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.
You're right Sean, future real total returns for equities are expected to be considerable less than 6.5%.
GMO's monthly, 7-Year Asset Class Real Return Forecasts, have a red dotted horizontal line running the width of the chart and is labeled "6.5% Long-term Historical US Equity Return". Jeremy Grantham has pointed out in the past that the 6.5% real return INCLUDES an expansion in the multiple over time and that SHOULD NOT BE EXPECTED to continue into the future.
IMO, arguing with spirach2 really is a waste of time.
I have no idea why he pops in here occasionally. He is without a doubt the most obnoxious, mean-spirited, hateful, individual I ever met, save one. I'm pretty sure the majority of folks over on the other board have tired of his nonsense as well. I do believe he has been "P-Boxed", (put in a virtual penalty box) in the past for obnoxious behavior.
Today someone asked for clarification on something WEB was reported to have said in the past (2008 AM) and, of course, he couldn't resist the opportunity to immediately throw out a nasty insult (msg # 212077).
But seriously, don't waste your time with his hateful nonsense, read Jim's intelligent, thoughtful, reply/analysis instead (msg # 212082). Apparently WEB hinted at what he thought BRK might be worth in 2020.
As always, JMO.
LOL, spirach2. It is interesting that YOU would bring up monkeys today, considering what you've just pulled over on the other board. It's obvious that "flinging it" is your one and only core competency.
Sean, this article addresses and supports what you wrote earlier in response to my question for Hussman regarding the effect share repurchases have on the real (net of inflation) PER SHARE growth rate.
« So now the question is... How long will corporations keep buying back stock at current or ever-increasing levels? Will this source of demand continue? »
It looks like share repurchases should be view as a temporary event because funding has been a result of  a build up of excess cash as a result of a reduction in capital expenditures which, in turn, has been brought on by a lack of investment opportunities due to a stagnant economy and  taking on excess debt, thanks to the Fed's ZIRP.
I would still like to see Hussman and/or the guys at GMO address this question.
Good article, hc, thanks for the heads up!
« Indeed, in falling markets, no-dividend stocks tend to get hammered, while higher-yielding shares often hold up better. That goes to a more fundamental issue: To make money from a company that never returns cash to shareholders, you're dependent on someone else coming along and paying more for your shares than you did. »
And THAT, in a nutshell, is why I don't own BRK.
According to his Twitter profile he sees himself as a: "Realistic optimist widely viewed as prophet of doom."
I have an idea that I would like to see him adddress in his Weekly Market Comment, but can't find a way to pass it along to him (e-mail, snail mail, etc.) other than to create a Twitter account and tweet him, which I am reluctant to do.
Here's my questions: What effect do share repurchases, "buybacks", have on the real grow rate? Would you be willing to pencil-in, say, a 1% per year share reduction for the next 100 years, bumping the real growth rate up accordingly?
Inquiring minds want to know.
This post refers to your first post, not your follow up.
BRK-B closed at $125.83 last Friday. Why pay someone $5.40 per share to make $4.17 per share ($130.00-$125.83) more than what you could make by simply selling into the market? That just doesn't make sense to me. If I was the buyer I wouldn't do that. I bought an insurance policy that guarantees that I won't get less than $124.60 per share ($130.00 - $5.40) for my stock regardless of how low the market price actually goes before expiry. As soon as price of the stock falls below $124.60 the insurance policy begins to have value. Let's see what the other option experts (axp & beach) have to say.
Tom, I don't pretend to be an options expert, but for what it's worth, here's how I see it.
A contract controls 100 shares, so to "sell/write/go short" one "130 Sep 14" PUT contract your broker will "lock up" $13,000 of the cash in your money market sweep account as collateral for the duration of the contract (50 days, 8/1/2014 to 9/20/2014) or until it exercised. Your buyer pays you $540 for the right to force you to buy 100 shares of his stock at $130 per share anytime during the the duration of the contract. My guess is he'll exercise if the stock price falls significantly below $124.60 per share, which is 131% of book value per share ($94.99 as of 6/30/2014) and above the 120% buyback trigger at $113.99.
If your buyer doesn't exercise then you'll make 4.15%, (5.40+130)/130-1. Annualizing 50 days to 365 days is ridiculous, in my opinion, but if you insist on doing it, that's 34.6%, ((5.40+130)/130)^(365/50)-1.
Now, let's assume WEB "parties hearty" on his birthday, Saturday, August 30, and something bad happens. If on Monday, September 1, the stock trades at $114 per share (~120% of book value per share), and your buyer exercises, then on a per contract basis you trade, $13,000 of your cash for 100 shares of his stock now worth $11,400. And you're stuck with a 8.15% loss, (5.40+114)/130-1 over the 31 day period. By the way, that annualizes to a LOSS of about 63%.