10% SWR using Berkshire Hathaway?

[cardude]

This came off the Motley Fool Berkshire board. Think it would work? What about having 25% cash and 75% Berkshire instead of using leverage like in this example, and only selling the Berkshire stock when it is not undervalued and using the cash to live off of when it is undervalued. Only rebalance when the price is right as well. If I was 25% cash it would last me about 10 years. I wonder if that's long enough to ride out a nasty bear market?

Here's an interesting calculation for you:
Imagine a portfolio of nothing but Berkshire for funding a retirement,
purchased today at $92,000 per A share.
If the price is low, you don't want to sell---you're willing to use
a tiny bit of margin for your living expenses so that you can wait, and
your next sale as after a new high. You sell enough to pay off the
small margin amount. Presumably a year or so of living expenses is a
small fraction of your portfolio's value, so the margin level will be small.
If you can't wait for a new all-time high, you at least promise
yourself to wait till a new one-year high.
(actually Berkshire tends to hit long strings of new all-time highs, so
in the past it has statistically been worthwhile to wait till it drops
3% from its all time high before selling, but I digress).
Further, you're going to keep working till the stock hits $130,000.
No sales or withdrawals before then, in other words---just hold your breath.
In this scenario, I estimate you could withdraw 10% of the original
dollar amount every year for the next 30 years and still have more
dollars worth of stock than you started with. Well, with a 99.3%
probability in my simulations. How's that for a safe withdrawal rate?
At a nice round $10,000 per A share withdrawal rate (never increasing
with the portfolio size or inflation), or 10.87% of initial portfolio
value, you would have over a 98% probability of a higher dollar balance
in each of years 10, 20, and 30.
This is a very long and involved simulation that I've described before,
so I won't go into the boring details. Suffice to say that the
assumptions going into it are not crazy: I assume that Berkshire
gradually loses its ability to outperform the broad US market, and that
the range of discounts to IV is somewhat broader than historically seen"

 

[ziggy29]

In a word, no.

I have about 10% of my portfolio in Berkshire -- just bought a bunch of it in late November when the B shares were in the 2500s -- but anyone putting 75% of their portfolio in one stock -- even a solid and highly diversified single holding like Berkshire -- is asking for it.

Warren Buffett is 78. Even though he does nothing in the day-to-day operations of any of Berkshire's subsidiary businesses, if he were no longer "in the picture" one way or another, someone with 75% Berkshire might get caught with their pants down as "Mister Market" throws a tantrum.

 

[cardude]

someone with 75% Berkshire might get caught with their pants down as "Mister Market" throws a tantrum.

Yeah, that's one worry--what happens when he is gone. My thinking was that I could ride out a 10 year stretch of a punishing market with the 25% cash, but that may not be long enough. Also, there is the risk of the business (Berkshire) actually failing in the future. My hope would be that if I paid enough attention to the business I might be able to sniff out trouble before it becomes terminal, but that might just be a pipe dream.

I'm actually 45% Berkshire now, 25% cash, and 30% in various other funds that got killed last year (a small cap fund, S/P 500 Index, Longleaf international, and Third Avenue Value). I wonder if 50% Berkshire and 50% cash would work? Has anyone looked into this anti diversification idea before, or tried it?

 

[Nords]

I wonder if 50% Berkshire and 50% cash would work? Has anyone looked into this anti diversification idea before, or tried it?

Yeah, Buffett's opinion is that most investors should stick to low-cost index mutual funds.

We let our ER portfolio get up to 36% Berkshire, and our kid's college account was up to 65%, by last Feb when we [-]realized we were taking a helluva risk[/-] decided to rebalance. We sold the ER portfolio down to 23% and put the college fund in two-year CDs (she's a high-school sophomore). Sold at $4700/share. I'm on a federal pension with a COLA but I still wouldn't try that again.

A Canadian ER, back in the early '90s, risked his entire portfolio on Pfizer when it was widely expected to be dead. The bet paid off for him, but that's exactly what it was-- a bet. And you only hear about the winners.

Nothing wrong with being aggressive or in a hurry, but you also have to be ready to accept the possibility that you might have to work another 10-20 years to recover from a perfect storm (like Berkshire's worst one-year drop in three decades). The share price also dropped darn near 50% in the late 1980s and again in 1998-9. How would that affect your ER plans?

Anyone worried about Berkshire's succession issues may want to read Miles' "The Warren Buffett CEO". I don't think it's an issue, and I'm looking forward to reading about the four CFO wannabes when he writes the February annual letter.

 

[ziggy29]

Anyone worried about Berkshire's succession issues may want to read Miles' "The Warren Buffett CEO". I don't think it's an issue, and I'm looking forward to reading about the four CFO wannabes when he writes the February annual letter.

I don't think it's a big long-term issue; as I mentioned, he doesn't run any of Berkshire's businesses and his departure won't affect them a bit -- only future capital allocation decisions. Just the same, Mister Market isn't always rational and could decide to heavily discount the shares for a while in that event.

 

[Nords]

Just the same, Mister Market isn't always rational and could decide to heavily discount the shares for a while in that event.

Yep. It'll all come down to opinions on book value.

The current market conditions must be giving Buffett & Munger an incredibly strong will to live-- if for no other reasons than curiosity, schadenfreude, and humanity's irresistible fascination with slow-motion train wrecks. I guess at this point the danger would be overstimulation, not ennui.

The two people whose health I care about are Ajit Jain & Astrid Menks Buffett. Losing Susie Buffett was traumatic enough for Buffett, and without either of them I doubt he'd be able to get through two weeks.

My problem is looking around for someplace where I could say "Yeah, I trust their judgment, self-discipline, & ethics more than Buffett's guys."

 

[james22]

Could you link to the Fool discussion, cardude? I looked and couldn't find it. Thanks.

 

[cardude]

TMF: Re: Tax tricks / Berkshire Hathaway (BRK-A)

 

[james22]

Thanks.

 

[ziggy29]

My problem is looking around for someplace where I could say "Yeah, I trust their judgment, self-discipline, & ethics more than Buffett's guys."

Yeah, there is that. Guys like Jain and Lou Simpson aren't everywhere. And perhaps Ron Ferguson turned out to be the exception to the rule where Buffett's judgment of managers comes into play.

Another concern is that most of Buffett's guys are fairly old now. Jain is 57 and I think he's the youngest of the bunch in terms of potential successors for capital allocation.

I think a lot of those concerns are already priced in, though.

 

[Nords]

Another concern is that most of Buffett's guys are fairly old now. Jain is 57 and I think he's the youngest of the bunch in terms of potential successors for capital allocation.

Gosh, maybe we should get some of them there young whippersnapper financial MBAs into Berkshire to really show them how it's done. You know, the ones we were hiring a few years ago to cut our lawns when they were in high school.

I'm 48 years old and I think I'm just beginning to start to comprehend what the heck I'm doing with my investments. I'd have a hard time keeping a straight face around someone in their 30s, let alone their 20s, telling me how to invest for recessions. Age 57 seems like a good credibility starting point.

Charlie Munger's 85th birthday is coming up this month and Buffett will be 79 in August. We'll have to see what Buffett says in his Feb annual letter or what happens at the May annual meeting...

I wonder when Buffett's & Munger's grandchildren will start showing up on the company boards of directors.

 

[Zathras]

Has anyone looked into this anti diversification idea before, or tried it?

A number of people have:
Madoff

Enron

I love the idea of GE right now. 7.3% yield on a company that is extremely solid with a record of a commitment to dividends. Should be a awesome buy right now. Even though I feel this way, I won't put all my eggs in one basket.
Sure, it may turn out wonderful, probably would. But there is always the chance, and I won't take that chance with my retirement.

 

[cardude]

I love the idea of GE right now. 7.3% yield on a company that is extremely solid with a record of a commitment to dividends. Should be a awesome buy right now. Even though I feel this way, I won't put all my eggs in one basket.

Sure, it may turn out wonderful, probably would. But there is always the chance, and I won't take that chance with my retirement.

This crazy idea of putting all your eggs into one basket would only possibly work if you really knew that basket, and GE would scare me. I just don't understand it.

Berkshire I understand fairly well-- it's an insurance company that takes enormous low-cost (and sometimes no-cost) float and invests it in real businesses with good returns using very little debt. OK, so it's a little more complicated than that, but that's the general idea. I guess the basic point was if one was going to try it, Berkshire may be the right company. But yes, I agree, it may be risky.

What about this: If Berkshire was the only stock you could own, and the rest was to be put in cash (or bonds, or something supposedly safe), what percentage would you be willing to put into Berkshire?

50%?
25%?
10% ?

 

[ziggy29]

This crazy idea of putting all your eggs into one basket would only possibly work if you really knew that basket, and GE would scare me. I just don't understand it.

The interesting thing is, this was a point of difference between Buffett and Ben Graham. Even when they agreed on the ideas, Buffett was a lot bolder about putting large chunks of his wealth on one stock play than Graham was. In other words, Graham's philosophy was to make a lot of small plays instead of a few concentrated large ones.

What about this: If Berkshire was the only stock you could own, and the rest was to be put in cash (or bonds, or something supposedly safe), what percentage would you be willing to put into Berkshire?

Hard to answer, because I think this is an artificial constraint (that Berkshire was the *only* equity investment you could make).

But playing along, I'd say maybe 50% if that were the ONLY equity I could own. But in reality, in addition to other equities and index funds for equity asset classes, I probably wouldn't want more than 20% or so in BRK (which is a higher percentage than I'd put in any other single-company stock because of its composition, balance sheet and diversified operations) and the rest in a diversified equity portfolio across multiple equity asset classes.

 

[clifp]

I'd be comfortable with 25% in Berkshire. I'd one point I had 75% of my net worth tied up in Intel. It is amazing how a couple dollar drop in a stock could ruin your day and a $5 drop would ruin your week.

If it was the only equity I could own I'd go as high as 1/3.

 

[Zathras]

20%, 15% given my choice. Of course, since this is a fantasy world, can I also stipulate that it is a 100% safe choice
Lots of people thought they understood Enron as well. I am not saying that BRK is going broke. Just that I don't feel comfortable that the failure of 1 business (no matter how unlikely) could financially ruin me.
I don't invest to 'get filthy rich' just 'moderately rich'

 

[Nords]

What about this: If Berkshire was the only stock you could own, and the rest was to be put in cash (or bonds, or something supposedly safe), what percentage would you be willing to put into Berkshire?
50%?
25%?
10% ?

Having tried all of the above, the answer that gives us the best combination of diversification and "sleep at night" is 25%.

But the first option floated our kid's college fund quite nicely.