No. of Recommendations: 21
Someone asked for opinions about when to buy [back] in to Berkshire.
I thought this image might be helpful
http://stonewellfunds.com/SmoothedRealValuePerShar...A long time ago I proposed that the ultimate safe withdrawal rate is to liquidate no more than the amount the value of the shares has increased. Prices might go up and down, but the real value of your holding would never change. You could withdraw money forever, or at least as long as the real value kept rising. Since valuation metrics are themselves pretty volatile, I proposed using a smoothing method. At worst it would be an over- or under-estimate for 2-3 years.
The smoothing proposed was a 16-quarter weighted moving average of real book per share. I also use a 16-quarter weighted moving average of my two-and-a-half column valuation figure. Once they are scaled to match, they match each other very closely. There is a slight divergence lately since book per share has risen a bit faster than my valuation method, because earnings in the subs have been a bit weak in the last couple/few years. For these purposes it makes little difference.
The graph simply shows the real stock price (in today's dollars, log base 10), and the smoothe value. The value is scaled to give the average price:value ratio of 1 in the last 20 years.
This looks almost like a trend line, but there is a crucial difference: if the rate of growth of observable value changes, the smoothed line changes, over a maximum of 4 years but on average less than two. So there is no danger of extrapolating old fast growth rates.
Unsurprisingly, the ratio of price to estimated value is a pretty good predictor of whether you're about to see unusually good or unusually bad price changes.
In the last 20 years,
Cheapest 15% of the time: Two year forward real total return average 17.8%/year
Next 15% of the time: Two year forward real total return average 14.8%/year
Next 20% of the time: Two year forward real total return average 10.0%/year (just a little cheaper than average)
Next 20% of the time: Two year forward real total return average 8.7%/year (just a little more expensive than average)
Next 15% of the time: Two year forward real total return average 0.6%/year
Most expensive 15% of the time: Two year forward real total return average -5.4%/year
The current valuation level is at percentile 93.5, so around the middle of the "most expensive" bucket above.
The current ratio of price to the value line is 1.187, or 18.7% more richly valued on this metric than the 20 year average.
The 20-year-average valuation level today would correspond to $612733 per share ($408.49 per B). That price (or lower) might perhaps make a good re-entry target?? Of course that number will rise with share value and with inflation as time passes.
Those averages and returns are just observations about what happened in the past. The future may differ.
Jim
