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Thread: investing: berkshire hathaway vs sp500

  1. #1
    Flashaholic* turbodog's Avatar
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    Default investing: berkshire hathaway vs sp500

    I've been an sp500 index fund holder for a long time. Reason: historical returns, low fees (with vanguard), and low/no tax consequences till I sell.

    I've been reading the BH annual report for 3-4 years now, simply for fun. I keep seeing their annualized average returns compared to the sp500. They are about twice the s&p.

    What gives? Is it that simple? Yahoo finance back up their data claims.

    If they can manage 20% annualized (even through dot.com and real estate implosion) then why doesn't everyone jump on them?

    I know brk-a is ~$100k/share and brk-b is around $3500. That alone keeps A unavailable for most, but B's not too bad.

    Even so... aren't there places where you can buy fractional B shares? And on top of that... looks like B is coming up on a 50:1 split anyway.

    Basically.... what's the deal with BH stock? Is it really 20%? Do loads affect this? Seems loads were a mutual fund thing anyway.

    Seems too easy...

    Comments? Experience?
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    Flashaholic* LEDninja's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    BH is a stock not a mutual fund. Your broker charges you a fee when you buy the stock. Your broker charges you a fee when you sell the stock. Your broker may charge you an annual fee to maintain your account.

    BH is a 'value' stock. Warren Buffet only buys companies that make money and make money LONG TERM. Not companies that have a story to tell.

    Companies that have a story to tell?
    In the '90s Nichia invented the LED. Story: 10X longer runtime, save on batteries, electric bill.
    In the early '00s Lumileds introduced the Luxeon. Story: 14X brighter. Where did Nichia go.
    In the late '00s Cree introduced the XR-E. Story: 2X more efficient. Where did Lumileds go.
    In the early '10s Luminus Devices introduced SST-90. Story: Single chip 2250 lumens bright as a 150W bulb.
    So Mr. Buffet looks at the history of LED companies and mutter to himself "If I buy an LED company somebody better will probably come along in 5-7 years and my stock will be worth shit. Think I'll pass."
    The same philosophy kept him out of the dot com companies.

    Mr Buffet looks around him. Cheap peak oil has come and passed. More and more oil will be expensive tar sands or shale oil. Long term gas prices have nowhere to go but up. People won't be able to ship goods by air or even truck. So what did Mr. Buffet buy last year? A stock that went out of favour when Ford introduced the Model T and is still cheap. He bought up the railroads - all of it. More and more goods will travel by rail. And nobody can build a competing railway because nobody else owns a continuous strip of land from the Atlantic to Pacific, from Canada to Mexico. BH's railway will make money for the next 100 years and beyond.

    BH makes steady money but in many years it will underperform the S&P500. It will lose money some years too. But long term its a make money s-l-o-w-l-y stock. Its a good stock to hold for the next 10, 20 years. Not one to trade in and out of. Of course if Mr. Buffet dies all bets are off.

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    Flashaholic* turbodog's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by LEDninja View Post
    BH is a stock not a mutual fund. Your broker charges you a fee when you buy the stock. Your broker charges you a fee when you sell the stock. Your broker may charge you an annual fee to maintain your account.

    BH is a 'value' stock. Warren Buffet only buys companies that make money and make money LONG TERM. Not companies that have a story to tell.

    Companies that have a story to tell?
    In the '90s Nichia invented the LED. Story: 10X longer runtime, save on batteries, electric bill.
    In the early '00s Lumileds introduced the Luxeon. Story: 14X brighter. Where did Nichia go.
    In the late '00s Cree introduced the XR-E. Story: 2X more efficient. Where did Lumileds go.
    In the early '10s Luminus Devices introduced SST-90. Story: Single chip 2250 lumens bright as a 150W bulb.
    So Mr. Buffet looks at the history of LED companies and mutter to himself "If I buy an LED company somebody better will probably come along in 5-7 years and my stock will be worth shit. Think I'll pass."
    The same philosophy kept him out of the dot com companies.

    Mr Buffet looks around him. Cheap peak oil has come and passed. More and more oil will be expensive tar sands or shale oil. Long term gas prices have nowhere to go but up. People won't be able to ship goods by air or even truck. So what did Mr. Buffet buy last year? A stock that went out of favour when Ford introduced the Model T and is still cheap. He bought up the railroads - all of it. More and more goods will travel by rail. And nobody can build a competing railway because nobody else owns a continuous strip of land from the Atlantic to Pacific, from Canada to Mexico. BH's railway will make money for the next 100 years and beyond.

    BH makes steady money but in many years it will underperform the S&P500. It will lose money some years too. But long term its a make money s-l-o-w-l-y stock. Its a good stock to hold for the next 10, 20 years. Not one to trade in and out of. Of course if Mr. Buffet dies all bets are off.
    I understand the whole value approach.

    The simple question is: are BH returns really ~20% a year?

    If so, what costs would I incur to buy, own, sell it. I assume broker fee to buy, nothing to own, broker fees to sell, and capital gains after that.

    Concerning the bold parts above... BH has beaten sp for all but 6 of the last 45 years and has only had 2 negative years in 45 years.

    Not to sound ungrateful, but have you actually looked at the BH returns?

    According to the 2008 annual report (could not find 2009 one...) BH's compouned annual gains are 20.3% frm 1965 to 2008. The sp is 8.9% and this includes dividends.
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    Flashaholic* LEDninja's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by turbodog View Post
    The simple question is: are BH returns really ~20% a year?

    Concerning the bold parts above... BH has beaten sp for all but 6 of the last 45 years and has only had 2 negative years in 45 years.

    Not to sound ungrateful, but have you actually looked at the BH returns?

    According to the 2008 annual report (could not find 2009 one...) BH's compouned annual gains are 20.3% from 1965 to 2008. The sp is 8.9% and this includes dividends.
    I live in Canada. There are tax disadvantages and regulatory hassles in buying foreign (including US) stock. When I started there was no brk-b just brk-a which i cannot afford. So no, I have not looked at BH.

    There is a big difference between compound and annual returns over extended periods.
    Even if you put money in a savings account, after about 10 years the interest reinvested will be the the same as your original investment. So you have double the money to earn interest. After 20 years 4X. After 30 years 8X. After 40 years 16X. After 45 years 24X. 24X*3%=72% return on the original investment in year 45. It is the interest earning interest, not the original investment earning interest that will determine how much you make. And time is your friend.
    In the S&P and TSX in Canada over the time period (last 45 years) the indexes have doubled every 7 years or so. After paying management fees an index fund should double every 8 years. 45/8=5.625. 2X, 4X, 8X, 16X, 32X, ~50X.
    The problem with the index is that it lost money 3 years out of every 10. So it is a case of 3 steps forward 1 step back. Severely affecting returns.
    Simply staying away from companies that are not rock solid, BH has managed to only lose 2 years out of 45. BH does not make more money, but it loses less.

    You still have access to the last 4 annual reports?
    Look up the annual stock price increase for the last 9 years (or more if available). Average them. That will give you some idea how BH actually performs. I suspect it is a lot less than 20%.
    If you can find historical data, find out how the S&P (or DJIA) has done over the same years. It is nowhere near the long term trend of 8.9%.

    -

    After the crash of '29 the stock market dropped to 25% of its high. Took 25 years to recover.
    After the Japanese crash of 1990 the Nikkei dropped to 25% of its high. Still at the low today 20 years later.
    This time the massive stimulus seem to have stopped the slide. But worrywarts including me worry about what will happen when the stimulus is finished.
    The baby boomers will be retiring soon. They will be withdrawing money from their stocks and mutual funds pushing prices down. There are not enough echo boomers at their peak earning years to buy up all the stocks pushing them back up. I suspect the stock market will stay rocky in the midterm.
    The DJIA crossed the 10,000 mark 10 years ago. It is below 11,000 today. So the average growth over the last 10 years is less than 1% per year. I suspect the next 10 may not be much better. My gut feel is go for safety rather than ride the market.

    -

    I am retired. I have no way of making up any losses in my portfolio. So I am trying to avoid losses more than trying to get rich quick.
    In my RRSP (401K equivalent) the bulk of my money is in government bonds or GICs (CDs with government guarantee). So any market ups and downs don't affect me there.
    Outside my RRSP about half my money is in high dividend yielding stocks. Half my income is from the dividends. I do not have to sell stocks to raise cash. So any market ups and downs don't affect me there either. I am getting ~5% dividends. Less than the long term growth of the stock market but much better than the stock market in the last 10 years.
    The rest of my money is in 'dividend income' funds. Growing slowly so I can keep up with inflation.
    The split of fixed income inside my RRSP, stock based investments outside is due to Canadian Tax Laws. You will have to arrange your portfolio according to your country's tax laws.

  5. #5
    Administrator Kestrel's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    I have owned BRK/B for a number of years and read the annual reports – they contain a lot of good information as the OP states, plus we get some insight into Buffett’s methodologies.

    If you PM me your e-mail address, I can e-mail you the synopsis of the 2006 & 2008 annual meetings (of most interest being the question & answer session). These transcripts are extremely difficult if not impossible to find on the web, and provide very valuable information for a potential Berkshire investor. The 2009 Q&A was published by the Omaha World-Herald newspaper but is no longer available online – I went so far as to contact them directly about it but with no success. There is much info in those that will answer some of your questions. They are also very entertaining to read.

    WB has stated quite publicly for people to not expect outsized stock price appreciation in future years – BRK cannot grow anywhere near as fast as it used to. He has stated that he would be disappointed if BRK does not beat the S&P500 by a slight margin over a long period of time in future years.

    Another advantage of BRK is that it produces no dividend payments or capital gains distributions – all price gains on individual stocks are completely tax deferred by their very nature (index funds are mostly tax-deferred, while actively managed funds are partially tax-deferred). If the long-term capital-gains rate stays unchanged (please let's not have an argument about what tax rates should be or will be etc and take this thread off-topic), you would be looking at only a 15% long-term capital gain tax rate on 100% of your stock price appreciation upon final sale of BRK – just about the best tax strategy (IMO) after a ROTH IRA.

    FWIW my domestic portfolio is slightly greater than 50% BRK/B, the majority of the remainder being in a few Vanguard funds.

    Edit:
    The OP is citing the following information:
    From the 2008 BRK annual report, page 4.
    (Annual returns & comparisons are tabulated on page 4 for every year from 1965 to 2008.)
    Year BRK S&P500 (annual percentage change)
    1999 0.5 21
    2000 6.5 -9.1
    2001 -6.2 -11.9
    2002 10.0 -22.1
    2003 21.0 28.7
    2004 10.5 10.9
    2005 6.4 4.9
    2006 18.4 15.8
    2007 11.0 5.5
    2008 -9.6 -37.0

    • Using stock quote data for BRK/A from CNN/Money (one decade timeframe) and Vanguard’s historical data for their S&P500 index fund (as of 12/31/2009) reveals the following. BRK/A has doubled in value over the past 10 years, while the Vanguard S&P500 index fund is down ~10% overall over the past 10 years (with dividend distributions reinvested).
    • As always, past results are not necessarily indicative of future performance.
    • Yes, the numbers for the past 10 years are very good. Previous to the past 10 years, BRK was far better.
    • Compounded annual gain 1965-2008: BRK, 20.3%. S&P500, 8.9%
    • As WB states, if you are hoping to maintain that 20%, you will probably be very disappointed. However, as I posted earlier, WB hopes that BRK will generally outperform the S&P 500 in the future over long timeframes.
    Hope this helps,
    K
    Last edited by Kestrel; 01-20-2010 at 02:06 PM. Reason: BRK annual report info, also added links

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    *Flashaholic* LuxLuthor's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Great post. Everyone wishes they had bought BH way back when. My only concern now is what you just said regarding his expectations, and the fact that Warren is getting old--turning 80 in August. With age comes winding down, perhaps decreased mental faculties, and soon--death (based upon actuarial tables). It's hard to be able to trust BH's performance once Warren is gone....but his information is great to read.

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    Administrator Kestrel's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    What you are saying is correct. However, WB has been working very hard in recent years selecting a few different people to lead BRK after he is gone. One person who has the possiblity of outperforming even WB is Ajit Jain - don't take my word for it, take WB's. Over many years' reading about BRK (both in the annual reports and the Q&A transcripts), it is astounding to see his name coming up again and again with respect to being one of the prime movers of BRK performance over the past decade. I am less familiar with the other people that WB has been working with, but I have great confidence in his judgement in this matter.

    Close scrutiny of BRK over the years demonstrates that WB selects supremely capable people to run the various business operations of BRK, and leaves them empowered to run their operations independently. I believe that BRK will remain in excellent hands once WB has left the helm. The people who sell their BRK holdings after WB is gone just haven't been paying attention.
    Last edited by Kestrel; 01-20-2010 at 02:41 PM. Reason: misc edits

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    Default Re: investing: berkshire hathaway vs sp500

    Kestrel, LEDNinja, thanks for your insightful posts. Based on the last quote I see at approx 4pm, the price is $3476.00 or roughly $69 / sh at tomorrow's opening... should be interesting to see how much of a spike we'll see tomorrow morning.

    I also read this interesting quote on CNN Money: "...Buffett said that the reason for the split was to avoid socking smaller shareholders of Burlington with a big tax hit once they received Berkshire stock. He added that the fact that more individual investors will be able to buy Berkshire B shares was "a consequence" of the split, not the motivation for it."
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    Default Re: investing: berkshire hathaway vs sp500

    The subject of Buffett is a vast one. Probably only dwarfed by the topic of how to approach investing itself.

    First, notice that the performance of BRK has actually been WORSE than that of the S&P500 over both the past 1-year and the past 2-years. In other words, despite all that you read about his very smart investments during this recession, he is still behind.

    Second, notice the ratio of price-to-book, which is now above 1.2. What does this mean? Essentially, when you are buying BRK you are buying the companies it owns (since it is a kind of investment fund itself). The PB ratio indicates you are paying more than a 20% premium to the value of the underlying companies. Now, what stops you (or another fund) just buying the companies BRK owns? Isn't that like owning BRK but paying more than 20% less?

    Next, you should be aware of statistical bias whenever you are looking at an investment that has been very successful in the past (like BRK has indeed been over 20+ years). You are looking at them BECAUSE they have been successful. But, just by chance, some investments out of the millions and billions of possibilities, will stand out as being incredibly successful.

    As an example, think of the Legg Mason superinvestor Bill Miller. He had a string of something like 14 consecutive years of beating the S&P500. Suppose you saw that and bought in. And, you know what? Right then he faltered badly, falling behind the S&P500. The stock price of LM itself collapsed as a result.

    What went wrong? Value investing can itself be quite risky. He was taking concentrated bets, and at some point it backfired.

    Back to BRK: as others pointed out, Buffett is easing out due to age. Already his share of BRK is down to only 25%. Yes, lieutenants are being appointed and groomed. But can you really "appoint" investment genius? AND a lot of luck? I don't think so.

    Ultimately, I think the OP question is trying to avoid confronting the hard investment problems. There is the hope to find some kind of shortcut -- just buy one stock and get rich over time without having to think or act very much.

    Is this possible? Perhaps, but very, very unlikely.

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    Flashaholic* turbodog's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by RGB_LED View Post
    Kestrel, LEDNinja, thanks for your insightful posts. Based on the last quote I see at approx 4pm, the price is $3476.00 or roughly $69 / sh at tomorrow's opening... should be interesting to see how much of a spike we'll see tomorrow morning.

    I also read this interesting quote on CNN Money: "...Buffett said that the reason for the split was to avoid socking smaller shareholders of Burlington with a big tax hit once they received Berkshire stock. He added that the fact that more individual investors will be able to buy Berkshire B shares was "a consequence" of the split, not the motivation for it."
    So the 1:50 split went through for sure?
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    Flashaholic* turbodog's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by flashy bazook View Post
    The subject of Buffett is a vast one. Probably only dwarfed by the topic of how to approach investing itself.

    First, notice that the performance of BRK has actually been WORSE than that of the S&P500 over both the past 1-year and the past 2-years. In other words, despite all that you read about his very smart investments during this recession, he is still behind.

    Second, notice the ratio of price-to-book, which is now above 1.2. What does this mean? Essentially, when you are buying BRK you are buying the companies it owns (since it is a kind of investment fund itself). The PB ratio indicates you are paying more than a 20% premium to the value of the underlying companies. Now, what stops you (or another fund) just buying the companies BRK owns? Isn't that like owning BRK but paying more than 20% less?

    Next, you should be aware of statistical bias whenever you are looking at an investment that has been very successful in the past (like BRK has indeed been over 20+ years). You are looking at them BECAUSE they have been successful. But, just by chance, some investments out of the millions and billions of possibilities, will stand out as being incredibly successful.

    As an example, think of the Legg Mason superinvestor Bill Miller. He had a string of something like 14 consecutive years of beating the S&P500. Suppose you saw that and bought in. And, you know what? Right then he faltered badly, falling behind the S&P500. The stock price of LM itself collapsed as a result.

    What went wrong? Value investing can itself be quite risky. He was taking concentrated bets, and at some point it backfired.

    Back to BRK: as others pointed out, Buffett is easing out due to age. Already his share of BRK is down to only 25%. Yes, lieutenants are being appointed and groomed. But can you really "appoint" investment genius? AND a lot of luck? I don't think so.

    Ultimately, I think the OP question is trying to avoid confronting the hard investment problems. There is the hope to find some kind of shortcut -- just buy one stock and get rich over time without having to think or act very much.

    Is this possible? Perhaps, but very, very unlikely.

    I highlighted some of the more 'interesting' parts of your post.

    If your idea of behind depends on returns within the past 2-3 years then I don't think you're a BH or SP type of investor. As WB says... we buy these companies to hold till death, then pass onto our kids.

    What stops me or you? Deals like WB did with GE. He "invested" into GE, got a premium dividend and the rights to buy more stock at excellent prices. Nobody else gets these deals.

    Hard? Hard is thinking about the ways I could spend my investment money now and have fun. Acting is writing that check each month to a stock/fund/etc that's down, but knowing that patience pays off. Sometime the hardest active action you can do is to simply keep doing what you are already doing.

    And all this disgresses from my initial question. Is the 20% real. Apparently the answer is yes. What keeps everyone from jumping on the bandwagon? Apparently the share price is a barrier to entry, even with fractional shares. Also, it's a mental perception problem also. Nobody want to say their entire portfolio is comprised of 1-2 shares of stock. It sounds better to say that I've got 1000 shares of X.

    All this is a moot point anyway... as far as share price and barrier to entry. I know I could do fractional shares, but a B class split 1:50 _IS_ easier to deal with. I can buy them anywhere now. I can buy 1 share and do a drip straight to BH.
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    Default Re: investing: berkshire hathaway vs sp500

    "If your idea of behind depends on returns within the past 2-3 years then I don't think you're a BH or SP type of investor."

    Hardly - you misunderstood what I was getting at. The point is that you grab those investments that seem to have a great record only to find they disappoint relative to that record. The past two years' of experience in other words may be more representative than the earlier run of success.

    Of course, BRK has advantages (such as tax efficiency). The point is these can be replicated. (as someone mentioned, for example, in a certain type of tax advantaged account, such as the Roth IRA).

    "What stops me or you? Deals like WB did with GE. He "invested" into GE, got a premium dividend and the rights to buy more stock at excellent prices. Nobody else gets these deals."

    Notice that this sort of deal was basically available because of the unusual crisis we've been in during the past two years. And, BRK performance during these same past two years has been disappointing! So this sort of deal WAS NOT the factor explaining our supposed inability to match BRK performance.

    The point I was getting at is that you CAN generally buy the bundle of companies BRK owns. You can certainly put some of your money into GE, into GS, into Amex, ..., etc. You can even match the weights of BRK cash into these companies into your own set of companies. Those things you cannot match are few (e.g., wholly owned companies) and even then you can find substitutes.

    "Hard? Hard is thinking about the ways I could spend my investment money now and have fun."

    Investing is hard work, for the vast majority of people not fun -- why most people avoid putting in the work and generally suck at it. A lot of math ability or at least knowledge is also generally required, which also seems mostly lacking in the general population.

    "And all this disgresses from my initial question. Is the 20% real. Apparently the answer is yes."

    No. The 20% is what is in the history. What matters for you is the future. And the 20% is certainly not "real" in the future in the sense that you can be fairly certain it will be there and that you should bet all (or most) of your money on this belief.

    "Apparently the share price is a barrier to entry, even with fractional shares."

    Wrong. B-shares track the A-shares quite well already. But there are also funds, including closed-end funds available at a discount that track BRK which you or anyone could easily buy.

    The 50-1 split was just approved, but this is not to make it easier for people to invest. It was done to facilitate the exchange of BRK shares for those of the railroad company Buffett just bought. Buffett didn't want to do a share exchange, but he didn't have enough cash to do a cash buy. So he more or less had to do the split.

    Some analysts think it will allow BRK to be added to the S&P500 as a result, which might help the shares gain a bit of value as well.

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    Flashaholic* turbodog's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    If you've got a particular overriding point, please make it. Otherwise it seems your goal is to simply argue with each and every point made by all here.

    When WB bought into GE, the opportunity was a product of the financial problems that are abounding right now. I feel sure that WB has exploited similar opportunities throughout the years. It is the ability to see an opportunity, be able to act on it (cash reserves), and the ability to act (mental fortitude) that brings paydays later on. It's a zero sum game. For WB to win, someone loses.

    Action... I'm looking at making a decision and moving on. A good plan today beats a great plan tomorrow.

    I need to read it all again, but I'm pretty sure they split B class shares so they could use them to swap for the railroad stock. This was done not so that they could raise money but so the RR stockholders would have a manageable stock in terms of cost. This is one of the reasons B was made in the first place, so people who owned A shares could gift part of them and stay under gift tax limits.

    In any case, I have sufficient evidence and expectation the BRK will continue its 45 year track record to invest my dollars into it.

    From all accounts, all stocks are headed upward anyway right now. From all my customers, in all fields, I hear the same thing: things are picking up.
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    Administrator Kestrel's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by turbodog View Post
    If you've got a particular overriding point, please make it. Otherwise it seems your goal is to simply argue with each and every point made by all here.
    +1, do not feed.

    Everyone, just do what works for you, I'm not a financial advisor. One problem with this field is that there is so much d@mn data that people can pick and choose to put together whatever set that best suits their preconcieved opinions.

    Follow the dots:
    Benjamin Graham -> Warren Buffett -> Ajit Jain.
    WTF does Bill Miller have do to with this? Never mind, money talks and BS walks.

    I have Benjamin Graham's book right here.
    His methodologies were not flawless, but they were very very good.

    I have Warren Buffett's book right here.
    His methodologies are not flawless, but they are very very good.

    I'd be happy to have a conversation about anything in them, they contain very little BS (although Graham's book is a difficult read to say the least - I have not yet been able to complete it). If anybody wanted those Q&A transcripts of the 2006 & 2008 Annual Meetings, please feel free to send me a pm. As I said, they are very difficult if not impossible to find on the Web, and they contain some very good information. They also make for very enjoyable reading.

    Turbodog, enjoy your BRK/B. In all likelihood Berkshire will take very good care of you. I hope that I was able to address some of your questions, FWIW I have been a student of BRK for longer than any poster here has been on this forum. BTW the stable of companies completely owned by Berkshire cannot be matched as a whole - one example being GEICO, which is a money machine. Thanks for posting your thread, it was good while it lasted.


    Good night.

    K
    Last edited by Kestrel; 01-21-2010 at 01:37 AM.

  15. #15

    Default Re: investing: berkshire hathaway vs sp500

    Why ask questions and then complain that the answers were detailed?

    It seems as if the original OP was not really seeking discussion and views, including possibly opposing views, but mainly confirmation of views already reached.

    Perhaps next time a disclaimer should be added that responses will only be appreciated if they are simplistic and mainly in agreement with the OP view-point. Then those considering whether to put in the effort to respond can make a more appropriate decision.
    Last edited by flashy bazook; 01-21-2010 at 06:42 PM.

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    Flashaholic* turbodog's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    There is only one truth, not versions and interpretations of it.

    It's not that your responses went un-read or un-understood, but that they simply didn't address the initial questions asked.

    Great thing about time. It allows you to tailor your ignore list very precisely.
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    *Flashaholic* LuxLuthor's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Well all I can say after today's bloodbath, is thank God for automatic stop loss orders.

    Locked in my profits when Apple, Google, Cree, BHP all sold today. They all had an average 100-130% return.

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    Default Re: investing: berkshire hathaway vs sp500

    I have not studied BH for some time, but my impressions of it (fwiw):

    - The real profit of the company is insurance, the rest of the investments / company purchases are just to sop up the cash flow. Frankly, I think a lot of people could make money if they owned an insurance company.

    - The investment in GE was at best, a marginal investment so far. Perhaps in 10 years it will look more interesting. AFAIK, the price of GE is still not higher than what he paid for it.

    - The rail investment is potentially their best investment ever. It assumes what all Americans hate to believe - that overseas production will dominate, and the entire economy will be based around moving goods from China to the rest of the country. For this, rail is an excellent method.

    The main risk is that it assumes a constantly rising merchandise trade deficit and no end to rising consumer consumption due to this. I have real doubts about the ability of the economy to absorb substantially more merchandise trade deficit without imploding (again), which could affect the cash flow of this project.

    - IMHO, the stock market, in general, is overpriced. A good price for a solid firm with moderate growth is a PE of 10:1. Most stocks now are closer to 20:1, meaning your potential for profit from price rises is moderate. If you factor in the risk of being in the market (stock price dropping) the returns are actually lousy. The only basis I can see for the market to rise is the devaluation of the dollar. This might be a valid basis to work from, but if that is the primary assumption, it would be safer to just buy Euros or other commodities.

    - I have not confirmed this, but I read that 50% of the daily stock trades on the NYSE are not done by one company's computers - Goldman Sachs. If that is even close to true, then a long term value investor is just a pawn.

    With the reduced price of the BH stock, this will just make BH stock subject to the same games GS plays with all of the other stocks - namely making it a target for options games, etc. In other words, far from a long term investment.

    Of course - I have been very wrong before.
    Last edited by HarryN; 01-25-2010 at 11:20 AM.
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by HarryN View Post
    The rail investment is potentially their best investment ever. It assumes what all Americans hate to believe - that overseas production will dominate, and the entire economy will be based around moving goods from China to the rest of the country. For this, rail is an excellent method.
    The resurgence in rail is only partially dependent upon assuiming the trade deficit with China continues. There are other factors:

    Rail will also increasingly be used to replace long-distance domestic trucking for a bunch of reasons. One is high fuel costs of course. Another is labor costs. A third is the deteriorating condition of our highway infrastructure which IMO will prove too costly to repair relative to the economic benefit. A fourth is the increasing use of passenger rail as an alternative to the car or plane for long distance travel. Eventually this will of course mean brand new dedicated high-speed passenger lines, not Amtrak running on freight lines. Nevertheless, investment in existing rail lines is prudent as these high-speed trains may need to travel some portion of their route on these lines, as is done in Europe. And then of course there are the usual space benefits rail provides relative to the amount of cargo it moves. A single rail line can replace something like 6-12 lanes of highway. The reclaimed land can be put to more economically productive uses. As strange as it sounds, the 20th century may have belonged to the auto, but the 19th and the 21st will belong to rail. It's honestly hard NOT to see rail taking up an increasing percentage of the transportation pie just by the physical benefits alone.

    I also think for related reasons the investment in GE will turn out to be a good one. Who do you think will be heavily involved once the Class 1 freights start electrifying their main lines? And that WILL happen. I think $3 diesel was the tipping point where electrification starts to pay off long term. I know BNSF is in the process of studying electrification right now. If they go ahead, I have little doubt UP and others will follow. Electrification in turn equals faster passenger trains. This brings more demand for passenger rail. It's already happened overseas as HSR replaced conventional lines. Even "conventional" 125 mph electrified rail will greatly increase the popularity of rail compared to what exists today ( mostly 79 mph or lower diesel trains ).

    None of these investments are get rich quick schemes, obviously. However, Warren Buffet has always been an old school investor, thinking in terms of decades or even generations.

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    Default Re: investing: berkshire hathaway vs sp500

    You are right JTR - the passenger rail expansion scam is well under way, in spite of its long history of needing massive public subsidy to break even. I was riding on BART yesterday to a conference, and remembering that I once calculated that for the taxes I am paying to subsidize it, I could have ridden in a limo every time I ever want to go anywhere on it. This will make GE and BH a lot of money.
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by HarryN View Post
    You are right JTR - the passenger rail expansion scam is well under way, in spite of its long history of needing massive public subsidy to break even. I was riding on BART yesterday to a conference, and remembering that I once calculated that for the taxes I am paying to subsidize it, I could have ridden in a limo every time I ever want to go anywhere on it. This will make GE and BH a lot of money.
    For what it's worth I'll grant that there is some pork in some rail projects. Unfortunately that's the price you pay in order to get rail funding in places where it actually plays a pivotal role, such as the Northeast. You'll end up with Amtrak stopping in some small town serving 5 people a week solely because that town falls in the district of a Congress person who can pull the plug on rail funding on, say, the Northeast corridor. I don't like it any more than you, but it's the system we have in place. Sadly, it's these pork barrel rail projects which get the most negative attention, coloring the public's perception of passenger rail as a whole. Sure, BART is currently underutilized because of the layout of the city where it's situated in. There is no "center city" in the strict sense. In order for BART to become a central player either you'll need to build a lot more lines to more places, or encourage denser settlement along existing routes. The latter is probably increasingly likely to happen given societal trends. Something similar was said when the IND subway started expanding to the outer boroughs which were mostly farmland in the 1930s. Those subways eventually gave rise to enough new development to have made the investment worthwhile. Point of fact some parts of the outer boroughs could use more subways at this point. That's really how passenger rail subsidies should be thought of - as a way to lubricate the entire economic engine. They're not profit-making entities in and of themselves, nor should they be. But done right, they pay for themselves many times over.

    And it also bears mentioning that no form of passenger transportation to date pays for itself once you account for everything. I always think it's odd how rail is often held to a higher standard where it's expected to make a profit after paying for both operating and infrastructure costs. Road users don't even pay enough to keep the roads in good repair, never mind building new ones. And they certainly don't pay for the externalities which have been discussed in other threads. Oddly enough, the freight railroads are about the only transportation entity that can make a profit after paying for both operating and infrastructure costs.

    Anyway, I would hardly call passenger rail a scam. Built where it's needed, mainly in densely populated corridors, it'll generate enough money to cover operating costs. This has already been proven multiple times overseas. The government pays for the initial infrastructure. Once built, high-speed trains earn enough revenue so that they need no operating subsidies. But the key here is "high-speed". That's >125 mph in the rest of the world. I'll admit to a bit of disappointment upon hearing that some of the $8 billion in rail funding will go towards improving conventional trains running on freight lines. While better than nothing, 79 mph trains aren't going to attract the kind of ridership 200 mph trains would. At least your home state is finally going ahead with their 200+ mph train. If it succeeds, my guess is we'll see a nationwide boom in HSR similar to the Interstate highway boom in the 1950s. The key isn't just building the line itself, but also having local transit systems like BART to get passengers those last few miles. I hope the planners remember to budget for this. Think how useless the Interstate highway system would be without local roads. We need to think in the same terms with rail.

  22. #22

    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by LuxLuthor View Post
    Well all I can say after today's bloodbath, is thank God for automatic stop loss orders.

    Locked in my profits when Apple, Google, Cree, BHP all sold today. They all had an average 100-130% return.
    The subject of automatic stop loss orders is itself a very interesting and difficult one.

    When I try to use them either I seem to get stopped out too early (when I didn't really want to be stopped out, in retrospect) or not early enough.

    How do you set them so they work well? You seem to have grabbed huge returns before they kicked in - how far below current price do you place them? Is it a fixed percentage, or a trailing stop at a fixed percentage? Or something else?

    TIA

  23. #23
    *Flashaholic* LuxLuthor's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by flashy bazook View Post
    The subject of automatic stop loss orders is itself a very interesting and difficult one.

    When I try to use them either I seem to get stopped out too early (when I didn't really want to be stopped out, in retrospect) or not early enough.

    How do you set them so they work well? You seem to have grabbed huge returns before they kicked in - how far below current price do you place them? Is it a fixed percentage, or a trailing stop at a fixed percentage? Or something else?

    TIA
    First, I don't use them with stocks like GE that I think don't have enough profit to bother with, and hopefully will have a longer term profit runup.

    Once I see either a large dollar amount or % return (i.e. Google, Apple, BHP, CREE), at some point I put in the trailing stop loss sell order. If there is a rapidly falling market, or bad news about a particular stock, when your target sell price is reached, it may drop further before the market order can be executed, or even a slight bump back up. (There is another stop loss sell at an exact price once a trigger level is hit, but I don't use that because a falling stock may whizz by that specific sell amount, and not get sold)

    The first thing you have to look at is how much volatility there is up & down over the last xxx months. A higher priced stock like Google would easily have 10 point swings up/down without it representing a real trend....essentially driven by day traders which is a losing game to play.

    Then you have to look at the news and trends with that individual stock, and the overall markets and decide if you think there is a signficant negative or positive overall mood in the market which can be determined by many factors. What you are trying to anticipate is not triggering a sell with small ups/downs, because you are better playing a longer term trend (1+ years) or not at all.

    So with GOOG which I bought at 301, it had the most point swing volatility, so once it climbed to about 450, I set trigger to sell if it dropped 40. When it climbed to 500, I moved it to 50. When hit 600 I moved it to 60 below it's peak price which got up to 630, so I let it fall to 570 before it sold at 568.

    AAPL, I bought at 90-92 and had a trailing stop between 10-12 points, and it sold at 202.

    CREE I bought at 15, and when it ran up to 30 I put in a 5 point trailing stop sell, and kept it there, until it sold at 59

    BHP I bought at 32 and when it ran up to 50, put an 8 point trailing stop, and it sold at 73.

    However, once I saw this trend starting on Jan 19th, I proceeded to sell all but my bottom feeder losers like GE which have not yet started a longer term move up, because I believe we are headed for a severe bear market with DOW down to 7,000 for many reasons. So there were a dozen others that I had a 20-60% profit in which I manually sold at market between 1/20-1/22 but did not yet have automatic stop loss trailing orders on.

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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by LuxLuthor View Post
    However, once I saw this trend starting on Jan 19th, I proceeded to sell all but my bottom feeder losers like GE which have not yet started a longer term move up, because I believe we are headed for a severe bear market with DOW down to 7,000 for many reasons.
    +1 to that. I've been telling people for the last six months, including my account manager, that we're going to have a double dip, only I think closer to the 3000 level. The signs are all there. So far almost nobody believes me. I'm glad to see at least one other person thinks likewise. I think I'll wait as close to April 29 as I can before adding to my Roth for 2009. Even if the market doesn't bottom out by then, it might come close. As for what I have now, it might be a good time to switch them to some kind of constant share price income fund to preserve my gains. It's all IRAs, so there are no tax consequences to doing so.

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    *Flashaholic* LuxLuthor's Avatar
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    Default Re: investing: berkshire hathaway vs sp500

    Yeah, it's gonna be hard to know how far down the DOW will go before bottom is reached. It will freak the world out once it starts falling below 9,000 & 8,000 ranges, on top of the real 15-18% rate of unemployment and underemployment. People naively think all those jobs are coming back to USA workers. Many of them are not. Ever. Raising the minimum wage has been disastrous for unskilled labor jobs....done at a time we are in crisis mode was ignorant.

    That will lead to another massive wave of credit card defaults, and next tier of mortgage defaults by people who could afford them but are out of work, underemployed, and have no further sources of credit. (Unlike the first wave of default home owners that should never have been given a mortgage + made worse by irresponsible inflated derivative & hedge fund abuses).

    Then there are much deeper and growing world geopolitical & economic problems that would take a hour to flush out properly. China moving to its most severe steps of bringing its explosively growing economy to a screeching halt will have an enormous impact for one. At some point no one (in their right mind) is going to buy our USA currency and bonds, given its dropping asset value...and you throw in possible WMD or significant terrorist attack, war in Korea or Iran/Israel...and the real fun begins.

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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by jtr1962 View Post
    +1 to that. I've been telling people for the last six months, including my account manager, that we're going to have a double dip, only I think closer to the 3000 level. The signs are all there. So far almost nobody believes me. I'm glad to see at least one other person thinks likewise. I think I'll wait as close to April 29 as I can before adding to my Roth for 2009. Even if the market doesn't bottom out by then, it might come close. As for what I have now, it might be a good time to switch them to some kind of constant share price income fund to preserve my gains. It's all IRAs, so there are no tax consequences to doing so.
    I believe today is the start of the bloodbath bear. Well Jan 19th was the peak, but I believe today confirms my worst fears. How low it will go, nobody know.

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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by LuxLuthor View Post
    I believe today is the start of the bloodbath bear. Well Jan 19th was the peak, but I believe today confirms my worst fears. How low it will go, nobody know.
    Yep-it looks like the Dow might go under 10,000 today. A lot of bad signs also, such as falling tax revenue in all levels of government.

    Stocks end January in the red -- a bad sign, historically

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    Default Re: investing: berkshire hathaway vs sp500

    DJIA:
    Low 9,998.030,
    Last 10,002.180

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    Default Re: investing: berkshire hathaway vs sp500

    Quote Originally Posted by jtr1962 View Post
    +1 to that. I've been telling people for the last six months, including my account manager, that we're going to have a double dip, only I think closer to the 3000 level. The signs are all there.

    I surely hope you are very wrong on this. I don't think it will go that low since they reimplemented the "uptick" rule but I agree we are due for a correction.

  30. #30

    Default Re: investing: berkshire hathaway vs sp500

    If you want a good dose of doom & gloom & realism go to http://www.zerohedge.com

    They recently had an article/post about how most states unemployment funds are out of money & the federal govt has been lending to the states to keep it going.

    Don't use the site for investment advice though. It's based on a pessimistic reality and the market is based on something completely different. (I'm not going to say govt manipulation but it sure looks that way sometimes.)

    To the OP:
    Why not buy SPY and sell covered calls? If you sell calls that are $4 or $5 out you can add .5% per month to your returns and still take part in a 4% gain (if it happens to go up that month). With today's discount brokers options aren't that expensive. I like ThinkOrSwim.

    EDIT: The covered call thing I wrote about does not take into account any tax considerations.
    Last edited by smfranke; 02-07-2010 at 07:39 AM. Reason: Taxes

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