Russell Rebalance: Berkshire will be 1.1% of index after June 25th.

[Charlie]

June 14 (Bloomberg) -- Financial companies will displace computer and software makers as the largest industry in the Russell 3000 after the addition of Berkshire Hathaway Inc. when the index rebalances this month.

 

The insurance and investment company run by billionaire Warren Buffett is set to be added to the Russell 3000 and Russell 1000, according to the Tacoma, Washington-based Russell Investments’ website. Berkshire is one of 38 financial companies on the preliminary list. Russell will review and update the additions June 18 and again on June 25 before they take effect.

 

Banks and financial firms will account for 19 percent of the index, up from 15.3 percent last year, making it the biggest increase by industry based on market value. Berkshire will also account for about 1.1 percent of the rebalanced Russell 1000 and will rank in its top 20 companies, according to New York-based Investment Technology Group Inc., which monitors and analyzes changes in indexes for its institutional clients.

 

http://www.businessweek.com/news/2010-06-14/financials-surpass-technology-companies-in-russell-rebalancing.html

 

Cheers!

[Alekbaylee]

Not sure if it's related, but the stock is up +10% in less than a month.

Granted it was already at that level a few months before but seems to have more steam this time... Fly baby, fly...  ;D

[twacowfca]

Not sure if it's related, but the stock is up +10% in less than a month.

Granted it was already at that level a few months before but seems to have more steam this time... Fly baby, fly...  ;D

 

BRK has advanced much more than the Russell 1000 and the S&P 500 during the last few days.  

This is almost certainly related to its addition to the Russell 1000, effective after the close of the market June 25.  The same thing happened early in the year before BRK's addition to the S&P 500 when it outperformed that index dramatically.  This outperformance is a phenomenon that happens regularly.  The outperformance is especially pronounced with large companies,like BRK, that were not previously part of an index until the year of their inclusion.

 

In view of this, we took most of our cash and bought BRK a few days ago and also bought July calls.  This worked very well for us in Q1 before admission to the S & P500  and seems to be working nicely this time as well.  :)

 

The amount of BRK stock that will have to be bought by Russell index tracking funds before June 26 is astounding, about four percent of BRK's shares outstanding!  :)

[EricSchleien]

okay -- so why would a larger company have more impact than a smaller company.  wouldn't you think a smaller company's price would have a larger impact in share price due to less float?

[twacowfca]

okay -- so why would a larger company have more impact than a smaller company.  wouldn't you think a smaller company's price would have a larger impact in share price due to less float?

 

 

Index funds and quasi index funds sometimes ignore smaller companies at the tail end of the index cut off or are less scrupulous in buying enough shares of smaller companies in their universe to get an exact balance if failure to do so would not lead to significant tracking error. They do this for the very reason you mentioned: less liquidity with smaller caps.  Failure to get an exact balance with a mega cap company like BRK will definitely produce significant tracking error.  Even large cap funds that claim to be actively seeking alpha will ignore BRK at their peril of falling behind their benchmark.  :)

[twacowfca]

Tomorrow after the close is the reconstitution day for the Russell indexes.  We will be exiting our BRK trade and our July BRK calls probably with a market at close order because new Russell admissions typically decline in price for a few days after the reconstitution day.  We hedged our trade a few days ago with SPY puts because the market looked like it was getting squirrelly again.  If the market looks ugly tomorrow, we may keep the puts to give us a little hedge on our remaining portfolio even as we build up our cash once again as we do not anticipate a bull market.

 

I think that what we are doing is prudent action that increases our margin of safety, but buy and hold value investors might call it day trading.  Am I just fooling myself?  Your opinion will be much appreciated.

[Myth465]

Tomorrow after the close is the reconstitution day for the Russell indexes.  We will be exiting our BRK trade and our July BRK calls probably with a market at close order because new Russell admissions typically decline in price for a few days after the reconstitution day.  We hedged our trade a few days ago with SPY puts because the market looked like it was getting squirrelly again.  If the market looks ugly tomorrow, we may keep the puts to give us a little hedge on our remaining portfolio even as we build up our cash once again as we do not anticipate a bull market.

 

I think that what we are doing is prudent action that increases our margin of safety, but buy and hold value investors might call it day trading.  Am I just fooling myself?  Your opinion will be much appreciated.

 

I think its prudent and I have been thinking alot about this over the last few weeks. I think what you are doing is A trading value, and B investing with a catalyst. Its something I want to do more and more of given the markets volatility.

 

I think you have core positions that you hold in good value ideas (FUR, LRE, L, BRK, FFH, Est.). Then you have trading positions where you invest with a catalyst or on downturns and look to trade out of when you have gains.

 

I want to have core positions that I hold until intrinsic value and then buy more on downturns in trading accounts that I sell out of once the stock has rebounded. This could be done with shares or options.

 

[vinod1]

Tomorrow after the close is the reconstitution day for the Russell indexes.  We will be exiting our BRK trade and our July BRK calls probably with a market at close order because new Russell admissions typically decline in price for a few days after the reconstitution day.  We hedged our trade a few days ago with SPY puts because the market looked like it was getting squirrelly again.  If the market looks ugly tomorrow, we may keep the puts to give us a little hedge on our remaining portfolio even as we build up our cash once again as we do not anticipate a bull market.

 

I think that what we are doing is prudent action that increases our margin of safety, but buy and hold value investors might call it day trading.  Am I just fooling myself?  Your opinion will be much appreciated.

 

This is as sensible an investment approach as any that I have read. You bought an exceptionally good business at a decent margin of safety with a catalyst and hedged market risk when the broad market is above its fair value. If it does not fit some definition of value investing, too bad :)

 

Vinod

[Charlie]

Look at the Berkshire Price at the SP addition (february 12). It went up for nearly one month

after the inclusion.

So I´m not sure how much index buying is before and how much after the inclusion into the

Russell index.

 

But selling at P/B of 1,33 is in my opinion too cheap.