interact in such a manner that it pretty much mandates an all out effort to outperform the the market constantly.  To me that means when Berkshire, the stock, goes up fast it will be sold by nearly everyone.  

 

Personally my focus is on investing where I think the outcome is better than buying CD's at the bank.  That's an old fashioned thing, the crowd I grew up with pretty much either bought rental real estate of bank CD's, those of us in the investment club were sort of unique in our near 100% allocation to stocks 50 ago...it just never changed for those I have close relationships with.

 

Let me also say I loved this post. This is how most should live their lives, instead of obsessing over reading 10Ks and relentlessly searching for better stocks, make great long term investments so you can spend your time with on your family, your business and your hobbies while time works its magic on your investments.

[dealraker]

1 hour ago, ValueArb said:

 

Let me also say I loved this post. This is how most should live their lives, instead of obsessing over reading 10Ks and relentlessly searching for better stocks, make great

1 hour ago, ValueArb said:

 

Let me also say I loved this post. This is how most should live their lives, instead of obsessing over reading 10Ks and relentlessly searching for better stocks, make great long term investments so you can spend your time with on your family, your business and your hobbies while time works its magic on your investments.

long term investments so you can spend your time with on your family, your business and your hobbies while time works its magic on your investments.

Re-reading the post of course I meant real estate "or" bank CD's.   

 

A distinct memory of mine, one experienced many times in my high school through my 20's, was witnessing men talking about the stocks of Coke and Pepsi.  Coke and Pepsi were two of the growth stocks that were constantly discussed...but what I remember the most of all is hearing these men stating the trading of these stocks, not holding them.  Yes it was always a buy and sell themed discussion.

 

This wasn't the men in my investment club who were not fast in-and-out traders, this was out in the public discussion by the men my father's age who I knew well.  My internal response to these discussions was continually, "Why do they do this?

 

Those that held and lived a while easily had 100  + bagger returns, no decisions after buying needed.  

Edited March 7 by dealraker

[scorpioncapital]

20 hours ago, ValueArb said:

 

Let me also say I loved this post. This is how most should live their lives, instead of obsessing over reading 10Ks and relentlessly searching for better stocks, make great long term investments so you can spend your time with on your family, your business and your hobbies while time works its magic on your investments.

 

If they never sell it, how is it different than 'fondling Gold'? How do you derive an economic or personal lifestyle benefit from it?

[Saluki]

2 hours ago, scorpioncapital said:

 

If they never sell it, how is it different than 'fondling Gold'? How do you derive an economic or personal lifestyle benefit from it?

 

Well, there is a strategy that Buffett used to recommend in the early days, to borrow against the stock.  He assumed correctly that the stock would compound at a faster rate than the interest on the borrowing,  

 

Apparently that strategy is being used again by the ultra wealthy to spend their wealth and not be taxed on the sale.  You just borrow against the assets and when you die, the estate is based on the net value, including the debt, which reduces the inheritance as much as selling, but there is no tax to the decedent on sale. 

[Munger_Disciple]

19 minutes ago, Saluki said:

 

Well, there is a strategy that Buffett used to recommend in the early days, to borrow against the stock.  He assumed correctly that the stock would compound at a faster rate than the interest on the borrowing,  

 

Apparently that strategy is being used again by the ultra wealthy to spend their wealth and not be taxed on the sale.  You just borrow against the assets and when you die, the estate is based on the net value, including the debt, which reduces the inheritance as much as selling, but there is no tax to the decedent on sale. 

 

Do you have a reference? IIRC Buffett expressly recommended against using margin as any stock can fall > 50%. 

[Saluki]

I don't have a cite, and I hope I'm not misremembering.  But I think it was either in the Snowball or the partnership letters where someone that he knew personally was going to sell BRK to get the money for the deposit on a house or something. And he thought that they would miss out on a lot of compounding and suggested that.  

 

Weirdly, there's a guy in Palo Alto who would probably be worth like $200bln or something by now if he hadn't sold his 10% of Apple.  Ronald Wayne - Wikipedia  So missing out on early Berkshire doesn't seem so extraordinary. 

[RadMan24]

There have been two really smart investors that bought BRK in recent years when the stock was performing poorly relative to the S&P 500 due to lingering concerns about Buffett and such: Meryl Witmer and Greg Abel. 

 

Meryl bought in May 2020 at $173 for Brk. B - now $400

Abel bought Sept 2022/March 23 - call it $400,000 for Class A, now $600k. 

 

[Munger_Disciple]

1 hour ago, Saluki said:

I don't have a cite, and I hope I'm not misremembering.  But I think it was either in the Snowball or the partnership letters where someone that he knew personally was going to sell BRK to get the money for the deposit on a house or something. And he thought that they would miss out on a lot of compounding and suggested that.  

 

I am not sure you are correct. Buffett actually sold a few shares of his Berkshire stock in the 70s when his wife wanted to buy a house in Laguna Beach. More importantly, Buffett said this in the 2014 Special 50-year shareholder letter:

 

"Another warning: Berkshire shares should not be purchased with borrowed money. There have been three times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a satisfactory holding for investors. But it could well be a disastrous choice for speculators employing leverage."

[longlake95]

18 hours ago, Munger_Disciple said:

 

I am not sure you are correct. Buffett actually sold a few shares of his Berkshire stock in the 70s when his wife wanted to buy a house in Laguna Beach. More importantly, Buffett said this in the 2014 Special 50-year shareholder letter:

 

"Another warning: Berkshire shares should not be purchased with borrowed money. There have been three times since 1965 when our stock has fallen about 50% from its high point. Someday, something close to this kind of drop will happen again, and no one knows when. Berkshire will almost certainly be a satisfactory holding for investors. But it could well be a disastrous choice for speculators employing leverage."

I'll try to find the my source on this (read this a longtime ago) : but I'm fairly sure when Buffett bought ocean side house in Laguna, he promptly put a mortgage on it, and put the proceeds right back into BRK. He just carried that little mortgage around, cuz it was dirt cheap $$$ and posed no financial harm.

[gfp]

The first Laguna beach house was $150k and I think Warren paid in cash.  He had recently shut down the partnership and that gave him $16 million cash but he pretty quickly spent every dime of it buying shares of stock (and presumably the Laguna house).  Then he ran out of cash and had to live on only the $50k annual salary Berkshire paid him and some fees he earned from running a pension fund for FMC Corporation (a sort of favor for a friend).

 

A few years later, Warren paid $300k cash for Howie's first farm in Nebraska.  Howie paid Warren rent.  I'm not sure if that farm was mortgaged or not.

Edited March 9 by gfp

[scorpioncapital]

22 hours ago, Saluki said:

 

Well, there is a strategy that Buffett used to recommend in the early days, to borrow against the stock.  He assumed correctly that the stock would compound at a faster rate than the interest on the borrowing,  

 

Apparently that strategy is being used again by the ultra wealthy to spend their wealth and not be taxed on the sale.  You just borrow against the assets and when you die, the estate is based on the net value, including the debt, which reduces the inheritance as much as selling, but there is no tax to the decedent on sale. 

 

Isn't this a prepayment of the tax on death? The loan withdrawals = the tax owed eventually?

 

I have heard about this strategy. It is used by wealthy in rich countries with high marginal tax rates. The caveat is that the loan rate is < the tax rate (usually) and that you don't get a margin call! I would imagine you have to take a view on overvaluation and reduce debt when market is bubbly and increase it during/after every regular catastrophe or bust.  You have to do it prudently. I think there may be some benefits also on deducting interest expense. I know the Davis family used this strategy. The son on this podcast mentions how his dad and granddad who made a vast fortune as investors in insurance companies took great risks on margin. He told the truth - to create vast wealth you need leverage. To preserve it, you do not. So question is what phase we all are in right? this is the podcast - https://youtu.be/o6rgXYt7BnE?si=17PykIM6QV1VtEHr

 

 

 

 

Edited March 9 by scorpioncapital

[gfp]

On the subject of Buffett and debt and Berkshire board members making well timed moves with the stock...

 

In 1976 Warren convinced his Mother to sell her 5,272 shares of BRK.A to his sisters Doris & Bertie for $5,440 plus a $100,000 note (to Mom, not the bank or margin).  They each got 2,636 A-shares at about $40/share while coming up with only about $2/share in cash.  95% leverage.  Kind of puts his stories from this year's annual letter about his sister being one of the greatest investors of all time all on her own into perspective.

 

Charlie Munger did a similarly well-timed masterstroke of estate planning near the absolute bottom of stock prices in the GFC - he got 2,000 A-shares out of his estate, sold to family members in exchange for a promissory note.  On 11/20/2008, with BRK.A at $77,500.

https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml

[Munger_Disciple]

57 minutes ago, gfp said:

The first Laguna beach house was $150k and I think Warren paid in cash.  He had recently shut down the partnership and that gave him $16 million cash but he pretty quickly spent every dime of it buying shares of stock (and presumably the Laguna house).  Then he ran out of cash and had to live on only the $50k annual salary Berkshire paid him and some fees he earned from running a pension fund for FMC Corporation (a sort of favor for a friend).

 

A few years later, Warren paid $300k cash for Howie's first farm in Nebraska.  Howie paid Warren rent.  I'm not sure if that farm was mortgaged or not.

 

 IIRC Warren called his broker and instructed him to sell a few Berkshire shares to raise cash saying that Susie wanted to buy a house. He probably bought back those and more later after getting a mortgage. 

[Munger_Disciple]

15 minutes ago, gfp said:

On the subject of Buffett and debt and Berkshire board members making well timed moves with the stock...

 

In 1976 Warren convinced his Mother to sell her 5,272 shares of BRK.A to his sisters Doris & Bertie for $5,440 plus a $100,000 note (to Mom, not the bank or margin).  They each got 2,636 A-shares at about $40/share while coming up with only about $2/share in cash.  95% leverage.  Kind of puts his stories from this year's annual letter about his sister being one of the greatest investors of all time all on her own into perspective.

 

Charlie Munger did a similarly well-timed masterstroke of estate planning near the absolute bottom of stock prices in the GFC - he got 2,000 A-shares out of his estate, sold to family members in exchange for a promissory note.  On 11/20/2008, with BRK.A at $77,500.

https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml

 

This is very different from margin debt; mom wasn't going to call on the loans even if daughters didn't make a payment on the note  for a few months.

 

But a great strategy to keep in mind. 

Edited March 9 by Munger_Disciple