Berkshire and SWR

[billystu]

Anybody here hold a large portion of their portfolio in Berkshire Hathaway? I think Nords may have a chunk tied up in Berkshire, if I remember correctly.

The reason I ask is I was wondering how much yall thought that altered the SWR if you have one large position that dominates your portfolio.

I'm currently 58% Berkshire, 24% cash and 18% other (value fund, international fund, small position stocks). Berkshire should hold up well in a long bear market with lots of volatility as they have a huge cash hord that can be put to work quickly when the opportunity arises. The downside is when Warren/Charlie pass there will be a possible large selloff, which I'm thinking (hoping) will be temporary. I also think after they pass the stock could start paying a divended which would serve me well. My Berkshire position was purchased from 1996 to 2000.

I'm planning on a 3% WD rate when I quit, which I hope to do so in the next few months.

Any thoughts?


billystu

 

[Hyperborea]

John Greaney (intercst) has a discussion of this over on his web page.
http://www.retireearlyhomepage.com/concport.html

I'm not sure that Berkshire is only as "diversified" as one stock but it's sure not the same as holding the market.

 

[billystu]

Thanks for the reply. I'll check out that discussion.

And I agree, Berkshire certainly isn't the entire market but it's not like a single company either due to all the different operating companies inside, the big cash position, dollar hedge, etc. Got some internal hedging in there.................

billystu

 

[Nords]

"This is what I've been saying"...

Thanks, Hyper, more people need to read that link before holding muster at the Church of Diworsification. That should answer Billy's first question.

"Diversification is important for a retiree making annual withdrawals from a portfolio. If you decide to maintain a concentrated portfolio in retirement, reduce your annual withdrawal. If you can't survive on the lower withdrawal rate, then you need to diversify. However, this doesn't mean you should automatically sell all your winners and buy an index fund when you retire."

Billy, Berkshire is about 28% of our portfolio and people claim that I'm not diversified. So 58%-- yikes! Maybe you should review Robert Miles' "101 Reasons" book and see if you still want to keep the faith. http://www.amazon.com/exec/obidos/tg/detail/-/047141123X/102-0010977-2463373?v=glance

If you can stomach breath-taking volatility by not making withdrawals during the downside, then stay the course. I agree with your thinking on the fund's stock's cash position. I also agree that Buffett's death (or disability retirement) will produce a "buying opportunity" of unprecedented magnitude in the history of the stock market. I used to think that I'd be selling if that happened, but I doubt I could ride the ultimate timer's wave and get back in at a good price. I'd rather just ride it out, although I'm sure Robert Miles would margin his shares to buy more. Buffett has a deep bench and those guys will figure out how to realize the value of a security trading at a discount to its intrinsic value.

I think any Berkshire shareholder can stomach the volatility. A 3% SWR is higher than Greaney's calculation, but there are other choices:
- keep a cash stash and skip a year or two of withdrawals, replenishing the stash after recovery, or
- temporarily reduce your expenses until Berkshire regains its value and you feel comfortable raising your SWR, or
- (*shudder*) get a j-j-j-j-job.

 

[Cut-Throat]

If you can stomach breath-taking volatility by not making withdrawals during the downside, then stay the course.

I think that anyone that is comfortable with the way that their portfolio is invested, is fine. And you can tell when they are not comfortable with it.

When I was working, I thought that anyone who is not 100% in stocks with 10 years of employment to go was crazy. I was basically 100% in stocks. Now that I am not working, I could not take the volatility of this. This should keep me from doing stupid things, such as selling on the way down. Or even selling because I thought we might go down next year

 

[bijoux]

Re: "This is what I've been saying"...

I think any Berkshire shareholder can stomach the volatility.  A 3% SWR is higher than Greaney's calculation, but there are other choices:
- keep a cash stash and skip a year or two of withdrawals, replenishing the stash after recovery

Thanks Nords,

I must have missed Greaney's SWR calculation-- I figured 3% was fairly conservative.

And on the volatility issue, my feeling is like yours-- if I have enough cash to last me through times when the stock is undervalued I'm thinking I'll be OK. But of course it will be a whole different ball-O-wax looking at volatility when I'm not working vs. now with that steady income flowing in to help me not worry about the ups and downs..........

However, after I sell one of my big non-liquid assets(business) I'll have about 10 years of expenses in cash sitting around so surely that will keep me insulated from having to sell at the wrong time.

I'm really not sure where to put all that cash, however. I don't like bonds because rates are rising and should continue to do so. I don't want to buy any more Berkshire right now . I don't have any other stocks I'm looking at that are cheap. I'm not that comfortable with what TIPS will do in our current/future environment (although Bill Gross recommends them in maturities less than 5 years, I think). I suppose I could ladder CDs or something mundane like that to take advantage of the rising rates. Thoughts? I've never had a big cash position when like I will when I quit so I'm really clueless.....

billystu

 

[bijoux]

I think that anyone that is comfortable with the way that their portfolio is invested, is fine. And you can tell when they are not comfortable with it.

When I was working, I thought that anyone who is not 100% in stocks with 10 years of employment to go was crazy. I was basically 100% in stocks. Now that I am not working, I could not take the volatility of this. This should keep me from doing stupid things, such as selling on the way down. Or even selling because I thought we might go down next year

Thanks for the reply Cut-Throat,

I think I'm going to be OK with the volatility issue due to the cash I will have on reserve, but I really won't be sure how it will effect me when I'm not working. I may change my mind once I try it

You got me pegged-- I'm obviously slightly questioning my approach and not totally comfortable with it so I definitely appreciate your thoughts since you are actually DOING what I'm getting ready to do (not work).

billystu

 

[bijoux]

Re: "This is what I've been saying"...

"Diversification is important for a retiree making annual withdrawals from a portfolio.

Thinking about the volatility issue and diversification some more, I'm NOT an EMTer and so I don't believe volatility always equals risk. It does equal risk if you are retired and you soley rely on one unhedged asset class to fund your retirement because if it falls and you have to sell it to live you are obviously going to be in trouble over time.

However, if you have other reserves to live off of (cash) and don't have to sell then volatility has much less of an effect.

If you are a net buyer of stocks (or whatever) over time then volatility is your friend and is not risk at all but opportunity. I guess this approach could work even when retired if one had the ability to discern the opportunities between different asset classes held. Volatility could create bigger possible gains in one asset class vs another, so you use some of your cash or sell one asset class to fund another asset class. Of course if you guess wrong then you're in big trouble, so all of the above may be a really stupid idea. I'm certainly not savvy enough to do it.

billstu

 

[charlie]

Hi billystu,

IMHO, you should first decide on your overall target
stock/bond/cash allocation. If you are concerned
about rising interest rates, then I-bonds might be
a good choice for your bond position in an after
tax account. A couple can buy up to $120,000 per
year in paper bonds and Treasury Direct. There
is no good reason not to establish your bond position
as soon as you sell your business if you are buying
I-bonds.

If your stock allocation is light after selling your business, then put your stock plus cash allocation
into a MM fund or Vanguard's Short Term Investment
Grade bond fund and then DCA into a diversified mix of index funds over a 3 year period until you reach your
desired allocation. If we have a market correction
during that time you might consider plunging into
your stock allocation in one lump.

What I have outlined is the most risk free method I
know to get to your desired asset allocation. If this
strategy is to tame for you then please feel free to
completely ignore me as my children are want.

Cheers,

Charlie

 

[charlie]

Substitute "wont" for "want" above .... as in "wont
to do"

Charlie

 

[Nords]

Re: "This is what I've been saying"...

I'm really not sure where to put all that cash, however.

We all wish we could struggle with that problem!

After you run to the bank to deposit the check and make sure it clears, put it in a MM account for six months and think about the next step. Six months won't affect the long-term returns but it could sure affect the quality of your decision-making. The idea is to let the hard-earned emotional euphoria fade into a cold-hearted perception of reality that's not skewed by "advisors" or "planners" or other salesmen.

One pop-psychology approach is to blow 10% of the profits on a mid-life crisis. Contemplating this usually puts me into a catatonic state with my hands clenched around dollar bills, but it might work for others.

While you're thinking, take a look at Bernstein's Four Pillars book and plug through the asset-allocation exercises to see what you're comfortable with.