A Long Squeeze in BRK?

[twacowfca]

The recent comments by WEB that adding BRK to the S&P 500 index means that BRK will soon have a new "shareholder" who will be required to purchase for his index funds a great amount of BRK's shares suggests the possibility of a new phenomenon : a Long Squeeze.

 

 

Dynamic and Vinod1 have pointed out in their recent posts the uniqueness of BRK's addition to the S&P500,   a megacap that has never before been purchased by index funds or similar funds.  WEB recently stated that

this will be like having a new, permanent shareholder ( likely next month ) that will have to buy 6 to 7% of BRK's stock.  Is it likely that shareholders will willingly cough up such a large number of BRK's until recently thinly traded shares from the most solid base of long term "partners" of any NYSE company without demanding a hefty premium from Mr. Market's recent feeding frenzy for BRK's shares?

[Dynamic]

That's an interesting thought, twacowfca. Presumably if the price were to rise substantially faster than the general market thanks to relative scarcity, motivated buyers regardless of price, reluctance to sell among current owners (Intr.Val is possibly between $130k and $160k per A share subject to adjustment when annual report comes out), it might conceivably put greater pressure on S&P trackers to purchase BRK to reduce tracking error.

 

Some of the index tracking is done using software, and I guess it depends on the weighting applied to index tracking accuracy to determine the strength of the imperative to purchase. Of those index funds I looked at some years ago (including quite a few FTSE100 / FT All Share in London), tracking errors of 0.3% to 0.5% per year were perhaps typical, from memory. If BRK makes up 1.1% of the index or so, and gained as much as 50% in price, that's about 0.27% gain in the index that's potentially missed if a fund has only half the "correct" amount of Berkshire stock. Many trackers can omit entirely certain small-weighted stocks, holding only a representative selection, but would hold roughly 'correct' positions in the largest 10 to 30%.

 

I don't see why a tracker shouldn't begin building a position now, prior to planned inclusion in the index, but they'll probably do so only once the inclusion date (BNI acquisition date?) has been announced or has passed.

[maxprogram]

Also remember -- the BNI acquisition is for 40% stock. Not sure what the index funds will do here, but they could replace up to 40% of their BNI holdings with BRK. So, it might not be necessary to purchase the entire BRK position in the market.

[beerbaron]

Anybody believe Buffett, played the BRK.B split to get into the S&P 500, raise it's share price and therefore reduce the amount of shares issued? It doesn't sound like a Buffett play but it would have been pretty wise to keep an this ace up it's sleeve, waiting for a huge stock acquisition to use it.

 

What happens to the deal if the BRK.A shares pass the 120K$?

 

BeerBaron

[twacowfca]

Anybody believe Buffett, played the BRK.B split to get into the S&P 500, raise it's share price and therefore reduce the amount of shares issued? It doesn't sound like a Buffett play but it would have been pretty wise to keep an this ace up it's sleeve, waiting for a huge stock acquisition to use it.

 

What happens to the deal if the BRK.A shares pass the 120K$?

 

BeerBaron

 

 

The downward adjustment in BRK shares received by holders of BNI who elect to receive BRK stock will cease once the BRK equivalent price for A shares rises above $120K/sh, with the basis for the price of the A shares to be calculated as the average price for the five trading days before the effective date of the acquisition.

[twacowfca]

Also remember -- the BNI acquisition is for 40% stock. Not sure what the index funds will do here, but they could replace up to 40% of their BNI holdings with BRK. So, it might not be necessary to purchase the entire BRK position in the market.

 

 

Good point.  It looks like perhaps 10 - 12% of BNI's stock is now owned by index funds or those who may be

short term holders.  This percentage may rise as the effective date of the acquisition draws near. If BRK's price rises substantially above $120K, almost all the BNI holders will want to receive the maximum allocation of BRK shares.  In that event, index funds and those who have executed equity forward contracts-- intending to fill with BRK shares allocated to BNI holders, are apt to come up short because virtually all BNI holders would want to receive the maximum allocation of BRK shares.

 

Quants involved in merger arbitrage or new additions to the S&P500 must be bleary eyed trying to wrap their arms around the nonlinear variables in this one.  :)

[Guest longinvestor]

Also remember -- the BNI acquisition is for 40% stock. Not sure what the index funds will do here, but they could replace up to 40% of their BNI holdings with BRK. So, it might not be necessary to purchase the entire BRK position in the market.

 

 

 In that event, index funds and those who have executed equity forward contracts-- intending to fill with BRK shares allocated to BNI holders, are apt to come up short because virtually all BNI holders would want to receive the maximum allocation of BRK shares.

 

Quants involved in merger arbitrage or new additions to the S&P500 must be bleary eyed trying to wrap their arms around the nonlinear variables in this one.  :)

 

This appears to be what is unfolding. Just look at the market participants...what they are asking. Will BRK issue more shares for joining the index? WEB has of course clarified that. Nope!

Whatever it is, the idiots on the street have no clue about what the IV of BRK is. We will see more trading and all the baggage that comes with it.

Well until BRKB is back up to the 1000's again ;D

[value-is-what-you-get]

Anybody believe Buffett, played the BRK.B split to get into the S&P 500, raise it's share price and therefore reduce the amount of shares issued? It doesn't sound like a Buffett play but it would have been pretty wise to keep an this ace up it's sleeve, waiting for a huge stock acquisition to use it.

 

What happens to the deal if the BRK.A shares pass the 120K$?

 

BeerBaron

 

I was thinking along these lines too BeerBaron.  I expect it was probably a cost/benefit decision.  Initially it looked like WEB was doing an about face on what he had said previously about stock splits, buying with undervalued shares etc. but his instinct probably went with the "all will be forgiven when the stock price goes up".  I think in hindsight people can say he is the master who engineered all these careful and profitable market moves, but I also think that in reality he makes the decision based on a very basic cost/benefit analysis, albeit with some extremely complicated inputs.  The genius is understanding and realistically valuing the inputs and the probabilities attached to them.  Like playing bridge for 10s of billions!! ;D

[Alekbaylee]

Twacowfca,

 

Some are thinking in the same line :

http://www.fool.com/investing/general/2010/01/29/berkshire-shares-could-rise-another-20.aspx

[twacowfca]

Twacowfca,

 

Some are thinking in the same line :

http://www.fool.com/investing/general/2010/01/29/berkshire-shares-could-rise-another-20.aspx

 

 

WOW!  It seems that the number of shares required by funds that must hold BRK or fall behind their peers is much larger than merely the shares index funds must have -- BY A FACTOR OF FOUR ! This scramble for shares could become a feeding frenzy.

[UhuruPeak]

This scramble for shares could become a feeding frenzy.

 

Nothing wrong with that  :P

[StubbleJumper]

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

 

SJ

[twacowfca]

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

 

SJ

 

 

Don't even think about it unless you find something much better.  Realize that BRK has been chronically undervalued compared to all other S&P500 cos.  In the future, it's likely that the value of the cos in the index will no longer be a ceiling for BRK's relative price, but usually a floor if BRK continues to maintain it's superior economics after Warren meets his maker.:)

[Alekbaylee]

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

 

SJ

 

SJ,

I'm asking myself the same question... :-\

[Alekbaylee]

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

 

SJ

 

 

Don't even think about it unless you find something much better.  Realize that BRK has been chronically undervalued compared to all other S&P500 cos.  In the future, it's likely that the value of the cos in the index will no longer be a ceiling for BRK's relative price, but usually a floor if BRK continues to maintain it's superior economics after Warren meets his maker.:)

 

Some are even more optimistic...

http://www.theglobeandmail.com/globe-investor/investment-ideas/why-you-should-buy-into-buffetts-berkshire/article1447645/

One thing is sure : if this kind of coverage continues, the stock is going to the roof pretty soon.

[StubbleJumper]

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

 

SJ

 

 

Don't even think about it unless you find something much better.  Realize that BRK has been chronically undervalued compared to all other S&P500 cos.  In the future, it's likely that the value of the cos in the index will no longer be a ceiling for BRK's relative price, but usually a floor if BRK continues to maintain it's superior economics after Warren meets his maker.:)

 

 

Well, at what point do you sell?  BRK goes through long cycles of trading at a significant discount to IV, and only occasionally seems to pop up near or above IV.  If this is the case, it might be reasonable to expect that one could unload a position in BRK over the coming days (weeks?) at a price near IV and presumably be able to re-enter at some future point at a discount to IV.  The alternative is a long-term hold, which would be ok too, but beyond tax considerations, I fail to see a reason to keep BRK once it's trading around IV.

 

Looking back a few years, WEB made this very same error by not unloading BRK's position in KO when it was ridiculously over-priced....this cost shareholders untold millions.

 

So if you wouldn't dump it in the $80s, at what point would you dump it?  Put in a limit order for $120?  $150?

 

SJ

[twacowfca]

KO at a P/E of 50 VS BRK at P/BV of 1.3?!  Yikes!  What a hot potato!

[StubbleJumper]

KO at a P/E of 50 VS BRK at P/BV of 1.3?!  Yikes!  What a hot potato!

 

Yeah, ok, fair enough.    ::) ::)  KO was ridiculously overvalued, and BRK is just is the process of getting less ridiculously undervalued. 

 

The exaggeration aside, the point still stands.  Once a security hits its IV there may be value in re-examining whether you should still keep it.  In retrospect, I should have dumped BRK the last time the baby-Bs hit $5k.  I don't want to make another error of omission.

 

SJ

[twacowfca]

KO at a P/E of 50 VS BRK at P/BV of 1.3?!  Yikes!  What a hot potato!

 

Yeah, ok, fair enough.    ::) ::)  KO was ridiculously overvalued, and BRK is just is the process of getting less ridiculously undervalued. 

 

The exaggeration aside, the point still stands.  Once a security hits its IV there may be value in re-examining whether you should still keep it.  In retrospect, I should have dumped BRK the last time the baby-Bs hit $5k.  I don't want to make another error of omission.

 

SJ

 

 

I have a confession to make.  I too have, on occasion traded out of BRK.  But I've repented, and am no longer tempted, at least when the price is relatively attractive, the wind is in their sails and the weather ahead is clear.  :)

[Alekbaylee]

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

SJ

 

SJ,

Looks like you were right...

[tyska]

 

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

SJ

 

SJ,

Looks like you were right...

 

 

But it hasn't hit the 80's yet. :)

 

Dan

[StubbleJumper]

 

So I guess my question is how long do we hold out?  I tend to think that IV might be somewhere around $150k for BRK-A, or about $100 for a B-share.  The baby-b shares hit $77.50 yesterday.  Do they have enough legs to hit IV over the next few weeks? I was of the view that I might unload my Bs at some price in the 80s, and then wait for an opportunity to buy back in later in the fall.....

 

SJ

 

SJ,

Looks like you were right...

 

 

But it hasn't hit the 80's yet. :)

 

Dan

 

Yeah, I haven't unloaded yet either.  Missed opportunity, or is this a brief interlude before a longer term climb?  Time will tell!

 

SJ

[tyska]

 

 

Yeah, I haven't unloaded yet either.  Missed opportunity, or is this a brief interlude before a longer term climb?  Time will tell!

 

SJ

  It's interesting that I bought and sold FFH a few times for profit as I was learning about it. Then it seems that the more I learned about it the harder it became to sell as I felt that it was not at the value I felt it should be at. So talk about a few missed opportunities especially last spring when I was hoping for a pop after earnings release and well you know the rest of the story. But I'm not anywhere near under water though either.

 

Dan

[StubbleJumper]

So, to resurrect this thread, the baby-Bs have hit $79 this afternoon.  Where have people situated their limit-orders?

 

As I suggested earlier, I kinda figure IV might be somewhere around $100, but BRK trading at IV is about as common as seeing Halley's comet.  Is $85 too low for a limit-order?

 

SJ

[goldfinger]

I would kick my own ass for selling below 100$. The operational side is going to kick ass over the next decade and more.

(Secretly I would situate IV closer to 160k-170k an A share at least.)  ::)