Buffett, Bogle and Berkshire shareholders

[Guest longinvestor]

Buffett has been singing praises of Bogle regularly at the annual meeting and in the letter.

 

This year, Buffett was rather gracious and even put a spotlight on Bogle during the meeting

(starting at 00:24:29) and had this to say,

 

We have a special guest at the meeting this year. Jack Bogle. I understood that he was coming to the meeting. Where are you Jack? Can we get some light on Jack? There you are! I have been speaking about investing in Index funds in my letters. Index fund investing would  not have happened without Jack. Others talked about it. Jack Bogle probably has done more for American Investors as a whole than any other person in the country...........applause........the truth is that the development of index funds was not in the interest of Wall Street because it brought down the costs of investing. He was the subject of much derision and a lot of attacks. Now we are talking of trillions in index funds.  Jack has probably saved, at a minimum, left in the pockets of investors, without hurting them in overall gross performance, tens and tens of billions and that number is likely going to be 100's and 100's of billions over time. It is Jack's 88th Birthday on Monday and on behalf of American Investors, I would like to say "Thank you, Jack"......to thunderous applause. I clapped until I was among the last to do so.

 

Now to the topic. Buffett has raised some questions in the minds of Berkshire investors. After all, the index funds have done very well since the GFC, and even beat BRK's performance for the first time, in one 5 year period 2009-2014. Then we have the famous hedge fund versus Vanguard index fund bet. And then we have Buffett's sermon that the vast majority of investors would likely be better off simply putting all their money in an index fund, bought over time. And to make the head scratch, he even recommends to the trustees of his estate that his wife's portfolio be invested 90% index fund and 10% treasuries. And then we have Berkshire's size anchor and of course his age and how much he will be missed at Berkshire.

 

How about Berkshire investors? What's on your minds? Diversify out? All into index funds?

 

Chime in.

 

Edit: My question is not what you think Buffett thinks BRK will do; rather, if you are a BRK shareholder, what are your thoughts!

 

 

 

 

 

 

 

[clutch]

It's very hard to argue against his logic. Especially if you assume that BRK now won't be outperforming the index by much.

 

For those who wants to programmatically invest, and hence remove any negative consequences of biases / emotion, I think indexing makes a perfect sense.

 

On the other hand, if you believe you can act rationally and properly value BRK, it could make sense to buy BRK at opportune times.

 

But the second method is obviously harder than the first, and requires both the skills and temperament. And I'm not sure how many investors can actually do the second method well, even if the decision was simply about buying BRK when it's relatively cheap.

[Munger_Disciple]

Buffett may be hinting that Berkshire is unlikely to beat the index by much going forward due to its size. He also said (for the first time I think) at this year's annual meeting that if the cash pile starts becoming too big like $150B, he has to think about a dividend.

[vinod1]

In the annual meeting he elaborated on this.

 

Why did Buffett advise his wife to invest in index funds versus into Berkshire Hathaway?

 

She won’t be selling to buy an index fund - every single share of Berkshire Hathaway will be going to philanthropy - so far 40% has been distributed - for someone who’s not an investment professional, what’s the best investment where there’s less worry than anything - big thing is money to not be a problem – there’s no way that there will be an issue absent a nuclear attack if she invested in the S&P; Buffett’s aunt Katy, whose husband used to employ Charlie and Warren, worked all her life and died at 97 with a few hundred million dollars, because she was in Berkshire Hathaway. She’d write Buffett and say she hated to be a bother but was curious if she would ever run out of money. Buffett told her that she’d run out only if she lived 986 more years. There will be people who come around with various suggestions on what to do with the money he leaves his wife, and there’s a chance she won’t have as much peace of mind only owning one stock as owning the index.

 

Vinod

[Guest longinvestor]

In the annual meeting he elaborated on this.

 

Why did Buffett advise his wife to invest in index funds versus into Berkshire Hathaway?

 

She won’t be selling to buy an index fund - every single share of Berkshire Hathaway will be going to philanthropy - so far 40% has been distributed - for someone who’s not an investment professional, what’s the best investment where there’s less worry than anything - big thing is money to not be a problem – there’s no way that there will be an issue absent a nuclear attack if she invested in the S&P; Buffett’s aunt Katy, whose husband used to employ Charlie and Warren, worked all her life and died at 97 with a few hundred million dollars, because she was in Berkshire Hathaway. She’d write Buffett and say she hated to be a bother but was curious if she would ever run out of money. Buffett told her that she’d run out only if she lived 986 more years. There will be people who come around with various suggestions on what to do with the money he leaves his wife, and there’s a chance she won’t have as much peace of mind only owning one stock as owning the index.

 

Vinod

 

That and Astrid reportedly has rather modest spending habits. All her life, she apparently spent much of her time in thrift stores and such. Her needs for capital are nothing compared to the roughly $100B that would have been handed out to the charities. Every charity penny will remain in BRK shares until given away. If Buffett believed that the charitable money would compound faster in the index than BRK, he would have switched already.

 

 

 

 

[cubsfan]

I'll take my chances with BRK. I don't own any index funds, but have a large stake in BRK beginning in 2002.

I scaled it up a lot last year. How much diversified do you need to be considering the makeup of BRK?

To me, it's a hand picked index fund with no fee. Warren will never promote BRK - never has, never will.

At this point, with the S&P at 20 or so PE - I think BRK will do just fine.

[John Hjorth]

I'm in Berskhire, and it's the by far largest position - right now about 21% on overall basis.

 

When the talk is about indexing, I've developed a habit of going to p. 13 - 18 in the Semper Augustus Client Letter of February 2017 about Berkshire. There I study the "Company B", especially it's P/E, and it's P/B.

 

That's - simply put - my vaccine against indexing.

 

Berkshire investing is "sitting on your butt and your hands" investing. So is indexing.

 

Next time hell breaks loose here on Earth again, while indexing one will bleed exactly as the overall market is bleeding. Berkshire will come down some, too, but most likely not as much, because of all the cash and T-bills, the "lazy capital", and also a war chest in a severe downturn or a real crisis.

 

I consider Berkshire anfragile, in the meaning Mr. Taleb uses the word. The more stress you put it under, the stronger it will come out on the other side.

 

The drag on ROE for Berkshire from the warchest is to me the opportunity cost for Berskhire being antifragile. Just a special kind of put, built into the stock.

 

- - - o 0 o - - -

 

Edit: cubsfan beat me to it - for a part of my post.

[Guest longinvestor]

I'm in Berskhire, and it's the by far largest position - right now about 21% on overall basis.

 

When the talk is about indexing, I've developed a habit of going to p. 13 - 18 in the Semper Augustus Client Letter of February 2017 about Berkshire. There I study the "Company B", especially it's P/E, and it's P/B.

 

That's - simply put - my vaccine against indexing.

 

Berkshire investing is "sitting on your butt and your hands" investing. So is indexing.

 

Next time hell breaks loose here on Earth again, while indexing one will bleed exactly as the overall market is bleeding. Berkshire will come down some, too, but most likely not as much, because of all the cash and T-bills, the "lazy capital", and also a war chest in a severe downturn or a real crisis.

 

I consider Berkshire anfragile, in the meaning Mr. Taleb uses the word. The more stress you put it under, the stronger it will come out on the other side.

 

The drag on ROE for Berkshire from thP

e warchest is to me the opportunity cost for Berskhire being antifragile. Just a special kind of put, built into the stock.

 

- - - o 0 o - - -

 

Edit: cubsfan beat me to it - for a part of my post.

 

Interesting connection to antifragility. What's stress to Berkshire? Not getting elephants? Earnings swings, like we're seeing at BNSF? Cash piling up? Being dubbed Old Economy? (That is being heard once again)? Reinsurance market sucks? Scandal at investee? Inability to pull off the stock buyback?

 

Their way of dealing with any of this is to keep the head down and keep increasing the earnings power. And wait for sin & folly to reach a crescendo.

 

[boilermaker75]

I'm in Berskhire, and it's the by far largest position - right now about 21% on overall basis.

 

When the talk is about indexing, I've developed a habit of going to p. 13 - 18 in the Semper Augustus Client Letter of February 2017 about Berkshire. There I study the "Company B", especially it's P/E, and it's P/B.

 

That's - simply put - my vaccine against indexing.

 

Berkshire investing is "sitting on your butt and your hands" investing. So is indexing.

 

Next time hell breaks loose here on Earth again, while indexing one will bleed exactly as the overall market is bleeding. Berkshire will come down some, too, but most likely not as much, because of all the cash and T-bills, the "lazy capital", and also a war chest in a severe downturn or a real crisis.

 

I consider Berkshire anfragile, in the meaning Mr. Taleb uses the word. The more stress you put it under, the stronger it will come out on the other side.

 

The drag on ROE for Berkshire from thP

e warchest is to me the opportunity cost for Berskhire being antifragile. Just a special kind of put, built into the stock.

 

- - - o 0 o - - -

 

Edit: cubsfan beat me to it - for a part of my post.

 

Interesting connection to antifragility. What's stress to Berkshire? Not getting elephants? Earnings swings, like we're seeing at BNSF? Cash piling up? Being dubbed Old Economy? (That is being heard once again)? Reinsurance market sucks? Scandal at investee? Inability to pull off the stock buyback?

 

Their way of dealing with any of this is to keep the head down and keep increasing the earnings power. And wait for sin & folly to reach a crescendo.

 

A recession is stress on BRK, as it is on the whole economy. But BRK comes out stronger (more earning power) from a recession because of the businesses BRK can add for cheap during the recession.

[John Hjorth]

Exactly what boilermaker75 said.

[Guest longinvestor]

Exactly what  boilermaker75 said.

 

True.

 

There is another newer stressor in play. Buffett's wards are making bigger and bigger capital allocation moves while Buffett gets all the headlines. Even if they make mistakes, Buffett will take the heat. Flying under the radar is a great stressor for the other capital allocators within Berkshire. Hope Buffett lives on to 100+ and continue to provide air cover! Also one more big crisis where the wards get to make the deals under Buffett's umbrella, how wonderful would that be.

[rb]

BRK mathematically should outperform a broad index. Even assuming that the investment decisions weren't very good - obviously an erroneous assumption. Because of its size its holdings are basically an index. However it would be an index in an insurance wrapper, with 100B worth of leverage behind them. Due to this leverage BRK underlying performance beats the index.

 

Now what i've just said over there is also why BRK's P/B multiple is >1. In the end the relative performance vs an index is influenced by the start and end points of your measurement. If BRK's fully valued it should more or less match index performance. If it's undervalued it should beat. If it's overvalued it should under perform. One reason why the index beat BRK in 2009-2014 is because the index got really cheap in 2009. If BRK's P/B was 3, then I'd be pretty sure that the index will beat BRK no matter what BRK does.

 

I hope this makes sense.

[John Hjorth]

Your post makes perfect sense at least to me, rb.

 

Without the intention to nitpick your post, insurance float stands at USD 105 B at the end of 2017Q1, and I have a fairly strong propensity to add approx. USD 82 B [deferred taxes] to that amount as leverage, free of cost, and basically free of covenants, if the insurance operation does not start to stray away. [Mr. Jain will see to that.]

 

Book equity at that time was approx. USD 293 B.

 

If any of my fellow board members here on CoBF know of a company with similar properties, please contact me.

[cubsfan]

BRK mathematically should outperform a broad index. Even assuming that the investment decisions weren't very good - obviously an erroneous assumption. Because of its size its holdings are basically an index. However it would be an index in an insurance wrapper, with 100B worth of leverage behind them. Due to this leverage BRK underlying performance beats the index.

 

Now what i've just said over there is also why BRK's P/B multiple is >1. In the end the relative performance vs an index is influenced by the start and end points of your measurement. If BRK's fully valued it should more or less match index performance. If it's undervalued it should beat. If it's overvalued it should under perform. One reason why the index beat BRK in 2009-2014 is because the index got really cheap in 2009. If BRK's P/B was 3, then I'd be pretty sure that the index will beat BRK no matter what BRK does.

 

I hope this makes sense.

 

But the price/book on the S&P is 3 .... and BRK should be a superior investment to the S&P if we really

are a collection of "Moat" businesses with superior capital allocation.

 

And with BRK price/book is 1.4 --- that's why I don't want to go near the S&P with BRK at this price.

[John Hjorth]

Based on what has been discussed in this topic so far, - especially longinvestor's starting post - I have decided to do a visit to Indexville going forward, in the coming period - it will not be extensive, and it will be on some kind of on/off  basis - when I'm in the mood to do so, so it will take some time.

 

It's about working on my total ignorance in the area. It's also about what to say to the Lady of the House about what to do with the whole Holly-go-Molly the morning I wake up dead.

[james22]

Needn't be either/or.

 

I prefer Small Value index funds in tax-advantaged accounts, individual stocks (BRK/MKL/FRFHF) in taxable.

 

(Only when fairly valued - else bonds, cash.)

[John Hjorth]

My visit to Indexville ended the weekend before the last, while reading The latest memo from Mr. Marks : There They Go Again . . . . Again.

[Guest longinvestor]

https://www.cnbc.com/2017/10/11/warren-buffett-decides-not-do-second-wager-against-hedge-funds-citing-his-age.html

 

After bringing up the second act, Buffett backed out citing his age. Someone else to take the index side?

[stahleyp]

I don't really buy Buffett's age argument since he mentioned that he would be willing to do it even if that meant his estate or something else had to settle it.

[Guest longinvestor]

I don't really buy Buffett's age argument since he mentioned that he would be willing to do it even if that meant his estate or something else had to settle it.

He made his point with the bet. The point was "fees". Although the bet was taken in 2007, he has been saying this for almost 50 years. The folks who don't want to be convinced won't. It won't matter even after another 10 years. I kinda see Buffett as being right, this new bet with another guy this time, is tantamount to running the clock on Buffett. Needless to add, it is another fee taker who is betting.

 

Buffett called out the mis characterization of this bet in the financial media as active versus passive. No it is not. It is about fees. An active manager who does not take any fees has a >zero chance of beating the index. Doesn't that describe Berkshire Hathaway? Conversely, egregious fees will see to it that the index wins, again. That was the bet. The truth hurts, but if you can keep collecting without performing, why stop? 

 

If there was another bet, if I was Buffett, in addition to the million dollars, I would include the fund manager paying back all of the fees and make the investees whole as well. That point was conveniently overlooked during the last bet with Seides.

[Guest longinvestor]

In another 37 trading days, with current price momentum, something looks likelier to happen. On Dec 31, 2019, when the clock strikes midnight, we’ll get to see the 10 year performance of Berkshire versus the S&P. The narrative, in my current estimation, is likely going to shift from Berkshire trailed to Berkshire beat. Delta of ~+2% annually. The irony is that the numerical reason for this shift did not occur in 2019 or 18 or...but in 2010. The Index swung back wildly to the + side that single year to deliver a whopping +27% advantage over Berkshire. We had to wait 10 years to see that sand to be washed out!

 

Besides this, beating the index during it’s best ever decade will be quite something. Berkshire is supposed to trail during such periods!

 

Can’t wait. Hopefully I am correct!

 

 

[scorpioncapital]

I get maybe 315% for the SP500 total return and 328% for Berkshire last 10 years to date. It's so close to call a triple that one can probably say it's the same thing. I'd be very curious to see a 10 year period where the divergence is more striking.

 

 

[Dynamic]

Trailing 10 years: Nov 6th 2009 - Nov 6th 2019 from Yahoo Finance historical prices using their ticker symbols adjusted for split:

^SP500TR 6219.10 in 2019 vs 1756.07 in 2009. Ratio = 3.5415 = 13.48% cagr before tax

BRK-B 222.00 in 2019 vs 68.50. Ratio = 3.2409 = 12.48% cagr before tax

$242.59 would have matched the index (+12.3% difference)

 

Dec 31st 2009 to Nov 6th 2019: = 9.852 years.

^SP500TR 6219.10 in 2019 vs 1837.50 in 2009. Ratio = 3.3845 = 13.17% cagr before tax

BRK-B 222.00 in 2019 vs 65.72 Ratio = 3.3780 = 13.15% cagr before tax

$222.43 would have matched the index. 0.19% difference from yesterday's close. For me withholding tax on dividends would have made the S&P500 worse.

 

So we are basically into rounding error on the calendar decade to date and it's quite possible that Berkshire can outpace the index by more than 0.19% by the end of the year, especially if sentiment towards it has changed and the stocks it holds continue to outpace the index

 

By my calculation, since end of Q3 the Berkshire portfolio is up about 7.2% versus 3.4% for SP500 or 3.5% for SP500TR (dividends reinvested) and 6.7% for Berkshire stock, continuing the price outperformance during Q3. The portfolio plus KHC holding market value is up 7.6%, incidentally in those 5 weeks or so.

 

If Apple and the banks keep rerating upwards to the end of the year, and KHC too, that could be reflected in the price of Berkshire by more than 0.19% even if analysts continue to underestimate the Berkshire portfolio gains as they did last quarter.

 

So it's certainly feasible for Berkshire to do marginally better than the index over a 10 calendar year period and a calendar decade coming out of a major systemic shock, where we're told that value has underperformed as a style, and such a period without any more than a brief flirtation with a 20% drop from its peak that would be called a bear market (the index dropped by a fraction more than 20% from last year's September peak to 24th December intraday, I seem to recall, then rebounded, so not being a closing price it's probably not quite classified as a bear market).

 

What will be really interesting is whether Berkshire can significantly exceed the index performance when this bull run comes to an end. By significantly, I probably mean 10-30% in total outperformance over a decade, not much more, though timing of the end points could also make a major difference.

 

Berkshire offers so many advantages to me over an S&P500 index fund (trust, low debt, ability to value it and assess its trading range, sufficient diversification, no dividends to pay tax on), that I'm quite happy to accept roughly market matching performance over a decade or so of buy-and-hold plus occasionally switching some of my portfolio into high conviction ideas, and sleep very well knowing it's being managed honestly and competently for the long term. It remains my default investment for a large portion of my wealth while I'm waiting for the next big idea, or to switch back into when my last big idea reaches rather high valuations that make me nervous about the downside risk, and I cannot foresee it losing its appeal as the major part of my portfolio for at least one or two decades unless I find something even better, even though I may retire within 2-5 years. It should be a very good vehicle to continue safely compounding faster than inflation plus my draw-down rate in retirement. That would leave me room to take sizeable positions in other high conviction ideas to increase my financial security or my spending power.

[Guest longinvestor]

I get maybe 315% for the SP500 total return and 328% for Berkshire last 10 years to date. It's so close to call a triple that one can probably say it's the same thing. I'd be very curious to see a 10 year period where the divergence is more striking.

 

I got ahead of myself by a year. My bad! To wash off the single year pendulum swing in 2010, the ten year clock ends 12/31/2020. Duh. Plus too many assumptions to make about the next 13+ months.

 

I will wait!