1.2x P/BV entry point

[Dynamic]

+1

 

I completely agree.

 

If the amount of undervaluation is exactly consistent (e.g. no volatility and always selling at 80% of Intrinsic Value), the long-term investor is rewarded in exact proportion to the increase in IV of the company.

 

In practice there is volatility, but the smaller it is, the closer the long-term investor's returns will match the proportionate increase in IV.

 

The other bonus is that a modest volatility tends to keep short-term speculators away and retain a shareholder constituency mostly of long-term value-oriented investors. This reduces pressures to juice the stock price and keeps it all about increasing IV.

[Palantir]

That doesn't make sense. The same can be accomplished by keeping stock at FV. Yet some are hoping that their investment stays undervalued, which to me defeats the purpose of...investing.

[writser]

I never understood that line of reasoning anyway. I'd be happy if Berkshire shares triple tomorrow - I will sell and buy something else that is undervalued. I try not to get attached to any of my positions.

[Guest longinvestor]

How on earth is a long term investor rewarded by keeping the stock undervalued?

 

Because you don't overpay when you buy at a discount to IV and you hope the discount will be the same at the sell. Your return is the gain in IV during your holding period. No room for profiting from non informed investor.

 

+1 exactly my reason. I gain from my assessment of value. Besides, all serious money any investor has ever made has come from buying decisions. Not selling. Looking back at my performance, I've made many many mistakes selling(too early, too late, no good reason etc.). So, I avoid getting into Investments that may require selling at all. For reasons other than for my purchasing power. BRK uniquely fits this.

[Dynamic]

OK, I understand both points of view and actually agree, and I'm not averse to selling overvalued positions to buy something cheaper too - I do actually like volatility as a means of providing me with opportunities to profit from market madness.

 

Any constant multiple of IV (even above IV) would deliver returns consistent with gains in IV in the hypothetical example. It's only when a dividend gets paid that it's better to buy below IV. Low volatility is still what keeps speculators away, which is a desire of Buffett.

 

I originally bought BRK.B in about 2003 when mega-catastrophe reinsurance was a big thing, and hoped for volatility and viewed mega-cats as buying opportunities which actually strengthed BRK.B's position and caused firming of insurance premiums in the near future, allowing BRK.B to write a higher volume of sensible business.

 

From the point of view of being happy for it to remain undervalued (either at irregular intervals or permanently) until we retire, we aim to keep investing. We will get more intrinsic value for our money if we purchase significantly below IV. Just like Buffett's analogy from some years ago of being a regular buyer of hamburgers. You should rejoice when the price is low, not when it's high if you're a regular buyer. I intend to keep investing until I retire, so low prices will help me.

 

I would agree that volatility is helpful to the skilled investor/trader who understands intrinsic value and can sell high to buy something else low, and its effect is larger at boosting returns than the effect of buying consistently as less than IV and holding forever.

 

[giofranchi]

Besides, all serious money any investor has ever made has come from buying decisions. Not selling. Looking back at my performance, I've made many many mistakes selling(too early, too late, no good reason etc.). So, I avoid getting into Investments that may require selling at all. For reasons other than for my purchasing power. BRK uniquely fits this.

 

+1!

 

Except that maybe BRK is not the only company which fits those criteria...

 

Cheers,

 

Gio

[KinAlberta]

So, this may have been discussed elsewhere but did Buffett put as much of a ceiling on the price as a floor?  i.e. Are you using lower standards on other lessor quality companies while waiting for Berkshire to trade close to 1.2?

 

In other words, what other companies (with comparable and predictable earnings power, product durability, "fortress like balance sheet", etc.) trades close to a P/BV ratio that Buffett would see as a decent buying price? And if if does, are you buying?

 

Here's an article from 2011 somewhat in line with my thinking on this (though I'd wonder if the quality companies in the S&P outweigh the failing companies to the extent that 1.1 or especially 1.2 would be low enough)

 

http://www.bloomberg.com/news/articles/2011-09-27/buffett-buyback-shows-s-p-500-passes-berkshire-book-value-test

[John Hjorth]

So, this may have been discussed elsewhere but did Buffett put as much of a ceiling on the price as a floor?  i.e. Are you using lower standards on other lessor quality companies while waiting for Berkshire to trade close to 1.2?

 

In other words, what other companies (with comparable and predictable earnings power, product durability, "fortress like balance sheet", etc.) trades close to a P/BV ratio that Buffett would see as a decent buying price? And if if does, are you buying?

 

Here's an article from 2011 somewhat in line with my thinking on this (though I'd wonder if the quality companies in the S&P outweigh the failing companies to the extent that 1.1 or especially 1.2 would be low enough)

 

http://www.bloomberg.com/news/articles/2011-09-27/buffett-buyback-shows-s-p-500-passes-berkshire-book-value-test

 

KinAlberta,

 

We discussed on the 6^th of August in this topic.

[Guest longinvestor]

So, this may have been discussed elsewhere but did Buffett put as much of a ceiling on the price as a floor?  i.e. Are you using lower standards on other lessor quality companies while waiting for Berkshire to trade close to 1.2?

 

In other words, what other companies (with comparable and predictable earnings power, product durability, "fortress like balance sheet", etc.) trades close to a P/BV ratio that Buffett would see as a decent buying price? And if if does, are you buying?

 

Here's an article from 2011 somewhat in line with my thinking on this (though I'd wonder if the quality companies in the S&P outweigh the failing companies to the extent that 1.1 or especially 1.2 would be low enough)

 

http://www.bloomberg.com/news/articles/2011-09-27/buffett-buyback-shows-s-p-500-passes-berkshire-book-value-test

 

 

did Buffett put as much of a ceiling on the price as a floor?  Great question! Since about 2011, the stock has traded in a range of 1.2 to 1.3x BV. It used to trade 1.1 to 1.2x BV before the bump up of buy back threshold from 1.1 x to 1.2x. The market appears to price the stock literally with Buffet's words over all else! . And as Buffett has pointed out, never below the threshold, so the market seems to deny the opportunity for any buybacks. So far at least it has acted as a floor. The ceiling appears to be not much different than the floor.

 

Who cares about FV, ha!

[Dynamic]

I think you're probably right that in the general market the publicly stated 1.2x BV limit on buybacks (and the remark that this is still a significant discount to Intrinsic Value) along with general worries people have about succession and the potential for a short-term decline should Buffett cease being CEO are keeping the price only moderately above 1.2x.

 

Right at this moment BRK.B is trading at 1.38x BV, so I'd revise the range to at least 1.2-1.4x and possibly a little higher - I had a feeling it was close to 1.5x BV on odd occasions.

 

Even if the trading range is restricted, I do have a trick for earning 34% in 6 months with BRK.B though. Step one: Buy in February at a fraction over 1.2x the currently known BV, then see the 31st Dec 2015 BV announced as a little above where you purchased, meaning you paid just under 1.2x BV at time of purchase. Step two: watch the price rise to about 16-18% above where you bought in over the next 4-5 months. Step three: Get your Prime Minister to hold a referendum on leaving the EU. Step four: when 52% of the voters vote in favour, TA-DAH!! Your currency plummets against the US dollar and you have a 33.95% gain in your native currency!  :P

 

[Guest longinvestor]

I think you're probably right that in the general market the publicly stated 1.2x BV limit on buybacks (and the remark that this is still a significant discount to Intrinsic Value) along with general worries people have about succession and the potential for a short-term decline should Buffett cease being CEO are keeping the price only moderately above 1.2x.

 

Right at this moment BRK.B is trading at 1.38x BV, so I'd revise the range to at least 1.2-1.4x and possibly a little higher - I had a feeling it was close to 1.5x BV on odd occasions.

 

Even if the trading range is restricted, I do have a trick for earning 34% in 6 months with BRK.B though. Step one: Buy in February at a fraction over 1.2x the currently known BV, then see the 31st Dec 2015 BV announced as a little above where you purchased, meaning you paid just under 1.2x BV at time of purchase. Step two: watch the price rise to about 16-18% above where you bought in over the next 4-5 months. Step three: Get your Prime Minister to hold a referendum on leaving the EU. Step four: when 52% of the voters vote in favour, TA-DAH!! Your currency plummets against the US dollar and you have a 33.95% gain in your native currency!  :P

Lol, can't stop laughing

[KinAlberta]

So, this may have been discussed elsewhere but did Buffett put as much of a ceiling on the price as a floor?  i.e. Are you using lower standards on other lessor quality companies while waiting for Berkshire to trade close to 1.2?

 

In other words, what other companies (with comparable and predictable earnings power, product durability, "fortress like balance sheet", etc.) trades close to a P/BV ratio that Buffett would see as a decent buying price? And if if does, are you buying?

 

Here's an article from 2011 somewhat in line with my thinking on this (though I'd wonder if the quality companies in the S&P outweigh the failing companies to the extent that 1.1 or especially 1.2 would be low enough)

 

http://www.bloomberg.com/news/articles/2011-09-27/buffett-buyback-shows-s-p-500-passes-berkshire-book-value-test

 

KinAlberta,

 

We discussed on the 6^th of August in this topic.

 

Thanks. Also, I couldn't find the right words or example but I'll take a shot.

 

It's not just the idea of a ceiling on BRK specifically, but that a very well thought out "rule of thumb" is being used for a great company that doesn't seem to come close to being applied to many other companies.

 

I.e. If there were two identical companies, twin sisters, out there and solely because of what Buffett said about his, it was trading slightly over his P/BV pronouncement, but it seems that in today's market the twin sister would happily be trading at say 50-100% more expensive ratio.

 

It all seems to throw sand in the face of the efficient market hypothesis. People that would buy BRK instead are doing a poorer analysis on other companies and choosing to pay relatively more for them, all because of the asymmetric information out their which is solely Buffett's idea of a great value. :-)

 

Sorry, for the so poorly expressed thoughts.

[benjamin1978]

Could you clarify what you said? I read your post three times and am utterly confused.

 

What does it mean that people buying BRK doing poor analysis?...

 

So, this may have been discussed elsewhere but did Buffett put as much of a ceiling on the price as a floor?  i.e. Are you using lower standards on other lessor quality companies while waiting for Berkshire to trade close to 1.2?

 

In other words, what other companies (with comparable and predictable earnings power, product durability, "fortress like balance sheet", etc.) trades close to a P/BV ratio that Buffett would see as a decent buying price? And if if does, are you buying?

 

Here's an article from 2011 somewhat in line with my thinking on this (though I'd wonder if the quality companies in the S&P outweigh the failing companies to the extent that 1.1 or especially 1.2 would be low enough)

 

http://www.bloomberg.com/news/articles/2011-09-27/buffett-buyback-shows-s-p-500-passes-berkshire-book-value-test

 

KinAlberta,

 

We discussed on the 6^th of August in this topic.

 

Thanks. Also, I couldn't find the right words or example but I'll take a shot.

 

It's not just the idea of a ceiling on BRK specifically, but that a very well thought out "rule of thumb" is being used for a great company that doesn't seem to come close to being applied to many other companies.

 

I.e. If there were two identical companies, twin sisters, out there and solely because of what Buffett said about his, it was trading slightly over his P/BV pronouncement, but it seems that in today's market the twin sister would happily be trading at say 50-100% more expensive ratio.

 

It all seems to throw sand in the face of the efficient market hypothesis. People that would buy BRK instead are doing a poorer analysis on other companies and choosing to pay relatively more for them, all because of the asymmetric information out their which is solely Buffett's idea of a great value. :-)

 

Sorry, for the so poorly expressed thoughts.

[Jurgis]

He's saying that people are buying other (worse) companies for worse valuations at the time they could buy easily analyzed (by Buffett himself) BRK at 1.2-1.4 book.

 

At least that's my interpretation. :)

 

I somewhat agree that if you buy non-BRK, it may be worthwhile to compare it with BRK and decide if the non-BRK is cheaper and/or better company than BRK. Otherwise why buy the non-BRK?

[benjamin1978]

He's saying that people are buying other (worse) companies for worse valuations at the time they could buy easily analyzed (by Buffett himself) BRK at 1.2-1.4 book.

 

At least that's my interpretation. :)

 

I somewhat agree that if you buy non-BRK, it may be worthwhile to compare it with BRK and decide if the non-BRK is cheaper and/or better company than BRK. Otherwise why buy the non-BRK?

 

I agree with your point and think it's a good yardstick to use to measure and quantify opportunity cost of capital, especially when rates are at 0 which don't provide that anchor anymore. 

 

Taking that logic one step further, what about investors who treat concentrated BRK positions almost like a placeholder for cash (which is for sure to lose value over time)? What are the arguments for and against that?

[KinAlberta]

He's saying that people are buying other (worse) companies for worse valuations at the time they could buy easily analyzed (by Buffett himself) BRK at 1.2-1.4 book.

 

At least that's my interpretation. :)

 

I somewhat agree that if you buy non-BRK, it may be worthwhile to compare it with BRK and decide if the non-BRK is cheaper and/or better company than BRK. Otherwise why buy the non-BRK?

 

That's pretty much it, though I'm not suggesting that they necessarily buy BRK either.  They may not only be buying other companies for worse valuations but they are performing worse valuations in determining the value of others, but then relying on Buffett's price for bRK.  I'm just thinking there is some kind of disconnect in reasoning going on in the market, simply because Buffett laid out his price for BRK, and only BRK. They are accepting his reasoning for BRK valuation but not using it elsewhere. (Is it that they think a 1. whatever P/BV pricing/margin of safety methodology could only apply to BRK and not say a GE.

 

 

 

A Buffett quote, 2000 AR:

 

“Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business.” 

 

I'd say, unless the cash flows are quite stable and predictable.

[Guest longinvestor]

He's saying that people are buying other (worse) companies for worse valuations at the time they could buy easily analyzed (by Buffett himself) BRK at 1.2-1.4 book.

 

At least that's my interpretation. :)

 

I somewhat agree that if you buy non-BRK, it may be worthwhile to compare it with BRK and decide if the non-BRK is cheaper and/or better company than BRK. Otherwise why buy the non-BRK?

 

That's pretty much it, though I'm not suggesting that they necessarily buy BRK either.  They may not only be buying other companies for worse valuations but they are performing worse valuations in determining the value of others, but then relying on Buffett's price for bRK.  I'm just thinking there is some kind of disconnect in reasoning going on in the market, simply because Buffett laid out his price for BRK, and only BRK. They are accepting his reasoning for BRK valuation but not using it elsewhere. (Is it that they think a 1. whatever P/BV pricing/margin of safety methodology could only apply to BRK and not say a GE.

 

 

 

A Buffett quote, 2000 AR:

 

“Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business.” 

 

I'd say, unless the cash flows are quite stable and predictable.

 

 

While on this subject, here's Chris Davis (Davis Funds) talking about owning BRK, starting at the 14 minute mark.

They've owned BRK for a long time, in large measure too. Also talks about growth vs value. The fund has not performed great over the past 10 years but has a long runway behind them.

 

The reason I bring up a fund manager's view of BRK is that there are other fund managers who owned large positions in BRK before but got into other lesser quality names and lost their shirts and reputation. Not sure but didn't Berkowitz own lots of BRK in the past?? Other famous fund managers? What lessons did they learn about their valuation methods? 

[Jurgis]

Perhaps we should split this into another thread.

 

Comparative valuation is not easy.

 

Let's take BRK and a number of "Buffett-approved" companies. By "Buffett-approved", I mean companies that are owned by BRK, Munger or where Buffett talked positively about management and owning the stock but doesn't own it for some reason (usually we are talking banks here - Buffett just buys more WFC instead of something else).

 

So: AXP, BAC, JPM. I don't believe the following are cheap, but they also have been mentioned/approved/owned by Buffett: MCO, KO, DIS, V, MA, COST. Buffett approved, cheap, but I don't like them: DE, IBM.

Feel free to add others.

 

So how would you compare valuations and quality of these companies to BRK and would you invest in them rather than in BRK at this point in time?

 

Personally, I hold some AXP, BAC, JPM, MCO, DIS, COST. All things being equal, I'd probably just buy BRK instead of all of these. But things are not equal - I am concerned about Buffett's mortality (and this is yet another thread, but I'm am gonna sell BRK the moment Buffett dies and I'm not changing my mind on this). So things not being equal I could add to AXP, BAC, JPM now rather than adding to BRK.

 

What are your guys thoughts though? Are any of the Buffett-approved companies attractive enough for you to buy them instead of BRK? Or even sell BRK and buy company XXXX? Why or why not?

[John Hjorth]

It's interesting topics that you bring up here, Jurgis. I suggest you just do the respective topic splits by starting new topics.