Wedgewood Partners on selling their BRK stake

[Munger_Disciple]

If you look at peak to trough Berkshire was down more than 50% during this period.

 

Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)

Trough: 3/5/09 closing price 72,400 (intra-day low was lower)

 

Drawdown: -51.3%

 

Munger_Disciple - this is an interesting example.  Before Buffett came out with his 1.1x and 1.2x book value buyback "floor" prices,  I liked to use price-to-book value as a short-hand way to buy and sell BRK.    Basically if the price approached 2x book value - you sold (or didn't buy) and if you got anywhere near book value - you bought. 

 

The drawdown you note neatly encapsulates this "rule".  The peak in Q4 2007 represented a price-to-book value of 1.96x book value.  The trough in Q1, 2009 represented a price-to-book of 0.95x book value.  Many people were buying BRK hand-over-fist in late 2008 and early 2009.  Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time.  He was actually selling his shares to his heirs near their lows on margin (95% margin IIRC).  It was actually a ringing of the bell to buy BRK because Munger was executing a deft tax-planning move.

 

There was another 50% draw-down with BRK that happened early in my investing career.  During Q4 1998 and Q1, 1999 (in the middle of the Gen Re acquisition), BRK sold briefly at 2.1x book value.  Then in March 2000, it sold as low as 1.06x book value.  I believe the fall in price from peak to trough was 49.8%.

 

My larger point is that 50% drawdowns do happen to BRK.  But they start from a point of very high valuation and the trough (when it happens) often represents an outstanding bargain investment. BRK's valuation today makes it unlikely you would see a 50% drawdown from today's prices.  And if you did, then you might want to buy it in size.

 

wabuffo

 

Excellent observations wabuffo! Similar to your rule of thumb, Buffett mentioned an overvaluation P/B level of 2.0x in the 50th anniversary annual letter in 2014 and of course Berkshire used to have <1.2x level for repurchases.

 

I didn't sell any Berkshire in late 2007 but I increased my BRK allocation quite significantly during the Feb-March 2009 period. I thought it was too cheap at those levels and was lucky to have dry powder around.

 

I would note however that an investment in the S&P 500 index at its bottom in March 2009 would have returned 5.5 times the original investment today. BRK stock increased still an excellent 4.34 times in comparison (314,250 vs 72,400). However for me it was easier to value BRK than the index in 2009, so I have no qualms and am very happy. At the present time I would rather own BRK than the index.

 

I remember a life lesson taught by the great Charlie Munger: The secret to success in marriage and life is to have low expectations. In that spirit, I would be happy if BRK just matched the index result in a tax efficient way going forward. Anything else will be icing on the cake!

 

-Munger_Disciple

[Munger_Disciple]

Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. 

 

https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml

 

Who says they don't ring a bell at the bottom.  Sometimes they do!

 

wabuffo

 

Master at work! It is like watching Roger Federer play tennis.

[scorpioncapital]

If buffet really thought brk can't beat sp500 even a little why doesn't he liquidate, break it up, or close shop ? The only conclusion is not enough time has passed (although as has been pointed out it's been quite a while of matching performance) or he has some hope that it will do better. I am also hoping on his hope )

 

 

 

[gfp]

Man wabuffo, remember those days?!  The old chucks angles board was so active during that time.  Old timers debating going on margin, how low will she go, etc..

 

Here are a couple of my posts from that week.  Charlie filed his SEC filing on the transfer to his kids a couple days after I was doing it for friends and clients.  We were talking about Warren doing it for his sisters with his Mother's shares the same way..  Seems like forever ago.  Just celebrated my 10 year wedding anniversary.

 

 

 

Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. 

 

https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml

 

Who says they don't ring a bell at the bottom.  Sometimes they do!

 

wabuffo

 

Master at work! It is like watching Roger Federer play tennis.

[wabuffo]

The old chucks angles board was so active during that time.

 

oh hey - gfp = globalfinancepartners!  The penny just dropped.  I didn't realize the connection! 

 

Yeah the old Chuck's Yahoo BRK board was amazing - Prez, BabyB and too many others to mention.  Those were fun times.  I learned a great deal from many posters there and on the Motley Fool.  Became a better investor because of them.

 

wabuffo

 

 

[John Hjorth]

3. This Form 4 is being filed to report a private sale of shares of Class A Common Stock to family members, in exchange for a promissory note.

 

I wonder what the conditions were in those promissory notes. [ :- ) ] Transfer of non-cash generating assets to the kids at low prices.

 

- - - o 0 o - - -

 

When I was young, I had a boss, that when he was young was serving a client - a lawyer of high age, who was wealthy. Because of high earnings combined with frugality he had become wealthy by buying real estate. He had started deliberately & gradually transferring properties to his kids, starting with the properties with the most louzy cash flow first, some even with negative cash flow, because of the mortgages. My boss asked him why he did so [The lawyer was old and alone. He had lost his wife, who had passed away.] His answer was : "That way I'm sure that my kids still visit me!" [ ; - D]

[Cigarbutt]

3. This Form 4 is being filed to report a private sale of shares of Class A Common Stock to family members, in exchange for a promissory note.

 

I wonder what the conditions were in those promissory notes. [ :- ) ] Transfer of non-cash generating assets to the kids at low prices.

 

- - - o 0 o - - -

 

When I was young, I had a boss, that when he was young was serving a client - a lawyer of high age, who was wealthy. Because of high earnings combined with frugality he had become wealthy by buying real estate. He had started deliberately & gradually transferring properties to his kids, starting with the properties with the most louzy cash flow first, some even with negative cash flow, because of the mortgages. My boss asked him why he did so [The lawyer was old and alone. He had lost his wife, who had passed away.] His answer was : "That way I'm sure that my kids still visit me!" [ ; - D]

Side note:

Interesting that you describe a trust but verify situation while transferring value from one generation to the next. I've been looking into an estate freeze 'strategy' for my business, which implies, in my neck of the woods, to alter the structure of the company and to issue new preferred shares (fixed income) that freezes the value for the owner (tax deferred until the last breath) and new regular shares to the offsprings whose value will grow over time (more tax deferral). The key issue is control, whose loss of can only be deferred to some degree. It is possible though to set up voting rights or involve a family trust (where the owner remains a trustee) in a way to (economically) maintain contact with the next generation.

 

-----)back to the thread dealing with Wedgewood throwing the towel and sale move as a potential contrarian indicator to buy BRK.

[John Hjorth]

Personally, I would really appreciate such a topic in the "Personal Finance" forum, for inspiration, and for structured discussion and sharing of thoughts on this matter at hand. I really hope someone here on CoBF will take the intiative [someone, who has practical experience with it, and/or has given it intensive consideration - perhaps gfp and/or Cigarbutt? [ : - ) ]].

 

- - - o 0 o - - -

 

Back to topic.

[Cigarbutt]

On the tax-efficient transfer topic,

Personally, I would really appreciate such a topic in the "Personal Finance" forum, for inspiration, and for structured discussion and sharing of thoughts on this matter at hand. I really hope someone here on CoBF will take the intiative [someone, who has practical experience with it, and/or has given it intensive consideration - perhaps gfp and/or Cigarbutt? [ : - ) ]].

 

- - - o 0 o - - -

 

Back to topic.

Let's make this work in progress and there will be more to come from my part, in due course and in a separate thread.

It seems that the best time to do such transfers is during marked to market dislocations. :)

Back to topic.

[stahleyp]

From 10/11/07-3/9/09, S&P 500 was down about 50% vs about 39% for Berkshire.

 

If you look at peak to trough Berkshire was down more than 50% during this period.

 

Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher)

Trough: 3/5/09 closing price 72,400 (intra-day low was lower)

 

Drawdown: -51.3%

 

Source: Yahoo Finance

https://finance.yahoo.com/quote/BRK-A/history?period1=1193900400&period2=1238569200&interval=1d&filter=history&frequency=1d

 

Here are the numbers based on your time frame:

 

SPY:  -53.49%

BRKB: -53.27%

KIE: -72.54%

IYF: -75.02%

 

SPY probably edged out Berkshire wiht dividends, but Berkshire did way better than two rather diversified ETFs.

 

I picked the peak for S&P 500 and you picked the peak for Berkshire. Keep in mind that this was a financial crisis so financial stocks were hit harder.

 

Now, let's look at a rather arbitrary number and we'll start before the crisis happened:

 

Jan 3rd 2007. From 1/3/07-3/5/09.

 

SPY: -51.33%

BRKB: -36.87%

IYF: -79.29%

KIE: -74.12%

 

If that isn't out performance, I don't know what is.

 

 

[Gregmal]

I for one would like to point out that people talking about previous BRK performance are talking about things that are backward looking and based on hind site. Which is funny because Cardboard just posted "The Perfect Trade" topic(which wouldn't you know it, just worked again) and there were a bunch who took issue with it for the same reasons....

 

Personally I think looking backward and using hind site is incredibly relevant to forward assumptions, so I'm not sniding that...just the inconsistency amongst some, which frankly I think comes down to people differentiating trading(taboo) vs investing(THA ONLY WAY!), or failing to do so...IE its not ok to be backward looking and base a trade off hind site, but if you are investing, it is;...FALSE. If we dont learn from history, we are bound to repeat it. Patterns repeat themselves, the trend is your friend. Theres a million sayings similar to those that correctly deserve to be heeded.

 

Its also important to note that trading patterns based largely off of psychological factors and purely technical market forces and a certain security, BRK for instance, outperforming, are probably more closely related to each other than many realize.

[Cigarbutt]

^This is an exercise of (trying to) translating backward-looking returns into forward-looking returns.

The following article supplies a graph that decomposes the returns over time periods. A backward-looking trend about diminishing alpha returns is clear and the relative outperformance during the last downturn (what Paul is describing) hasn't made much of a difference overall.

https://www.marketwatch.com/story/buffetts-formula-is-still-working-if-you-know-where-to-look-2019-05-22

 

FWIW, I think what Mr. Buffett has achieved in the last period (to match the S&P 500 with such a size and in such an environment) is truly amazing given his historical investment mindset (he constantly adapts). And IMO this was achieved in a context where he has built ammunitions to maintain (or even to increase) his (or his legacy's) edge. But it's understandable that some people are losing their patience.

[Munger_Disciple]

 

Here are the numbers based on your time frame:

 

SPY:  -53.49%

BRKB: -53.27%

KIE: -72.54%

IYF: -75.02%

 

SPY probably edged out Berkshire wiht dividends, but Berkshire did way better than two rather diversified ETFs.

 

I picked the peak for S&P 500 and you picked the peak for Berkshire. Keep in mind that this was a financial crisis so financial stocks were hit harder.

 

Now, let's look at a rather arbitrary number and we'll start before the crisis happened:

 

Jan 3rd 2007. From 1/3/07-3/5/09.

 

SPY: -51.33%

BRKB: -36.87%

IYF: -79.29%

KIE: -74.12%

 

If that isn't out performance, I don't know what is.

 

 

 

1/3/07 is also an arbitrary date. I was just looking at peak-trough numbers for BRK during 2008-2009. If you take the last 10-17 year time frame (long enough for most people) BRK either slightly under performed or over performed the S&P 500 index depending on the the start date. I don't think BRK is a financial so the comparison to financial ETFs gives you much information. Buffett himself compares BRK to the S&P 500 index, not financial ETFs.

 

Our collective time is probably better spent looking into possible future returns of BRK than the past.

 

[CorpRaider]

Now do Japan.

[writser]

I for one would like to point out that people talking about previous BRK performance are talking about things that are backward looking and based on hindsight. Which is funny because Cardboard just posted "The Perfect Trade" topic(which wouldn't you know it, just worked again) and there were a bunch who took issue with it for the same reasons....

 

True up to some point. I think there's a difference though. If you look backwards at Berkshire there is not only history of good returns, but also a history of solid decision making and closing on savvy deals. In hindsight you can analyse what Buffett did and conclude: his thoughts on Geico, See's Candy, Coca Cola, American Express, Bank of America, BNSF, his hedge fund bet, etc. were spot on (and, in all fairness, not so spot on with Berkshire, Kraft, ..). But I think all in all history suggests that Buffett is a great investor, which would suggest future outperformance is perhaps possible. You still have to judge for yourself whether he is getting senile or not, whether he can generate alpha with such a large capital base and what will happen when he dies. But I think there is some predictive value in his track record. And if he starts dry humping Becky Quick on CNBC you can think "he's losing his mind" and sell your shares (though did he really lose it? Maybe he's just faking it).

 

On the other hand, if you look at a graph and say: "I could have bought BAC at $22 and sold at $24 a few times", is there any predictive value in that? Why would it work in the future? Why would it be a more profitable strategy than buying at $22.50 and selling at $23.50? Or, even more extreme, than buying at $22.90 and selling at $23.10? Or than buying and holding? If the strategy stops working after a few months, should you be patient or adjust your price levels? Can you explain when and why the strategy works? Can you explain when and why it stops working? If you make the roundtrip a few times, are you simply lucky or are you a good investor? Maybe there are answers to these questions, but I don't think Cardboard has them. I for sure don't have them.

 

Not saying you can't make money the second way. Just saying that I prefer situations where I can explain beforehand why I expect to make money, and where I can explain afterwards whether my thought process was correct. That way I can hopefully avoid making repeat mistakes. And it gives me a (tiny) bit of confidence if something blows up in my face.

[John Hjorth]

... You still have to judge for yourself whether he is getting senile or not, whether he can generate alpha with such a large capital base and what will happen when he dies. But I think there is some predictive value in his track record. And if he starts dry humping Becky Quick on CNBC you can think "he's losing his mind" and sell your shares (though did he really lose it? Maybe he's just faking it).

 

Writser is being "nasty" here, in a a constructive way. It is about the "real" truth. It is about loosing confidence, based on languishing, geriatrical based, fading of capabilities. Taboo, and hard to discuss. Doubt and distrust eventually towards the Berkshire board also. Very hard to discuss. [ : - ) ]

[Gregmal]

I for one would like to point out that people talking about previous BRK performance are talking about things that are backward looking and based on hindsight. Which is funny because Cardboard just posted "The Perfect Trade" topic(which wouldn't you know it, just worked again) and there were a bunch who took issue with it for the same reasons....

 

True up to some point. I think there's a difference though. If you look backwards at Berkshire there is not only history of good returns, but also a history of solid decision making and closing on savvy deals. In hindsight you can analyse what Buffett did and conclude: his thoughts on Geico, See's Candy, Coca Cola, American Express, Bank of America, BNSF, his hedge fund bet, etc. were spot on (and, in all fairness, not so spot on with Berkshire, Kraft, ..). But I think all in all history suggests that Buffett is a great investor, which would suggest future outperformance is perhaps possible. You still have to judge for yourself whether he is getting senile or not, whether he can generate alpha with such a large capital base and what will happen when he dies. But I think there is some predictive value in his track record. And if he starts dry humping Becky Quick on CNBC you can think "he's losing his mind" and sell your shares (though did he really lose it? Maybe he's just faking it).

 

On the other hand, if you look at a graph and say: "I could have bought BAC at $22 and sold at $24 a few times", is there any predictive value in that? Why would it work in the future? Why would it be a more profitable strategy than buying at $22.50 and selling at $23.50? Or, even more extreme, than buying at $22.90 and selling at $23.10? Or than buying and holding? If the strategy stops working after a few months, should you be patient or adjust your price levels? Can you explain when and why the strategy works? Can you explain when and why it stops working? If you make the roundtrip a few times, are you simply lucky or are you a good investor? Maybe there are answers to these questions, but I don't think Cardboard has them. I for sure don't have them.

 

Not saying you can't make money the second way. Just saying that I prefer situations where I can explain beforehand why I expect to make money, and where I can explain afterwards whether my thought process was correct. That way I can hopefully avoid making repeat mistakes. And it gives me a (tiny) bit of confidence if something blows up in my face.

 

I get what you're saying but its not really intended to be an endorsement of "its done this before so it will do it again". Its really just a way to enhance returns while remaining flexible with liquidity to fit a trading range or area high probability entry/exit point into a larger thesis. Its not really worth doing this sort of stuff if you wouldn't want to own the security longer term, for starters. From there, I suppose the best way to summarize it is that you're taking a position at a point where short and long term value converge and either a) looking to generate an above average short term IRR, or b) build into a position at a favorable long term valuation. So short term, $199 has proven favorable for BRK as a trading point. Longer term, provided nothing crazy occurs, $199 is a good value as well. This convergence dissipates probably around $210 for the time being. Viking does it quite often. A lot of people dont like this because its something you have to see with your eyes and then make a judgment call on rather than throw it into a spreadsheet at stare at it...

[Kuhndan]

I took a stab at valuing Berkshire in a recent Seeking Alpha article based upon Buffett’s comments in his 2018 annual letter. I continue to think it is a great value.

 

https://seekingalpha.com/article/4296869-berkshire-hathaway-forest-selling-discount

[Guest cherzeca]

there is certainly nothing "wrong" about building up a warchest of $120B cash.  my only thought has been that Buffett has been looking at his punchcard lately only for savior type deals, the FC deals and most recently OXY.  these are great deals but there are not going to be enough of them out there to put this cash to work...unless of course FC2.0 comes around.  in which case Buffett, or his successors in interest, will look like a genius...again

[Spekulatius]

there is certainly nothing "wrong" about building up a warchest of $120B cash.  my only thought has been that Buffett has been looking at his punchcard lately only for savior type deals, the FC deals and most recently OXY.  these are great deals but there are not going to be enough of them out there to put this cash to work...unless of course FC2.0 comes around.  in which case Buffett, or his successors in interest, will look like a genius...again

 

Yes, but this also makes him a defacto market timer. Nothing wrong with this, but many here are a bit inconsistent in terms of stating that market timing does not work, yet giving Buffet a free pass on it (sort of).

 

Another way to look at is that Buffet doesn’t buy relative value. I guess he has internalized value metrics and does not bend the, when Mr Market does not collaborate. I personally see this a bit different and in a way, I buy relative value within reason and most here do so as well, in my opinion.

[scorpioncapital]

He's not a market timer. He's a value timer. He's not waiting for a crash. But he is waiting for the right prices, this can occur in a crash or outside of one (eg enough time passing and apathy toward a company's valuation). A crash is just icing on the cake.

[redskin]

Nice update on your line of thinking, which has been consistent.

Accepting the possibility that you may be right to "outsource", to some degree, the timing of investments (which really is not timing but sticking to internal yardsticks by Mr. Buffett {and IMO not thumb-sucking as implied by the Wedgewood move}), a potential weakness of the model may be that the IV floor that you describe may move down, as perceived by the markets, when fat pitches come along, given how progressively correlated BRK has become in downturns (typical time to use the elephant gun) and given BRK's relatively high exposure to financials.

As John Hjorth alludes to above, BRK is built to last but a question remains: is the relative advantage for BRK in downturns and the ensuing recoveries sufficient, on a relative basis?

 

If the buybacks become truly significant, the IV/BV ratio would narrow somewhat, but otherwise (as is likely to persist for some years) I'd imagine that there are still quite a lot of people willing to pay 120% of BV, and probably also 125% of BV in normal circumstances, which acts as something of a backstop.

 

They might adjust last-reported BV down a little in the event of a market crash.

 

Certainly, if markets plummet, Berkshire is likely to fall too, by a somewhat similar amount, such that the perceived risk-adjusted returns are commensurate for all stocks.

However, 'somewhat similar' may still be less than the general market, which could be pegged to a few reasons:

1. If it was trading at the bottom of its range before the crash (e.g. P/BV < 1.30) as it is now, it likely to fall a little less .

2. It is seen as more defensive (i.e. lower risk, meaning lower business risk as well as lower 'beta' for those who subscribe to EMH or CAPM), hence on a risk-adjusted basis it ought to fall a little less. Some of the optionality of Berkshire's assumed ability to invest its excess cash profitably when markets are down is then priced in when markets fall markedly, reducing how much it falls compared to the wider market.

3. The stock portfolio of Berkshire might well fall less than the market because it's also relatively defensive. And even if the Berkshire portfolio experiences a 20% pre-tax decline, this $42 billion reduction in market value is only about 10.6% of Berkshire's Book Value, and after applying 21% deferred tax reduction to the unrealized capital loss, BV would only reduce by 8.4%. This would be partially offset by operating earnings too.

 

I would expect most things to decline in market panics, Berkshire included, and for Berkshire to gain IV and increase leverage by spending that float-funded cash hoard at such times if it can deploy capital, even if it that value might be hidden for a few years. I would not expect Berkshire to fall more than the general market, but not an awful lot less than it either (unless it was highly priced going prior to the crash, of course)

 

I don't try to side-step market crashes, aiming to remain fully invested as I would expect the compounding I'd miss out on by predicting the crash too often and too early to exceed the losses I'd avoid by going to cash.

 

If purchases are made above book value and below intrinsic value, the gap between book and intrinsic value will actually widen.

[wabuffo]

We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year

 

BTW - back to the original post for a quick sec.  Anyone else noticed that this bolded statement is plainly untrue. 

 

Here is Wedgewood's holdings of BRK.B shares over the last few years according to the 13Fs.  He actually started selling in late 2015 (when BRK got cheap and very near Buffett's 1.2x book value buyback level).  There was more selling there than this year.  How does one reconcile his statement and his many media appearances as a BRK bull with his actual record?  Perhaps I'm missing something.

wabuffo

[Read the Footnotes]

We sold our multi decade-long position during the third quarter after first trimming the position during the second quarter this year

 

BTW - back to the original post for a quick sec.  Anyone else noticed that this bolded statement is plainly untrue. 

 

Here is Wedgewood's holdings of BRK.B shares over the last few years according to the 13Fs.  He actually started selling in late 2015 (when BRK got cheap and very near Buffett's 1.2x book value buyback level).  There was more selling there than this year.  How does one reconcile his statement and his many media appearances as a BRK bull with his actual record?  Perhaps I'm missing something.

wabuffo

Nice find. That seems to be further indication of my point, which is that they sound more like a contrary indicator than anything else.

 

https://www.morganstanley.com/wealth-investmentsolutions/pdfs/uma/wwp-1.pdf

 

If you check out the Morgan Stanley doc linked above, you will see net returns have substantially underperformed their index in every time period presented. Also, they actually describe themselves as large cap growth, but from the Morgan Stanley doc, you can see the portfolio is primarily mega-cap, not large cap. I won't argue with their assertion that they are growth investors, although I suspect there is a good bit of momentum there, too. Growth and momentum are a bit hard to separate though, so I can accept just calling them growth investors.

 

The most impressive part of their portfolio is that fact that they managed to achieve an R^2 of 0.96 over the past 3-year period. It requires effort if not skill to attain such a high R^2 with only 18-22 positions. I have noticed that closet indexers are getting better at their craft, and this might be yet another example. What is interesting is that the R^2 was so high and yet 10-yr net returns trailed their index by roughly 4.25% per year.

 

Is it possible that they actually sold Berkshire because it was introducing too much of an active management risk component to the portfolio, and therefore created career risk for management if the portfolio started to drift from the index?

[John Hjorth]

wabuffo,

 

I think this should be measured on a relative [position size in percentage] basis. The Wedgewood LPs have withdrawn substantial capital over a period, ref. what longinvestor and I have posted earlier in this topic. I have made no calculations on it though, and I don't intend to.