BRK's repurchase authorization

[james22]

Your thoughts, Nords?

You still ~33% BRK?

Thanks.

[Nords]

I've been putting a lot of thought into this over the last couple months.

Short answer: bullish. It's like 2001 all over again. Maybe even better.

Long answer:
Just to set the record straight, we started loading the truck on BRK in early 2001. We got as high as 36% BRK in our ER portfolio and our daughter's college portfolio was over 50% BRK. Around Feb 2008 I got a pretty strong nudge from one of this board's long-time members that it made sense to do a little diversification. Our daughter was 15 years old by then and a high-school sophomore, so spouse and I stopped talking about it and finally hauled our assets out of the recliner to take action. BRK "B" shares had just hit an all-time high of $100/share (split adjusted) so we started selling.

We sold our ER portfolio's shares down to 23%, and since then we've maintained an asset-allocation band of 18%-28%. (We put the entire college fund into CDs.) Our split-adjusted sales price for all those transactions was $94/share, which turned out to be world-class timing. It almost makes up for my years of "other" dirty market timing.

We've kept those remaining shares since 2008, and today they're just under 24% of our ER portfolio. (Our daughter's college fund has been steadily shrinking-- she's now a college sophomore-- and it's still in CDs.) We feel pretty good about how this AA has worked out over the last few years (see my profile for the details), and we even rode it all the way through the Great Recession. So we're not exactly eager to overweight BRK.

However, when Berkshire "B" shares split and joined the S&P500, their options market really ramped up its volume. Lots of options traders in that stock seem to be doing it for portfolio/volatility insurance rather than out of any real understanding of the company or its stock-price seasonality. After reading McMillan's options textbook and a few other guides, and clarifying my muddy thinking with Brewer, about 18 months ago we started selling call options on a fraction of our BRK shares as a way of forcing ourselves to make rebalancing decisions. That's worked out pretty well-- usually at premiums of $2-$3/share. The shares have occasionally reached our strike prices but dropped before expiry, so we've never been exercised.

Selling call options was easy when the share price was up in the $80s, but it's a little riskier now to predict where the price will be in 6-9 months. I haven't sold any calls for a few months and our remaining ones expire in Jan 2012 at strikes of $90-$95/share. I'd love to have those exercised but I'm just as happy to keep the premium $$.

OTOH Buffett's share-buyback announcement has effectively put a floor on the stock's share price. As long as he's alive, anyway.

What's even more significant than Berkshire's first share buybacks in over four decades is Buffett's hiring announcement of Ted Weschler. (If you haven't researched Weschler, he's worth a look. One of this board's members knows of him, and Weschler may be even better than Lou Simpson.) That alone would be reason for optimism, yet Buffett went even further in the press release by making several references to his "retirement" and "no longer being CEO". This is the first time he's ever been so explicit on transition, and Buffett chooses his words very carefully. This is unprecedented signaling of his intentions.

I feel that Buffett is going to become even more explicit about his transition in the next year or two, and Charlie Munger may retire within that time. Much speculation has been made of Munger's selling Wesco's remaining shares to Berkshire (so that Munger no longer runs Wesco annual meetings) and of Munger's dozing off during the fourth or fifth hour of the last Berkshire annual meeting's Q&A. (Some cynics think that Munger died long ago but has refused to face the facts and has been granted a confidentiality waiver on the disclosure while he's still stubbornly arguing with the IRS and the SEC.) This transition progress will inspire a lot of institutional investors to leap into the stock. When Buffett & Munger are no longer running the show, BRK may even (*gasp*) start paying a dividend.

So next week I'm going to start selling put options on BRK shares. I'll look for strike prices 10-15% OTM, hopefully around $2-$3/share, with expirations of 6-9 months. I'll limit the number of contracts we're selling so that if we get exercised then we won't be above 28% of our asset allocation.

We haven't decided what to do with the premium cash. We could certainly use it to pay for our familyroom renovation. However we've already had those funds set aside for several years and there are no other major home-improvement plans on our horizon, so there's no urgency to rebuilding that cash stash. If the options market gives us the opportunity then I might buy some long-dated calls. I'm pretty comfortable with the stock going back above $80/share within the next 12-18 months.

Of course if the calls double or triple in value then I'd be tempted to sell them instead of exercising them...

I should emphasize that we've profited immensely from the BRK-related thoughts and advice of four of this board's long-term members. You guys know who you are-- thanks again!

Those are my thoughts. Does that answer your question?

[james22]

Thanks, Nords.

Just trying to get a sense of how attractive BRK is now.

I've lots of dry powder, including 10% cash in taxable, that I'm holding for a dip. Wondering if buying BRK now with the cash (as a hedge against the no dip/decade of slow growth possibility) makes sense, or if I'm just being impatient.

[Nords]

Quote:

Originally Posted by james22 I've lots of dry powder, including 10% cash in taxable, that I'm holding for a dip. Wondering if buying BRK now with the cash (as a hedge against the no dip/decade of slow growth possibility) makes sense, or if I'm just being impatient.

I guess that depends on how much deeper you expect BRK's dip to be. I don't think it'll go back down below $66/share.

But it's frustrating buying a value-priced stock and watching it just sit there-- especially when it doesn't pay a dividend!

[nvestysly]

Quote:

Originally Posted by Nords ...$66/share.

Interesting that you mention $66. We recently added some at $68 but we missed the $66 price and I'm kicking myself. We're hoping for another dip. Here's hoping Mr. Market gets a little down-in-the-dumps again soon!

[james22]

Thanks again.

I would have thought it a no-brainer once to buy on a repurchase authorization, but I think BRK valuation depends now on Buffett's bet that financials will be protected from loss.

I don't know about that - but then that's the hedge, right?

[Nords]

Quote:

Originally Posted by nvestysly Here's hoping Mr. Market gets a little down-in-the-dumps again soon!

I bet Buffett's buy orders get filled faster than ours...

[Sandhog]

Quote:

Originally Posted by Nords I bet Buffett's buy orders get filled faster than ours...

Nooooo. Nords, please say it ain't so. Aren't we all equal as investors, small and large?

Sadly, I'm 99.99 percent sure your are right.

[Cassius King]

Been actively buying BRK for the last few months. Gonna make this a sizable position of my port.

[Ed_The_Gypsy]

Quote:

Originally Posted by Nords But it's frustrating buying a value-priced stock and watching it just sit there-- especially when it doesn't pay a dividend!

I am getting addicted to dividends.

Still holding my BRK B's but not adding to the position. I missed out 20 years ago when I was talked out of buying BRK (only one class at that time; B came much later). The point made was that if you looked at it as a mutual fund, it was expensive. Oh, well. Up about 17+ times since, >15%/year.

[Nords]

Quote:

Originally Posted by Ed_The_Gypsy I am getting addicted to dividends.

I'm reluctant to throw away our portfolio and start over. But if I was just starting out then I'd go with the Dividend Growth Investor or more DVY or M*'s dividend expert.

I'm starting to see these sentiments all over, which probably means that dividend investing is the next bubble. Everyone can start their four-year timers now...

Quote:

Originally Posted by Ed_The_Gypsy Still holding my BRK B's but not adding to the position. I missed out 20 years ago when I was talked out of buying BRK (only one class at that time; B came much later). The point made was that if you looked at it as a mutual fund, it was expensive. Oh, well. Up about 17+ times since, >15%/year.

20 years ago Berkshire was a much different company, and you had to believe in Buffett's stock-picking abilities. Even buying one share was a huge commitment to an illiquid asset. From the problems he'd had in the 1980s, you'd have had significant doubts. ESRBob says he's one of the few people to actually lose money on Berkshire Hathaway, but it can be done.

I've been churning up the puts & calls commissions. Our next calls are Jan12 at $90 & $95 strikes. I think they're going to expire without exercise. I'm not so sure about our Mar $82.50 call (I got greedy) but we got $2.50/share for that one and we'd be rebalancing at that strike anyway. Same logic for the Jun $85 call. I finally completed Fidelity's hoop-jumping gauntlet for margin & naked puts trading, so we also sold Mar & Jun $65 puts.

With a lot more doom & gloom, coupled with Berkshire's $66/share buyback commitment, I'm actually looking forward to 2012's "Sell in May and go away"...

[Ed_The_Gypsy]

Hmmm. When you say 'bubble', Nords, do you mean that the NAVs will take a dive, or that the dividends will dry up? I am more concerned about the latter.

[Nords]

Quote:

Originally Posted by Ed_The_Gypsy Hmmm. When you say 'bubble', Nords, do you mean that the NAVs will take a dive, or that the dividends will dry up? I am more concerned about the latter.

I think share prices are being driven up by scarred scared investors chasing yields, so today's 3.5% dividend payer will be bid up to become tomorrow's 3% dividend payer. Even if they raise the dividend from one year to the next.

I predict that the high-dividend mutual funds, REITs, and MLPs will be driven up first. They have higher yields, and a noobie who's screening for double-digit dividends will go for them first.

Berkshire "B" shares were surprisingly volatile when they started trading after the split, and the calls were wildly mispriced. That's getting more difficult. I look for calls that are 10-15% out of the money with at least six months to run. I think the share price exhibits some mild seasonal behavior, and when it's pushing $85 then people have been taking profits. When I can sell $90 or $95 calls for $2.50/share and wait six months to expiry, that works out to a 5.26%-5.56% "Berkshire dividend".

I only do it with shares we're willing to have called away, so I'm only doing it a few times a year. That works out to the number of shares we're willing to sell to rebalance our portfolio. In the past spouse and I used to hate to sell to rebalance ("What if it goes up more?!?") but when we can sell calls we're quite happy to get exercised.

[Cassius King]

Quote:

Originally Posted by Ed_The_Gypsy I am getting addicted to dividends.

Then take a look at this: AGNC

[james22]

Cramer: Berkshire Hathaway Is a 'Screaming Buy'

News Headlines

[73ss454]

Quote:

Originally Posted by james22 Cramer: Berkshire Hathaway Is a 'Screaming Buy'

SELL!

[Nords]

Quote:

Originally Posted by james22 Cramer: Berkshire Hathaway Is a 'Screaming Buy' News Headlines

The options market apparently awards Cramer as much credibility as I do.

[RetireBy90]

Quote:

Originally Posted by Nords I'm starting to see these sentiments all over, which probably means that dividend investing is the next bubble. Everyone can start their four-year timers now...

Interesting that I had the same thought many times over the last several weeks.

I wonder how this would play out. One option, if the economy gets better and interest rates go up to more reasonable numbers, wouldn't that cause dividend rates to go up in order to continue to attract that investor, and thus force stock prices for these to go back down?

Another option, with returns from bonds rising, dividends could return to a more normal return of say 3% as you suggest. This would require prices to rise. Thought I had read that longer term history says S&P was about 2.5% dividend.

So if this is true, dividends are being overbought, how would it play out, I'm convinced that the Fed will have the power to keep rates from any significant rise. I find it interesting to watch how the pieces move together, not suggesting that I would make trades based upon this. I'll keep my AA as long as I get close to my needed returns. Ok, maybe with my little side fund for gambling. I did get AAPL at $389 last month

[james22]

$81 today, up 12%.

[Nords]

Quote:

Originally Posted by james22 $81 today, up 12%.

One of our covered-call contracts expired today with a $82.50 strike. We also had a naked put expire with a $65 strike. I got a little greedy on the call but I don't know what they were thinking when they bid up the puts.

Our next covered call expires in June with an $85 strike. I suspect we're going to be exercised on that one, especially because it's the month after the annual meeting. But we got $2.68/share so no complaints yet.

Future calls are priced as though everyone expects the stock to keep going up... at least "more up" than they expected it to go up 1-2 years ago. I may be done selling Berkshire calls for a while. It might be worth taking another look at selling puts 1-2x/year.