Good morning, hc. I've given up on both BRK and WEB. When I read (the Saturday morning that the AR was released) that WEB's answer/solution to the "5-Year test" was to move the goal posts, that was the last straw for me. Best wishes to you and Beach. Take care.
Search for, and then download, Vanguard's research report: « Revisiting the ‘4% spending rule’ »
An excerpt (from page 4):
4% spending rule explained
The 4% spending rule states that retirees with a diversified portfolio split between stocks and bonds can safely withdraw 4% of their initial balance at retirement, adjusting the dollar amount for inflation each year thereafter. This level of spending is intended to provide a stable, inflation-adjusted income stream that can potentially be sustained for 30 years, based on historical returns for stocks and bonds.
Sean & MV, yesterday GMO released a new paper that might interest you. It's free, no registeration is required. Search for « A CAPE Crusader: A Defence Against the Dark Arts -- James Montier »
It reviews five different models that are used to guesstimate, or forecast, the REAL (net of inflation) annualized total return of the S&P 500 over the next SEVEN years. The bottom line? The average forecast for the five models is zero.
The chart on the last page, a breakdown of the individual components that make up the return, fascinates me. I don't understand why they have suddenly started using a normal real capital return of ~3.3%. IIRC, for years, they've insisted that the capital return should track the real, per share, sales growth, and that it, historically, has averaged between 1.0 and 1.8% per year. I wonder if the they are now making an adjustment for buy backs?
I hope you find that helpful.
I learned a long time ago, hc, not to have heroes. Eventually, they all disappoint.
So Ron is pumping for the DJIA to hit 30,000 in ten years. Maybe. But what if, just what if, the T4Qtr $360.10 in dividends per share at yearend 2013 grows by 5% a year and is valued at 30X at yearend 2023? That would put the DJIA at $17,600 ten years from now, not $30,000, and that's only 8.6% higher than where it closed yesterday. If you bought at 46X (yearend 2013), sell at 30X (yearend 2023) and dividends per share grow 5% per year, that would put the ATR for the decade around 3.4%. That beats cash, but other than that, it is nothing to write home about.
Mocking what you don't understand, MV? That's a real sign of intelligence - NOT!
I'll bet you don't even recognize that WEB's Market Cap to GDP valuation metric is also a Price to Sales ratio. Do you know why he used it? My guess is it is was a way to smooth, or normalize earnings.
As of 9/30/2013, the S&P 500's trailing four quarter per share Earnings and Sales, was $94.37 and $1,115.38. That's an Earnings to Sales ratio of 8.5%. If one were extremely naive, or an idiot, one would multiple that by the magic 15X earnings multiple that folks are so in love with and declare that fair value was a Price equal to 127% of Sales. But someone who looked a little deeper would see that the current multiple is on the high side. Looking back over 52 rolling four quarters of data (31Dec2000 to 30Seo2013) one would see that the mean and standard deviation of the earnings to sales ratio was 6.4 ± 2.2%. If one multiples the MEAN earnings to sales ratio by 15, then one might come to the conclusion that fair value price is 96% of sales, not 127% of sales, and certainly not yesterday's close at 166%.
Ratioing something you really care about (in your case, earnings; in mine, dividends) against sales is a way to normalize or improve the quality of the number you're really after.
Before I give up and go, I will leave you with a searchable list of resources that discuss valuation using the price to revenue ratio, and/or, the all important, REAL revenue per share growth rate.
I can't give you links, but I can give you searchable strings that should take you to the links.
IMO, Grantham's single best article is : « OUTSTANDING INVESTOR DIGEST GMO BUBBLES »
Hussman has several good articles on valuation which include my favorite metric, the price to revenue ratio.
« Hussman Price-to-Sales Ratio May Prove Valuable in the Next Profits Recession »
« Hussman Baked In The Cake »
« Hussman Investment, Speculation, Valuation, and Tinker Bell »
Believe what you want to believe. Most folks do. But it is my belief that both Grantham and Hussman now believe that fair value (expressed as a Price to Revenue ratio) for the S&P 500 is around 1.00 or 100%. IIRC, once upon a time, they supported an even lower value.
I'm too burnt out on the subject to care enough to discuss it anymore. But it only involves three variables, the dividend per revenue ratio, currently around 3.1%; the REAL long-term sustainable revenue per share growth rate, which was, historically speaking, around 1.5%, but now with buy backs "muddying the waters" by artificially pumping the per share REAL "growth" rate, maybe 2.5% today; and finally the REAL discount rate, 5.7%, which is equivalent, nominally speaking, to about 8.0% if one assumes that inflation will average about 2.2% in the future.
If you grow 3.1% (Div/Rev) by a REAL 2.5% per year and discount the stream of dividends by a REAL 5.7% per year, you should get an IV/Rev of about 0.99 or 99%.
The Price to Revenue ratio for the S&P 500 is currently about 1.65 or 165%.
If you care, read their papers.
Hi Beach, share buy backs make it difficult for amateurs, like me, to value companies. Reducing the number of shares via buy backs artificially enhances the per share growth rate for sales and dividends. It is just another variable that I have to take into consideration. IMO, it is a way for low growth / no growth companies to give the false impression that they can still grow. For years, I have avoided companies whose valuations required multiple growth rates and now I have to add low growth companies that game their growth rates with buy backs to that list. I guess the time has come for me to just give up.
It's getting there!
"multpl" estimates that the S&P 500's price to revenue ratio is now 1.65.
It has been higher only 1 quarter (31Dec2000) out of the last 52.
There is a lot of good Price/Rev information on Hussman's site as well.
That's the only number I care about. There is an hour's worth of discussion, spreadsheets and chalk boarding, behind the "why", but for me, that's the bottom line, and it is too high.
So you should be thrilled! Now, every time someone buys the "500" they are also being coerced into buying BRK as well.
Once upon a time BRK was an independent little ship, sailing the seas on its own merry way. Now it's a lifeboat, frozen to the davit of a much larger ship. When that larger ship goes down, BRK has no choice but to follow it.
If, and when, that event eventually plays out, you can find some appropriate background music for it by searching for: « Titanic Violin: Nearer My God To Thee ».
« WHY DEMAND for spy continues to exceed DEMAND for brkb? »
JMO hc, the reason folks are buying "500" related products is:
#1 - Momentum, everyone knows the "500", and that it did spectacularly well last year. No one wants to miss the boat/train on something like that! And, by the way, what's a BRK? And don't you need a brokerage account and have to pay a commission to buy that unknowable, black box, pig in a poke, of a stock? And besides, the "500" is a lot like IBM, no one ever got fired for buying the "500" or IBM (LOL!).
#2 - Its tax preparation season. If your accountant calls you and says, good news, you (or someone you love, who you might be coaching) are going to get a nice refund! But, hey, I see you didn't fund your Traditional IRA and 401(k) to the max last year. Would you like an even BIGGER refund? If you do, you can still add to your Traditional IRA for tax year 2013, but you have to do it before I close out your return. That would really increase your refund! Just think of all that extra money as being Uncle Sam's way of saying: Thank YOU, for saving for YOUR future. But I really need to know, within the next couple of days, what you're going to do. Call me. ... So what do you think, hc, that's a pretty hard offer to resist, particularly if you're young, have the spare change, are sick to death of making 1% (thanks Ben!) on your bank/credit union accounts and have absolutely no sense of valuation, and even if you did, why would you care? You've got 30 years to work off your mistakes! And now, assuming you've decide to pick up that reward for saving for your future, what do you buy? (see #1, above).
You know what's really sad, hc? Year to date, BRK-B has under performed TSLA by 46.3%! (YTD: BRK-B, -4.6%; TSLA, +39.6%) . Why doesn't BRK perform like a momentum stock? YYY? It's got to be the supply & demand thingy, because neither pays a dividend and neither has been buying its stock in SIZE. Oh, the humanity!
BRK-B's performance was just fine. It started and ended the period at about the same multiple (Price to Book Value ratio) and book value per share grew at a faster than average rate. By hinting to his investors what BRK is worth to him (the price to book value ratio, below which, he would consider buying back his stock), Buffett has done a marvelous job of protecting his investors from the nonsense valuations that have taken hold of other equities.
RSP, on the other hand, started the period (yearend 2008) with a price to trailing four quarter dividend of 41.9 and ended the five year period (yearend 2013) at 78.5. Why do RSP's investors now believe that its dividend is worth almost twice as much as it was worth five years ago? I can't see a single valid reason to support that. In my opinion, irrational exuberance took over, and by the end of the period, giddy folks, who had suddenly fallen in love with equities, enthusiastically, but foolishly, bid their prices up into an equity fantasy land. In my opinion, RSP is badly over valued. By the way, congratulations on the nice five year return, but don't be surprised if some day in the future, when Mr. Market finally wakes up and realizes that he over paid you, that he doesn't claw some of that return back.
As always, just my opinion.
Beach, you're telling me how things where in the past. I'm telling you how I want them to be in the future. In my opinion, Jeremy Grantham, John Hussman and John Burr Williams aren't wrong, they are/were just like Galileo and Darwin (I'm know I'm exaggerating a bit here, but I do so to make a point) ahead of their time. Try to leave the world a little better than the way you found it. The problem with accepting injustice is it eventually breeds transformations like Pasha Antipova "Strelnikov" (can you tell the snow here is finally getting to me?).
All I want, hc, is a fair contest, an honest return ... for everyone, all the time.
No cheating, no pumping, no conning the more naive investors out of THEIR future returns by promoting various gimmicks to induce them to pay a ridiculous price for your shares.
I know Hussman, Grantham, and their crews, try very hard, but it certainly looks to me, like no listens to them.
Maybe if someone with the statuary of Jack Bogle would stand up and say that buying the index is a great idea, but overpaying for it is just stupid (it destroys your future returns), and that he wouldn't pay more than "X" times revenue for the "500", maybe, just maybe, THAT would make a difference.
Seriously hc, BRK's performance over the last five years has been exemplary, the "500", on the other hand, "won" by cheating. A ridiculous expansion of the multiple (price to revenue ratio) due to an idiotic momentum surge by fools who don't know any better isn't any different, in my book, than an athlete who won a host of contests as a result of his illegal use of steroids. Both deserve to be stripped of their metals.
I read the same Bloomberg story.
The quote that bothers me is: "To keep investors happy, Coca-Cola should return more cash to shareholders by way of share repurchases and higher dividends, Russo said."
If the data in Yahoo's quarterly Cash Flow statement is correct, for the four quarters ending 27Sep2013, KO returned 101% of its free cash flow to equity to investors: 58% in dividends and 43% was used to buy back stock.
Isn't 101% enough?
IMO, Buffett has not only managed BRK brilliantly over the years, but has also done a wonderful job of protecting his investors from the nonsense prevailing elsewhere by dropping broad hints as to what BRK is worth, at least to him.
If my calculations are correct, over the last five years, BRK started and ended the period at the pretty much the same multiple of book value per share (137% & 136%), and grew book value per share by about 13% a year (it has averaged about 9.8% per year since yearend 2000). A very credible, very good return.
That bag of trail mix (which, in my opinion, contains more turds than raisins) known as the S&P 500, started the period priced at a very credible 87% of revenue, but ended the period at a ridiculous pumped up 165% of revenue, paid a dividend that average about 2.6% of revenue per year during the period and grew revenue per share by an incredibly pathetic 1.4% per year (and that nominal growth rate includes real growth, inflationary growth, and share reductions via by buybacks!). The S&P 500's return is higher than BRK's, but its return is also, in my opinion, nothing more than a very sick joke being played out on unsuspecting naive, retail investors.