Why not just invest it all into Berkshire B Stock?

[andysandp]

What are the pros and cons of putting 50% or more of your portfolio into Berkshire B Stock?

Berkshire's track record is incredible.  Buffet said don't expect the incredible returns as the past, but he's still beating the market.

Let's say you put 50% into SNP and 50% into Berkshire B stock.

Thoughts?

[acroy]

I've had this exact thought every few years over the last... 20yrs. Dump 100% into BRK and put my investment mind to sleep. Shoulda dumped it all into BRK all those years ago, I'd be much richer.

pros:
-'actively managed' by the best of the best in the business
-diverse holdings incl cash
-proven multi-decade outperformance
-cheap (no management fees etc)

cons
- all the eggs in one basket


hmmmm

[I'm a red panda]

cons
- all the eggs in one basket

put all your eggs in one basket, and then watch that basket - Mark Twain

[maizefolk]

Biggest con from my perspective: Warren Buffett probably won't live as long as you will.

After he's gone one of his handpicked successors will take charge, but A) they may not have whatever magic/luck he has B) even if they do, other investors may not believe that they do, so the stock price could still spend a long time going in the wrong direction.

[Cycling Stache]

I think the concern is that, notwithstanding Warren Buffett's amazing track record, you're still betting on someone doing better than the market, which statistically people don't do.  Warren Buffett is an outlier, but it's unclear whether he's a statistical outlier (if enough people try something, some are going to be successful), or whether he truly has an analytical advantage.

If he's the former, then there's no reason to believe he's likely to outperform the market in any given future year.  And indeed, I think he's (slightly) behind the S&P 500 the last 10 years.  If the latter, then you have to factor in how long he's going to be doing it, and whether his analytical advantage over the market is still sufficiently great to make it worth taking a chance on him.  Again, the last 10 years suggest that whatever his advantage is may not be as great anymore.

In any event, I think Warren Buffett is an incredibly intelligent guy who says incredibly intelligent things.  But I'm skeptical whether he's going to outperform the market in any given year going forward.  Thus, index funds. 

[thenextguy]

Bill Miller had a good track record, too.

[Financial.Velociraptor]

IMO, Berkshire has lost track of its edge.  Historically, BRK invested float in capital efficient businesses.  In the last decade, there have been enormous investments in regulated monopoly businesses that are hugely capital intensive.  BH Energy and BNSF will be a long term drain on free cash flow.  This is why he has trailed the S&P recently after so many years of out performance.

[andysandp]

IMO, Berkshire has lost track of its edge.  Historically, BRK invested float in capital efficient businesses.  In the last decade, there have been enormous investments in regulated monopoly businesses that are hugely capital intensive.  BH Energy and BNSF will be a long term drain on free cash flow.  This is why he has trailed the S&P recently after so many years of out performance.

Berkshire is still beating S and P.

Going back just the last 10 years, Berkshire has only lost to S and P in 2008, 2009, and 2015.

Berkshire beat SNP

2010 to now
2011 to now
2012 to now
2013 to now
2014 to now
2016 to now
2017 to now

Also with S and P Index you have to pay taxes on Dividends, so returns will be slightly lower, while Berkshire has no Dividends.

Even though Berkshire doesn't seem as strong as before, they are still beating the market.

They have lot of cash right now, which means they are due for buying something good, right?

[thenextguy]

They have lot of cash right now, which means they are due for buying something good, right?

Or they can't find anything to buy.

[doggyfizzle]

BH Energy and BNSF will be a long term drain on free cash flow.

Umm, no?  Have you read any of the annual shareholder letters or SEC filings regarding BNSF and Mid-American?  Those business throw off ridiculous amounts of FCF specifically because they are so heavily regulated and operate in markets with little to no competition.  They are guaranteed an ROIC (with State Electric Regulators for Mid-American and Surface Transportation Board via Productivity/Investment Cases for BNSF).  BNSF has been paying dividends to the parent company every year since Berkshire bought it while still having plenty of cash to reinvest the most in PPE every year for all Class I North American railroads.  Mid-American is so well run it hasn't had to raise electric rates in Iowa in almost a decade and still has maintained or grown profit nearly every single year in that time-frame.  Neither of those business could be described as a drain on FCF.  They serve as an excellent hedge against the wide fluctuations in insurance earnings, so in catastrophic years (2017), FCF from the capital-intensive business can be used to cover insurance losses so insurance float (which is concurrently invested) is not liquidated to meet claims requirements.

[Financial.Velociraptor]

Lot's of misinformation in this thread.   Buffet has not beat S&P over last 7 years.  There is a chart at the beginning of every shareholder letter.  It is quite clear BRK is lagging.  Buffet used to say he should start paying a distribution if he couldn't beat the 500 on any 5 year rolling basis.  When he missed the mark, he moved the goalposts...  When he missed the mark again, he moved the goalposts once more...

BH Energy and BNSF are NOT free cash flow positive.  They generate tons of OPERATING cash flow.  But on a FCF basis (which is net of capex), they are huge drains on FCF.  Those are capital intensive businesses that require tons of continual reinvestment to maintain  margins.  Buffet was quite clear in the most recent letter that he was making unheard of net investments into BNSF capex in hopes of future returns.

The old BRK, invested in capital efficient businesses that returned FCF to the parent for additional investment.  That has changed.  The Oracle has lost his touch and should spin off BNSF and BH Energy and start paying a dividend.

[maizefolk]

The old BRK, invested in capital efficient businesses that returned FCF to the parent for additional investment.  That has changed.  The Oracle has lost his touch and should spin off BNSF and BH Energy and start paying a dividend.

I thought the argument here is that once you get to be as big as BRK is, it gets harder and harder to find business which are both capital efficient and big enough to move the needle? (Which I acknowledge may just be a different way of saying "the magic is gone").

[Financial.Velociraptor]

The old BRK, invested in capital efficient businesses that returned FCF to the parent for additional investment.  That has changed.  The Oracle has lost his touch and should spin off BNSF and BH Energy and start paying a dividend.

I thought the argument here is that once you get to be as big as BRK is, it gets harder and harder to find business which are both capital efficient and big enough to move the needle? (Which I acknowledge may just be a different way of saying "the magic is gone").

Yes, Buffet has been clear that size is the enemy of returns and the justification for buying huge capital intensive businesses was to provide a place to deploy billions of dollars of float annually into a place with a "guaranteed" return.  We were warned he couldn't beat the S&P forever. 

[doggyfizzle]

Lot's of misinformation in this thread.   Buffet has not beat S&P over last 7 years.  There is a chart at the beginning of every shareholder letter.  It is quite clear BRK is lagging.  Buffet used to say he should start paying a distribution if he couldn't beat the 500 on any 5 year rolling basis.  When he missed the mark, he moved the goalposts...  When he missed the mark again, he moved the goalposts once more...

BH Energy and BNSF are NOT free cash flow positive.  They generate tons of OPERATING cash flow.  But on a FCF basis (which is net of capex), they are huge drains on FCF.  Those are capital intensive businesses that require tons of continual reinvestment to maintain  margins.  Buffet was quite clear in the most recent letter that he was making unheard of net investments into BNSF capex in hopes of future returns.

The old BRK, invested in capital efficient businesses that returned FCF to the parent for additional investment.  That has changed.  The Oracle has lost his touch and should spin off BNSF and BH Energy and start paying a dividend.

You are absolutely NOT correct.  Check out bnsf’s most recent fixed income presentation.  FCF was $3.5 billion for the 12 months ending on 3/31/17.  Again, if you understand the rate structures of Mid American and BNSF you would realize the companies are nearly guaranteed to be FCF positive...always.  OCF for BNSF was $7.1 billion, minus CapEx of $3.7 billion.  No matter how you slice it, that’s very, very FCF positive.

http://www.bnsf.com/about-bnsf/financial-information/pdf/fixed-income-investor-presentation-1st-quarter-2017.pdf

[doggyfizzle]

And for MidAmerican cash flows please refer to slide 21 from thei most recent fixed income presentation.  All recent years besides 2014 have been FCF positive, and FCF generation is projected to increase into the next decade.  Maybe you are confusing earnings not remitted to the parent company with FCF?

[maizefolk]

Out of curiosity doggyfizzle  & Financial.Velociraptor, you're both talking about BNSF railroads, but Doggy, you're combining it with mid-american energy which is a power utility in Iowa, and Velociraptor you're combing it with black hills energy which is both an electric and natural gas utility in places farther west than Iowa (South Dakota, Nebraska, Wyoming, etc). I know mid-american is owned by BRK. I though black hills was a publicly traded corporation, but I could be wrong.

I don't know that it makes any difference, since you can still disagree about BNSF, but is it possible part of your disagreement results from each discussing different companies?

[doggyfizzle]

I linked to FI presentations from both BNSF and MidAmerican; both of which show VERY positive FCF generation.  I’m not saying they are the same company; they are operated separately but are both subject to heavy regulation and thus earn reliable returns based on their monopoly position.  MidAmerixan used to be the parent company for MidAmerican/PacifiCorp etc, but after the NVD aquaitok the name was changed to Berkshire Hathaway Energy.  I still refer to it as MidAmerican out of habit.

[maizefolk]

No, please read my post again. I'm not saying you're saying BNSF is the same company as MidAmerican.

I'm saying VF is talking about BNSF + Black Hills Energy and you're talking about BSNF + MidAmerican.

MidAmerican != Black Hills Energy.

[andysandp]

Lot's of misinformation in this thread.   Buffet has not beat S&P over last 7 years. 

I believe it has.

I used Portfolio visualizer.com to get the returns of Berkshire vs Vanguard 500 with Dividends reinvested.  It beat SNP in 7 of the last 10 years.  If you go back more then 10 years, Berkshire killed S and P.

Here are compound returns of Berkshire vs Vanguard 500.  Please note returns are from Jan 1st of the specified year, until end of Feb 2018.

2010-  B-  14.98  V-13.71
2011-  B-  14.11  V- 13.54
2012-  B-  17.5    V- 15.54
2013-  B-  17.63   V- 15.48
2014-  B-   14.28  V- 11.8
2016-  B-  23.09   V- 16.22
2017-  B-  22.81   V- 20.13

[doggyfizzle]

No, please read my post again. I'm not saying you're saying BNSF is the same company as MidAmerican.

I'm saying VF is talking about BNSF + Black Hills Energy and you're talking about BSNF + MidAmerican.

MidAmerican != Black Hills Energy.

I don’t see where Raptor at all mentions Black Hills Corporation.  He mentioned BH Energy, which is what Berkshire Hathaway has renamed MidAmerican to so the company benefits from Berkshire’s “brand” name.

[Acastus]

The biggest risk with Berkshire Hathaway is manager turnover, and there is only 1 Buffett. If you think someone else will be just as good, you are wrong. He is a savant.

If you can get past that risk, BH is a more diversified holding than most any other holding companies (like GE, UTC, ITW). They have around 300 wholely owned subsidiaries, and a large holding of stocks from other publicly traded companies. The structure is very much like a broad market cap fund.

[maizefolk]

No, please read my post again. I'm not saying you're saying BNSF is the same company as MidAmerican.

I'm saying VF is talking about BNSF + Black Hills Energy and you're talking about BSNF + MidAmerican.

MidAmerican != Black Hills Energy.

I don’t see where Raptor at all mentions Black Hills Corporation.  He mentioned BH Energy, which is what Berkshire Hathaway has renamed MidAmerican to so the company benefits from Berkshire’s “brand” name.

Gotcha. My mistake then, thanks for the clarification, and please accept my apologies for the misunderstanding. I'd only ever seen "BH Energy" used as one of the brand names for Black Hills Corporation, not as a synonym for MidAmerican.

[CorpRaider]

You probably could do a lot worse (especially if it gives you more comfort to hold through drawdowns versus and index).  Buffett is the GOAT and he works basically for free. 

There are valid questions, however, about whether there is just too much money to invest now to put up similar returns to those he racked up in the past.  I recently did a post about this (also discussing a post from Jason Zweig in the WSJ Money Beat blog about this issue).

To me the biggest problem with ad-hoc active managers (or one of them at least) is that you can't really account for changes.  Like you know, the guy is not hungry anymore and maybe moves to Florida and hires his brother in law, like on famous MF manager....or gets divorced, has a mid-life crisis....whatever. 

Thus, I personally prefer rules-based quantitative solutions; a market cap weighted index being amongst those (and one of the hardest to beat largely because of low management, tax, and market impact costs).

[anisotropy]

Our BRK position is tiny compared to our overall portfolio (directly held, outside of index funds). I question myself regarding this decision on a weekly basis. My best attempt to answer your question is this:

BRK does not out perform EVERYTHING over all time frame.

What I mean by everything includes EM, EAFE, TSX, etc. Sure, since 60s it might have, but BRK these days are moving more and more in tandem with the s&p so ya...

[hodedofome]

BRK is a fairly diversified stock, much more than most companies. It's almost like owning an index fund.

IMO owning BRK at this point of the game is making a bet that the guys who take over the company after Buffett is gone will continue to allocate capital in good investments. That, or you're betting on the company being broken up and the sum of the parts are greater than BRK today.

[trollwithamustache]

what happens when Buffet dies?

[doggyfizzle]

what happens when Buffet dies?

Ted/Todd manage stock investments, Greg Abel runs Brk, Ajit runs insurance, Howard serves as board chairman, and Gates makes sure nobody can ever buy up enough stock to try and pull an Ackman.

[yachi]

what happens when Buffet dies?

Ted/Todd manage stock investments, Greg Abel runs Brk, Ajit runs insurance, Howard serves as board chairman, and Gates makes sure nobody can ever buy up enough stock to try and pull an Ackman.

Agree with this, except Howard gets a limited board position to maintain the company culture.  I think Greg Abel will get the chairman of the board position.  Either way, I agree Warren Buffet's stepping away from Berkshire is an event with way lower impact to Berkshire's bottom line than many fear, especially since the company's stock seems to reflect this fear already at times.  Warren Buffet said if Buffett, Munger, and Ajit were drowning and you could only save one, swim toward Ajit.  The company has a culture that will survive Buffet, and that culture does very good things for investment returns and risk.  Behave rationally (buy more at lower prices, not at higher prices), have patience to wait out for a deal, maintain a safe amount of cash to protect the business during emergencies.

[trollwithamustache]

what happens when Buffet dies?

Ted/Todd manage stock investments, Greg Abel runs Brk, Ajit runs insurance, Howard serves as board chairman, and Gates makes sure nobody can ever buy up enough stock to try and pull an Ackman.

Agree with this, except Howard gets a limited board position to maintain the company culture.  I think Greg Abel will get the chairman of the board position.  Either way, I agree Warren Buffet's stepping away from Berkshire is an event with way lower impact to Berkshire's bottom line than many fear, especially since the company's stock seems to reflect this fear already at times.  Warren Buffet said if Buffett, Munger, and Ajit were drowning and you could only save one, swim toward Ajit.  The company has a culture that will survive Buffet, and that culture does very good things for investment returns and risk.  Behave rationally (buy more at lower prices, not at higher prices), have patience to wait out for a deal, maintain a safe amount of cash to protect the business during emergencies.

I've never met any of these guys, so I hope you are right. But understand Berkshire is a huge bet on the next jockey being as good without the current coach. That's the risk.

[frozen]

I noticed that my FUSVX (Fidelity S&P 500 index fund) lists Berkshire Class B shares as a top 10 holding. It seems you would be better diversified by holding an S&P 500 index fund.

I have some Berkshire shares too, just for fun.

[PVkcin]

Lot's of misinformation in this thread.   Buffet has not beat S&P over last 7 years. 

I believe it has.

I used Portfolio visualizer.com to get the returns of Berkshire vs Vanguard 500 with Dividends reinvested.  It beat SNP in 7 of the last 10 years.  If you go back more then 10 years, Berkshire killed S and P.

Here are compound returns of Berkshire vs Vanguard 500.  Please note returns are from Jan 1st of the specified year, until end of Feb 2018.

2010-  B-  14.98  V-13.71
2011-  B-  14.11  V- 13.54
2012-  B-  17.5    V- 15.54
2013-  B-  17.63   V- 15.48
2014-  B-   14.28  V- 11.8
2016-  B-  23.09   V- 16.22
2017-  B-  22.81   V- 20.13

Here is the link from Berkshire's own website with all the shareholder letters:
http://www.berkshirehathaway.com/letters/letters.html

Here is the 2017 letter:
http://www.berkshirehathaway.com/letters/2017ltr.pdf
Page 1 compares the S&P 500 to Berkshire's per share value every year 1965-2017.

[andysandp]

Lot's of misinformation in this thread.   Buffet has not beat S&P over last 7 years. 

I believe it has.

I used Portfolio visualizer.com to get the returns of Berkshire vs Vanguard 500 with Dividends reinvested.  It beat SNP in 7 of the last 10 years.  If you go back more then 10 years, Berkshire killed S and P.

Here are compound returns of Berkshire vs Vanguard 500.  Please note returns are from Jan 1st of the specified year, until end of Feb 2018.

2010-  B-  14.98  V-13.71
2011-  B-  14.11  V- 13.54
2012-  B-  17.5    V- 15.54
2013-  B-  17.63   V- 15.48
2014-  B-   14.28  V- 11.8
2016-  B-  23.09   V- 16.22
2017-  B-  22.81   V- 20.13

Here is the link from Berkshire's own website with all the shareholder letters:
http://www.berkshirehathaway.com/letters/letters.html

Here is the 2017 letter:
http://www.berkshirehathaway.com/letters/2017ltr.pdf
Page 1 compares the S&P 500 to Berkshire's per share value every year 1965-2017.

That link gives returns for one full calendar year. 

I was giving returns starting from Jan 1 of a certain year, going though Feb 28 2018.  Usually people hold Berkshire Stock and don't sell it,  so I think my numbers are more useful.

[CorpRaider]

Like I noted in my post on the subject of whether BRK is too big, he's "only" running 1-2% of Russell 3000 market cap (not to mention private market and foreign opportunities). 

Also he's effectively levered long with un-callable, likely free, debt due to the float (although basically the equivalent of float is currently sitting in cash and equivs).  "I've always played my own game."

Thought it was interesting to think of the fact that you really should back out passive market cap indexers from his potential opportunity set, as they aren't making active bets (IF they b&h....if not I guess they will be selling to him during next drawdown; my money says a bunch won't hold through next bear). 

I thought it was also sort of interesting to note if you are in an active fund you are sort of selecting your manager to go up against the GOAT.

[MustacheAndaHalf]

Another take on Buffet comes from academia, and their models of stock market performance.  For years the "3 factor model" of stock returns (beta, small cap, value) was the best fit, and Buffet beat his expected returns.

The latest thinking is that Buffet discovered two new factors before anyone else, which is quite an accomplishment.  The factors of "quality" and "profitability" explain Buffet's returns well.  They were discovered decades after Buffet figured them out.  I mostly know of them through Larry Swedroe's books, but sometimes see them when I browse a white paper on investing.

So instead of buying Berkshire Hathaway for Buffet's reputation, you could search for funds that invest using the factors Buffet discovered.

[GrumpyPenguin]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

[yachi]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

I wondered about this oddity, and dismissed it as Buffett not wanting to overly promote his own stock.  He clarified his position last year, I think at the annual meeting Q&A.  The reason he doesn't want his wife to remain invested in Berkshire is he doesn't want people bugging his wife with messages such as "Berkshire has lost it's way and it's not like Warren would have wanted it, you should sell your shares now."  Or bugging her to sell off her shares for other reasons.

That said, here's a direct quote from the 2016 Annual Report:
"Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve
learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index
fund."
So there you have his advice.

[andysandp]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

Curious why not just go 100% S and P 500 index fund?  I thought Bonds is for people who psychologically can't handle downturns.  I would assume Buffet's wife can.

[MustacheAndaHalf]

Buffet's advice is to invest in an S&P 500 index fund, and you can view his advice to his wife as confirmation he really means it.  But it's otherwise not useful to compare someone who will have hundreds of millions in cash and billions in stocks to people's situation here.  Anyone with hundreds of millions in short-term bonds is probably not representative of how others will fare.

[CorpRaider]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

Curious why not just go 100% S and P 500 index fund?  I thought Bonds is for people who psychologically can't handle downturns.  I would assume Buffet's wife can.

She's probably working with like a 2% withdrawal rate or something.  But it seems like even @ 4% withdrawal, if spending the S&P 500 dividends and bond interest, that would be sufficient to carry one through five or so years of a depression like crash. 

I predict a lot of these "I can tolerate 100% in stocks" people who started investing after the GFC are going to freak out in next bear.

[Cycling Stache]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

Curious why not just go 100% S and P 500 index fund?  I thought Bonds is for people who psychologically can't handle downturns.  I would assume Buffet's wife can.

She's probably working with like a 2% withdrawal rate or something.

This cracked me up.  A 2% withdrawal rate?  Maybe .001%.

That's assuming no more growth on his $88 billion, and her spending $1 million a year.  Does she even spend that much?

Regardless, I don't think Warren Buffett's wife's asset allocation tells us anything other than even the world's best investor feels like the S&P 500 is a pretty solid investment.  That's good enough for me, although I'll take VTSAX and some international for a little more diversification.

[Financial.Velociraptor]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

Wife and family won't get 88B.  He is a founder of the Giving Pledge with Bill Gates and is obligated to donate at least half of his fortune to charity.  I believe he plans to do a lot more than half (and already does 4% a year).  Presumably their house in LCOL Omaha is long paid for.  How much does a woman who successfully stayed married to a notorious miser really need?

Curious why not just go 100% S and P 500 index fund?  I thought Bonds is for people who psychologically can't handle downturns.  I would assume Buffet's wife can.

She's probably working with like a 2% withdrawal rate or something.

This cracked me up.  A 2% withdrawal rate?  Maybe .001%.

That's assuming no more growth on his $88 billion, and her spending $1 million a year.  Does she even spend that much?

Regardless, I don't think Warren Buffett's wife's asset allocation tells us anything other than even the world's best investor feels like the S&P 500 is a pretty solid investment.  That's good enough for me, although I'll take VTSAX and some international for a little more diversification.

[Car Jack]

I've been looking at BRK-B again (have looked many times) since taxes were just done.  The reason for me is singular.  No dividends thrown off which are unavoidable and taxable.  This tax year, I've edged into the Roth phase out area and it's a pain in the ass.  I'll be calling Fidelity and Schwab for my Roth and wife's Roth to remove 2/3 of the contribution to be correctly invested for the phase out point we're in. 

Of course, to lose the dividends, I'd have to sell the ETFs I own which will trigger long term cap gains.  My circumstances are different in 2018 than it was last year so I can do this and stay out of the Roth phase out area.....I hope.  I'll probably wait until late in the year to see what my income ends up at then decide if I want to sell SCHB and VTI to buy BRK-B. 

[CorpRaider]

What happens when Buffett dies? 

His instructions for his estate is 10% short term government bonds and 90% in a low cost S&P 500 index fund. 

Why are people here really going against his advice?

Curious why not just go 100% S and P 500 index fund?  I thought Bonds is for people who psychologically can't handle downturns.  I would assume Buffet's wife can.

She's probably working with like a 2% withdrawal rate or something.

This cracked me up.  A 2% withdrawal rate?  Maybe .001%.

That's assuming no more growth on his $88 billion, and her spending $1 million a year.  Does she even spend that much?

Regardless, I don't think Warren Buffett's wife's asset allocation tells us anything other than even the world's best investor feels like the S&P 500 is a pretty solid investment.  That's good enough for me, although I'll take VTSAX and some international for a little more diversification.

As stated above, he's leaving the vast majority of his net worth to the Gates foundation.  Like all of it.  I bet she's not going to get more than $20MM.