Sean, I'll respond to you, and only you, since you at least ask the right questions and actually think. The rest of the folks here, with a few exceptions, are nothing more than a bunch of mean-spirited, DA, Buffett wannabes, who ride HIS coattails and then, like weekend armchair quarterbacks, jump with joy and exclaim: "WE" won if "THEIR" team does well.
Assumptions: BRK grows BV/s by 10% a year for the next 7 years, during which it does not pay a dividend. In year 8 it pays a dividend equal to 4.8% of BV/s at yearend 7, and then grows both the D/s and BV/s by 5% a year forever thereafter. Calculate the current NPV (IV/BV) of that future stream of dividends using a discount rate of 9%, which is the MINIMUM discount rate that I believe Buffett himself uses. NPV =(((1+10%)/(1+9%))^7)*(4.8%/(9%-5%))
Goodbye and good luck.
PA announcement: jad has now left the board.
Keep cheering a rising price and an expanding multiple. That IS what fools do. At some point in the future you'll come to realize just how overvalued BRK and everything else was today.
BRK has 30B$ of excess cash on the balance sheet and WEB can't find anything worth buying. IIRC, Charlie commented during the Q&A at the DJCO that he had received ~$125,000 in new money and couldn't find anything worth buying. Really? Not even BRK?
When the first buyback at 110% of BV was announced I was shocked. It took awhile, but I finally came to the realization that WEB and Charlie use a businessman's discount rate, not the far lower rate Mr. Market uses.
BRK has grown BV/s by about 10% a year since 2000. Assume for a moment, that starting next year, BRK paid a dividend equal to 5% of BV/s and grew that dividend by 5% per year forever ( do you get it? a 5% dividend + 5% growth = 10% growth without a dividend ). What value, IV/BV, would you place on BRK?
It depends on your discount rate, "r", doesn't it?
IV/BV = D/BV / ( r - g )
I suspect WEB uses 9% and he might value BRK at 125%, (5% / ( 9% - 5% ), which goes a long in explaining why he won't offer 120% or more on a buyback.
I also suspect that WEB's dour business partner is far less optimistic, and probable uses 10%. My guess is he might value BRK at 100%, 1X Book, (5% / ( 10% - 5% ).
Keep holding out for 170%, you fool, with any luck at all, you'll never see it.
I am in the process of simplifying, if not for myself, for my wife's sake. I just can NOT bring myself to pay 50+ times the dividend for anything. That immediately excludes VOO (Vanguard's S&P 500 ETF) and VIG (their Dividend Appreciation ETF). I believe I can reduce my portfolio down to two mutual funds and two ETFs that I can at least tolerate.
Thanks, hc, that was interesting.
I don't screen using EV/EBITDA anymore, but three (CVX, T & VZ) of my current holdings are below 6.5X.
About eight years ago I did successfully trade Accuride, ACW, based indirectly on EV/EBITDA. At the time it was controlled by KKR and my expectation was that while neither the enterprise value, EV, nor the EBITDA would change much during the duration of the trade, the VOC, Value of Equity, would increase as Net Debt decreased (debt was paid down or cash was retained). I got luckly on that one and decided not to repeat that stunt again. I passed when they did Sealy, ZZ, - cute ticker symbol. Much to my chagrin, I mistakenly thought ACW was cheap when I bought it. If I remember correctly, the EV/EBITDA ratio was under 7. I did learn one thing from that trade. A low EV/EBITDA is justifiable IF CapX net of Depreciation is positive AND a large percentage of EBITDA, which is just another way of saying there isn't much Free Cash Flow to Equity hiding within a dollar of EBITDA. That's something to think about when considering any capital intensive business, e.g., automotive.
I'm also not enthralled with Vanguard's Managed Payout Fund, VPGDX. It pays out $0.0555 per share per month (which annualizes to about 3.4% on yesterday's price of $19.26), but 43% of that is a return of capital. The monthly distribution is reset every January and my understanding is that the goal is to increase both the distribution and the capital, year over year, by a rate equal to or greater than inflation. That (a total return of about 5.6% per year, ~3.4% + ~2.2%) at least seems doable.
Good morning, hc. I took a quick look at it. Since inception, 4/26/2013, it has paid out $2.25, but lost $3.29 in capital. The fixed monthly distribution seems overly generous. I wonder how much of that is a return of capital. I'll pass.
IMO, that's just another ludicrous rationalization to support overvaluation.
Years ago, iluvbabyb wrote that WEB does lower his discount rate as bond yields fall, but that he also has a FLOOR, 9%. His most recent deals and the fact that he has an excess ~$30B in cash on the balance sheet still supports that, IMO. Only retail is willing to bid prices up to the point where they'll make a bond-like return of next to nothing on their investments.
I thought the first graph, "Obviously Not a Bubble", really didn't support his argument. IMO, a plot of the Price to trailing four quarter Dividend would have been more meaningful. That ratio would at least show how the market had valued a dollar's worth of dividends over time. Date, P/D: 12/31/1994, 34.85; 3/31/2000, 89.41; 9/30/2002, 51.60; 6/30/2007, 57.45; 3/31/2009, 29.28; and 6/30/2014, 52.44.
So what's a dollar's worth of dividends worth?
That depends on both your discount rate and what you believe the sustainable future growth rate will be.
IF you want at least a 7% return on your money AND you believe that dividends per share will grow, on average, nominally, by 4% per year over the next century, THEN you might favor a P/D ratio of about 35.
Take a look at multpl's chart of the S&P 500 Dividend Yield. For 120 years, 1870 to 1990, the D/P ratio was consistently above 3%, (equivalent to a P/D ratio of 33 or less).
Congratulations! Twenty pounds in three months is really impressive. You are doing EXACTLY what my doctor is asking me to do. If I lost half that much weight in twice the time my doctor would be thrilled.
So it looks like WEB is getting 9% on his 3B$ participation on the BKW deal. If nothing else that reconfirms that he is still using a high discount rate and goes a long way, in my opinion, in explaining why his buyback threshold is so low.
If I remember correctly, there was a time (around the Gillette or Duracell deal?) when WEB couldn't stand to be in the same room with the PE guys (Henry & George?) and now he has become best buds with them. Oh well, that's why I try not to have heroes anymore, they all disappoint eventually.
Thanks for the heads-up, hc. This is the first time I've heard of him. I couldn't find the interview, but on your recommendation, I did read, and enjoy his most recent blog: « Rickards: Stock market reality check ». Based on feed-back from my two sons (both in their twenties, high school graduates, some college, they did opted instead for technical programs: electrician & culinary arts), his comments on jobs is on the mark.
By the way, I'm not on my deathbed yet, although following my doctor's orders: eating a low carb diet and riding an exercise bicycle while reading a large print book, isn't exactly my idea of living either. I am bored to death with the market and equities. I'm in the process of tweaking my portfolio for eventual hand off to my wife (just in case I can't follow the regime), so nothing I'm doing has any value to anyone.
IMO, CURRENT interest rates don't matter. It's just a trick propagated by the Fed to push up and then support, equity prices. At least for the time being, don't you feel richer? What will matter, in the not so distant future, is the interest rate YOUR buyer will use to formulate his bid when you decide to sell.
Good morning, hc. I've never been a fan of CAPE. While it adjusts earnings for changes in inflation, it does not compensate for any real growth that occurred over the decade in question, so the denominator is always a bit lower, and the resulting PE ratio higher, than it should be. And, IMO, no amount of normalizing and tweaking the earnings number(s) will ever give them any credibility as a valuation tool (same goes for book value).
FYI, I've pretty much lost interest in equity valuation (no interest at all in BRK and marginal interest in everything else), so if you find that I post less and less, you now know why. IMO, even the recent historical data for dividend paying stocks has been badly damaged by excessive financial engineering, thus making the valuation process for even those stocks much more difficult.
Not at all, search for following (it should be on Regents Exam Prep Center):
« Examine the differences between qualitative and quantitative data »
mv, IMO, "material discount" is a qualitative weasel word, it has NO quantitative significance. It IS whatever you want it to be.
Thanks for the laughs, hc.
IMO, that was a pretty pretentious post. Since Jim believes he knows BRK's IV with a higher degree of accuracy than WEB does, maybe he should offer to sell him a lunch and use it to teach the Oracle of Omaha how to correctly value BRK.
Generally speaking, I do have a lot of respect for Jim, his knowledge and opinions, but today, at least in my opinion, he dropped a couple of points.
In this one, the koolaid, strong it is.
« If you owned it back in 2007 before there was a buyback threshold, what did you do then to estimate its value? »
Well, I certainly didn't believe it was worth 194% x Book, or I would not have sold it.
My thoughts on valuation have changed dramatically over the years and what I believe, either now or then, no longer matters.
When WEB first announced the buyback at 110% of Book and followed it up a week later with the "buying a dollar bill for 90 cents" discount remark, I was absolutely furious. It destroyed a short term trade I have going at the time. But once I got over it and began to rationalize his numbers it did make sense. WEB no doubt uses a higher, businessman's discount rate, not the silly, implied rate that retail is willing to accept. He also very likely has a better sense of what future growth rates are likely to be (his interest in population growth rates is a strong clue in that direction) and has the most realistic view of what BRK could actually distribute as a dividend (10% annual growth in book value per share does NOT imply a future dividend/book rate of 10%).
JMO, have a good day.
brkahoo, you're obviously promoting the seller's side of the argument. Fleecing the sheep is kind of fun isn't it? I I know, I did it in December 2007. I didn't pump it, but I didn't try talking it down either, and the financial rewards (for me) were wonderful. But I do still feel guilty about taking advantage of someone else and the damage that period of overvaluation caused the stock still lives on today.
The problem, as I see it, with Bull Markets is the unfair wealth transfer that occurs between buyers and sellers. Today's foolish buyers will be sellers themselves someday in the future. If they can't find a greater fool to bail them out then they will have to accept a lower (than expected) return on their investment.
As an example, look at BRK-A. Someone paid $203,801 yesterday. That's $32,821 (~19%) more than what WEB and his BOD would pay (buybacks are authorized when the price falls below 120% of Book Value per share). Figuratively speaking, on a per share basis, the buyer gifted the seller the equivalent of a brand new Mercedes (MSRP of a 2014 CLA250 is $29,900) for the privilege of buying his (the seller's) stock.
You are correct.
It IS "an exercise in sarcasm", and of the few people who have bothered to post a reply, YOU are the first person to point that out.
Maybe there is hope for you after all, assuming, of course, that you understand the points he is making.
Read Brett Arends's article:
"30 reasons not to worry about a stock market crash
Opinion: Everyone knows that bearishness is for losers"
It made me smile!
No need to search for it, John P. Hussman (hussmanjp) embedded the link in a tweet yesterday.