Author Topic: Where is Warren??  (Read 2263 times)

dpmeado

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Where is Warren??
« on: November 04, 2018, 10:49:57 AM »
I disovered the Moneymoustache site only 3 days ago and have been pouring over all of the information ever since. My wife and I started our saving journey 6 years ago after reading a Dave Ramsey book and have never looked back. I have also read everything Paul Merrimans web site has to offer on buy and hold strategy. After reading all of this information I have noticed several consistencies. 1) everyone loves vanguard index funds 2) everyone quotes Warren Buffett. 3) nobody recommends buying Berkshire Hathaway’s stock.
Can someone explain why this is the case? Everyone agrees Warren Buffett is one of the greatest investors of all time so why not invest in him? Berkshire is a conglomerate of companies, almost like its own ETF rather than a traditional stock. I understand it does not pay a dividend but does buy back stock. Any clarity would be greatly appreciated.

jacoavluha

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Re: Where is Warren??
« Reply #1 on: November 04, 2018, 11:17:45 AM »
You invest about 3% in Berkshire when you buy total market index. Even Buffett himself says you should just buy the index fund

lhamo

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Re: Where is Warren??
« Reply #2 on: November 04, 2018, 12:29:43 PM »
Warren Buffett is 88.  Charlie Munger is 94.  Nobody knows for sure yet who is going to run Berkshire Hathaway in the future, and whether they will have the same skill in picking companies to invest in. 

Most of us here prefer index investing, which as the PP pointed out includes some Berkshire Hathaway in it.  But if you want to sink 300k+ into a single A share, please feel free....

markbike528CBX

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Re: Where is Warren??
« Reply #3 on: November 04, 2018, 12:47:43 PM »
Author Topic: Where is Warren??
Warren is Everywhere, just like Elvis, just ask Mojo Nixon -Elvis is Everywhere


I disovered the Moneymoustache site only 3 days ago and have been pouring over all of the information ever since. ........

Welcome!  ALL of the information?  Wow you are a fast reader :-)

...... Everyone agrees Warren Buffett is one of the greatest investors of all time so why not invest in him? Berkshire is a conglomerate of companies, almost like its own ETF rather than a traditional stock.......

Jacoavluha and Ihamo are correct.
 I'd add that Berkshire Hathaway is a huge company, and even if Warren stays alive AND continues to be the greatest investor on Earth, the % growth possibility just isn't there.

That said, Berkshire Hathaway is probably a better bet than some actively managed ETFs out there.
I'm just fresh out of 300k bills, so no CLASS A BRK.A for me.

jacoavluha

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Re: Where is Warren??
« Reply #4 on: November 04, 2018, 12:59:29 PM »
I would encourage you to buy one B share though. About $200. Then you get the annual letter printed copy in the mail every year. It’s great to read. Just make sure you don’t have preferences set to electronic prospectus at your brokerage.  And can get tickets to the annual meeting if you want to go. Discount on geico insurance too

dpmeado

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Re: Where is Warren??
« Reply #5 on: November 04, 2018, 01:25:17 PM »
Thanks for the insite and lessons in posting (I’ll choose my words a little more carefully next time). And for the record I was of course talking about B shares.

Telecaster

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Re: Where is Warren??
« Reply #6 on: November 04, 2018, 03:40:13 PM »
I disovered the Moneymoustache site only 3 days ago and have been pouring over all of the information ever since. My wife and I started our saving journey 6 years ago after reading a Dave Ramsey book and have never looked back. I have also read everything Paul Merrimans web site has to offer on buy and hold strategy. After reading all of this information I have noticed several consistencies. 1) everyone loves vanguard index funds 2) everyone quotes Warren Buffett. 3) nobody recommends buying Berkshire Hathaway’s stock.
Can someone explain why this is the case? Everyone agrees Warren Buffett is one of the greatest investors of all time so why not invest in him? Berkshire is a conglomerate of companies, almost like its own ETF rather than a traditional stock. I understand it does not pay a dividend but does buy back stock. Any clarity would be greatly appreciated.

The usual advice is to avoid individual stocks--for good reason.  Very few people including professional managers actually wind up outperforming the broader market.  When it comes to investing, simple is good. 

That said, you are right. BRK is more like a actively managed fund than an individual stock.  Unlike actively managed funds, there are no management fees.  BRK also has a smart buy back policy (unlike many companies) in that they only buy back stock when they think stock is greatly undervalued.  For that reason, there seems to be a floor as to how low the stock can go.   

So, the usual advice is good, but IMO BRK is a reasonable exception. 

I happened to like BRK and own fair amount.   

BicycleB

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Re: Where is Warren??
« Reply #7 on: November 04, 2018, 04:21:38 PM »
I agree it's a good question.

I think the reason for recommending Vanguard is that they are the leader in providing a cost advantage - a cost advantage that is based on fundamental principles ("buy the market, minimize cost") and can reasonably be expected to continue.

Buffett is quoted because he's well known for financial success and says things that people want to quote. But this site isn't fundamentally based on any Buffett principles. It is based on saving, and using relatively reliable replicable investing techniques, so that the invested savings can be relied on. Berkshire doesn't offer the same reliability in principle, and in fact violates some of the commonly accepted principles, therefore it's not consistently recommended.

markbike528CBX

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Re: Where is Warren??
« Reply #8 on: November 04, 2018, 07:50:15 PM »
When (not IF), the OP, dpmeado, finishes reading the forums here :-),  Warren Buffett's "Letters from the Chairman" in the annual report are often great tutorials on aspects of Berkshire Hathaway's businesses. They are clearly written.

And you can glean quotes to sound far more authoritative on the Internet.

Sunshinewhenitrains

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Re: Where is Warren??
« Reply #9 on: November 04, 2018, 08:16:42 PM »
I made a video about this.  It's only 2 min long. Buffets voice rings clear. Buy the index.

 https://www.youtube.com/watch?v=zN90VrFcOC4&t=25s

I have over a 10%+ ROI over 10 years because of this advice, and show the proof.

Berkshire Hathaway didn't beat the index during the time period of his famous million dollar bet.


steveo

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Re: Where is Warren??
« Reply #10 on: November 05, 2018, 02:06:22 AM »
Berkshire Hathaway didn't beat the index during the time period of his famous million dollar bet.

This is exactly why I just buy the index. Buffet is a god of investing but that doesn't mean he will outperform the market from this day forward.

MustacheAndaHalf

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Re: Where is Warren??
« Reply #11 on: November 05, 2018, 07:44:35 AM »
Everyone agrees Warren Buffett is one of the greatest investors of all time so why not invest in him
Mostly because nobody can predict what happens next.

Berkshire Hathaway has $500 billion in assets.  If they find a $10 billion company they know will go up +25%, they can't move the needle.  First, they have to provide a public notice that they intend to buy 5% of a company, which for a $10 billion company is $0.5 billion.  So now that $0.5 billion goes up +25%, netting Berkshire Hathaway $0.125 billion.  That only adds +0.025% to the company's returns - it doesn't move the needle.  So Berkshire Hathaway has to invest in larger companies, which restricts their choice of investments.

Decades ago Berkshire Hathaway beat the market by a wide margin.  Now, the company sometimes beat the market (past 5 yr, past 15 yr) and sometimes don't (past 10 yr).  There's less of an advantage to investing there today than years ago, from what I can see.

Boofinator

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Re: Where is Warren??
« Reply #12 on: November 05, 2018, 08:22:16 AM »
Warren is an investing genius. You know it. I know it. Most of the developed world knows it. So what makes you think this information isn't already priced into their stock?

Realize that every time you purchase a stock, there's somebody on the other side of the trade selling that stock. And chances are very high that that person trades stock for a living. And as much as you feel BRK is undervalued at that given stock price, they feel BRK is overvalued.

specialkayme

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Re: Where is Warren??
« Reply #13 on: November 05, 2018, 11:23:33 AM »
Warren is an investing genius. You know it. I know it. Most of the developed world knows it. So what makes you think this information isn't already priced into their stock?

The PE ratio.

BRK's current PE ratio is 26.3. In comparison, Google is 26.84. Amazon is 102. Chipotle is 70.7. Netflix is 106. PE measures investor confidence. The market is valuing Berkshire Hathaway less than Google, Chipotle, Amazon and Netflix, in that order. So apparently, the market believes Hastings (CEO of Netflix) is more of a "genius" than Buffet.

Do you believe any of those 4 companies have the resilience, adaptability, and market insight that Berkshire Hathaway has?

Do you think Netflix and Amazon will be around in 100 years? Do you think Chipotle will be a market leader in 70 years? Probably not.
Do you think Google will continue to be a powerhouse company in 25 years? I don't know. Alot can happen in the tech market in two decades.
Do you think Berkshire will continue to turn a profit in 25 years? I don't know. It depends on how well the company can transition without Buffet. But if I had the choice of placing bets on Buffet, Amazon, Netflix, Chipotle, Google, or Tesla (with an infinite PE ratio), I'd choose Buffet.

That doesn't make Berkshire a good investment, mind you, just a better investment than other options on the market right now. Personally I'd rather buy the whole market and watch the game unfold.

But I do believe BRK is undervalued, and I don't believe the proper amount of investor confidence currently exists in BRK. In comparison.

Boofinator

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Re: Where is Warren??
« Reply #14 on: November 05, 2018, 11:39:35 AM »
Warren is an investing genius. You know it. I know it. Most of the developed world knows it. So what makes you think this information isn't already priced into their stock?

The PE ratio.

BRK's current PE ratio is 26.3. In comparison, Google is 26.84. Amazon is 102. Chipotle is 70.7. Netflix is 106. PE measures investor confidence. The market is valuing Berkshire Hathaway less than Google, Chipotle, Amazon and Netflix, in that order. So apparently, the market believes Hastings (CEO of Netflix) is more of a "genius" than Buffet.

Do you believe any of those 4 companies have the resilience, adaptability, and market insight that Berkshire Hathaway has?

Do you think Netflix and Amazon will be around in 100 years? Do you think Chipotle will be a market leader in 70 years? Probably not.
Do you think Google will continue to be a powerhouse company in 25 years? I don't know. Alot can happen in the tech market in two decades.
Do you think Berkshire will continue to turn a profit in 25 years? I don't know. It depends on how well the company can transition without Buffet. But if I had the choice of placing bets on Buffet, Amazon, Netflix, Chipotle, Google, or Tesla (with an infinite PE ratio), I'd choose Buffet.

That doesn't make Berkshire a good investment, mind you, just a better investment than other options on the market right now. Personally I'd rather buy the whole market and watch the game unfold.

But I do believe BRK is undervalued, and I don't believe the proper amount of investor confidence currently exists in BRK. In comparison.

The PE ratio is a start. But if that was the solution on which company to invest in, either (1) investing would be child's play, or (2) every company's stock price would gravitate toward identical PE ratios. Clearly, PE ratio is only a small part of the puzzle given that neither of those scenarios are true. With just a bit of internet searching, the consensus seems to be that PE ratio has a fairly low correlation with future earnings growth. For example, https://www.newconstructs.com/pe-ratios-good-measure-value/

To add, the companies you compared to BRK are considered "growth" companies, whereas BRK is a behemoth and can't be expected to grow at the same kind of rate. Expected future earnings growth affects stock price (the numerator) but not past earnings (the denominator), and therefore results in inflated PE ratios.

Full disclosure, I own a decent chunk of BRK.B. But I also accept that it is essentially gambling on my part (relative to the S&P index).

specialkayme

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Re: Where is Warren??
« Reply #15 on: November 05, 2018, 12:35:02 PM »
The PE ratio is a start. But if that was the solution on which company to invest in, either (1) investing would be child's play, or (2) every company's stock price would gravitate toward identical PE ratios. Clearly, PE ratio is only a small part of the puzzle given that neither of those scenarios are true.

I never indicated that the PE ratio is the only reason you should invest in anything. Instead, I indicated that the PE ratio is a measurement of investor confidence. If you believe all available information about a company is already included in the stock price, the information is either placed into A) the company's EPS, or B) the company's PE ratio. The EPS would measure the company's financials, while the PE would measure the company's "non-financial" value, i.e. investor confidence. That is, of course, assuming you believe that everything about the company is already included in the stock's current price.

To add, the companies you compared to BRK are considered "growth" companies, whereas BRK is a behemoth and can't be expected to grow at the same kind of rate. Expected future earnings growth affects stock price (the numerator) but not past earnings (the denominator), and therefore results in inflated PE ratios.

I don't know if I would agree with that statement. Sure, some of them are growth companies, but many giant behemoths have significantly larger PE ratios than BRK. Amazon and Walmart are both behemoths, and both have PE ratios greater than BKE (59 for Walmart). Which means there is more investor confidence in Walmart and Amazon than there is in BKE. And yet, I don't know how much growth Walmart can provide over the next decade. It's already #1 on the Fortune 500 list. Can it go higher? Sure. But I wouldn't consider it a "growth" company.

That's not to say I put much value in PE ratios. But when you compare two companies, it's telling to see how people value them in comparison.

Car Jack

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Re: Where is Warren??
« Reply #16 on: November 05, 2018, 12:49:47 PM »
To answer the question "Where's Warren?", I have an answer.  He's out there repurchasing a Billion dollars in Berkshire Hathaway stock.

I've got a very small stake in BRK/B, and was wondering why it shot up nearly 10 points. 

Boofinator

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Re: Where is Warren??
« Reply #17 on: November 05, 2018, 01:13:51 PM »
I never indicated that the PE ratio is the only reason you should invest in anything. Instead, I indicated that the PE ratio is a measurement of investor confidence. If you believe all available information about a company is already included in the stock price, the information is either placed into A) the company's EPS, or B) the company's PE ratio. The EPS would measure the company's financials, while the PE would measure the company's "non-financial" value, i.e. investor confidence. That is, of course, assuming you believe that everything about the company is already included in the stock's current price.

I don't quite agree with you here. Specifically, "the PE would measure the company's "non-financial" value, i.e. investor confidence". For most investments (with the exclusion of perhaps some seriously odd valuations like TSLA), the PE reflects an expectation of future earnings (which are unknown but can be estimated) and book value relative to recent earnings. Yes, investor confidence plays a role, but mathematically it is based on expected future earnings. Also, accounting and market fluctuations can have a significant effect on recent earnings. I have a ton of confidence in BRK, but don't expect much growth; for some of the other companies mentioned, investors have been richly rewarded by expecting high growth and paying for stocks with accordingly high PE ratios.

Also, when it comes to stocks, the fate of the company in 30 years is practically immaterial, unless you buy and hold stocks forever. And if that is the strategy being used (buy-and-hold rather than using a valuation metric to also determine when to sell), I highly recommend sticking to index funds. Just my two cents.

specialkayme

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Re: Where is Warren??
« Reply #18 on: November 05, 2018, 01:29:02 PM »
Yes, investor confidence plays a role, but mathematically it is based on expected future earnings.

Expected future earnings is another word for investor confidence.

"A high P/E ratio signifies greater investor confidence in a company's future prospects"

Source: https://www.investopedia.com/ask/answers/where-can-i-find-pe-ratios-dow-and-sp-500/

I have a ton of confidence in BRK, but don't expect much growth

A stock moves up in one of two ways: the EPS increases, or the PE increases. Actually the PE doesn't increase by itself, as the stock price would increase disproportionately to earnings, thereby instilling greater investor confidence, which increases PE, but you get the idea. Anyway, if you don't believe BRK will grow, and you don't expect the EPS to increase significantly, you are either expecting the PE to increase significantly or you're holding a dud and you know it. If you expect the PE to increase significantly, you believe the market currently undervalues BRK, or that the company is worth more than the stock price indicates. If that's the case, then all available information about the company isn't part of the stock price currently, and you believe the market moves inefficiently and you're waiting for a correction. But your earlier posts don't indicate you feel that way.

So if you think the stock is accurately priced, and the market correctly determined its value, you believe the PE is correct and not likely to change. If you aren't expecting much growth you aren't expecting the EPS to change.

So . . . . why do you own BRK?
« Last Edit: November 05, 2018, 01:36:55 PM by specialkayme »

Boofinator

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Re: Where is Warren??
« Reply #19 on: November 05, 2018, 01:49:13 PM »

Expected future earnings is another word for investor confidence.


I am not a finance major, but it is hard for me to wrap my head around the two terms being synonymous. As mentioned, I have a ton of confidence in BRK continuing to be successful, but very middling confidence on TSLA (despite an admirable mission). I think the respective PEs reflect low expectation for growth with the former and high expectations of growth for the latter. "Investor confidence" does not seem a good descriptor.

A google search doesn't seem to fully jive either.
https://www.sec.gov/files/investor_confidence_noteOct2017.pdf
https://www.nyif.com/articles/investor-confidence-measurement-3-effective-tools
https://www.investopedia.com/terms/s/state-street-confidence-index.asp
http://www.statestreet.com/ideas/investor-confidence-index.html

Telecaster

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Re: Where is Warren??
« Reply #20 on: November 05, 2018, 01:57:50 PM »
IMO, P/E isn't really a useful metric for Berkshire which is still at its core an insurance company.  Price/Book is a little more meaningful.  Over the past 15 years or so, BRK has traded in a range of about 1.3 to 1.5 P/B, give or take a bit.   The old share buy-back rules were that BRK might buy back stock any time the P/B went below 1.2.   In June, they changed to that "below intrinsic value."   We don't know the exact prices that Buffett used to repurchase most recently, but the P/B was likely around 1.4-ish.   At the P/B is 1.5 BRK isn't particularly attractive, but it definitely is at 1.3.   

These days the appeal of BRK isn't so much the appeal of outperforming growth, it is the appeal of consistent, predicable earnings.  But it is important to buy at reasonable valuations. 


Telecaster

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Re: Where is Warren??
« Reply #21 on: November 05, 2018, 01:58:27 PM »

Expected future earnings is another word for investor confidence.


I am not a finance major, but it is hard for me to wrap my head around the two terms being synonymous. As mentioned, I have a ton of confidence in BRK continuing to be successful, but very middling confidence on TSLA (despite an admirable mission). I think the respective PEs reflect low expectation for growth with the former and high expectations of growth for the latter. "Investor confidence" does not seem a good descriptor.


Probably "investor expectations" would be a better descriptor. 

specialkayme

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Re: Where is Warren??
« Reply #22 on: November 05, 2018, 01:59:02 PM »
it is hard for me to wrap my head around the two terms being synonymous.

. . .

A google search doesn't seem to fully jive either.

Then keep googling.

" Investor confidence in future growth is measured in the price to earnings ratio(or P/E ratio)."
Source: https://www.business-case-analysis.com/valuation.html

"Instead, they [PE Ratios] are a sign of investor confidence."
Source: https://seekingalpha.com/article/4135675-pe-peg

Does investor sentiment affect price-earnings ratios?
Boonlert Jitmaneeroj
"An examination of the influence of investor sentiment on the price-earnings (P/E) ratio reveals a significant positive relationship between investor sentiment and P/E ratio which implies that stocks are relatively overvalued during period of excessive optimism."
https://www.emeraldinsight.com/doi/abs/10.1108/SEF-09-2015-0229

"A low P/E indicates the market has less confidence that the company's earnings will increase"
Source: http://www.morningstar.com/InvGlossary/price_earnings_ratio.aspx

"A higher P/E ratio means that the market is more willing to pay for the earnings of the company. Higher price to earnings ratio indicates that the market has high hopes for the future of the share and therefore it has bid up the price. On the other hand, a lower price to earnings ratio indicates the market does not have much confidence in the future of the share."
Source: https://www.readyratios.com/reference/market/price_to_earnings_ratio.html



The concept of connecting PE to investor confidence isn't actually mine. I wish I was that smart.

specialkayme

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Re: Where is Warren??
« Reply #23 on: November 05, 2018, 02:00:39 PM »
Probably "investor expectations" would be a better descriptor.

Maybe. I'm not married to the term. The concept is the same, regardless of what you call it.

Boofinator

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Re: Where is Warren??
« Reply #24 on: November 05, 2018, 02:13:28 PM »
it is hard for me to wrap my head around the two terms being synonymous.

. . .

A google search doesn't seem to fully jive either.

Then keep googling.

" Investor confidence in future growth is measured in the price to earnings ratio(or P/E ratio)."
Source: https://www.business-case-analysis.com/valuation.html

"Instead, they [PE Ratios] are a sign of investor confidence."
Source: https://seekingalpha.com/article/4135675-pe-peg

Does investor sentiment affect price-earnings ratios?
Boonlert Jitmaneeroj
"An examination of the influence of investor sentiment on the price-earnings (P/E) ratio reveals a significant positive relationship between investor sentiment and P/E ratio which implies that stocks are relatively overvalued during period of excessive optimism."
https://www.emeraldinsight.com/doi/abs/10.1108/SEF-09-2015-0229

"A low P/E indicates the market has less confidence that the company's earnings will increase"
Source: http://www.morningstar.com/InvGlossary/price_earnings_ratio.aspx

"A higher P/E ratio means that the market is more willing to pay for the earnings of the company. Higher price to earnings ratio indicates that the market has high hopes for the future of the share and therefore it has bid up the price. On the other hand, a lower price to earnings ratio indicates the market does not have much confidence in the future of the share."
Source: https://www.readyratios.com/reference/market/price_to_earnings_ratio.html



The concept of connecting PE to investor confidence isn't actually mine. I wish I was that smart.

I never said they weren't connected. I said they weren't the same. And none of the quotes you mention affirm that they are the same, either, only that there is a relationship. Which I agree with.

specialkayme

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Re: Where is Warren??
« Reply #25 on: November 05, 2018, 02:57:30 PM »
I never said they weren't connected. I said they weren't the same.

http://gph.is/XL8SdT

Boofinator

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Re: Where is Warren??
« Reply #26 on: November 05, 2018, 03:22:04 PM »
I never said they weren't connected. I said they weren't the same.

http://gph.is/XL8SdT

Do you think his expression might reflect upon your understanding of logic?

Financial.Velociraptor

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Re: Where is Warren??
« Reply #27 on: November 05, 2018, 04:37:10 PM »
Buffet/Munger and BRK-B are no longer jockeys to bet on in my opinion.

In times past, they regularly beat the index.  They did so by buying companies that were capital efficient.  In recent years, they have bet the farm on Berk Energy and BNSF, two highly capital intensive industries with long term low margin capability.  Since then, they have trailed the index.  Buffet used to say he should stop investing and return cash to shareholders if he couldn't beat the index over a rolling 5 year period.  When he missed the mark, he moved the goal posts to a 6 year rolling period.  When he missed yet again, he went silent on the matter.

Not where I want my money.

specialkayme

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Re: Where is Warren??
« Reply #28 on: November 05, 2018, 05:01:29 PM »
I never said they weren't connected. I said they weren't the same.

http://gph.is/XL8SdT

Do you think his expression might reflect upon your understanding of logic?

No need for personal insults my friend.

Jamese20

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Re: Where is Warren??
« Reply #29 on: November 06, 2018, 02:56:20 AM »
hi guys

sorry to hi-jack the thread, but i have been learning more and more about buffett as time goes on and the notion that he doesnt know how to get rich quickly, but if you look at his wealth progression from 21-26 - he didnt even have his partnership setup and he managed in 5 years to go from 20k net worth to 140k net worth in 5 years, that is increasing your wealth by 140% a year on average if i am not mistaken (maths isnt my strongest area)

the man was a millionaire in todays money at 26 without even starting his partnership - how the bloody hell did he achieve that?

TomTX

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Re: Where is Warren??
« Reply #30 on: November 06, 2018, 05:19:32 AM »
hi guys

sorry to hi-jack the thread, but i have been learning more and more about buffett as time goes on and the notion that he doesnt know how to get rich quickly, but if you look at his wealth progression from 21-26 - he didnt even have his partnership setup and he managed in 5 years to go from 20k net worth to 140k net worth in 5 years, that is increasing your wealth by 140% a year on average if i am not mistaken (maths isnt my strongest area)

the man was a millionaire in todays money at 26 without even starting his partnership - how the bloody hell did he achieve that?

Pete (MMM) likely grew his wealth a similar amount in the same timeframe, long before starting the blog.

As far as investing - there are a lot more opportunities to find undervalued companies when you are investing tens of thousands than when you are investing tens of billions.

As others have noted, BRK simply has far fewer options for companies to invest in, and all of them are heavily analyzed by plenty of other professional investors.

Jamese20

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Re: Where is Warren??
« Reply #31 on: November 06, 2018, 05:25:18 AM »
hi guys

sorry to hi-jack the thread, but i have been learning more and more about buffett as time goes on and the notion that he doesnt know how to get rich quickly, but if you look at his wealth progression from 21-26 - he didnt even have his partnership setup and he managed in 5 years to go from 20k net worth to 140k net worth in 5 years, that is increasing your wealth by 140% a year on average if i am not mistaken (maths isnt my strongest area)

the man was a millionaire in todays money at 26 without even starting his partnership - how the bloody hell did he achieve that?

Pete (MMM) likely grew his wealth a similar amount in the same timeframe, long before starting the blog.

As far as investing - there are a lot more opportunities to find undervalued companies when you are investing tens of thousands than when you are investing tens of billions.

As others have noted, BRK simply has far fewer options for companies to invest in, and all of them are heavily analyzed by plenty of other professional investors.

i couldnt work out how pete did it either - there is an issue of maths involved with some of the numbers and during his saving period he mainly started in the lost decade!

i know why buffets wealth went up once his partnership then BRK formed, but the period of 21-26 sees some incredible wealth building going on

specialkayme

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Re: Where is Warren??
« Reply #32 on: November 06, 2018, 06:07:36 AM »
if you look at his wealth progression from 21-26 - he didnt even have his partnership setup and he managed in 5 years to go from 20k net worth to 140k net worth in 5 years, that is increasing your wealth by 140% a year on average if i am not mistaken (maths isnt my strongest area)

It's a combination of savings and compound interest. Same thing that Pete (MMM) did. And many others.

Keep in mind that Buffet started investing way earlier than 21. He had a baseline knowledge then to build upon.

But lets run an experiment. Lets say that Buffet started with a 20k net worth, with zero debt, at 21. Lets also assume that he didn't use leverage (debt) to build his portfolio. Lets also assume that he saved 10k per year. Lastly, lets assume the market did 10% per year, and Buffet did an astonishing 22% returns per year.

Age 21 - He received 4.4K in earnings (22% of 20k), plus 10k in savings. Net worth is now 34.4k
Age 22 - He received 7.5K in earnings (22% of 34.4k), plus 10k in savings. Net worth is now 51.9k
Age 23 - He received 11.4K in earnings (22% of 51.2k), plus 10k in savings. Net worth is now 73.3k
Age 24 - He received 16.1k in earnings (22% of 73.3k), plus 10k in savings. Net worth is now 99.4k.
Age 25 - He received 21.8k in earnings (22% of 99.4k), plus 10k in savings. Net worth is now 131.2k
Age 26 - He received 28.8k in earnings (22% of 131.2k), plus 10k in savings. Net worth is now 170k.

That is mathematically how he did it. Now 22% is an EXTREMELY unreasonable, long term and consistent investment average to maintain. But it is Buffet we're talking about.

Now lets assume he only got 15% average gains. But instead he saved 15k per year in savings. His net worth over the same time period would be 177k. Or assume he only got 12% average gains and saved 18k per year, his net worth would be 185k.

But you get the idea. It takes consistency and discipline. In the early years, he easily could have spent that extra investment because he "earned" it. Or he could have cut back on his savings because his earnings was good enough. But consistently saving and reinvesting is what gets you those type of returns over the long term.

I don't know the actual numbers for Buffet. But it really doesn't matter how much he saved per year, and what his returns are. It matters what your returns could be, and how much you can save.

Jamese20

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Re: Where is Warren??
« Reply #33 on: November 06, 2018, 06:15:27 AM »
if you look at his wealth progression from 21-26 - he didnt even have his partnership setup and he managed in 5 years to go from 20k net worth to 140k net worth in 5 years, that is increasing your wealth by 140% a year on average if i am not mistaken (maths isnt my strongest area)

It's a combination of savings and compound interest. Same thing that Pete (MMM) did. And many others.

Keep in mind that Buffet started investing way earlier than 21. He had a baseline knowledge then to build upon.

But lets run an experiment. Lets say that Buffet started with a 20k net worth, with zero debt, at 21. Lets also assume that he didn't use leverage (debt) to build his portfolio. Lets also assume that he saved 10k per year. Lastly, lets assume the market did 10% per year, and Buffet did an astonishing 22% returns per year.

Age 21 - He received 4.4K in earnings (22% of 20k), plus 10k in savings. Net worth is now 34.4k
Age 22 - He received 7.5K in earnings (22% of 34.4k), plus 10k in savings. Net worth is now 51.9k
Age 23 - He received 11.4K in earnings (22% of 51.2k), plus 10k in savings. Net worth is now 73.3k
Age 24 - He received 16.1k in earnings (22% of 73.3k), plus 10k in savings. Net worth is now 99.4k.
Age 25 - He received 21.8k in earnings (22% of 99.4k), plus 10k in savings. Net worth is now 131.2k
Age 26 - He received 28.8k in earnings (22% of 131.2k), plus 10k in savings. Net worth is now 170k.

That is mathematically how he did it. Now 22% is an EXTREMELY unreasonable, long term and consistent investment average to maintain. But it is Buffet we're talking about.

Now lets assume he only got 15% average gains. But instead he saved 15k per year in savings. His net worth over the same time period would be 177k. Or assume he only got 12% average gains and saved 18k per year, his net worth would be 185k.

But you get the idea. It takes consistency and discipline. In the early years, he easily could have spent that extra investment because he "earned" it. Or he could have cut back on his savings because his earnings was good enough. But consistently saving and reinvesting is what gets you those type of returns over the long term.

I don't know the actual numbers for Buffet. But it really doesn't matter how much he saved per year, and what his returns are. It matters what your returns could be, and how much you can save.

thanks for this, i believe he was on 12k  a year so saving 10k im not sure is realistic however i think he was doing like 30-50% returns with his money at that period which would make sense to it - i wish i knew this stuff at 21 :(

specialkayme

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Re: Where is Warren??
« Reply #34 on: November 06, 2018, 06:38:14 AM »
i wish i knew this stuff at 21 :(

You can't drive on the highway while looking only in the rear view mirror.

Three things that I wish I knew when I was 10:
1. The power of compound interest.
2. The power of savings percent, not savings amount, when compared to annual income.
3. The power of not chasing the Smiths

Had I known, I could have retired at 30. But I didn't. I do know now though.

But better than "I wish I knew. . . ", how about "What will you do now that you do know?"

Boofinator

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Re: Where is Warren??
« Reply #35 on: November 06, 2018, 06:50:48 AM »
if you look at his wealth progression from 21-26 - he didnt even have his partnership setup and he managed in 5 years to go from 20k net worth to 140k net worth in 5 years, that is increasing your wealth by 140% a year on average if i am not mistaken (maths isnt my strongest area)

It's a combination of savings and compound interest. Same thing that Pete (MMM) did. And many others.

Keep in mind that Buffet started investing way earlier than 21. He had a baseline knowledge then to build upon.

But lets run an experiment. Lets say that Buffet started with a 20k net worth, with zero debt, at 21. Lets also assume that he didn't use leverage (debt) to build his portfolio. Lets also assume that he saved 10k per year. Lastly, lets assume the market did 10% per year, and Buffet did an astonishing 22% returns per year.

Age 21 - He received 4.4K in earnings (22% of 20k), plus 10k in savings. Net worth is now 34.4k
Age 22 - He received 7.5K in earnings (22% of 34.4k), plus 10k in savings. Net worth is now 51.9k
Age 23 - He received 11.4K in earnings (22% of 51.2k), plus 10k in savings. Net worth is now 73.3k
Age 24 - He received 16.1k in earnings (22% of 73.3k), plus 10k in savings. Net worth is now 99.4k.
Age 25 - He received 21.8k in earnings (22% of 99.4k), plus 10k in savings. Net worth is now 131.2k
Age 26 - He received 28.8k in earnings (22% of 131.2k), plus 10k in savings. Net worth is now 170k.

That is mathematically how he did it. Now 22% is an EXTREMELY unreasonable, long term and consistent investment average to maintain. But it is Buffet we're talking about.

Now lets assume he only got 15% average gains. But instead he saved 15k per year in savings. His net worth over the same time period would be 177k. Or assume he only got 12% average gains and saved 18k per year, his net worth would be 185k.

But you get the idea. It takes consistency and discipline. In the early years, he easily could have spent that extra investment because he "earned" it. Or he could have cut back on his savings because his earnings was good enough. But consistently saving and reinvesting is what gets you those type of returns over the long term.

I don't know the actual numbers for Buffet. But it really doesn't matter how much he saved per year, and what his returns are. It matters what your returns could be, and how much you can save.

Keep in mind Buffett was a fund manager at the beginning, taking an outrageous percentage of the profits (which his investors didn't mind since he was guaranteeing them huge profits as well). Wealth rises extremely quickly when you're taking a cut of a large (and growing) pie. (This is no dig on Buffett but a measure of both his investing and business prowess.)

maizeman

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Re: Where is Warren??
« Reply #36 on: November 06, 2018, 07:18:31 AM »

Expected future earnings is another word for investor confidence.


I am not a finance major, but it is hard for me to wrap my head around the two terms being synonymous. As mentioned, I have a ton of confidence in BRK continuing to be successful, but very middling confidence on TSLA (despite an admirable mission). I think the respective PEs reflect low expectation for growth with the former and high expectations of growth for the latter. "Investor confidence" does not seem a good descriptor.


Probably "investor expectations" would be a better descriptor.

Agreed, and no, specialkayme, that is not the same as saying investor confidence.

Imagine two companies with identical book values and business models. One is lead by a solid CEO who I have a lot of confidence will be able to grow earnings 8%/year for the next decade. The second is lead by a volatile and eccentric billionaire prone to meltdowns on twitter and investor calls, smoking pot on podcasts, and firing people on whims. I think there is a 50% chance he can grow earnings 35%/year for the next decade, and a 50% chance he'll lead the company down in flames tomorrow.

Even though I have more confidence in the first CEO (and would be more likely to put a big percentage of my net worth into the stock of the first company if I was prone to investing in individual stocks), I'd be willing to invest in the second CEO's company at a higher P/E ratio, because the expected value of future earnings for the second company is higher (1.88x higher in absolute terms, 1.66x higher if we apply a 8%/year discount rate to the net present value of future earnings over the next decade).

specialkayme

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Re: Where is Warren??
« Reply #37 on: November 06, 2018, 08:07:22 AM »
Imagine two companies with identical book values and business models. One is lead by a solid CEO who I have a lot of confidence will be able to grow earnings 8%/year for the next decade. The second is lead by a volatile and eccentric billionaire prone to meltdowns on twitter and investor calls, smoking pot on podcasts, and firing people on whims. I think there is a 50% chance he can grow earnings 35%/year for the next decade, and a 50% chance he'll lead the company down in flames tomorrow.

Even though I have more confidence in the first CEO (and would be more likely to put a big percentage of my net worth into the stock of the first company if I was prone to investing in individual stocks), I'd be willing to invest in the second CEO's company at a higher P/E ratio, because the expected value of future earnings for the second company is higher (1.88x higher in absolute terms, 1.66x higher if we apply a 8%/year discount rate to the net present value of future earnings over the next decade).

You're confusing the definition of "investor confidence" with "confidence in a particular aspect of a company." The two are not the same. Investor confidence is the confidence an individual has in their investment, not the confidence an individual has in management of the company.

In your example, you believed that one company would perform better than another, despite the individual confidence of the CEOs. But investor confidence doesn't measure your feeling of the CEO. It doesn't measure your feeling of the company at all. It measures the confidence of the individual investor in their projections of the growth of the company, or namely that the investor believes the company will meet or exceed their own subjective beliefs as to company growth projections. In your example, you would be more willing to invest in the second company, despite having less confidence in the company's CEO. Why? Because of the expected returns for the second company. You were more confident in the expected returns of the second company, and thus were more confident in your investment. Thus the higher PE ratio.

Lets say based on the past financials of both company A and company B, both companies are likely to increase by 20% over the next successive years. Except there are a number of inherent nonfinancial aspects to both companies, including the respective changes to the markets the two companies are in, the CEOs of the companies, government regulations, you name it. Both companies are expected to return 20%, but both companies aren't equally as likely to return 20% based on the non financial variables. How much confidence you individually place on that 20% target impacts your willingness to invest in company A over company B, or vice versa. You expect both companies to return the same profits, but you believe one is more likely to do it over the other. You have a greater confidence in the individual investment projections of one over the other. So you buy one over the other. Which leads to a higher price, and in turn a higher PE ratio, all other things remaining constant. The individual confidence in that company impacts its PE ratio.

You can believe a company is complete shit, morally and ethically horrible, and will rape the world, and still invest in the company. Your investment isn't an impact on the confidence you have in the company, their management, their ethics or morals, or functionality of the company. Your investment means that you are confident your investment will create a positive return.

You can use "investor expectations" almost the same, except it isn't exactly the same. You objectively expect both companies to return 20%. But you subjectively believe one company is more likely to do it over another. Or you subjectively have more faith in one over another. So that's where you put your money. You have greater confidence that one will hit the return estimates over another, but you have the same expectation in both investments.

maizeman

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Re: Where is Warren??
« Reply #38 on: November 06, 2018, 08:25:12 AM »
In your example, you believed that one company would perform better than another, despite the individual confidence of the CEOs.

No. If you read the example you will see that Company 1 has a 50% chance of performing better. Company 2 has a 50% chance of performing better.

specialkayme

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Re: Where is Warren??
« Reply #39 on: November 06, 2018, 08:33:24 AM »
No. If you read the example you will see that Company 1 has a 50% chance of performing better. Company 2 has a 50% chance of performing better.

And yet . . .

I'd be willing to invest in the second CEO's company at a higher P/E ratio, because the expected value of future earnings for the second company is higher

So then . . .

you believed that one company would perform better than another

Or, probably more accurately, you believed your investment would perform better with one company over another. Despite both companies having an equal chance of success.
« Last Edit: November 06, 2018, 08:37:09 AM by specialkayme »

maizeman

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Re: Where is Warren??
« Reply #40 on: November 06, 2018, 08:44:16 AM »
No. If you read the example you will see that Company 1 has a 50% chance of performing better. Company 2 has a 50% chance of performing better.

And yet . . .

I'd be willing to invest in the second CEO's company at a higher P/E ratio, because the expected value of future earnings for the second company is higher

So then . . .

you believed that one company would perform better than another

Okay, this is going to be a harder discussion than usual as you are using words as equivalent which are not equivalent. Expected value calculations are not the same as "what you believe will happen." That is, in fact, why investor confidence is not the same as investor expectations.

Consider a hypothetical case of home insurance against only hurricanes. The chance that my home will be destroyed in a hurricane during my lifetime is 4% (again hypothetically). The cost of hurricane insurance over my lifetime is 3%.

Rationally, I do not expect that my house will be destroyed by a hurricane during my lifetime. I can even say I am confident (p < 0.05) that my house will not be destroyed by a hurricane during my lifetime.

Rationally, purchasing hurricane insurance makes economic sense, and I am likely to do so, even though I do not expect my house to be destroyed by a hurricane.

Similarly:
I do not believe company 2 will outperform company 1, or that company 1 will out perform company 2.
I have much more confidence in my projections for company 1 than for company 2.
Yet as a rational human being I am willing to pay a higher P/E ratio to purchase company 2's stock than company 1's stock.

specialkayme

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Re: Where is Warren??
« Reply #41 on: November 06, 2018, 09:25:02 AM »
Rationally, purchasing hurricane insurance makes economic sense, and I am likely to do so, even though I do not expect my house to be destroyed by a hurricane.

But your decision to purchase insurance had nothing to do with the "confidence" you had that your home wasn't going to be destroyed by a hurricane, or your "expectation" that your home would be destroyed by a hurricane. If you expected it to happen, you'd live somewhere else instead of buying insurance. Your decision to purchase insurance did have to do with your confidence that the insurance was a good investment, despite the expectations that you weren't going to need it and the expectations that its lost money.

Look at it instead like a horse track bet. 5 horses are running. One (A) has odds of 1/9. One (B) 1/2. One (C) 4/5. One (D) 1/1. And the last (E) at 50/1. Without knowing anything else, what horse do you expect to win? Probably A. Why? Because the people that are supposed to know something about the horses and their performance put the lowest betting odds, or the smallest payout in the event the horse won, on horse A. Does that mean horse A will win? Not necessarily, but you expect horse A to win. Do you believe that you know anything more than the individuals who's job it is to know how the horses will perform? Of course not. So you expect horse A to win.

Now lets say that you have $2 to bet on a horse. All five look healthy. All five look like they could win. But you expect horse A to win. Does that mean you bet on horse A? Probably not. Why? Because if you bet on horse A, your $2 will return $2.20. Statistically, all other things being equal, horse A has a 20% chance of winning, and yet you only get $0.20 return on that investment (assuming a bet is an investment, which it isn't). Instead, if you bet on horse B, that $2 investment would return $3.00. Horse C would get you $3.60, Horse D $4.00, and horse E $102.00. The potential return of horse E is 51x your initial "investment," and so maybe you consider it a good gamble. You consider it a good gamble not because you expect to win, but because you believe the odds were disproportionately calculated. You believe all things being equal, horse E has a 20% chance of winning. Of course not all things are equal, which is why there are different odds put on each horse. But you still believe that 50/1 odds are so much of a deviation away from the statistical odds of winning, all things being equal, that you place the bet anyway.

When you placed the bet did you have any expectation that horse E would win? No. Were you confident that horse E would win? No. But you placed the bet anyway. Why? Because the potential return justified the higher risk. And you felt comfortable with that bet. What made you feel comfortable? Everything tells you horse E won't win, and yet you bet anyway. You lacked total confidence in the horse, and the jockey, but you place the bet anyway, because you have confidence in your investment. The placing of the bet doesn't mean you necessarily have confidence in the track, or confidence in the moral or ethical concept of horse racing (which is what the SEC considers market analysis of "investor confidence" to be). Instead, you feel confident that the odds weren't accurate on horse E. Or, that if that race was ran over and over again, more often than one out of 51 times horse E had a chance of winning.

You had confidence in your investment. Not the horse. Not the jockey. Not the stable. You had no expectation horse E would win. But you did have confidence that your bet, absent all the known quantities at play, was the right decision.

The same applies to stocks. People will invest in a stock knowing that another company will perform better. But their investment, despite being in a wrong company, will still return a greater profit. The individual doesn't have any more or less confidence in the company, but they do have confidence in the investment.

maizeman

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Re: Where is Warren??
« Reply #42 on: November 06, 2018, 11:00:02 AM »
For reference, you starting out with this comment, which focused solely on your expectations for the companies, rather than the range of possible outcomes for each company.

Do you believe any of those 4 companies have the resilience, adaptability, and market insight that Berkshire Hathaway has?

Do you think Netflix and Amazon will be around in 100 years? Do you think Chipotle will be a market leader in 70 years? Probably not.
Do you think Google will continue to be a powerhouse company in 25 years? I don't know. Alot can happen in the tech market in two decades.
Do you think Berkshire will continue to turn a profit in 25 years? I don't know. It depends on how well the company can transition without Buffet. But if I had the choice of placing bets on Buffet, Amazon, Netflix, Chipotle, Google, or Tesla (with an infinite PE ratio), I'd choose Buffet.

You now seem to have talked yourself around into supporting everyone else's position, which is PE ratios don't represent the confidence of the investors in the companies, just rational investing decisions based on the probability of different outcomes and the value of each of those different outcomes:

When you placed the bet did you have any expectation that horse E would win? No. Were you confident that horse E would win? No. But you placed the bet anyway. Why? Because the potential return justified the higher risk.

Good for you! (And we are now in agreement).

TempusFugit

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Re: Where is Warren??
« Reply #43 on: November 06, 2018, 12:10:05 PM »
For reference, you starting out with this comment, which focused solely on your expectations for the companies, rather than the range of possible outcomes for each company.

Do you believe any of those 4 companies have the resilience, adaptability, and market insight that Berkshire Hathaway has?

Do you think Netflix and Amazon will be around in 100 years? Do you think Chipotle will be a market leader in 70 years? Probably not.
Do you think Google will continue to be a powerhouse company in 25 years? I don't know. Alot can happen in the tech market in two decades.
Do you think Berkshire will continue to turn a profit in 25 years? I don't know. It depends on how well the company can transition without Buffet. But if I had the choice of placing bets on Buffet, Amazon, Netflix, Chipotle, Google, or Tesla (with an infinite PE ratio), I'd choose Buffet.

You now seem to have talked yourself around into supporting everyone else's position, which is PE ratios don't represent the confidence of the investors in the companies, just rational investing decisions based on the probability of different outcomes and the value of each of those different outcomes:

When you placed the bet did you have any expectation that horse E would win? No. Were you confident that horse E would win? No. But you placed the bet anyway. Why? Because the potential return justified the higher risk.

Good for you! (And we are now in agreement).

I'm holding out for a poker based explanation using the concept of pot odds.  Horse racing is so 20th century.

Duke03

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Re: Where is Warren??
« Reply #44 on: November 06, 2018, 12:43:16 PM »
Buffet/Munger and BRK-B are no longer jockeys to bet on in my opinion.

In times past, they regularly beat the index.  They did so by buying companies that were capital efficient.  In recent years, they have bet the farm on Berk Energy and BNSF, two highly capital intensive industries with long term low margin capability.  Since then, they have trailed the index.  Buffet used to say he should stop investing and return cash to shareholders if he couldn't beat the index over a rolling 5 year period.  When he missed the mark, he moved the goal posts to a 6 year rolling period.  When he missed yet again, he went silent on the matter.

Not where I want my money.

You do realize his investment in BNSF has more than doubled right...…  I mean railroads spend a lot of money, but it's like owning your own money printing machine.  They have a monopoly that will bar any competition from coming into the space.  No one can afford to build new track mileage across the country.

specialkayme

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Re: Where is Warren??
« Reply #45 on: November 06, 2018, 12:53:54 PM »
You now seem to have talked yourself around into supporting everyone else's position, which is PE ratios don't represent the confidence of the investors in the companies,

If you believe that's where I've started and where I've finished, you either aren't understanding what I'm saying, or more likely I'm not communicating it very well. My position has not changed.

maizeman

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Re: Where is Warren??
« Reply #46 on: November 06, 2018, 01:08:10 PM »
You now seem to have talked yourself around into supporting everyone else's position, which is PE ratios don't represent the confidence of the investors in the companies,

If you believe that's where I've started and where I've finished, you either aren't understanding what I'm saying, or more likely I'm not communicating it very well. My position has not changed.

Given that a fair number of folks disagreed with your original position and so far no one disagrees with your new position, I'd say it's more likely the second of those two options.

specialkayme

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Re: Where is Warren??
« Reply #47 on: November 06, 2018, 01:20:29 PM »
I'd say it's more likely the second of those two options.

Probably so.

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Re: Where is Warren??
« Reply #48 on: November 06, 2018, 01:27:10 PM »
Buffet/Munger and BRK-B are no longer jockeys to bet on in my opinion.

In times past, they regularly beat the index.  They did so by buying companies that were capital efficient.  In recent years, they have bet the farm on Berk Energy and BNSF, two highly capital intensive industries with long term low margin capability.  Since then, they have trailed the index.  Buffet used to say he should stop investing and return cash to shareholders if he couldn't beat the index over a rolling 5 year period.  When he missed the mark, he moved the goal posts to a 6 year rolling period.  When he missed yet again, he went silent on the matter.

Not where I want my money.

You do realize his investment in BNSF has more than doubled right...…  I mean railroads spend a lot of money, but it's like owning your own money printing machine.  They have a monopoly that will bar any competition from coming into the space.  No one can afford to build new track mileage across the country.

Is rail transport going to look like the best freight option once there are fleets of autonomous electric semis available as an alternative?  Not so sure....

YoungInvestor

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Re: Where is Warren??
« Reply #49 on: November 07, 2018, 06:56:55 AM »
it is hard for me to wrap my head around the two terms being synonymous.

. . .

A google search doesn't seem to fully jive either.

Then keep googling.

" Investor confidence in future growth is measured in the price to earnings ratio(or P/E ratio)."
Source: https://www.business-case-analysis.com/valuation.html

"Instead, they [PE Ratios] are a sign of investor confidence."
Source: https://seekingalpha.com/article/4135675-pe-peg

Does investor sentiment affect price-earnings ratios?
Boonlert Jitmaneeroj
"An examination of the influence of investor sentiment on the price-earnings (P/E) ratio reveals a significant positive relationship between investor sentiment and P/E ratio which implies that stocks are relatively overvalued during period of excessive optimism."
https://www.emeraldinsight.com/doi/abs/10.1108/SEF-09-2015-0229

"A low P/E indicates the market has less confidence that the company's earnings will increase"
Source: http://www.morningstar.com/InvGlossary/price_earnings_ratio.aspx

"A higher P/E ratio means that the market is more willing to pay for the earnings of the company. Higher price to earnings ratio indicates that the market has high hopes for the future of the share and therefore it has bid up the price. On the other hand, a lower price to earnings ratio indicates the market does not have much confidence in the future of the share."
Source: https://www.readyratios.com/reference/market/price_to_earnings_ratio.html



The concept of connecting PE to investor confidence isn't actually mine. I wish I was that smart.

You can have full confidence in a company with no expectations of growth whatsoever (think of utilities). This will result in a lower p/e ratio than for a stock in which you have the same confidence but which is expected to grow.

Your quote would make more sense with the PEG ratio, even though I still wouldn't completely agree.