I realize I haven’t posted in ages. The reason is that there’s not that much to write about. I have made few trades over the last couple of months.
The most significant change I have made to my portfolio is that I have sold Berkshire Hathaway. I never really discussed Berkshire on the blog. I read the Berkshire annual reports and follow the company pretty closely, but in the end I don’t think I thoroughly understand Berkshire. I think I have what Charlie Munger refers to as “chauffeur knowledge” about Berkshire.
I do think that every once in a while an opportunity arises when even chauffeur knowledge can be enough to make a good bet. Investing in Berkshire in 2011 was such a moment in my opinion. People were saying Buffett would never buy back shares and that the company would be in all sorts of trouble when Buffett died. Meanwhile Berkshire was trading at historically low price/book ratio’s. Buffett practically told people in an annual letter that they would be making a huge mistake by selling their shares at the prevailing market prices, something he had not done before. So, I thought it was a good idea to buy and it has worked out well.
When I sold, Berkshire was trading around 1.5x book value. The company is currently certainly trading more in line with historical P/B ratio’s. I do think it is cheap compared to the US market as a whole, but I don’t think I can expect a much better return than the growth in Berkshire’s book value going forward. I think perhaps a 7-10% return would be a reasonable estimate of what I could expect.
It’s pretty arrogant to think you can do better than Berkshire. At the same time, Seth Klarman once said in an interview that all investing is an act of arrogance, because when you buy a stock you basically tell the seller he is wrong and making a mistake. It didn’t feel good to sell Berkshire and to be out of the ‘Berkshire owners club’, but I do think it is the right decision for me. I look at a lot of small companies and do a lot reading to find cheap stocks. I should set a fairly high hurdle to warrant the time and effort I spend. At the end of the day, I think I should aim for a bit more than what Berkshire can realistically provide over the long term.
Cloning
While it is certainly a challenge to do better than Berkshire going forward, I do think you could take a fairly passive approach and do just that. Mohnish Pabrai talks a lot about cloning in lectures and interviews. In a lecture to students Pabrai discussed a simple strategy of buying stocks after Buffett had to disclose his new holdings in 13F filings. Watch the video from 15:10 to 17:30. He describes how that strategy would have crushed the S&P.
Now you have Todd Combs and Ted Weschler taking care of a small part of Berkshire’s portfolio. They are both working with much smaller sums than Buffett, so they don’t have nearly the anchor of size that Buffett has. It is pretty easy to filter out the Combs and Weschler buys from Berkshire’s filings, because the holdings are small compared to the buys made by Buffett. If you implemented a strategy of simply cloning Combs and Weschler, as described by Pabrai in his lecture (the ‘100 IQ’ part, so not doing any analysis of your own or doing any ‘cherry-picking’ of these holdings), I’m pretty confident you would do better than Berkshire itself.
I try to get a reasonable level of understanding about companies I invest in, but I do think cloning as described by Pabrai can be a good strategy. I think it can be a good idea to use a small percentage of your portfolio to clone one or perhaps a couple of investors who you think are much better than you. In that way you can create a useful bogey/benchmark for your actively managed portfolio. The problem is that not all positions by investors have to be disclosed by the investors you want to clone, so you often have no knowledge of non-US holdings, short positions or the percentage of the portfolio held in cash. There are probably some long-only investors out there though that can be successfully cloned.
Disclosure: no position in Berkshire Hathaway
I agree with your decision. I Have been selling down as well but I keep a small position for sentimental reasons. In the past few years, whenever I made an investing mistake I forced myself to buy a couple of extra BRK shares. That turned out great but at current levels I don’t think it’s that attractive anymore. Maybe I should switch to Markel 🙂
I like the idea of investing in Berkshire when you’ve made a mistake. That should serve as a nice insurance policy. I do think Markel is a better bet at this point. I have Markel in my own portfolio and first bought it about 2 years ago. I’m still happy to hold Markel at these levels.
Perhaps some day I will be confident enough in my stock picks to invest my entire portfolio in micro caps, but I’m not there yet. I like having a part of my portfolio in a company like Berkshire or Markel when their shares look reasonably cheap.
Berkshire Hathaway is still over priced after your last post. In your opinion, what would be a entry point back?
I don’t think Berkshire is overpriced. The stock price is at a very similar level today as it was at the time of the post, yes. However, in December 2014 Berkshire was trading around 1.5x book value and today it’s trading at 1.37x last reported book value. So it is actually cheaper today, because Berkshire’s value tends to grow over time due to the earnings of their wholly owned businesses and the growth in the value of their investments.
I currently own Berkshire again and bought shares a while ago when they traded around the 1.3x book value level. I also sold my position in Markel at that time, which I thought was getting pretty expensive (it went up more since then). I think Berkshire will do better than Markel and the S&P500 over the next few years, but I could be wrong. There aren’t that many cheap things I can find in the US today and I think Berkshire is a very reasonable choice for my portfolio right now.