BRK Book Value Feb 2018?

[wescobrk]

What is best guess estimate of Berkshire's book value they will report in a couple of weeks?

[Guest longinvestor]

~$215000 (A)

$143 (B)

[John Hjorth]

From the "what are you buying today" topic:

 

I also bought some BRK.B recently although my logic might make some cringe.  I'm a big believer in the "cover your ass" incentive.  Barclays and UBS put price targets on the B shares for ~$240.  I'm betting that money managers will herd into Berkshire by  year end in a volatile market because it's easy to justify to unsophisticated retail customers.

 

Any thoughts on my reasoning?

 

A belated welcome to you here on CoBF, Nell-e! [: - ) ]

 

Personally, I'm more interested in tinkering with Berkshire earnings numbers like attached! BV and analyst price targets less.

BRK_-_Tinkering_with_earnings_numbers_-_20180209.xlsx

[DooDiligence]

From the "what are you buying today" topic:

 

I also bought some BRK.B recently although my logic might make some cringe.  I'm a big believer in the "cover your ass" incentive.  Barclays and UBS put price targets on the B shares for ~$240.  I'm betting that money managers will herd into Berkshire by  year end in a volatile market because it's easy to justify to unsophisticated retail customers.

 

Any thoughts on my reasoning?

 

A belated welcome to you here on CoBF, Nell-e! [: - ) ]

 

Personally, I'm more interested in tinkering with Berkshire earnings numbers like attached! BV and analyst price targets less.

 

5 hundo's per second!

[Dynamic]

Welcome from me too, Nell-e.

 

I'd be interested to hear you expand on your psychological/incentive insights, which I can't say I've quite understood.

 

I'm not sure I believe I have any ability to time the market and predict its movements within a year or judge other investors' psychology (and I'm wary that any apparent success anyone might have peering at charts or judging newsflow could either be illusory or could show a fair success for 9 times in a row but then spectacularly fail the 10th time wiping out all the profits of the other 9 trades and more). Even if it's possible for a few people, it's likely to be a negative-sum game compared to just buying and holding the market thanks to frictional costs, so the winners have to win by enough to overcome such frictional costs, which seems challenging. Value Investing with little regard to short-term price movements seems to produce more reliably good returns.

 

I do think that disciplined Value Investing by pricing of purchases to provide a large 'margin of safety' can give the illusion of successfully buying the dips or timing the market quite often, and the bigger the 'margin of safety' you insist upon (i.e. the bigger discount from Intrinsic Value you require) the more likely you are to buy only at unusually low market prices from where there's often a good upside. If you set the margin very high, you hardly ever buy, so you'd better buy big when you have such high conviction opportunities so that you make them count!

 

I do sometimes look ahead on the basis of fundamentals that are likely to result in increased price or increased downside protection in the near term and record these alongside my purchase notes so I can later compare what happened to my thesis at time of purchase. That might be projecting the Book Value per share for BRK.B that is to be reported at the end of February, providing a soft floor not too far below my purchase price in the near future (or even above my price, when I got some really cheap back in Feb 2016). Or in the case of Apple when I took a 25% position when it was very cheap due to unfavourable year-on-comparisons against their best quarter ever, I looked ahead to what future earnings, iPhone releases and year-on-year comparisons might do to investor psychology to 'out the value' when planning ahead, and considering how large my position might become (I considered it could potentially double within a year and I might have to trim back (tax-free) for risk management if AAPL rapidly rose to 50% of my portfolio). Fortunately, everything rose (Apple rose about 20%-40% more than the rest of my portfolio from time to time) and we brought more cash into the trading accounts, so I kept my full stake and despite rising 63% since purchase AAPL remained a 25-35%% position pretty much the whole time).

 

Price targets from sell-side analysts are something I mostly ignore but they are very rarely lower than current price (unless they have a Sell or Strong Sell rating) so they always seem anchored to recent market prices plus some room to appreciate, and are likely to get lowered again in light of sharp the market falls and high volatility of late. They're supposed to be some kind of price that if it reaches within 12 months, you might want to sell to lock in gains. With such targets they're also providing 'simple recipes' sent from the-gods-on-high for naive investors to buy now and sell when it hits this level, that provide a reason for people to trade in and out and generate trading commissions, knowing also that they may also have a 'stop loss' to see them trade out if it falls too. A lot of their reason-for-being seems to be to encourage retail trading.

I would say that $240 would be a point where BRK is not greatly discounted from Intrinsic Value, and is probably somewhere in the distribution of values where IV lies after the tax cuts, and that if there's an economic downturn in the offing, IV itself may lower a little but not enormously.

 

There do seem to be some quarterly patterns about investor inflows and outflows from time to time, and this showed in 2015 and perhaps at least some of 2016 too (see p15 of this Dalbar "QUANTITATIVE ANALYSIS OF INVESTOR BEHAVIOR" report: https://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf )

 

However, I suspect such trends could easily change from year to year and for me they'd just be a distraction from my focus on buying quality compounders only when undervalued by a good margin of safety and remaining invested to reap the rewards of compounding value.

[Guest longinvestor]

Bought at $190.5 today.

 

Have some more GTC buys out there just in the event that the market continues the temporary insanity streak. I hope there is gridlock in Congress or another spat between countries or a tweetstorm or the new Fed chief utter something ...anything to spook the market and thereby fill my orders is welcome here ;)

[Nell-e]

"Welcome from me too, Nell-e.

 

I'd be interested to hear you expand on your psychological/incentive insights, which I can't say I've quite understood."

 

Thanks for the welcome, Guys.  Let me say (1) I don't have magical psychological insights (2) there are many things I believe which I can't prove.  One example is that I think insider trading is rampant but obviously that's something I can't prove. 

 

Anyway, my guess that BRK.B will go up this year is based on the concepts of herding, institutional imperative, and the belief that money manager's primary goal is job security.  If a money manager severely underperforms and they don't own well known stocks, it's quite likely that some of their clients will question their competence and bail.  It's the reason that in every cycle there are certain glamour stocks that everyone piles into.  In past cycles, IBM, GM, MSFT, were "can't miss" stocks.  Last year, it was the FANG stocks. I also don't think it was a coincidence that Apple's stock took off after Warren Buffett endorsed it.  Every money manager piles in because they can say Apple is a great company even a value investor like Buffett is buying.

 

The stock market is already more volatile this year.  A money manager's worst fear is that their clients pull money out as the stock market goes down thereby forcing them to sell assets.  The thinking goes that money managers will be motivated to pile into well known "safer" names this year.  I think Berkshire fits the bill. Easy story to tell- Berkshire is a world class company run by world's greatest investor that will benefit immensely from tax reform and then they can pull up Berkshire's historical chart.

 

The reason for posting my thinking is because I'm hoping there are retired or active money managers on this board who can dispute or confirm my hypothesis.

 

[Guest longinvestor]

Nell-e,

I can't comment on how managers think (don't care really) but if we can call that sort of institutional behavior as idiocy, thanks to them for behaving so. Buffett's oft repeated line comes to mind; we do well when the markets don't. That probably captures what you are seeking, the flight to safety and such. Munger was more direct: We wouldn't be so rich if there were not that many idiots.

[Dynamic]

Thanks Nell-e. I get what you're saying. I could imagine a top mark for BRK.B this year being around $250 but I wouldn't expect it. If 2017Q4 BV were to be $145 and it rose to around $159 by 2018Q3 (a slight stretch but very possible), 1.6x BV is a viable price. Also I could see it going down a fair bit if there was a big market crash perhaps even $150-160 with mark-to-market declines in the portfolio.

[Spekulatius]

I always look at BRK compared to what else is offered by Mr. Market right now. Just a short while ago, you could buy RE, which is a very well managed insurer for book value (they don’t carry a lot of goodwill and intangibles either ). I do think that buying RE at book is better than buying BRK at 1.5-1.6x book. Just right now, you can buy AXS at ~0.93x book well, AXS isn’t the greatest insurer,  but they are far from the bottom too and have a history of reserve releases, which means that their reserving is conservative.

 

I think geht RE might compound just as well as BRK.

[zippy1]

Is not the new tax benefiting BRK and taking away the tax advantages from Bermuda base insurance companies ?

I wonder whether the market has factored this in?

[John Hjorth]

... I always look at BRK compared to what else is offered by Mr. Market right now. ... I do think that buying RE at book is better than buying BRK at 1.5-1.6x book. ...

 

... I think geht RE might compound just as well as BRK.

 

Berkshire isen't trading right now at 0.3 x BV - 0.4 x BV above soft buyback treshold, but more around .15 x BV above soft buyback treshold.

 

[Dynamic]

I agree John, using an estimate of year end 2017 Book Value per A share of $215,000 ($143.33 per B share) the buyback threshold (soft floor) would reach $258,000 per A share ($172 per B share) once such a number is published (after the close on Fri 23rd Feb). That's an estimate of course and I wouldn't be surprised to see it anywhere in the range of $142 to $147.

 

A price of $198.89 is 1.39x that estimate (15.6% above $172 estimated threshold), or 1.40x $142, or 1.35x $147.

 

Until that date, I believe buybacks are only authorized at 1.2x 2017Q3 BVPS or lower (around $225,000 for A, $150 for B) - actually a little lower, but the exact figure depends on which date you take the count of shares outstanding. There's definitely some downside potential in the current price, however I'd be very surprised to see prices close to $170-$177.

 

So while the buyback threshold based on the last published quarter is strictly-speaking well below the current price at present, I would believe enough investors are sufficiently forward-looking to have a reasonable estimate of what the threshold will be once the year-end accounts are released, and would be likely to provide sufficient demand to stop the price falling below that sort of level, thus providing a forward-looking soft floor. The exception would be a dramatic sell-off in stocks, leading to bargains everywhere, an assumption of mark-to-market loss causing a decline in their estimation of BVPS at the end of Q1.

 

I imagine some investors are also factoring in the Kraft-Heinz (KHC) holding which is not fully included in BVPS, making the 1.2x BVPS represent an even bigger discount to intrinsic value than before the stake in KHC was consolidated, so that perhaps adds around $3.42 to BV per B share once adjusted (about a 2.4% boost). The $143.33 estimate rises to $146.75, and 1.2x that is $176.10 (or 1.229x unadjusted BVPS).

 

I would typically project around 2.5% increase in BVPS per quarter, but perhaps a little less if I expect mark-to-market adjustments to be negative or insurance losses to be heavy. Perhaps adding 2.0% to the 2017Q4 estimate of $143.33 would see around $146.20 by 2018Q1 and a buyback price of $175.44. Adding a 2.4% boost to adjust crudely for KHC might see adjusted BVPS for 2018Q1 reach $149.71 and 1.2x that is $179.65.

 

For that reason, if prices reached around $180 in the absence of more tempting prospects elsewhere, I'd be getting very tempted to go essentially all-in on BRK.B, expecting a downside risk that is more limited than usual (save for a market crash) and significant upside potential by way both of re-rating by Mr Market and of compound growth in fundamentals that should exceed my targets in the long term.

 

I do give a little thought to the downside in the short-term, mainly as it would affect my ability or willingness to pounce on any high conviction opportunities I may find in other stocks that I would feel (at the time of getting such high conviction) would be greatly undervalued. The chance of a coinciding temporary decline in BRK.B's market price reducing my ability to capitalize on such possible future high conviction opportunities is outweighed by the long-term fundamental compounding I anticipate BRK.B will achieve for more than a decade, and well in excess of my target compound return, so I'm willing to make that trade-off for such certainty of meeting my goals.

 

Currently I have 71.9% in BRK.B after adding new cash and switching out of IBM and Wells Fargo to buy more BRK.B at around $193-$194 on average last week. My only other significant position is Apple at 25.7%.

I wouldn't recommend such a concentrated portfolio to most, but it suits me at present.

[Guest longinvestor]

Nice one, Dynamic. I'm with you on extreme concentration in BRK. Nice to have the discussion on downside risk with Berkshire as "may not beat the index".

[John Hjorth]

Nice one, Dynamic. I'm with you on extreme concentration in BRK. Nice to have the discussion on downside risk with Berkshire as "may not beat the index".

 

If you read it carefully, those considerations by Dynamic are - at least to some extent - short term beta considerations. [No critisism intended here, Dynamic.]. When you load up seriously on some position, the short term future will most likely be volatile, the long term future will tell you if your move was right or not.

[Dynamic]

I don't like to talk in terms of beta and alpha too much because I'd rather call it volatility in market price (instead of beta) and compounding of IV (instead of alpha).

 

Alpha and beta imply that volatility is the main part of risk and that therefore a more volatile stock should have its actual return adjusted downward according to its beta volatility to create an adjusted 'alpha' return that is lowered to account for the 'risk' implied by beta. As my intended holding period is far beyond the typical 1 year used by alpha/beta proponents, I do not consider I should adjust my return downwards and should simply focus on the business fundamentals and their likely growth and whether I paying or being offered a cheap or expensive price for that intrinsic value.

 

In other worse, because in overall terms I care only about my overall compound return of my portfolio over 10-30 years, not how bumpy a ride it is to get there (and whether or not I trail the market index in 25-50% of the years), I'm explicitly not adjusting compound returns downward.

 

In Feb 2016, aside from some shares (perhaps 15% of portfolio) outside my normal trading accounts, I pretty much went 100% BRK.B, selling a fairly full-valued Halma plc position and adding my cash balance to buy as much BRK.B as I could at $124-$125, which was just below 1.2x forward BV (announced 2015Q4 figures at the end of Feb 2016) and was about 1.234x 2015Q3BV. At that time I did consider elements of timing in choosing when to make the trades, as I knew the Q4 figures would be released after close on the last Friday of February, giving me a window during which such low prices could remain available. I anticipated that after the annual report release the stock wouldn't trade quite so low again. It turns out I was within a dollar of the quarter's low when I bought.

 

My main focus there was value - obtaining a large margin of safety by getting a significant discount to IV. My secondary thought was that the price was unlikely to get any cheaper, so I had a good chance of only seeing gains from then on and it was the time to pull the trigger and buy rather than wait for up to 3 weeks to see if the price fell any lower, which was a small element of consideration of volatility, but also the fact that everyone knew about the 1.2x BV buyback threshold being considered a significant discount to IV.

 

In that position I anticipated very little downside risk other than a market crash or heavy insurance losses, given the buyback threshold being so near my buy price.

 

Later in May 2016, Apple was trading around $95 (it actually traded a bit lower before I bought, but I wanted to get my thinking straight on the company before committing large sums to it). At this time BRK.B was trading at $142 and still somewhat undervalued and I sold enough to buy a 25% position in Apple on a trailing 12-month earnings yield of about 9.5% after tough year-on-year comparisons (10.4% yield after backing out net cash) with a belief that earnings would very likely recover and that comparisons would also look better and that I was buying well below IV. That was about as bold as I dared to go on a high conviction idea that carried more fundamental risk than BRK.B. Of my total portfolio I think BRK.B was around 55-60% at this point and I figured that the BRK.B position remaining should alone compound sufficiently to meet our retirement goals but that the Apple position could help us reach them faster. From then until December 2017 I didn't trade - only added more cash to the portfolio as I lacked high conviction ideas due to higher market prices.

 

In the last three months, I've probably gone from around 55% BRK.B to 72% once I felt confident about the effects of the tax cut on forward BV and IV. Again, value was my primary concern, but in giving up 'dry powder' cash I was giving up something with stable value in the event of a sharp decline in market prices, so I gave a little thought to how much I might gain or lose in the short term on the moderate chance that I found a high conviction opportunity before the fundamental compounding of BRK.B would almost certainly mean I had done better than cash.

 

I started out with about 10.5% cash position (in GBP) from new savings as of 10th Dec 2017 and bought more BRK.B at about £147 GBP ($196). That trade is one where I mainly focused on compounding but in weighing what I was giving up in terms of cash optionality should a huge bargain appear, equivalent to my May 2016 BRK to Apple trade, I did give a little consideration to the downside risks.

 

At the time, short of a recession, I figured that an unfortunate BRK.B price action might lead to 12-13% loss at most, unless there happened to be large insurance losses or a major market crash that might increase the market price decline to 30% in the latter case. I also figured that BRK's fundamental compounding was likely to see the 'soft floor' increase to around $196 by around 2019Q1 or 2019Q2 (unless there was a big market crash). I didn't want to miss out on likely 9-11% compounding by staying in cash. I figured also that we'd probably add 8-10% to our cash balance over the following 12-18 months of saving, giving reasonable 'dry powder' to take advantage of any bargains. And I figured that my chances of getting a high conviction opportunity were probably around 25% in that time frame.

 

All in all, I imagined that (short of a major market crash) in perhaps 70% of cases, BRK.B would be trading at or above my $196 buy price if that bargain came along (assuming a normal 1.2x BVPS to 1.6x BVPS trading range), and in about 25% of cases it would be below my buy price by up to 13%, and in about 5% of cases it would be between 14-30% down due to a deep market crash. So I considered I was unlikely to lose a lot of optionality, and I stood a good prospect of making a gain on BRK.B before that bargain came along and I'd be fairly certain of 9-11% compounding long term, which exceeds my retirement return assumption of 3.5% above inflation long-term. Comparing that to cash - it has a negative return after inflation but preserves its nominal value in the event of stock price falls no matter what, allowing me to take advantage of bargains. To me Berkshire provided enough probability of being able to participate in future bargains with the high likelihood of more than sufficient long-term compounding, so I made the trade, taking me to around 67-69% BRK.B (68.82% at year end 2017).

 

On 8th and 9th Feb 2018 BRK returned to around $192-$196 (now only £137-£141 GBP thanks to a weaker USD) as markets generally fell. I had small positions in IBM and Wells Fargo that I wasn't as sure about as BRK.B for the future and some additional cash to contribute too, and I sold IBM one day in my wife's account (prior to going ex-dividend, I think) and bought as much BRK.B as the increased cash balance allowed.

The next day we had added quite a bit more cash by transferring bank balances around (without risking our day-to-day requirements or emergency funds) and added it to my trading account. I had a target number of BRK.B shares I wanted to buy using the cash plus Wells Fargo stock. A reasonable looking price came for WFC so I sold that. I patiently waited for about 40 minutes more until BRK.B dropped just enough to buy the amount I was seeking at around $192.

 

Before today's open, with BRK.B at just under $198, cash is 0.01% (though I'll get Apple dividend and my final Wells Fargo dividend soon and add more cash in March), BRK.B is 71.75% and AAPL is 25.83%. I estimate that both my main positions are trading at a discount to IV and should have good prospects to compound per share fundamental value at least 9-11% in the long run.

 

Apple is more likely to suffer temporary declines and has the greater but still acceptable risk of permanent loss of value of the two. Annoyingly I lose 30% of every AAPL dividend to the US government, but my capital gains of 73% in USD, 81% in GBP, are tax-free so I can't complain really. If Berkshire becomes extremely cheap (e.g. $180 at present) I may consider that it's a sufficiently better prospect than AAPL to go all-in on BRK.B.

[John Hjorth]

Nice one, Dynamic. I'm with you on extreme concentration in BRK. Nice to have the discussion on downside risk with Berkshire as "may not beat the index".

 

If you read it carefully, those considerations by Dynamic are - at least to some extent - short term beta considerations. [No critisism intended here, Dynamic.]. When you load up seriously on some position, the short term future will most likely be volatile, the long term future will tell you if your move was right or not.

I don't like to talk in terms of beta and alpha too much because I'd rather call it volatility in market price (instead of beta) and compounding of IV (instead of alpha). ...

 

I apologize for using CAPM nomenclacure here. Basically unintended. It will not happen again here on CoBF for my part. We are on the same side of this trade.

 

 

 

 

[Viking]

~$215000 (A)

$143 (B)

 

longinvestor, great estimate of BV :-)

Actual number = $211,750

[Guest longinvestor]

~$215000 (A)

$143 (B)

 

longinvestor, great estimate of BV :-)

Actual number = $211,750

John Hjorth also came up with identical numbers. Both of us were trying to point out that some around here were missing the massive single quarter jump that is now published. But the bigger story is the tax reform taking us to a higher plateau of earnings which is recurring, which makes the BV discussion the silly syllabus. It gets even sillier if one thinks along the lines of Semper Augustus re unreported earnings. I do. Buffett has a very old habit of understating his hand.

[Viking]

~$215000 (A)

$143 (B)

 

longinvestor, great estimate of BV :-)

Actual number = $211,750

John Hjorth also came up with identical numbers. Both of us were trying to point out that some around here were missing the massive single quarter jump that is now published. But the bigger story is the tax reform taking us to a higher plateau of earnings which is recurring, which makes the BV discussion the silly syllabus. It gets even sillier if one thinks along the lines of Semper Augustus re unreported earnings. I do. Buffett has a very old habit of understating his hand.

 

longinvestor, I agree, “the bigger story is the tax reform taking us to a higher plateau of earnings which is recurring”. Do you have thoughts on what normalized earnings look like for BRK post tax reform? Or have you come across any good estimated you can link me to?

[Guest longinvestor]

~$215000 (A)

$143 (B)

 

longinvestor, great estimate of BV :-)

Actual number = $211,750

John Hjorth also came up with identical numbers. Both of us were trying to point out that some around here were missing the massive single quarter jump that is now published. But the bigger story is the tax reform taking us to a higher plateau of earnings which is recurring, which makes the BV discussion the silly syllabus. It gets even sillier if one thinks along the lines of Semper Augustus re unreported earnings. I do. Buffett has a very old habit of understating his hand.

 

longinvestor, I agree, “the bigger story is the tax reform taking us to a higher plateau of earnings which is recurring”. Do you have thoughts on what normalized earnings look like for BRK post tax reform? Or have you come across any good estimated you can link me to?

No, I don’t. On a bridge basis, reported earnings and growth over the past 5 years line up well with that of the previous decade, circa 15%.  I especially liked the table of earnings that was provided in the 2016 report. That’s my source. I do like Semper Augustus for putting numbers to unreported earnings.

[John Hjorth]

shalab,

 

If one do that, then we aren't talking about book value any longer.

[shalab]

why not? it is here in the AR - page K-62:

 

Investments in The Kraft Heinz Company (Fair Value: 2017 – $25,306; 2016 – $28,418) ...... 17,635

 

Almost 8 billion is not showing up in book.

 

shalab,

 

If one do that, then we aren't talking about book value any longer.

[John Hjorth]

Well, it's just not book value as such any longer then, but some kind of adjusted book value. The difference is conceptual.

[StubbleJumper]

Well, it's just not book value as such ant longer then, but some kind of adjusted book value. The difference is conceptual.

 

 

The difference is conceptual, and it's also half-assed.  With BRK, why would one bump BV to reflect and updated value of Kraft Heinz but not MidAmerican or BNSF?  We know that MidAmerican and BNSF are probably worth considerably more than their carrying value on the balance sheet, but we don't adjust their valuation because we wouldn't have the foggiest idea where to begin.  But, if you monkey around with the value of one large asset but not the others, your adjusted book value is neither fish nor fowl.

 

For Fairfax, some of us monkey around with BV to reflect the evidence from the market that certain assets are worth considerably more than their carrying value.  However, with Fairfax, it's less of an issue because with few exceptions their assets and liabilities are financial in nature, are relatively easily measured and are updated annually.  So at least with FFH, the updated BV isn't missing large chunks (the non-insurance subs are not so large).

 

It's still an interesting and worthwhile exercise to do, but it's just important to understand that it is half-assed by necessity.

 

 

SJ