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Berkshire Hathaway Inc. Message Board

jad1148 9 posts  |  Last Activity: Jul 11, 2016 5:34 AM Member since: Dec 8, 2002
  • Reply to

    is it to late to buy this fund

    by messjim123 Jul 5, 2016 10:03 AM
    jad1148 jad1148 Jul 11, 2016 5:34 AM Flag

    I guess exchanging three individual stocks (which may be overvalued) for a portfolio of stocks (that is very likely overvalued) isn't a terrible idea, but I'm not a buyer at the current valuation, a price to dividend ratio of about 34.6. I'll wait for a pullback before adding.

    According to Vanguard, for the year ended 6/30/2016, VPU returned 31.68%. The bulk of the return, 26.2%, was due to an expansion in the price to dividend ratio, from 27.45 to 34.65. Just too many overly enthusiastic buyers bidding the price up, in my opinion. I won't sell what I have, but I expect my annual total return to average about zero (no better than cash) over the next three years.

    Just my opinion.

  • jad1148 jad1148 Jul 8, 2016 9:26 AM Flag

    Gross is doing some Macro stuff. I'm OK with growth of 8% per year, on average, for BRK.

    Here's another way to look at BRK: pretend it's a 30-Year Zero Coupon Bond.

    If BRK grows BV per share by 8% per year, on average, and is worth 1.2X book at maturity, what would it be worth then? 12.08X current book value per share? And if you discounted that by 7.62% (the current YTM on the 30-Yr Zero plus an equity risk premium of 5.5%) what would it be worth today? 1.33X current book value per share?

  • jad1148 jad1148 Jul 8, 2016 9:04 AM Flag

    Because buying back shares just doesn't move the needle that much.

    As of 3/31/2016 I estimate that BRK had (in billions):
    2.465 equivalent "B" shares outstanding,
    $258 in Book Value,
    $33 in excess cash that could be distributed or used to repurchase shares,
    and had generated,
    $17 of trailing four quarter free cash flow to equity, which in the future, could be paid out as a dividend rather than being retained to book.

    Just for the sake of argument, let's assume that 100% of future FCFE is paid out as a dividend, and value the dividend at 20X, that puts its IV at $340 billion.

    Case #1 - Distribute the cash immediately.
    IV per share = ($33+$340)/2.465 = $151

    Case #2 - Us the cash to repurchase shares at 1.2X book.
    IV per share =($0+$340)/(2.465*(1-$33/(1.2*$258))) = $154

    So what is the better use of excess cash?

    Spend more than 12% of book value on share repurchases and increase IV PER SHARE by 2%.

    --- Or ---

    Spend that $33 billion buying additional dividend paying stocks that immediately increase, and eventually grow, FCFE.

  • hjc, Manlobbi, who sometimes competes with Jim, valuation-wise, on the other board, has written a book, "Manlobbi's Descent", that is due for release on Amazon today. If nothing else, read the free "Look inside" preview. I found his writing style to be extremely weird, to the point where I'll probably pass on it. If you're interested in his methodology, "IV10/Price", find an old post on the other board that he authored, click on his name, and then click on the Info tab.

  • jad1148 jad1148 Jul 6, 2016 5:55 PM Flag

    hjc, For a chart and table of interest rates going all the way back to 1Jan1871 search for:

    multpl 10-year treasury rate

    Note that the interest rate in 1938, the year John Burr Williams' book was published, wasn't much higher than it is today. Williams devoted Chapter XXI to a discussion and valuation of GM. He valued it, as of June 1937, using a discount rate of 4.75% and noted that his discount rate was higher than the 3% yield on government bonds, so he used an implied equity risk premium.

  • jad1148 jad1148 Jul 6, 2016 9:45 AM Flag

    For book value per share, I use a trailing, three year rolling, compound annualized growth rate.

    A 5% annual growth rate is too pessimistic, even for me.

    Since 6/30/2006, only 1 of the three year periods out of the 40 periods total has been at or below 5%.

    VL's 8% is acceptable, 29 of the 40 periods have been that high or higher.

  • Reply to

    Another Plummet Way Worse Than Market

    by winsail126 Jul 5, 2016 2:49 PM
    jad1148 jad1148 Jul 6, 2016 7:53 AM Flag

    Morning, hjc. I am looking at BRK-B as a possible short term trade, but I can't get excited enough about it to do it. I figure if I buy at a 10% premium (132%) to the buy back threshold, and sell three years later at the buy back threshold (120%), and book value per share grows, on average, by 8% per year (VL's estimate, not mine) that should be good for an IRR of about 4.6%. That does beat the 0.76% YTM on a 3-Year Zero (2019Jul31) but I was hoping to pick up a 5% equity risk premium on top of that. BRK-B would need to grow book value per share, on average, by about 9.18% per year or more to achieve that.

  • Reply to

    Another Plummet Way Worse Than Market

    by winsail126 Jul 5, 2016 2:49 PM
    jad1148 jad1148 Jul 6, 2016 6:17 AM Flag

    Aww, what's the matter babies? The truth hurt?

    It's not my fault that your fellow berkies are jumping ship to join the Utilities & Telecom party.

    You know, I never expected to average more than about 7% per year on either, but here I sit on high double digit returns, thanks to enthusiastic newbies.

    Let's analyze BARRON'S 52 week (1Jul2016) data for the DJU index. The starting yield was 3.76%, and year over 52 week year, the dividends grew 4.17%. That's good for 8.09%. But wait, during that period the newbies bid the price to dividend ratio up 22.47%, from 26.61 to 32.59, pushing the total return out to 31.51%. Here's hoping I get to keep that.

    Yesterday I told my wife, if this gets any sillier, I'll be sorely tempted to sell everything and go to cash.

  • Reply to

    Another Plummet Way Worse Than Market

    by winsail126 Jul 5, 2016 2:49 PM
    jad1148 jad1148 Jul 5, 2016 3:17 PM Flag

    Folks are busy chasing performance elsewhere.

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