Thanks for the offer, Tom, but I'll pass. My interest was limited to understanding the calculation error that you were making in the presentation of the results of your trades. Now that I've achieved that goal, I'm done. Thanks again, take care.
Yesterday, 7/22/2014, BRK-B's day-over-day return was -0.1244%. That annualizes (based on a 252 trading day-year) to -26.9%, (1-0.001244)^252-1).
If you're going to annualize short term gains then be fair, and annualize short term losses as well.
It's one thing to take a number based on a year and reduce it to a shorter period of time, the opposite (extrapolating with wild abandonment) is just plain ludicrous.
Well Tom, I can now see why you got so much grief on the BRK-A board. You are probably the only person on the planet that annualizes data that way. Not only is the method itself highly dubious, but one could argue that the very act of annualizing short term (less than a year) gains or losses is misleading as well.
So, let's assume that you sold one covered called yesterday. To do that you had to forfeit control of 100 shares of stock worth $12,858 at the close. Those shares are now in escrow with your broker as collateral to back the insurance policy you sold your buyer. Your buyer paid you $187, the premium on the the insurance policy that you sold him. Net cash flow on 7/21/2014 : -$12,858+$187 = -$12,671. Let's assume that the buyer does call your shares on the last trading before expiry. You lose your 100 shares and are paid $13,000. Note that your buyer would not have called your shares away if they weren't worth more than $13,000. Net cash flow on 9/19/2014 : $13,000. So, in my opinion, you made (before expenses) 2.60%, ($13,000/$12,671-1) on the deal. You want to annualize that, which I believe is a presumptuous mistake. Your deal spans 60 days. How are you extrapolating a simple return of 2.6% over 60 days to 15.6% over 365 days?
Yes, over a ten year period.
If there is market-wide correction, the sell-off will effect everything (which includes BRK-B, it IS, after all, the ninth largest position in the S&P 500). BRK has it own special event to contend with, WEB's passing, even he expects BRK to fall when that day comes. I believe a significant number of shareholders own BRK because they love WEB, not BRK. Will they still want to own BRK after he is gone? Is Howard and the three "T"s a big enough draw?
I do believe that BRK will outperform SPY over the next decade. Part of it is probably due to better portfolio management. BRK actually "shoots for" performance with safety and thus very likely has a lower proportion of funds invested in "dogs" than SPY does. By the way, I still believe IBM is a "dog". I believe that SPY attempts to "mirror" (for better or worse) the large cap end of the US stock market. SPY is, in my opinion, more overvalued than BRK. IMO the buyback press release in combination with WEB's comments on its significance (the 90 cent dollar remark) put a governor (in the automotive sense of the word) on BRK. It will never again run too fast or too slow. And then there is the "float", who knows, maybe even it will earn something some day, but Janet's predecessor, Ben, has remarked, that isn't likely to happen anytime during his lifetime.
What does GMO have to say about inflation?
The following is from the "boilerplate" notes at the bottom of the monthly 7-Year Forecast charts:
« US inflation is assumed to mean revert to long-term inflation of 2.2% over 15 years. »
The accuracy of predicting where BRK-B's bid will be 10 years from now depends on getting two things right: book value per share's compound average growth rate, CAGR; and the terminal multiple, the Price to Book Value ratio, P/B.
CAGR : Since 6/30/1998, BRK has grown book value per share by a real (factoring out inflation) 7.0% per year. Previous to that date the real growth rate was 22.0%. I can only guess at what caused BRK to abruptly downshift to a much lower speed at that point in time, but it did, and no one knows if and when another downshift might occur. So let's take a wild guess and use a nominal (includes inflation) CAGR of 8%. That's 7% real plus 2% inflation minus 1% as a safety margin (actually I'm superstitiously invoking the instructions on the reverse side of the headpiece that read, "Take back one kadam to honor the ...".)
P/B : I'll go with 1.2. WEB will very likely be gone by then and only an occasional press release announcing that a buy back had been made near there will convince the folks that remain that it is worth that.
10-Year projected bid : ~$240 per share.
That would deliver an annualized nominal total return of about 6.5% from last Friday's close.
JMO, but I believe it is our patriotic duty to emulate the Fed & its ZIRP and bid the price of the S&P 500 up to the point where no buyer will make any money, whatsoever, on his investment for at least a decade. That is, for every dollar he/she pays out today, he/she will get back $100 in total over the next decade, no profits, just a return of capital, net of taxes.
So how much is that?
Well, dividends per share, T4Q as of 6/30/2014, was $37.38. Let's assume that dividends grow 5% a year, and deduct 15% for taxes, that puts the ten year after tax sum at about $420.
To avoid paying any capital gains taxes when we sell (a decade from now) we need to buy the index today for the same price we believe it will sell for ten years down the road. If IV/s really is one times sales per share, and T4Q sales per share was $1,126.00 as of 3/31/2014, and we expect sales per share to grow by 5% per year, then that's $1,834.
Adding ten years worth of after tax dividends to a final closing price (designed to avoid paying capital gains tax) suggests that we pump the S&P 500 out to about $2,254 (two times current sales per share).
What was Jeremy's bubble number again?
After a bit of reflection, I've come to the conclusion that we are now at an impasse, and that any further discussion on this particular subject is unlikely to be productive.
To summarize, you obviously see great value in Graham's teachings. I have not made an effort to read his book because I am turned off by the valuation tools he uses. To me, his equations (e.g., IV = E*(8.5+2*G)*4.4/Y ) seem to be empirical and are loaded with what appear to be arbitrary constants (the "8.5", "2" and "4.4") that may have been valid decades ago based on observations he made at the time.
By the way, I too have a technical background. I spent 38 years of my life working in the chemical industry as an instrumental analytical chemist. I analyzed samples (using instruments that were designed by physicists) for other people (mostly R&D, but occasionally also for customer service engineers who were trouble shooting off-site problems in support of our businesses).
Price squared divided by the product of Book Value times Earnings means nothing to me and I don't see how it was derived from anything remotely fundamental.
For a detailed explanation and worked example by Julian Livy of a more elaborate version of the second equation see:
« Finding intrinsic value: The Graham Formula »
LOL, how many AAA rated bonds/companies are left in the U.S.?
Answer: 3 - JNJ, XOM & MSFT.
Now, here's something that does work for me.
If a company pays a dividend of $1.84 per year, grows it by 2% per year (0% real growth + 2% inflationary pricing growth) and I discount it by 7% (5% real discount rate + 2% inflationary adjustment) what is a 100 year stream of those dividends worth today? Answer: $37 per share. We just valued T (AT&T).
I've pulled my paperback copy of "The Intelligent Investor" off my bookshelf. It's the 4th Revised Edition with commentary by Jason Zweig. I'll readily admit that I'm the type of guy who will flip thorough a book looking for equations & graphs and focus on those sections first. I can see, from penciled notes on the blank page after the index, that two equations in particularly, irritated me to the point of not wanting to read the book.
Pages 349 & 374 : P/B times P/E target, less than 22.5,
Page 295 : Value per normalized E equals 8.5 + twice the 7 to 10 year CAGR.
Is there any hidden value in these heuristic rules of thumb or are they just so much mystical jibber-jabber? I really can't tell.
It reminds me of that scene in Raiders of the Lost Ark where they're determining what the length of the staff should be. One side of the headpiece has an inscription reading six kadams high, but the inscription on the other side says to be sure to subtract one. If you haven't read and understood the inscriptions on both sides of the headpiece then you will probably (like Belloq) end up digging in the wrong place.
Help me out. When (date & source) did Buffett write or say (and I'm paraphrasing), "You can't do it Ben's way anymore"?
And, by the way, I'm willing to take the time to help just about anybody, as long as they're not being obnoxious about it, and if it takes very little effort on my part to do so.
« He paid about 3.5 times revenue. »
Time to check your numbers!
The current (6Jun2014) Value Line report for XOM is available free on their website (it is one of the 30 DOW stocks).
XOM's 2013 Price per share ranged from $84.8 to $101.7.
XOM's yearend 2013 Sales per share was $90.02.
Which puts XOM's 2013 Price/Revenue ratio between: 0.94 and 1.13.
And, while XOM's DIVIDEND/REVENUE RATIO of ~2.7% is in the same "ballpark" as the S&P 500's, it's Revenue PER SHARE growth rate is expect to be better due to higher than average share reductions via buybacks.
And, just when did WEB "pound the table"?
October 17, 2008, "Buy American. I Am." (NYT Op Ed piece).
And what was the S&P 500's Price to Revenue ratio at that point?
1.08 on 9/30/2008.
By the way, WEB was a bit early:
0.87 on 12/31/2008,
0.64 on 03/06/2009,
0.80 on 03/31/2009.
And, as of today's close, with the P/Rev at ~1.75, Jeremy issue's a warning that he believes that we're approaching a Bubble (P/Rev of ~2.00).
To the best of my knowledge, the highest P/Rev ever was 2.44 on 03/24/2000.
Rhetorical Question: How high is too high?
GMO's 2Qtr2014 letter was released today.
Ben Inker's paper: "Free Lunches and the Food Truck Revolution", discusses selling puts.
« Some investors and strategists have suggested that put selling is a free lunch, and on the face of it, they
seem to have a point ... »
One of Jeremy's papers: "Bubbles Again ...", puts a number on it.
« Accordingly, my recent forecast of a fully-fledged bubble, our definition of which requires at least 2250 on the S&P, remains in effect. »
That's a Price to Revenue ratio of about 2.00 (T4Q Revenue per share as of 3/31/2014 was $1126.00).
Beach, I agree, the time frame is important. My two sons (ages 25 & 29) have Vanguard Traditional IRAs and are invested in the Target (Years 2055 & 2050) Retirement Funds. Both funds are currently: 63% Total US Stock Market, 27% Total International Stock Market, 8% Total US Bond Market, and 2% Total International Bond Market.
The Fed has done an incredibly effect job of destroying both the Credit and Equity Markets by pumping asset prices up to the point where it is almost a certainty that returns over the next decade will have to be subpar.
IMO, there really is nothing left to do other than take Munger's advice:
“At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”
Reference: Bloomberg, Andrew Frye, 20Sep2011, « Munger Says 'Thank God' U.S. Opted for Bailouts Over Handouts »
brkahoo, isn't it obvious?
Mr. Market understood what he said!
09/26/2011 Press Release : Will buyback shares at or below 110%
10/04/2011 WEB clarifies the PR by remarking: "Buying One Dollar for 90 Cents", implying an IV/BV ~122%
12/12/2012 Press Release : Buyback threshold reset to 120% or less