Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 20
Berkshire's share price has lagged the average big US company's share price lately. It happens.
But Berkshire is pretty fairly valued, and ... the average big US company's shares aren't.
So, here's a "risk free" way to make a one-time 12% return.
Sell short 2323 shares of RSP, the ETF that tracks the S&P 500 Equal Weight index. Current price $203.67.
Use the proceeds to buy 1000 shares of BRK/B at $473.22.
i.e., the price ratio is 2.323.
Then just wait. Close the position when the ratio gets above 2.6:1, which is what has been more typical in the couple of years, ignoring the few months a year ago that Berkshire was bubbly.
Alas, I have no idea how long that will take, so it might be a good rate of return or a feeble one. But it's market neutral, and takes no meaningful position in the super-gigacaps which are so unpredictable these days.
Though this is a market neutral, i.e. hedged position, I don't really think of it as "hedging" per se...I think it's just "free money" sitting on the sidewalk : )
Obviously this is a "bad idea". Simply being long Berkshire makes more sense. But I do like to keep entertained.
If anyone tries this (ha!), do remember one thing: in any hedged position, one side is definitely going to lose money. Don't ever worry about that loss, you'll go crazy. Look only at the return on the sum of the two, which is the reason you entered the position.
Jim
Speaking of super-gigacaps, a fun observation: The sum of the profits of Samsung, Hynix and TMSC is expected to be higher than the sum of the profits of Apple, Alphabet and Amazon this year. Chips are making money, for the moment. A *lot* of money.
No. of Recommendations: 3
“Simply being long Berkshire makes more sense.”
I’m keeping it simple for my simple mind :) Added a few dozen B shares @$471.70 today with P/“Current” Book likely 1.4 or less not to mention the recent buyback announcement.
AAPL is my #2 position & I will just sit tight with the news Tim Cook will become Executive Chairman in the Fall. Glad he will continue to be active and in a key role. The news was not my preference, but we’ve all heard such speculation for months and assume the passing of the CEO baton will be smooth.
No. of Recommendations: 0
So, here's a "risk free" way to make a one-time 12% return.
Sell short 2323 shares of RSP, the ETF that tracks the S&P 500 Equal Weight index. Current price $203.67.
Use the proceeds to buy 1000 shares of BRK/B at $473.22.
What is the interest rate charged to borrow those shares of RSP (shorting isn't free? Wouldn't that rate have to be subtracted from the 12%? And if there is any dividend distributed in the interim, that would have to be added to the 12%
No. of Recommendations: 4
What is the interest rate charged to borrow those shares of RSP (shorting isn't free? Wouldn't that rate have to be subtracted from the 12%? And if there is any dividend distributed in the interim, that would have to be added to the 12%
True in both cases. The most recent short borrow rate appears to be 0.29%. Oddly low.
But you can think about it two ways. In one scenario, you have about that amount of cash sitting around that you'd like to earn more money on. It contributes indirectly to the pair trade as the spare margin security to the deal, but you do continue to earn interest on it throughout the deal, which offsets the borrow cost on the RSP. You're earning relatively close to [one time] 12% on that combo (cash+long+short), whereas without the deal you'd have been earning interest, say 3.7%/year.
The other way to look at it is that it's a "naked" deal standing on its own in addition to and conceptually separate from anything else in your portfolio. The Berkshire basically forming the security for the short. In that view you certainly have to subtract the borrow cost from any profit from the position, but on the other hand it's a maybe 9-11% return on incremental capital allocation of zero, so it's an infinite rate of return on the cash you committed to the deal : )
Of course, the weak point about this as "free money" notion isn't the precise number on the return, it's the notion that the trade will work. That Berkshire will, if not outperform the market, at least mean revert back to its recent market tracking level. The future hasn't happened yet.
Jim
No. of Recommendations: 2
Mungofitch:
So, here's a "risk free" way to make a one-time 12% return.
A little surprised at this.
I just looked at the ratios of BRK.B and RSP prices over the last 10 years.
Before August 12, 2024, that ratio had NEVER been above 2.6.
Since August 12,2024 to now, it has been above 2.6 45% of the time, but it has been about 5 months since it was that high.
Over the full 10 years, the average ratio is 2.12 with std dev 0.316, so a ratio of 2.6 is 1.5 standard deviations above average.
Why do you estimate the probability that BRK.B/RSP will behave the way it behaved for years before August 2024 at "0%"? I put 0% in quotes because you put risk free in quotes.
R:)
