Back in May 2011 I wrote
an article on this blog making the case that Berkshire Hathaway was looking
cheap (Click here
to see the article or go to my May 2011 folder). At the time Berkshire
A shares were trading at around $120,000 and the B shares were approximately
$80.
I reasoned that Berkshire
looked cheap because the price-to-book value was at a historically low level
(1.24). I then assumed a more realistic ratio of 1.44 and estimated an 8
percent growth in book value per share to the end of 2013 (the logic for those
figures were explained in the original article).
By doing that, I arrived at
a forecast year-end 2013 price of $173,000 for the A shares and $115 for the B
shares.
So how did I go? Berkshire
A shares as of 27 November closed at $174,625 per share and the B shares closed
at $116.58.
It just goes to show that
it doesn’t always take rocket science to spot a good investment opportunity.
I also added back in May
2011 that I had bought Berkshire shares using Australian dollars. At the time I
purchased the Berkshire shares, the Australian dollar was worth $US1.10 (this
part was just good luck). So I picked up the A shares at an effective price of
around $113,000. The Australian dollar then depreciated to around $US0.92
(again, good luck).
Therefore, in Australian
dollars it worked out to a 23% annual compound return over the 2.5 years. An
investment in $US would have yielded closer to 15% compound per annum, not as
good as my return, but still a very nice return.
I will add that I’ve now
sold the shares. I don’t think Berkshire looks anywhere near as cheap today and
I have plenty of algorithmic trading opportunities (which is really my bread
and butter these days).
Decades ago, one could buy
Berkshire at almost any price and have obtained excellent returns. Those days
are long gone. Today, those kinds of returns will only have a chance of being
achieved if Berkshire is bought when the price-to-book value is at a very low
level.
This is a very basic,
long-term mean reversion strategy - buy when price-to-book is very low and hope
it reverts to the mean. Well, it worked this time. And of course, my thanks go to
the US Federal Reserve for allowing it all to happen.*
I’ve commented in other
articles on the legions of Buffett acolytes out there, but perhaps the best
observation on this is attributable to the hedge fund manager Michael Burry
(who foresaw and profited immensely from the sub-prime crisis), quoted in
Michael Lewis’s brilliant book The Big
Short:
“At one point I recognized that Warren Buffett,
though he had every advantage from learning from Ben Graham, did not copy Ben
Graham, but rather set out on his own path, and ran money his way, by his own rules.
I also immediately internalised the idea that no school could teach someone how
to be a great investor, if it were true, it’d be the most popular school in the
world, with an impossibly high tuition. So it must not be true.”
Most people have the
opposite reaction, they see what Buffett has done, it looks relatively straight
forward, so they attempt to emulate him, but they can’t. And this is why I
wouldn’t be giving a cent to Buffett clones, but I may have more to say on this
in a future article.
Great call on Berkshire! Our high AUD (at the time) gave Australian investors that added margin of safety. Berkshire, in it's current state, is one of the few companies in the world where one can feel confident that it's book value is fairly accurate and that it hasn't been cooked - with or without intent.
ReplyDeleteI wasn't aware of your blog in 2011 but similar calls were made by US fundie Whitney Tilson & an independent analyst research company locally. They didn't do the book value thing but broke up the company as a sum of parts analysis. Even though the numbers made perfect sense, I was sucking my thumbs trying to work out how long my kid's piggy bank would last because of Buffett's non-dividend policy. I finally allocated 10% of my portfolio in 2012 when AUD was $1.05. With hindsight, I should have aggressively put more but I wasn't sure how bills were going to get paid without a dividend.
Adam Smith wrote a good piece about Algo trading in The Money Game. It confirmed to me what you wrote in an earlier piece.
Thanks for your comments.
ReplyDeleteAs you say, Berkshire's book value is fairly accurate, so there is no need to do complicated "break-up" scenarios.
I haven't read the Money Game, but I'll get a copy.
Glad you were able to make some money.
The Money Game is a really good read - witty and entertaining. It was highly recommended by Buffett in one of his early shareholder letters - around 1970s or so.
ReplyDeleteMy apologies... I was a decade late. To be exact - Buffett's letter 1968 pg 4. Someone like you will not learn anything new, but if you liked "Where Are the Customers' Yachts?", this will be a good read.
ReplyDeleteWhat are your thoughts on the general Banking sector (specifically CBA & WBC) in Australia at the moment? My layman's thoughts (for conservative, amateurish, LT investors are:
A) Once there has been a severe financial crisis coupled with a sound recovery, another severe financial crisis may not happen for a long time... 10 yrs plus (unless there's a Black Swan event);
B) Extremely high interest rates (say HL variable rates of 10% plus) and potentially high unemployment / recession is the Bank's achilles heel. This is consistent with Phil Carret's overall views on investing.
C) Be weary of bubble property prices as this, coupled with high interest rates & high unemployment. This could cripple Bank earnings due to bad debts etc.
In conclusion, my layman's opinion for conservative investors seeking low Beta stocks with a target total return of 10% pa (average & not compounded)... existing investors should HOLD (due to CGT and lack of cheap quality companies to replace) and new investors should wait for a margin of safety.
Would appreciate your views. Thank you.
I basically agree with what you have said.
ReplyDeleteOne of the main issues for investors right now is the extremely low interest rates on deposits and that is pushing people to buy blue chip companies with attractive dividends (the banks, Telstra etc).
The banks can run into trouble in high interest rate environments (ANZ & WBC got themselves into deep trouble during the recession of the early 1990s). So never think our Australian banks can't experience problems - they can.
However, in the current environment, I'm holding my bank shares, not buying any more at current prices, just holding what I have.