What replaces Berkshire Hathaway in an equity portfolio?

[Nords]

We're looking for a better way to assess our assets (present value of our future annuities) and we're considering ideas on deciding when to "take some off the table"… whatever that means. One blatant candidate for tabling gains (and for reducing our portfolio's single-stock risk) would be Berkshire Hathaway.

Keep in mind that we have a hard time seeing ourselves selling any of our remaining Berkshire shares. We're familiar with the company and its issues, and I still consider Berkshire to be undervalued. Last year we sold off a sizable slug of Berkshire shares to rebalance our ER portfolio and to cash out our kid's college fund. Right now, we'd only sell more Berkshire shares if they become so highly valued that they exceed their asset allocation. Other than rebalancing, we don't have any need to sell shares.

But I'm willing to turn the question around: why own Berkshire at all? Why not own something better?

The problem is finding "better". "The Next Berkshire Hathaway" appears to be a hackneyed oxymoron. Here's the goals a replacement asset would need to beat:
- Trustworthy management
- Capable management
- Below intrinsic value
- Huge cashflow
- Huge margins (or enough volume to overcome smaller margins)

While this may not describe many of today's stocks, it might describe a few bonds.

Some candidates include Lampert, Danaher, and Loews. However Lampert (in my opinion) is getting sucked into the quicksand by Sears and Kmart. He may recover by breaking them both up (or shutting them down) but they're depressing his portfolio value. The Danaher brothers seem publicity-shy but they didn't fare very well in an old Business Week article and I'd benefit from a more balanced profile of them and their business. IIRC, though, they tend to overhaul acquisitions by replacing management and cutting costs-- not quite the same idea as Berkshire. And while I've read about Loews, it's my impression that they're struggling to get the family bank through some risky bets while carrying shareholders along for the ride.

Maybe some of these goals could be finessed by just liquidating Berkshire for an index ETF or a REIT. (No mutual funds.) Our other ETFs already cover small-cap value and large-cap dividends, both domestic & international. Considering that the rest of our assets include COLA'd pensions and a rental home, I'd have a hard time understanding the need for other asset classes. If we took Berkshire off the table today then it'd probably go into our other ETFs or straight to CDs and I bonds.

Any other ideas?

 

[unclemick]

Surrender to the hormones and buy some more BRK. Resistance is futile. Mentally wall off everything else - make sure all that other stuff is diversified - and can support you and family if Berkshire goes to zero.

Maybe some well placed stop loss points to protect yourself?

Only sell and buy something else unless you are clear why - hormones or diversification.

heh heh heh - er I confess I'm looking also, including Berkshire and Vanguard Total World Stock Index - as a speculation mind you. .

 

[kumquat]

Seems to me that BRK is more like a mutual fund than a stock. Usually a stock is a single company involved in a single business. BRK owns several companies in several areas of the economy. While hardly an 'index fund' they are somewhat diversified compared to most companies.

Since unclemick forgot 'psst...'

 

[Running_Man]

Your portfolio as you have designed it is extremely well positioned to endure any inflation. The risk to your portfolio, which is amplified with BRK's put position and the mortgaging of your house to invest in inflation bettering assets, is deflation and anything in the world economy that duplicates what has occured in Japan over the last 20 years. That is the one occurence which could put a real crimp in your long term plans, for while you could live quite well on mostly just your pension, I think you should insure against that occurence since that insurance is so cheap for someone in your shoes.

Therefore in my opinion, you should invest a good portion of your portfolio in what would seem to be the poorest of choices, safe short term government paper and a percentage of your money in gold. Both will actually perform acceptable in either high inflation or deflation. The best overall defense would be to actually repay your mortgage, but that would probably be unpalatable for you. RIght now is an interesting time, by fall the bills will start to arrive for the governments and we'll see how the markets handle it at that point.

 

[leftbucket]

Nords-

The proper answer to your question is that there is no replacement for BRK.

However, based on what you've said above you might want to consider an
equipment leasing fund. We've had 5% of our NW in one for four years and we've
been consistently getting a 9% dividend with tax advantages too.

Better than a bond fund (IMO), but still not as good as BRK. (We've got
25%+ of our portfolio with it)

-LB

 

[Nords]

The proper answer to your question is that there is no replacement for BRK.

I had to make sure I wasn't overlooking something or someone.

 

[NW-Bound]

I never owned BRK until recently, when I sold some of my MFs for tax-loss harvesting and diverted the proceed. However, in comparing BRK with some MFs such as Wellesley I see that BRK does not show superior performance to the former. If anything, BRK has more volatility. Note that I do not yet own Wellesley.

Ignoring the past 1 year, where BRK trails Wellesley, the performances in the past 3 years, 5 years, and 10 years of the two are comparable - taken from begin to end of the time intervals with dividends, if any, reinvested.

Now, if you go back 15 years, then BRK suddenly looks superior, in fact a factor of 2.75x better than Wellesley. This was surprising to me. So, I looked closer and found that 1994-1999 was a very good period for Buffet, which has not been replicated since.

So, what does this tell us about the future?

 

[calmloki]

Nords - just checked and our effective cumulative interest rate on all our property loans and a place we sold on contract and about 30% PenFed Cds is 8.99%. Not very liquid, but most of the loans are 60 month call and have been paying off within a couple years. Don't know if it is of interest to you, but if you are as hip to your local property values as you seem to be it might be an idea.

 

[clifp]

Nords, as other have said and I am sure you know Berkshire is a unique part of one portfolio. Obviously it has pretty high correlation with the equity market in general. Still overall I was pleased with Berkshire performance during this Bear Market, during times of panic BRK help up pretty well. Warren as expected used his cash hoard aggressively, although in hindsight he was generally to early.

However, I think Running Man gives some excellent advice, between your pension and heavy equity portfolio you will do terrifically in an inflationary environment. As you told me once, you've already won the game do you really need to run up the score.

The only things that seriously jeopardize you financial future is a long period of deflation and Uncle Sam deciding that we can't afford to pay our veteran their pensions. I would think assets that cover that contigency (remote as it is) might be the best portfolio advice.

 

[cardude]

I also have a huge portion of my portfolio in Berkshire (46%) and I'm also trying to figure out what to do. I'm 44, married with two kids, just ERd and have no pension or paid up health insurance.

Emotionally I think 46% is too much exposure in one stock, but I'm having trouble figuring out what to do (like Nords). In the past every time I have sold Berkshire and attempted to diversify I would have been better off if I would have just kept the Berkshire stock, so that's throwing a wrench into the old thought process.

Like Cliff I was hoping BRK would be a good place to be in a market panic, and while BRK's stock this year is down a little more than the S&P I think the underlying value went up due to the cash they were able to deploy at much higher rates (assuming their businesses and equity holdings-- Wells Fargo in particular-- also recover and are not permanantly impaired).

As for the risk, can I survive in retirement if BRK goes to 0? No. What is the probablity BRK goes to 0? Close to 0, IMO. Can I survive if BRK falls another 50%? Probably.

My reasons for wanting to keep BRK are like Nord's-- I generally understand the company and can roughly value it and compare my rough IV to the market price. Knowing this helps me sell only when the price meets or exceeds the IV, like it did at the end of 2007 and in October of 2008. Of course the problem is when the price and IV disconnect for long periods of time and I run out of cash, or they never converge. Then I would have to go back to work at some point, which I'm not ruling out at this point. To me, the fact that I will go back to work at some point in my life helps me mitigate the risk, but maybe that's just wishful thinking on my part.

I'm still thinking of trying the 60% cash, 40% Berkshire method. I'm currently only at 25% cash, but I'm working on that.

 

[charlie]

Nords, since you mentioned REITs, I have always liked Washington
Real Estate Investment Trust (WRE) and Weingarten Realty (WRI).

WRE is particualrly appealing at this time because the Washington
real estate market is hot right now with the new era of big gov coming
on.

I don't own either right now, but am keeping an eye on them.

By the way, don't bet the ranch.

Cheers,

charlie

 

[ziggy29]

Nords, since you mentioned REITs, I have always liked Washington
Real Estate Investment Trust (WRE) and Weingarten Realty (WRI).

WRE is particualrly appealing at this time because the Washington
real estate market is hot right now with the new era of big gov coming
on.

WRE is certainly one of the stronger and safer picks. There tends to be no recession in the "business" of government.

 

[unclemick]

Any info bearing on this thread coming out of BRK annual shareholders meeting so far?

heh heh heh -

 

[cardude]

I'm not there but a buddy of mine is. He said Warren pretty much said Berkshire is undervalued right now. He usually does not comment on Berkshire's stock price so that's interesting.

Said WFC will come out of this banking crisis stronger than they went in but it will take a couple of years.

Said his four possible replacements got creamed in 2008 in the market, so that makes me feel better.

 

[Nords]

I feared we'd reluctantly conclude that there's no Berkshire substitute. Of course we'd all like to return to 1956 or even 1980 but I don't see anything wrong with Berkshire's current positions or expected performance.

Can't beat its expense ratio or the executive's compensation. The only reasonable hedge against single-stock risk would be to reduce our asset allocation to it.

Nords - just checked and our effective cumulative interest rate on all our property loans and a place we sold on contract and about 30% PenFed Cds is 8.99%. Not very liquid, but most of the loans are 60 month call and have been paying off within a couple years. Don't know if it is of interest to you, but if you are as hip to your local property values as you seem to be it might be an idea.

I've been watching that with great interest. Especially the part where they kinda overlooked your lien, but those loans still seem less speculative than stock picking.

Median condo prices over here are $300K and median SFH prices are about $500K. Investors usually form a hui around one of those "I buy houses for cash!" entrepreneurs.

… between your pension and heavy equity portfolio you will do terrifically in an inflationary environment. As you told me once, you've already won the game do you really need to run up the score.

Yep. I think that "taking it off the table" would start with Berkshire shares. I'd prefer to wait until they're pushing intrinsic value again, but I'm a lousy judge of that. The only reason we sold shares before was to get the kid's college fund in cash (out of 65% BRK) and to balance our ER portfolio's AA. That's probably the only type of thing that'll get us to sell more shares.

Another snivel about replacing Berkshire would be finding a substitute that's less work. Private lending & angel investments have returns in direct proportion to the effort.

The only things that seriously jeopardize you financial future is a long period of deflation and Uncle Sam deciding that we can't afford to pay our veteran their pensions. I would think assets that cover that contigency (remote as it is) might be the best portfolio advice.

I also lump those two occurrences in the same category as "If that happens then we'll have way too many other things to worry about", and in that situation I think we'd be relying on our cash stash. Wallets would slam shut pretty tightly around here too.

I think that last fall we came as close as we're ever likely to come to deflation ever again-- it's the aftermath of the anti-deflation efforts that concerns me.

Nords, since you mentioned REITs, I have always liked Washington Real Estate Investment Trust (WRE) and Weingarten Realty (WRI).
I don't own either right now, but am keeping an eye on them.
By the way, don't bet the ranch.

I see REITs as a good substitute for owning rental property, and also as a great source of dividend income. When we sell our rental property someday, we'd hold the after-tax profits until a REIT bargain presented itself. But laddered CDs or I bonds could also do a great job of filling in the gaps without running an equity risk.
As far as betting the ranch goes, I think we're already plenty leveraged.

I'm not there but a buddy of mine is. He said Warren pretty much said Berkshire is undervalued right now. He usually does not comment on Berkshire's stock price so that's interesting.

The only time that Berkshire's stock price is truly undervalued is when Buffett files the SEC report for his insider purchases and Munger goes on margin to buy more! But I agree that even $4500/share would be "not overvalued".

 

[Cb]

Any info bearing on this thread coming out of BRK annual shareholders meeting so far?

heh heh heh -

Here's a summary...

Omaha.com Money Section

 

[shwgeek]

Nords:

What about actively managed mutual funds? There are quite a number of value oriented funds that I'd consider. Sequoia has reopened IIRC, as well as Dodge & Cox. I also happen to like Marty Whitman quite a bit, in the sense that I can see the logic of his approach from his writings.

There is a very good website that tracks the portfolio of many value investors: http://www.gurufocus.com

Of course, please do your own research. Best of luck.

 

[james22]

Maybe some of these goals could be finessed by just liquidating Berkshire for an index ETF or a REIT. (No mutual funds.) Our other ETFs already cover small-cap value and large-cap dividends, both domestic & international. Considering that the rest of our assets include COLA'd pensions and a rental home, I'd have a hard time understanding the need for other asset classes. If we took Berkshire off the table today then it'd probably go into our other ETFs or straight to CDs and I bonds.

Any other ideas?

Commodities!

 

[unclemick]

Nords:

What about actively managed mutual funds? There are quite a number of value oriented funds that I'd consider. Sequoia has reopened IIRC, as well as Dodge & Cox. I also happen to like Marty Whitman quite a bit, in the sense that I can see the logic of his approach from his writings.

There is a very good website that tracks the portfolio of many value investors: http://www.gurufocus.com

Of course, please do your own research. Best of luck.

Heh heh heh - yep I've been known to peek once in a while to see what Buffett has in the BRK portfolio. Of course I also look at pssst Wellesley top ten stock holdings also. I seem to check gurufocus more around football season - - hormones?

 

[Nords]

Nords:
What about actively managed mutual funds?
Sequoia has reopened IIRC...

Well, that's one of the options Buffett offered his limited partners when he dissolved his first partnership in 1969.
Seven Buffett-Inspired Funds We Believe In - Morningstar - Berkshire Coverage

But a 1% expense ratio?!? Yikes. Our entire portfolio's ETF/stock expense ratio is 0.23%... 23 basis points. And Berkshire's is less than a basis point or two when we add in "all" the trading costs over the years.

We gave up actively-managed mutual funds when we sold our last Tweedy, Browne shares over a year ago. (Another Buffett disciple.) I don't think we'll ever go back to active management or mutual funds. They serve a legitimate purpose for some investors but not for retirees who take a personal interest in financial management.

I don't mean to mislead anyone-- this is more of a thought experiment than a plan of action. I put up the post in an imitation of Munger's advice to "Invert, always invert." It's easy to find Berkshire bad-mouthing & wannabes, but not so easy to find acceptable substitutes.

 

[shwgeek]

But a 1% expense ratio?!? Yikes. Our entire portfolio's ETF/stock expense ratio is 0.23%... 23 basis points. And Berkshire's is less than a basis point or two when we add in "all" the trading costs over the years.

Just to play devil's advocate: assuming your time is free, then yes you do earn the 77 basis points. But would you rather be doing something more fun instead?

Let me confess that I'm also a do-it-yourselfer, mainly because I can't find a Canadian Berkshire, and the fact that I want the company to deliver a decent dividend stream as well.

But back to your question, perhaps I'm not understanding what you want to achieve by diversifying from Berkshire? If it's about moving to something nimbler that can potentially achieve a market beating return better than BRK, and you're not happy with the list of companies you researched, then I don't (yet) know of any mechanisms than an actively managed fund. Perhaps you can find some other company from gurufocus and let us all know (hint, hint)

If after thinking it through and you still can't identify something better, than perhaps you might just have to learn to live with it, I wish I had 40% of my asset in BRK

 

[unclemick]

Hmmm - go to the library. Find a copy of the 4th ed or later copy of Ben Graham's Intelligent Investor and skip all the chapters on investing - read the Post Script.

Then you can spend your free time elaborating to friends and those that will listen whether your success was skill or luck or both.

heh heh heh - if I had a distorted portfolio due to holding BRK over a long period - hard to be humble comes to mind. Keep the stock and enjoy the thought exercise. - it only takes one.

 

[Nords]

Just to play devil's advocate: assuming your time is free, then yes you do earn the 77 basis points. But would you rather be doing something more fun instead?

True, although we would've done the research of determining our desired asset allocation whether we used active or passive management.

I used to spend a couple hours a day researching & modeling individual stocks, but doing it right is hard work and I'm lazy. Now I spend less time on our ETF portfolio than I ever spent wading through mutual fund prospectii and quarterly reports. Turnover is minimal. Rebalancing is every 12-24 months. Research-- what research? It's an index. No worry over managers or shareholder proxies or fund bloat or too much cash or whether it's opening/closing or IRA fees. These days we occasionally look at percentages and where share prices are in relation to their long-term moving averages. Most of that can be done through Fidelity's e-mail alerts.

Better still, I don't have to put my faith in managers who may or may not be committed to my [-]fees[/-] welfare, who may or may not stick around, and who may or may not adhere to the principles which inspired me to buy their fund in the first place.

Active management has a legitimate niche. I just don't fit in it.

But back to your question, perhaps I'm not understanding what you want to achieve by diversifying from Berkshire?
If after thinking it through and you still can't identify something better, than perhaps you might just have to learn to live with it, I wish I had 40% of my asset in BRK

There's been plenty of Berkshire bashing in the media over the last year, even before Kass started talking his book, and it's far easier to find problems with buying the shares-- let alone holding them. So I thought, "Well, if the stock has issues, then what's better?" The "better" answer doesn't seem to be as easily forthcoming as the negativity.

I have no reason to sell Berskshire shares unless they rise above our asset-allocation band.

 

[shwgeek]

I used to spend a couple hours a day researching & modeling individual stocks, but doing it right is hard work and I'm lazy. Now I spend less time on our ETF portfolio than I ever spent wading through mutual fund prospectii and quarterly reports. Turnover is minimal. Rebalancing is every 12-24 months. Research-- what research? It's an index.

Active management has a legitimate niche. I just don't fit in it.

Yep.. I hear you. I'm too [-]busy[/-] lazy to go through all the reports of the 20 odd companies I'm holding now. I suppose when I semi-retire, then this could become one of my jobs.

Sounds like you're already doing mighty fine with just the ETF portfolio. I wouldn't fret about it if I were you.

There's been plenty of Berkshire bashing in the media over the last year, even before Kass started talking his book, and it's far easier to find problems with buying the shares-- let alone holding them. So I thought, "Well, if the stock has issues, then what's better?" The "better" answer doesn't seem to be as easily forthcoming as the negativity.

I have no reason to sell Berskshire shares unless they rise above our asset-allocation band.

Now that we've convinced you to hold on to a big chunk of BRK, let's count the risks

• Warren and Charlie are only getting older
• Did you hear from the 2009 meeting that there's no planned replacement for Ajit Jain?
• And did you also hear that all the potential Chief Investor Officers couldn't beat S&P last year?

Sorry for causing more stress and confusion. I plan to hold on to my BRK, but it doesn't make sense for me to have that much asset in it. You'd need to decide if holding on to yours makes sense for what you want to achieve with your money.

FWIW, I do subscribe to some investment newsletters, some of their recommendations are touted as "the next Berkshire". If you're still thinking about exploring there, you can send me a private message. Be forewarned that I do hold some of these companies.. and no I don't know enough about them to answer detailed questions.

 

[unclemick]

I know this is a serious thread but bear with me - there is the lefthanded hard a port position that draws screaming silence when I post it over at the Bogleheads forum:

Vanguard Total World Stock Index.

heh heh heh - A small antidote to tilting.