IMO, the S&P 500 has outperformed BRK-A because it has paid and grown the dividend per share faster than BRK has grown book value per share.
The S&P 500 started the five year period at a P/D of 51.05, ended it at 45.17, and grew D/s by an average annual rate of 13.71%.
BRK-A started the five year period at a P/BV of 1.37, ended it at ~1.30, and grew BV/s by an average annual rate of 10.52%.
Growth Adjusted Internal Rate of Returns:
S&P 500, 13.7%:
Clearly paying and rapidly growing the dividend (no doubt a result of increasing the payout ratio in combination with buying back shares) beat sitting on too much cash (while waiting for elusive elephants).
Thanks for the heads up, but I'll pass. It's a highly leverage portfolio of exotic credit instruments with unknown credit ratings. I've stopped looking at stuff like this (high income yield today, capital losses likely tomorrow). I've recently looked at and passed on NCZ, O and MSB. The Fed has taken too long to unwind their ZIRP and I've now begun to burn my investable cash hoard. Game over.
Thank you for the suggestion. I will take a look at the posts over there.
I don't consider myself to be a high yield investor and become extremely wary of yields greater than about 5%.
Consider, for a moment, two investments, "A" & "B", both have a similar total returns of ~7%.
"A" currently pays you ~2% and grows the distribution by ~5% per year, (e.g., the S&P 500).
"B" currently pays you ~5% and grows the distribution by ~2% per year (e.g., "T").
I would pick "B" or "A" because its price should decline by less (by 1/6 vs 1/3) if folks suddenly decided they needed a total return of 8% instead of 7% to be happy.
Last November someone posted a message on the IBM that "C" currently paid 11%. My first thought was really? and so does it grow the distribution by -4% (that's a minus 4%) per year?
Annualized, the change in distributions has been -5.66% per year and the change in net asset value has been -6.82% per year. Let's just use -6%, 11% (income yield) minus 6% (capital losses) is a total return of 5% and that's worse than either "A" or "B".
That's not exactly the type of investment I want to pass on to wife someday.
Thanks, hc. I did scan the article, but this says it all: « Disclosure: I am/we are long NCZ ». IMO, it's just another cheerleader piece. I finally gave up on NCZ and have now taken it off my watch list.
To make it stretch, I need to raise the aggregate yield of my portfolio. I did buy more VPU last week (~5% of portfolio). My buy was at a P/D of ~27. If the dividend continues to grow by about ~5.4% per year that should provide a reasonable return.
And there is a very good reason why.
Since inception, 7/31/2003, the fund's net asset value has fallen 56.87%. That annualizes to an average loss of 6.69% per year.
The fund paid its first distribution twelve years ago, $0.11563 per share per month on 10/01/2003, and it now pays $0.0575 per share per month on 10/01/2015. That 50.27% drop annualizes to an average loss of 5.66% per year.
« As painful as a 25% drawdown would be even for me, its a lot less severe than the 50%+ drawdown that would be necessary if you have margins fall back to earth at the same time. »
The S&P 500's trailing four quarter earnings (as reported earnings per share, Howard Silverblatt's data) peaked at the end of the 3Qtr2014 and has been falling ever since.
Qtr Ended ...... EPS(T4Q)
09/30/2014 ... $105.96
12/31/2014 ... $102.31
03/31/2015 ..... $99.25
06/30/2015 ..... $94.91 Est'd
How low will they go?
IIRC, Stockman believes normalized earnings would be about $80 (which is a profit margin of ~7% on revenue of $1146). Multiple that by a P/E of 15 and that would drop the S&P 500 down to $1200.
« I'm not really that worried about a market PE of 19.5 ... »
Well, with your 40 year investment horizon I can understand why. For anyone with a shorter horizon buying at 19.5 and selling at 15.5 will probably be painful. Essentially you're giving the seller the first three years of YOUR (the buyer's) return for the privilege of being allowed to buy his overpriced stock.
The excerpt below is from an interview that appeared in BARRON'S (January 3, 2011, pp. 27-28) with Ben Inker, Head of Asset-Allocation Group, GMO.
How do you define value?
With regard to stocks, fair value is a valuation level at which you could get a decent return for the stock. That means that at fair value, you should be able to get an annual real return of 5½% or 6% from developed stock markets. In order to do that, stocks need to be trading at a multiple of normalized earnings which is consistent with that. You want to see a price/earnings ratio on normalized earnings of around 15 times, maybe 16 times, if you are lucky. With bonds, it is even simpler, because you know what the coupon is. The questions are, do you know what the coupon is, what is inflation going to be, and is the resultant real yield sufficient?
The entire article is worth reading, to find it, search using the following string:
« The Charms of Cash Ben Inker »
I can certainly understand wanting to dump BRK for any number of reasons.
But really, now?
At ~1.3 X book?
And to do what?
Buy (of all things) the S&P 500 at ~19.6 X earnings?
Tom, I put a little more thought into the hypothetical future net cash flows behind your trade.
I now believe that if you can make the daily interest payments for the next four years ( 4 years X 360 payments per year) you should actually do OK.
I'm getting an IRR% of 5.14 and a MIRR% of 2.33% for the following:
NCF X Frequency
$1,350 X 1
0 X 44
-$23.3333 X 1440
$35,639.12 X 1
Note: #CF/Yr = 360
A straight buy, hold & sell under the same assumptions would have netted your 8%.
Clearly taking a loan at 6% to buy something that might earn 8% isn't as quite as good.
As always, just my opinion.
My guess is that you'll find that there will be four months a year when OUSA's monthly dividend is higher than normal: February, May, August and November. The months when both T and VZ payout.
Want a sustainable (well, at least for nine years) 11% payout?
Put a hundred dollars (all singles) in a cookie jar and withdraw eleven per year.
« Btw, to be fair Tom isn't paying interest on the entire 140k, right ? »
Based on what he wrote, it certainly sounds like he is, 6% of $140,000 divided by 360 days per year is roughly $23 per day.
I guess it comes down to what is more important to you, the money or your reputation. If $33,600 is pocket change for you, you could just tough it out (or as Charlie would say, suck it in and cope) for roughly the next four years.
Four years of margin interest should total about $33,600, 4 years * 6% per year * $140,000 principle.
But (and this does assume that BRK-B appreciates 8% per year) your trade, net of the forced purchase, might total $35,639, ( $129.10 * ( 1 + 8% ) ^ 4 - $140.00 ) * 1,000 shares.
That's about $2.04 per share, ( $35,639 - $33,600 ) / 1000 shares.
Just think of the bragging rights that earns you!
You could say, I once made a trade where I was PAID $1.50 per share to take a position and then, roughly four years later, was PAID $2.04 when I exited it. With only two positive cash flows, an IRR calculation has no solution. Now, THAT'S cool.
IMO, your sin wasn't paying $140 for BRK-B (although I certainly wouldn't do that), it was using margin (selling naked puts). Now, say 5 "Our Fathers", 5 "Hail Marys", make a good act of contrition, and DON'T DO IT AGAIN!
hc, I did preface my remarks with: "Let's be optimist for the moment and assume ..." AND Jim is guessing that BRK-B's 30Sep2015 BV/s might be $103.78, that suggests the current P/B might be 124%, which is within spitting distance of Buffy's buyback target AND everyone knows that stocks only go up AND while one might view Jim's transaction as an interest free loan, I never suggested it was risk free.
"z", IMO, you're so focused on pinching pennies (avoiding taxes and fees) that you're passing up on the dollars.
The real genius of Jim's option play is how he rescheduled his payment(s).
Let's be optimist for the moment and assume that BRK-B appreciates ~8% per year over the next 490 days, 18Sep2015 to 20Jan2017, and trades for $143 per share on the day that Jim's option expires.
Jim paid a total of $132.10, $52.10 TODAY and the remaining $80 is due on that day, in the FUTURE, when he actually exercises the option, deferring ~60% of his payment to the day he closes his trade.
So, instead of making a cumulative total return of only 8.25%, $143 / $132.10 - 1; he'll make 20.9%, ( $143 - $80 ) / $ 52.10 - 1, by simply rescheduling his payments.
« jims a nice guy »
Check out the trade he made today (the last paragraph of TMF# 219190).
Even a defensive pessimist like me can imagine that he might make, before expenses, an IRR of 15% on that.
IMO, Stockman is at the most pessimistic end of a realistic set of assumptions.
According to the video, he's assuming a multiple, P/E, of 12 to 15 on earnings per share of about $80. That would put the S&P 500 between 960 and 1200. I would buy at those levels.
NCZ's net asset value per share, XNCZX, began to drop in July of 2014 ...
Sorry, too many numbers, too early in the morning.
NCZ's net asset value per share, XNCZX, began to drop in July of 2015 as a result of falling oil prices. Unfortunately the cheerleaders and pumptards successfully convinced retail at the time that the NAV would come back (it never did) pushing the premium out to +18.22% by 7/9/2015 (a $9.96 market price to $8.42 NAV). One of the pumptards, desperately hoping to prop the price up, made the mistake of posting on the IBM board last November and I followed him over to the NCZ board to investigate the "free lunch" he was promoting. I began to argue that NCZ should trade at a discount, NOT a premium to NAV. I seriously doubt that anything I posted convinced anyone of anything, but eventually retail figured it out on their own and as of yesterday, 9/14/2015, it now trades at a 15.49% discount (a $5.40 market price to $6.39 NAV).
My guess is that it is currently priced to provide [GUESSTIMATE!] an annual total return of about 6.78%, $0.0575 distribution per share per month X 12 months per year / $5.40 market price - ~6% per year, on average, in anticipated capital losses going forward. Not bad, but it doesn't beat my current benchmark, T, which I believe is still good for an ATR of about 7.78%, $0.47 dividend per share per quarter X 4 quarters per year / $32.55 market price + ~2% per year, on average, in growth. I'm looking for an ATR of ~8% AND I've got to get PAID, quarterly at a minimum, preferable monthly. Rhetorical question: Is that asking too much?