As the title says, I like Berkshire and I think you should too. My reasoning is as follows. We are in a market where:
- Fed is tightening monetary policy and will do so for the near future
- S&P and Dow are overvalued
- Shiller PE is 29 vs median of 16
- Regular S&P PE is 20 vs median of 15 (and Dow is 22)
- S&P Price to Sales is 2.4 vs median of 1.5
- Borrowing rates are nearly guaranteed to increase and negatively impact valuations
- Both indexes are faced with a potential 25%+ decrease (or years of sideways price movement) before hitting median historical valuations
- Bonds are paying very little or even negative real returns and subject to inflationary risk
- Commercial, retail, and residential real estate are hard to predict due to disruptions from telework & COVID, with valuations potentially readjusting due to shifts in demand and headwinds from the end of cheap borrowing
- Commodities are volatile due to disrupted supply chains, inflation, and conflicts like Russia/Ukraine
- Cash would be king if you were willing to bet on inflation being tamer in the future, but my arm-chair QB call is that this is unlikely
Given all of these asset classes face some major challenge, broadly investing in them passively has some risks. Active investing is an option, but I'd rather focus my time on my family. I could delegate the active investing function and pick a managed mutual fund designed to weather the forecasts above -- but I have no idea how to pick the right fund. Thus, I arrive at Berkshire, which is like a diversified managed mutual fund where:
- I know and trust the current "fund managers"
- I know who the future "fund managers" will be
- I know the current and future "fund managers" are invested in the "fund"
- I know they have a long-term focus with continuity plans and oversight by a competent board of directors
- I can understand the assets and investments they own
- I know that the assets and investments they own were purchased at reasonable or attractive prices
- The "fund's" investments have a degree of pricing power to offset the impact of inflation
- The "fund" invests in products and services that will be around and necessary for many years to come
- The "fund" has a culture and propensity towards integrity and transparency with a principled and disciplined investing style
- The current "fund manager" is positioning the "fund" to survive markets being closed for months or years, a global nuclear war, massive insurance losses, and other such crises
- The "fund" has one of the lowest fund management costs anywhere
Given the market conditions for the major asset classes, I would ask the following: Would a diversified "fund" such as BRK be more or less attractive than other diversified alternatives? If it is more attractive, what price would you pay? -- mine is around 265 for the B-shares but your risk appetite may vary.
If you feel an alternative (like the Dow or the S&P) are better investments -- why? How are they better positioned and what upside would they offer?
EDIT:
For those wondering about how I arrived at $265. It was nothing fancy or sophisticated. I averaged the book value per share (BVPS) for 2021 and TTM and multiplied it by 1.2 ---- (223.46 + 217.63) / 2 * 1.2 = ~265.
Source for BVPS: https://roic.ai/company/BRK-B
BTW, some more interesting analysis:
- BRK has had a CAGR of 10% - 11% on their BVPS since 2006 -- Not too shabby for a managed mutual fund with bond like safety
- BRK was trading at a low of $70 in Jan 2007 -- but it was also a very rich 1.5x BVPS
- Compound $70 at 10% to Jan 2023 and we have $322, or what I would consider the upper limit for the fair value of BRK
- There are many ways to arrive at fair value. I do not aim to be precise but relatively accurate within a band/tolerance.
Submitted January 17, 2023 at 04:12AM by bapu_151719 https://ift.tt/VAcK794