Whats the point of investing when Buffett will do it for you?

[imported_bingobazza]

Seriously. Why bother doing the work yourself if you can buy berkshire Hathaway non voting shares for aroung $3000 a pop (assuming you want growth and not income).

And he will do a better job than you, unless you're deluded, a genius or lucky.

[WarmonkEd]

BRK has a huge amount it needs to invest in order to get a decent return. It's harder to earn a 10% return with $40 billion, than it is with $40,000.

[imported_bingobazza]

i agree, but when he has earned 28% over 30 years with less, 15% is possible...and thats acceptable to me these days. Any other reasons?

[eastbay]

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i agree, but when he has earned 28% over 30 years with less, 15% is possible...and thats acceptable to me these days. Any other reasons?

[/ QUOTE ]

Sure. You're looking for a different risk/reward profile than he's offering.

eastbay

[imported_bingobazza]

[ QUOTE ]
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i agree, but when he has earned 28% over 30 years with less, 15% is possible...and thats acceptable to me these days. Any other reasons?

[/ QUOTE ]

Sure. You're looking for a different risk/reward profile than he's offering.

eastbay

[/ QUOTE ]


eastbay

Lets say for the sake of argument that Im not....and that 15% (or the S&P index plus 5%) a year is fine for me. In that case, is there any logical argument for doing the work yourself?

What activities that carry more risk than putting all your money into one stock would you NOT consider to be specualting?

Bingo

[James Boston]

[ QUOTE ]
you can buy berkshire Hathaway non voting shares for aroung $3000 a pop

[/ QUOTE ]

Is that the only difference in the 2 classes of BRK? I really don't know.

To your question... I guess you would need to look at BRK the same way Buffett looks at everything he buys. I haven't, but it could be very over-valued. This doesn't sound unreasonable considering how highly esteemed Mr. Buffett is.

[AceHigh]

Fees...not as good lately. 20%/year would double you money in 4 years, here is the 5-year chart for BRK-B.

http://finance.yahoo.com/q/bc?s=BRK-B&t=5y&l=on&z=m&q=l&c=

[imported_bingobazza]

still not bad compared to this chart

http://finance.yahoo.com/q/bc?t=5y&s=BRK-B&l=on&z=m&q=l&c=&c=%5EDJI

and this ones a train wreck in compaison

http://finance.yahoo.com/q/bc?t=5y&s=BRK-B&l=on&z=m&q=l&c=&c=%5EIXIC

[imported_bingobazza]

[ QUOTE ]
[ QUOTE ]
you can buy berkshire Hathaway non voting shares for aroung $3000 a pop

[/ QUOTE ]

Is that the only difference in the 2 classes of BRK? I really don't know.

To your question... I guess you would need to look at BRK the same way Buffett looks at everything he buys. I haven't, but it could be very over-valued. This doesn't sound unreasonable considering how highly esteemed Mr. Buffett is.

[/ QUOTE ]

Berkshires A shares are expensive for a very good reason...to promote a direct link between the underlying value of the business by discouraging short term trading, which buffett despises, and to encourage long term ownership. I think 2%-10% of shareholders change from year to year. The B shares came in to facilitate 'gifting' by long term shareholders, and also for tax purposes that I dont understand, as Im not a US citizen. They are 1/30 of the A shares.

Check out the intrinsic value for the A shares here (I use the liquidation model), and divide by 30 to get the value of the B shares. You should find that the variance from true value is never that much. The long term nature of the owners of the shares essentially make sure that there is never a specualtive bubble in the share price.

http://www.creativeacademics.com/finance/IV.html

Bingo

[AceHigh]

Good point...looks like he is beating the market average for last 5 years. I'm sure a Buffet fund will perform at least acceptably for you.

Current year is a little disappointing:
http://finance.yahoo.com/q/bc?t=1y&s=BRK-B&l=on&z=m&q=l&c=&c=%5EDJI

[deathtoau]

[ QUOTE ]
Seriously. Why bother doing the work yourself if you can buy berkshire Hathaway non voting shares for aroung $3000 a pop (assuming you want growth and not income).

[/ QUOTE ]

Because Warren Buffett is 75 years old and won't be running the company for much longer than the near-term, maybe the next 5-7 years. When he gets seriously sick, dies or retires, whichever comes first, the stock will get hit with a minimum of a 20-30% drop in the next trading day.

[Ray Zee]

for that reqson a much better investment would be to short berk and buy his major holdings.
or if you like his picks just buy his major holdings. which is what you should do if you like a mutual fund. just buy what they are holding less the stocks that are in fashion, as mutual funds must buy them to attract new customers at the expence of those that trust them.

[imported_bingobazza]

[ QUOTE ]

Because Warren Buffett is 75 years old and won't be running the company for much longer than the near-term, maybe the next 5-7 years. When he gets seriously sick, dies or retires, whichever comes first, the stock will get hit with a minimum of a 20-30% drop in the next trading day.

[/ QUOTE ]

Buffett joked a couple of years ago that every year since 1970 someone has asked about what would happen if he got hit by a truck. He said he would step down if that question ever changed to what would happen if he DIDNT get hit by a truck.

He has already chosen his successor, who will be responsible for managing his billions of bequeathed wealth on behalf of his charitable foundation and his wife. He wont name him (I seriously doubt its a female). I think the succession issue has been one of the biggest over the last decade, and that its well in hand. I very much doubt that this stock will drop significantly for a prolonged period after his death simply because its share price hasnt risen because of his legend, but because of his performance.

You can be sure he has trained his successor like Ben Graham trained him, and thats good enough for me.

Bingo

[FatOtt]

[ QUOTE ]
for that reqson a much better investment would be to short berk and buy his major holdings.
or if you like his picks just buy his major holdings. which is what you should do if you like a mutual fund. just buy what they are holding less the stocks that are in fashion, as mutual funds must buy them to attract new customers at the expence of those that trust them.

[/ QUOTE ]

Yes, that's why I shorted BRK and bought shares in See's Candies, FlightSafety, Nebraska Furniture Mart, and the rest of them: Berkshire subs (http://www.hoovers.com/berkshire-hathaway/--ID__10206--/free-co-subs.xhtml)

Sorry for the sarcasm, but most of Berkshire's value comes from the companies that Berkshire owns completely and that aren't traded on public exchanges. It may have been the case that Berkshire looked a lot like a mutual fund 20 years ago, but it couldn't be further from the truth now.

To the original poster: the fact that you think this is a good strategy without thinking about the price/value proposition of the current share price makes me think you should just invest in an index fund. To make it explicit, would you feel equally strong about this strategy if BRKB was at $4,500 rather than $2,800?

If I could give Buffett all of my money and have him manage it for a 2% annual fee, I'd do it in a heartbeat, but that's not at all what you're getting when you buy Berkshire.

I don't mean to sound negative towards Berkshire, because I own some B shares, but if you're going to buy shares, it should be for the right reasons.

[RYL]

oops read the question wrong /images/graemlins/tongue.gif.

[imported_bingobazza]

[ QUOTE ]
[ QUOTE ]
for that reqson a much better investment would be to short berk and buy his major holdings.
or if you like his picks just buy his major holdings. which is what you should do if you like a mutual fund. just buy what they are holding less the stocks that are in fashion, as mutual funds must buy them to attract new customers at the expence of those that trust them.

[/ QUOTE ]

Yes, that's why I shorted BRK and bought shares in See's Candies, FlightSafety, Nebraska Furniture Mart, and the rest of them: Berkshire subs (http://www.hoovers.com/berkshire-hathaway/--ID__10206--/free-co-subs.xhtml)

Sorry for the sarcasm, but most of Berkshire's value comes from the companies that Berkshire owns completely and that aren't traded on public exchanges. It may have been the case that Berkshire looked a lot like a mutual fund 20 years ago, but it couldn't be further from the truth now.

To the original poster: the fact that you think this is a good strategy without thinking about the price/value proposition of the current share price makes me think you should just invest in an index fund. To make it explicit, would you feel equally strong about this strategy if BRKB was at $4,500 rather than $2,800?



[/ QUOTE ]

Maybe Osma Bin Laden will put a contract on the old guy and short the stock?

As for not thinking about about value, nothing could be further from the truth...see the post above...I dont believe that the value differs markedly at any time from the price, and thats not an accident.

Your right about the companies he took private. When he finds a big winner, he doesnt want to share it with the street if he can help it, and who can blame him.

The other 2 advantages that he has are the float from his insurance operations, acquired at almost zero cost, and the tax treatment that that float enjoys...this is more like a moderately geared invesmtent trust wrapped up in a tax shelter than a mutual fund.

When you say i feel strongly about this strategy, I can understand why you would think that, but to be honest, Im looking for someone to give me a good reason not to do....

Why cant you get him to manage all your money for 2% a year? Surely it will only cost you what you pay to acquire the shares? Have I misunderstood something here thats peculiar to the US?

Bingo

[AceHigh]

[ QUOTE ]
Why cant you get him to manage all your money for 2% a year? Surely it will only cost you what you pay to acquire the shares? Have I misunderstood something here thats peculiar to the US?

[/ QUOTE ]

You've convinced me that it's a good idea for you.

Most of us on the board don't like mutual funds because they are more interested in generating fees than making good investments.

Did you know most mutual funds overturn there whole portfolio every year? This makes sense for some funds, but a lot do it because they want to generate fees for the rest of the company. So we have a healthy distrust of fund managers and can out perform the majority of them by doing our own investing.

YMMV.

[FatOtt]

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As for not thinking about about value, nothing could be further from the truth...see the post above...I dont believe that the value differs markedly at any time from the price, and thats not an accident.

[/ QUOTE ]

Do you recognize the implication? If the price is always roughly equal to the value, there's no point in buying shares. If the price is "fair", that price anticipates the possibly superior investment returns of Warren Buffett. You should only be buying if you think the price isn't roughly equal to the value.

[ QUOTE ]
The other 2 advantages that he has are the float from his insurance operations, acquired at almost zero cost

[/ QUOTE ]

Take a look at the last 5 years of underwriting results - it's anything but "almost zero cost" because of Gen Re's horrible record.

[ QUOTE ]
Why cant you get him to manage all your money for 2% a year? Surely it will only cost you what you pay to acquire the shares? Have I misunderstood something here thats peculiar to the US?

[/ QUOTE ]

Do you really not understand this? Here's an analogy: Warren Buffett is going to manage $1,000 for you (at some acceptable expense, let's say 1% per year). That would be fantastic if you could just give him $1,000 and let him go. The problem is that it costs far more because you're not writing the check for $1,000, you're writing the check for whatever the share price is trading at. So if the stock is overvalued, you may be paying $3,000 for the privilege of managing only $1,000. If this still doesn't make sense to you, at a minimum you should understand the difference between "regular" mutual funds and closed-end funds and figure out how that applies to this situation.

[imported_bingobazza]

The insurance situation seems to be on the mend, apart from the SEC issues. I dont know if problem this was cyclical or if Buffett found some problem that made him want to buy to fix, to release earnings. But things seem to be moving in the right direction in relation to the bottom line now. I think that insurance is very cyclical. Buffet has been enjoying almost free floats through Geico for a few decades, with a few bumps here and there.

I read somewhere that his stock for equity swap is with hindsight considered a master stroke when he took General Re, due to the bond portfolio that General Re had and the valuations he placed on bonds and equities at the time. He dumped ton of overvalued stock, and got a load of bargain bonds in their place. Maybe in a few years, when the dust settles at General Re, and we see how its running under Buffett, we will be better placed to judge for the longer term.

http://www.insurancejournal.com/news/national/2004/03/08/39892.htm

Berkshire is a gowth stock now and has always been. Its set up like that. I just want to make sure that its not overvalued. Theres a link earlier in the thread that gives a liquidation valuation model for Berkshire. If you dont think you can make money paying fair current value, go to Omaha next year and you'll fnd about 20,000 very happy punters who will tell you different. If this liquidation model is right, (did I already say I was too lazy to work it out?), Berkshire has a PEG factor that never moves far from zero and earnings growth consistently in double digits. This makes it an absolute bargain.

I dont consider this a unit trust or mutual fund of any kind...he isnt subject to 5 or 10% rules, he isnt forced to make short term decisions to keep a sales force happy with good figures, he doesnt charge a bid/offer spread, he can borrow to gear....oh, and he beats the index. I dont understand your point here.

Bingo.

[FatOtt]

[ QUOTE ]
If you dont think you can make money paying fair current value, go to Omaha next year and you'll fnd about 20,000 very happy punters who will be very happy to disagree with you.

[/ QUOTE ]

I've been to Omaha for two annual meetings already, thanks. The point is, if the stock is valued fairly, it won't beat the index. That's the essence of being valued fairly. If it is undervalued, it will outperform (in expectation, or probabilistically). If it's overvalued, it will underperform.

I still think you are seriously misunderstanding what you're getting when you invest in Berkshire, but good luck with it.

By the way, this is hugely false:
[ QUOTE ]
The long term nature of the owners of the shares essentially make sure that there is never a specualtive bubble in the share price.

[/ QUOTE ]

It's not at all a stretch of the imagination to say that there was a bubble in Berkshire's share price in 1998. In fact, that overvaluation is one of the factors that resulted in Berkshire issuing shares for Gen Re - they got to use overvalued currency in much the same way that AOL did when they acquired Time Warner.

[imported_bingobazza]

FatOtt,

Valued as an investment trust, Berk is close to 100% NAV...therefore future growth is free.

Bingo

[FatOtt]

[ QUOTE ]
Valued as an investment trust, Berk is close to 100% NAV...therefore future growth is free.

[/ QUOTE ]

I've read this sentence about 5 times and I still don't understand the point you're trying to make. Future growth is not "free" if the asset is valued correctly. If, for example, Wal-Mart is priced correctly to yield 10% for the forseeable future, you don't earn more than 10% if Wal-Mart's earnings grow. Wal-Mart's expected earnings growth is inherent in the market's valuation.

For Berkshire Hathaway, unless you're buying shares at a stock price equal to the firm's book value, that stock price already incorporates expectations of future growth in cash flow. The firm will turn out to be undervalued if the market is underestimating the future growth, but you're horribly wrong if you believe that Berkshire is priced as if it will never grow earnings/cash flow/your favorite metric.

[DesertCat]

[ QUOTE ]
As for not thinking about about value, nothing could be further from the truth...see the post above...I dont believe that the value differs markedly at any time from the price, and thats not an accident.

[/ QUOTE ]

In July 2000, you could buy an A share for as little as $51,600. 7 months later you could pay as much as $74,600. Close to a 50% difference in a very short time. Do you think BRK's value actually changed almost 50% in seven months?

The price you pay will directly determine your total return.

[imported_bingobazza]

[ QUOTE ]
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Valued as an investment trust, Berk is close to 100% NAV...therefore future growth is free.

[/ QUOTE ]

I've read this sentence about 5 times and I still don't understand the point you're trying to make. Future growth is not "free" if the asset is valued correctly. If, for example, Wal-Mart is priced correctly to yield 10% for the forseeable future, you don't earn more than 10% if Wal-Mart's earnings grow. Wal-Mart's expected earnings growth is inherent in the market's valuation.

For Berkshire Hathaway, unless you're buying shares at a stock price equal to the firm's book value, that stock price already incorporates expectations of future growth in cash flow. The firm will turn out to be undervalued if the market is underestimating the future growth, but you're horribly wrong if you believe that Berkshire is priced as if it will never grow earnings/cash flow/your favorite metric.

[/ QUOTE ]

Im not saying its not valued to grow. The growth assumptions are held in the underlying assets like Coke and Gillette which it can sell tomorrow and cash in on those growth assumptions if it was to dismantle itself. In a liquidation sale, Berkshire can do this with its non cash assets. The net asset value calculation simply values what these assets can be sold for after debts and expenses at liquidation. In a firesale, Berks would return to shareholders an amount of cash/share approximating the current share price. So buying the berks stock gives you a margin of safety, BECAUSE of inherent growth assumptions, not despite them, if you value berk differently than you would value a retailer.

To put it another way, if you buy a share in a company in the knowledge that if that company goes bust you will get all your money back from the sale of the assets, any growth you get, hasnt cost you anything and is therefore free, if we ignore opportunity cost.

Therefore, any increase in future earnings, whether from using its cash better, using debt, increasing dividends from subsidiaries, writing off goodwill, share buybacks, under valued real estate, m&a activity, new business pipelines, or simply from the run of the mill increases in earnings in the underlying businesses when the PE ratio and the EPS growth rates stay the same, are totally and completely free, if it is currently valued at 100% or less of NAV. This is very different from book value.

Im not saying that the earlier liquidation model is accurate, but you seem to be saying that it isnt. If you could tell me why its wrong, that might help.

Investment trusts are generally sold at a discount to NAV as future rates of growth are uncertain. However, Berks when valued as an invesmtent trust is more expensive than most, being fully valued. But with such a long term track record, its understandable.

Valued as a company, when you say that a PEG value of 1 will return in share price growth to shareholders, on average, the annualised growth rate in earnings, I agree. If Berks grew its earnings by 15% a year, its share price should do teh same. Tthat is exactly what Im after....a 15% year on year increase, with no work to do and no stress. Thats basically what this post was about. i.e its so dependable in the long term, why do it yourself?

Yes, the share price will move away from the fundamentals despite Buffetts best efforts to ensure that it doesnt, but these will short term movements, hardly of bubble proportions...is a share that is worth 50c while selling at 75c in a bubble? These fluctuations wont make much difference to regular investors. One off investments need a little moe care.

Bingo

[FatOtt]

[ QUOTE ]
Valued as a company, when you say that a PEG value of 1 will return in share price growth to shareholders, on average, the annualised growth rate in earnings, I agree. If Berks grew its earnings by 15% a year, its share price should do teh same. Tthat is exactly what Im after....a 15% year on year increase, with no work to do and no stress. Thats basically what this post was about. i.e its so dependable in the long term, why do it yourself?

[/ QUOTE ]

I don't think I ever said anything about PEG, because I believe PEG is a completely meaningless number. There's no reason that PEG should be equal to 1 or .5 or 2 - there's just not. You're mixing linear and exponential functions and the proper PEG ratio for a firm will be different depending on its unique growth rate, duration of that growth rate, and discount rate.

Also, here's where your argument blows up:
[ QUOTE ]
If Berks grew its earnings by 15% a year, its share price should do teh same.

[/ QUOTE ]

This is completely untrue. Your return will be based on the price you pay, the market's expectations at the time you buy, and the realization of those expectations in the future. If the expectation of 15% earnings growth is baked into Berkshire's price right now, YOU WILL NOT EARN 15% RETURNS IF BERKSHIRE GROWS EARNINGS AT 15%. You will earn the market's discount rate.

[imported_bingobazza]

Peg is just shorthand for the relationship between the PE ratio and the EPS growth rate....its just a quick value measure. If the SP represents a NAV of 100% and the earnings grow at 15%, you are saying that the share price shouldnt move up by the same????????

FatOtt, if you have anything relevant to say, now is the time...the price talk is old. Ive answered it. For the last time, I beleive NAV is the best way to value Berk. That has different implications for future sp expectations. If you are going to say anything at all, tell me WHY BRK is currently a bad long term investment. Remember, I think it is valued fairly, but I use a different valuation than you, so is there any other reason?

Bingo