Author Topic: Anyone buying more Berkshire.B?  (Read 1525 times)

Fru-Gal

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Anyone buying more Berkshire.B?
« on: August 26, 2019, 12:51:36 PM »
I started buying Berkshire.B a year ago on Robinhood. I have 21 shares now, avg price 201, cheapest was 192 in December and most expensive share was my first for 218.

Should I buy more at these cheap prices? Do it on a platform other than Robinhood? Am a buy-and-hold investor, if for no other reason than because I never get around to selling. I initially bought because I thought I might like to go to the shareholder meeting.

(Of course bulk of my investments is in VTSAX and other index funds and also have a cash/CD emergency fund plus an ESPP that I should probably start selling gradually but obviously not right now.)

Boofinator

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Re: Anyone buying more Berkshire.B?
« Reply #1 on: August 26, 2019, 01:25:48 PM »
Should I buy more at these cheap prices?

I think that there are a lot of worse companies one could buy than BH, but what do you know about this stock that analysts* don't already know?

*Including a couple of the greatest analysts of all time who would probably love nothing more than to spend the over $100 billion their company has saved up on cheap stock buybacks.

http://www.berkshirehathaway.com/qtrly/2ndqtr19.pdf
http://www.berkshirehathaway.com/2018ar/2018ar.pdf (see page 7)

p.s. I own some Berkshire.B, though I have no plans to purchase more outside of an index.

Fru-Gal

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Re: Anyone buying more Berkshire.B?
« Reply #2 on: August 26, 2019, 02:33:35 PM »
Thanks for this, it's the kind of response I was hoping for (someone else to do my research for me)! The writing is just fabulous*, though I don't understand it all.

*e.g, talking about the performance of gold over the last 77 years, "The magical metal was no match for the American mettle."

Boofinator

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Re: Anyone buying more Berkshire.B?
« Reply #3 on: August 26, 2019, 02:59:35 PM »
I personally don't know anyone who has bought individual stocks and made more than the stock index over any decent period of time (though a lot of people I know claim otherwise). I've tried on a few occasions myself and failed (hence my ownership of BRK.B and several others, which of course now I can't sell without taking a big capital gains tax hit). Looking at the last 5- year period, BRK.B and S&P500 mirrored each other with 45% returns.

And yes, the BRK shareholder letters are gold. Also read Snowball if you have a chance.

Fru-Gal

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Re: Anyone buying more Berkshire.B?
« Reply #4 on: August 26, 2019, 03:26:18 PM »
Cool, I'll read it!

I like the argument that, as a holding company, BRK.B is itself a kind of index. I also like Buffett's philosophy. In general I wouldn't buy anything expensive that would already be in VTSAX, however I do have a few penny stocks in green energy, which is a field I'd like to support.

And speaking of individual success, I do have one stock that is up 555%! That is my one share of Enphase Energy, which I bought at $5.28 and is now at $34.62!

AdrianC

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Re: Anyone buying more Berkshire.B?
« Reply #5 on: August 26, 2019, 06:35:44 PM »
I like Berkshire. I already have a lot of it, some I bought 20 years ago.

It's quite cheap right now, at about 1.3x book value. Berkshire has bought back a few shares at around the current price.

Since I already have so much of it, and I'd have to sell something else first, I'm waiting to see if it gets a bit cheaper. At something like $175 I'd get very excited. I think Buffett would too if there wasn't anything else on sale.

chasesfish

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Re: Anyone buying more Berkshire.B?
« Reply #6 on: August 27, 2019, 05:25:59 AM »
I bought some.

Its essentially a Large Cap Value fund with the best manager in history.

Large Cap Value has underperformed growth for a while, but that doesn't mean that will continue in the future.

Buffett buys real companies with real cash flow.  This will perform well in a lower for longer interest rate environment.

vand

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Re: Anyone buying more Berkshire.B?
« Reply #7 on: August 27, 2019, 08:08:12 AM »
Personally I'd pass on BRK. Not because I don't think Buffett isn't still a great investor, but there are probably value investors now who are better positioned to take advantage when the pendulum swings back to value, whenever that will be.

Firstly, Buffett is 88 now. How will BRK look when he's no longer there? He's kind of an institution like the Queen, but one day, maybe in the not very distant future, he's not going to be at the helm.

But the main reason is that BRK is so large now that it inevitable suffers from elephantitis. Small/mid caps opportunities which may make a big difference to the bottom line of a smaller fund won't shift the needle in BRK.

I also have a problem with him buying back his own stock, which is something he has never done up until this point. If he can't find anything worth buying then he should just return the money to the shareholder,and let THEM decide if they want it reinvested.

Boofinator

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Re: Anyone buying more Berkshire.B?
« Reply #8 on: August 27, 2019, 08:15:15 AM »
I also have a problem with him buying back his own stock, which is something he has never done up until this point. If he can't find anything worth buying then he should just return the money to the shareholder,and let THEM decide if they want it reinvested.

What, specifically, is your problem with this? Warren has gone into detail when he would choose to pay stockholders through buybacks versus when he would pay dividends, and the calculus currently lies on the side of buybacks. The shareholder is always free to sell a few shares if they would like to simulate a dividend.

vand

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Re: Anyone buying more Berkshire.B?
« Reply #9 on: August 27, 2019, 08:26:54 AM »
I also have a problem with him buying back his own stock, which is something he has never done up until this point. If he can't find anything worth buying then he should just return the money to the shareholder,and let THEM decide if they want it reinvested.

What, specifically, is your problem with this? Warren has gone into detail when he would choose to pay stockholders through buybacks versus when he would pay dividends, and the calculus currently lies on the side of buybacks. The shareholder is always free to sell a few shares if they would like to simulate a dividend.


If Buffett claims to champion the small investor over Wall Street then he needs to make it easy for them to "realise" the dividend, and at $280k per class A share that's not feasible except for the super-wealthy. Even if you have class B shares you need to have 15-20 of them to sell 1 in order to realise the dividend.

But my real problem is that in buying back their own stock (BRK or anyone) is basically the company taking a position of hubris and saying that it thinks its a better investment than the rest of the market.

Boofinator

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Re: Anyone buying more Berkshire.B?
« Reply #10 on: August 27, 2019, 09:38:39 AM »
But my real problem is that in buying back their own stock (BRK or anyone) is basically the company taking a position of hubris and saying that it thinks its a better investment than the rest of the market.

With many companies I would agree with your sentiment. But with Berkshire, I hesitate to associate the actions taken and explained by the leader of one of the most successful companies of the twentieth century with hubris. On the flip side, I would associate your position with that characteristic, in that it presumes you know what is better for Berkshire than Mr. Buffett.

For the curious, Buffett goes into detail on buybacks on page 7 of the 2016 report: http://www.berkshirehathaway.com/2016ar/2016ar.pdf.

Also, from the 2014 report: "Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision."

MaaS

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Re: Anyone buying more Berkshire.B?
« Reply #11 on: August 27, 2019, 09:56:39 AM »
I also have a problem with him buying back his own stock, which is something he has never done up until this point. If he can't find anything worth buying then he should just return the money to the shareholder,and let THEM decide if they want it reinvested.

What, specifically, is your problem with this? Warren has gone into detail when he would choose to pay stockholders through buybacks versus when he would pay dividends, and the calculus currently lies on the side of buybacks. The shareholder is always free to sell a few shares if they would like to simulate a dividend.


If Buffett claims to champion the small investor over Wall Street then he needs to make it easy for them to "realise" the dividend, and at $280k per class A share that's not feasible except for the super-wealthy. Even if you have class B shares you need to have 15-20 of them to sell 1 in order to realise the dividend.

But my real problem is that in buying back their own stock (BRK or anyone) is basically the company taking a position of hubris and saying that it thinks its a better investment than the rest of the market.

If Berkshire pays the excess capital out as a dividend, the investor pays tax in that year. If the excess capital is "paid out" as a buyback, the investor gets to choose when they pay the tax. Buffett has said this multiple times.

Back on the topic - I don't own any but I've been considering it. As others mentioned, it's essentially a value index fund at this point. With a $122 billion (and growing quickly) cash pile to deploy in the event of a market pullback...

I understand the concern about Buffett (probably) nearing the end of his reign, but they do seem to have some excellent leadership ready to take over. Who knows.

vand

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Re: Anyone buying more Berkshire.B?
« Reply #12 on: August 27, 2019, 09:58:34 AM »
But my real problem is that in buying back their own stock (BRK or anyone) is basically the company taking a position of hubris and saying that it thinks its a better investment than the rest of the market.

With many companies I would agree with your sentiment. But with Berkshire, I hesitate to associate the actions taken and explained by the leader of one of the most successful companies of the twentieth century with hubris. On the flip side, I would associate your position with that characteristic, in that it presumes you know what is better for Berkshire than Mr. Buffett.

For the curious, Buffett goes into detail on buybacks on page 7 of the 2016 report: http://www.berkshirehathaway.com/2016ar/2016ar.pdf.

Also, from the 2014 report: "Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision."

For sure, Buffett is nobody's fool and the cash used for buyback will probably prove to be money well spent. I guess that I am just philsophically opposed to management(s) that has taken upon the mantle of trying to directly influence the price of its stock with its own buying programme. There's conflict of interest.

They have become so prevalent because companies have been incentivised to do so (via preferable tax treament over dividend payouts), but they do not create any economic value in the same way as released divdiend captial reallocated according to the market does.. another example of tax code destroying economic value.

And worse, it's much easier for management to deliver short term returns to shareholders via buyback rather than create long term value by using the money to invest in R&D to grow the company and improve future earnings, so it works as a form of bring forward future returns into the present.

PDXTabs

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Re: Anyone buying more Berkshire.B?
« Reply #13 on: August 27, 2019, 10:08:42 AM »
Buybacks might make more sense than dividends. However, in the past Buffett has been pretty clear that the best way to grow a business is to reinvest capital:

A profitable company can allocate its earnings in various ways (which are not mutually exclusive). A company's management should first examine reinvestment possibilities offered by its current business - projects to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors. - https://www.businessinsider.com/warren-buffett-on-dividends-2013-3

Basically, buybacks and dividends are a big public admission that you can't find anything better to do with your capital. For BH that makes sense at times, for many companies it does not.

MaaS

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Re: Anyone buying more Berkshire.B?
« Reply #14 on: August 27, 2019, 10:10:23 AM »
But my real problem is that in buying back their own stock (BRK or anyone) is basically the company taking a position of hubris and saying that it thinks its a better investment than the rest of the market.

With many companies I would agree with your sentiment. But with Berkshire, I hesitate to associate the actions taken and explained by the leader of one of the most successful companies of the twentieth century with hubris. On the flip side, I would associate your position with that characteristic, in that it presumes you know what is better for Berkshire than Mr. Buffett.

For the curious, Buffett goes into detail on buybacks on page 7 of the 2016 report: http://www.berkshirehathaway.com/2016ar/2016ar.pdf.

Also, from the 2014 report: "Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision."

For sure, Buffett is nobody's fool and the cash used for buyback will probably prove to be money well spent. I guess that I am just philsophically opposed to management(s) that has taken upon the mantle of trying to directly influence the price of its stock with its own buying programme. There's conflict of interest.

They have become so prevalent because companies have been incentivised to do so (via preferable tax treament over dividend payouts), but they do not create any economic value in the same way as released divdiend captial reallocated according to the market does.. another example of tax code destroying economic value.

And worse, it's much easier for management to deliver short term returns to shareholders via buyback rather than create long term value by using the money to invest in R&D to grow the company and improve future earnings, so it works as a form of bring forward future returns into the present.

It sounds like you may be letting your view on how the world should be influence your investment decisions. That's a dangerous game.

vand

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Re: Anyone buying more Berkshire.B?
« Reply #15 on: August 27, 2019, 10:17:09 AM »
But my real problem is that in buying back their own stock (BRK or anyone) is basically the company taking a position of hubris and saying that it thinks its a better investment than the rest of the market.

With many companies I would agree with your sentiment. But with Berkshire, I hesitate to associate the actions taken and explained by the leader of one of the most successful companies of the twentieth century with hubris. On the flip side, I would associate your position with that characteristic, in that it presumes you know what is better for Berkshire than Mr. Buffett.

For the curious, Buffett goes into detail on buybacks on page 7 of the 2016 report: http://www.berkshirehathaway.com/2016ar/2016ar.pdf.

Also, from the 2014 report: "Eventually – probably between ten and twenty years from now – Berkshire’s earnings and capital resources will reach a level that will not allow management to intelligently reinvest all of the company’s earnings. At that time our directors will need to determine whether the best method to distribute the excess earnings is through dividends, share repurchases or both. If Berkshire shares are selling below intrinsic business value, massive repurchases will almost certainly be the best choice. You can be comfortable that your directors will make the right decision."

For sure, Buffett is nobody's fool and the cash used for buyback will probably prove to be money well spent. I guess that I am just philsophically opposed to management(s) that has taken upon the mantle of trying to directly influence the price of its stock with its own buying programme. There's conflict of interest.

They have become so prevalent because companies have been incentivised to do so (via preferable tax treament over dividend payouts), but they do not create any economic value in the same way as released divdiend captial reallocated according to the market does.. another example of tax code destroying economic value.

And worse, it's much easier for management to deliver short term returns to shareholders via buyback rather than create long term value by using the money to invest in R&D to grow the company and improve future earnings, so it works as a form of bring forward future returns into the present.

It sounds like you may be letting your view on how the world should be influence your investment decisions. That's a dangerous game.

Well its better to have a conviction and let that shape your action, rather than the standard "just buy VTSAX" default.
We can agree to disagree about buybacks. Differing opinions are what make a market.

Boofinator

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Re: Anyone buying more Berkshire.B?
« Reply #16 on: August 27, 2019, 10:31:21 AM »
For sure, Buffett is nobody's fool and the cash used for buyback will probably prove to be money well spent. I guess that I am just philsophically opposed to management(s) that has taken upon the mantle of trying to directly influence the price of its stock with its own buying programme. There's conflict of interest.

They have become so prevalent because companies have been incentivised to do so (via preferable tax treament over dividend payouts), but they do not create any economic value in the same way as released divdiend captial reallocated according to the market does.. another example of tax code destroying economic value.

And worse, it's much easier for management to deliver short term returns to shareholders via buyback rather than create long term value by using the money to invest in R&D to grow the company and improve future earnings, so it works as a form of bring forward future returns into the present.

I'm not sure I agree with your analysis:

1) How does stock repurchasing influence price any more than dividends? With dividends, the price of the stock drops equal to the dividend payout. With stock repurchasing, the number of shares decreases by the relative amount repurchased. The former allows for immediate payments, while the latter increases your rights for future payments. No conflict of interest here, because all shareholders are getting equally rich with both methods.

2) Yes, there's some preferential tax treatment going on. But that really has nothing to do with economic value. The economic value is produced by the goods and services the company produces, as well as the return on investment that the profits provide to the shareholders. Again, if people need a cash stream, they are more than welcome to sell the stock, which will have appreciated by an amount about equal to the alternative dividend payout would have been.

3) Your third point is irrelevant. The relevant question is instead: How can a company provide shareholders with the best return on investment? For many growth companies, they spend all of their profits on R&D and the like (BH was growth for many many years), and this provides the best ROI. When a company can no longer grow and becomes a value company, the best ROI is to pay shareholders, either through dividends or share buybacks. This is simply the natural progression of the life of a company. (An analogy would be the progression of the net worth of a successful individual, where it might make sense to get into some debt when young in order to grow, but payoff that debt as circumstances change.)

Buffalo Chip

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Re: Anyone buying more Berkshire.B?
« Reply #17 on: August 27, 2019, 05:31:41 PM »
Here’s what I don’t understand about BH. This is essentially s large value mutual fund that is selling at a premium to book. What they’re invested in is public knowledge. What is the advantage of owning BH as compared to say buying and holding the underlying equity positions?

MaaS

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Re: Anyone buying more Berkshire.B?
« Reply #18 on: August 27, 2019, 07:10:42 PM »
Here’s what I don’t understand about BH. This is essentially s large value mutual fund that is selling at a premium to book. What they’re invested in is public knowledge. What is the advantage of owning BH as compared to say buying and holding the underlying equity positions?

Berkshire has a lot of really profitable companies that they own and operate. Here's what they own: https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berkshire_Hathaway

As they continue to grow their free cash flow from these businesses, valuing this company on book value makes less and less sense.

Ex:

Equity value = 202.53 billion
2018 FCF * SP500 P/E (18) = 411.53 billion
Cash - debt = 17 billion
Total = 631 billion

This is a very simplified view of BH, but, still sure it trades at a premium?


*Redo the math with a 12 p/e and we're still over the market cap. There's a lot of room for disagreement on the multiple.
« Last Edit: August 27, 2019, 07:12:55 PM by MaaS »

markbike528CBX

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Re: Anyone buying more Berkshire.B?
« Reply #19 on: August 27, 2019, 09:39:37 PM »
.,,snip...
I initially bought because I thought I might like to go to the shareholder meeting. ...snip...

Great minds think alike :-).  Bought 1 share $2500 2009  March for that exact reason. 1/50 split and BRK.B is 3x

AdrianC

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Re: Anyone buying more Berkshire.B?
« Reply #20 on: August 28, 2019, 06:15:33 AM »
.,,snip...
I initially bought because I thought I might like to go to the shareholder meeting. ...snip...

Great minds think alike :-).  Bought 1 share $2500 2009  March for that exact reason. 1/50 split and BRK.B is 3x

I went in '09. Happened to be in the area. Definitely worth it for a Berkshire/Buffett/Munger fan.

Maas went over why Berkshire should be valued at more than book value. In his last letter, Buffett went over a way to value Berkshire using "Four Groves":

- Non-Insurance Operating Businesses Earnings
- Investments less Taxes (that would be owed if they were sold)
- Partially Owned Businesses Earnings
- Cash

This ignores the value of the insurance businesses, but does include the investments owned by them.

You have to put a multiple on earnings of about 11x to get to the current quote. Needless to say, that's a lot cheaper than the S&P500.

markbike528CBX

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Re: Anyone buying more Berkshire.B?
« Reply #21 on: August 28, 2019, 11:04:49 AM »
.,,snip...
I initially bought because I thought I might like to go to the shareholder meeting. ...snip...

Great minds think alike :-).  Bought 1 share $2500 2009  March for that exact reason. 1/50 split and BRK.B is 3x

I went in '09. Happened to be in the area. Definitely worth it for a Berkshire/Buffett/Munger fan.

Maas went over why Berkshire should be valued at more than book value. In his last letter, Buffett went over a way to value Berkshire using "Four Groves":

- Non-Insurance Operating Businesses Earnings
- Investments less Taxes (that would be owed if they were sold)
- Partially Owned Businesses Earnings
- Cash

This ignores the value of the insurance businesses, but does include the investments owned by them.

You have to put a multiple on earnings of about 11x to get to the current quote. Needless to say, that's a lot cheaper than the S&P500.

I got the shareholder pass later ?2012?  but didn't go due to work commitments.

Edit: spelling
« Last Edit: August 30, 2019, 06:01:28 AM by markbike528CBX »