Many Berkshire Hathaway shareholders have a very large percentage of their net worth invested in the company. What are the risks of concentrated investments in general and Berkshire in particular?
Dec 14, 2023·edited Dec 14, 2023Liked by The Rational Walk
Thank you, Ravi, as always, for your thoughts on Berkshire.
I came close to tears when you wrote about your emotional bias. I have it, too. And, like you, I keep an eye on it, so I’m aware of the pitfalls. It is, indeed, hard to find exemplars like our fine duo and the people they gathered around them. I am lucky to have found them in the 1990’s. Not a linear thing, as I’m married and he had other priorities, but I’ve been lucky enough to be on that lifelong trajectory Arthur Clarke alluded to. So glad to share it with you and the many others.
Thank you again for your well-reasoned thoughts on one of my favorite topics!
Ravi, we share very similar experiences. At Chicago I was exposed to the early days of Modern Port Folio theory. But my real investment training came through an accidental learning, also at Chicago, in about 1974 of ‘a fellow in Omaha’ who had made a lot of money. I didn’t buy BKHT until early ‘79 at 196; this purchase sent me on a learning curve that will continue to the end of my life.
We both now have accrued very substantial deferred taxes, what Warren would call ‘float’. Berkshire’s financial anchor is now enormous. Already in the ‘80s Warren was reminding shareholders that success forges its own anchor. But with our float, if Berkshire only matches an index return, our after-tax return will safely exceed an index return.
One option you might have, if you have non-Berkshire assets in your tax account--we don’t--and you are charitably inclined and have a donor-advised fund, is to transfer appreciated Berkshire shares to the DAF and repurchase the shares in your tax account. This allows you to be charitable, while raising the cost basis of you repurchased Berkshire shares to current market. I figured this out several decades ago. You then have the option of selling those higher-cost-basis shares and reinvesting in an index. Like you I see no need to do this under current management for quite a while. But doing the DAF-repurchase transaction gives you a source of higher-cost basis cash.
Keep writing useful pieces. I’m sure they are instructive to younger investors.
We are in almost the exact same situation. So we have maybe another 20 years or so of “known management” before things get more risky you think? I was also going to pass much of my Berkshire holding onto heirs so they get the step up, thinking they could liquidate it if needed over the years for living expenses or for reinvestment into an index.
What index are you considering as a possible replacement for Berkshire if not the SP500?
I have been meaning to look at the S&P 500 equal weighted index. Invesco has a fund, RSP, that holds equal weights of all 500 companies. This would avoid the heavy concentration in the "magnificent seven" or whatever they are called these days. The posted "mungofitch" on the old motley fool message board, and now on shrewdm.com has written about RSP on several occasions. I am bothered by the very heavy weighting of the tech sector in the S&P 500. I've also considered international index funds. But I have not really gone far down that path, even in terms of research.
I agree with your puzzlement. IVV--cap-weighted--is up 24% YTD, while RSP is up only 12%. I’m less likely to buy IVV today, but RSP? The advantage we have owning a company like Berkshire is that we have a large margin of trust in a doorman who will help to keep us from doing something stupid. And Charlie has noted that avoiding stupidity is likely to be our main source of success. Has for me!
Yes RSP was what I was considering also, due to Mungo’s discussion of it. I have about 10% of my Brk in my IRA that I could liquidate for RSP if we ever got to full value (and RSP was cheap), but more likely I will just sell the Brk in the IRA a little each year for living expenses until it’s gone.
My personal opinion is that Berkshire should do better than the S&P 500 over the next decade, maybe similar to the 2000s, and I think Abel could very well be the “Tim Cook” of Berkshire so I'm in no hurry to do anything. But it is something I think about in the longer run. It’s going to be sad to see things become more “normal” over time. Now if the website ever gets modernized, I’m selling everything! (Jk!)
Thank you, Ravi, as always, for your thoughts on Berkshire.
I came close to tears when you wrote about your emotional bias. I have it, too. And, like you, I keep an eye on it, so I’m aware of the pitfalls. It is, indeed, hard to find exemplars like our fine duo and the people they gathered around them. I am lucky to have found them in the 1990’s. Not a linear thing, as I’m married and he had other priorities, but I’ve been lucky enough to be on that lifelong trajectory Arthur Clarke alluded to. So glad to share it with you and the many others.
Thank you again for your well-reasoned thoughts on one of my favorite topics!
Ravi, we share very similar experiences. At Chicago I was exposed to the early days of Modern Port Folio theory. But my real investment training came through an accidental learning, also at Chicago, in about 1974 of ‘a fellow in Omaha’ who had made a lot of money. I didn’t buy BKHT until early ‘79 at 196; this purchase sent me on a learning curve that will continue to the end of my life.
We both now have accrued very substantial deferred taxes, what Warren would call ‘float’. Berkshire’s financial anchor is now enormous. Already in the ‘80s Warren was reminding shareholders that success forges its own anchor. But with our float, if Berkshire only matches an index return, our after-tax return will safely exceed an index return.
One option you might have, if you have non-Berkshire assets in your tax account--we don’t--and you are charitably inclined and have a donor-advised fund, is to transfer appreciated Berkshire shares to the DAF and repurchase the shares in your tax account. This allows you to be charitable, while raising the cost basis of you repurchased Berkshire shares to current market. I figured this out several decades ago. You then have the option of selling those higher-cost-basis shares and reinvesting in an index. Like you I see no need to do this under current management for quite a while. But doing the DAF-repurchase transaction gives you a source of higher-cost basis cash.
Keep writing useful pieces. I’m sure they are instructive to younger investors.
We are in almost the exact same situation. So we have maybe another 20 years or so of “known management” before things get more risky you think? I was also going to pass much of my Berkshire holding onto heirs so they get the step up, thinking they could liquidate it if needed over the years for living expenses or for reinvestment into an index.
What index are you considering as a possible replacement for Berkshire if not the SP500?
I have been meaning to look at the S&P 500 equal weighted index. Invesco has a fund, RSP, that holds equal weights of all 500 companies. This would avoid the heavy concentration in the "magnificent seven" or whatever they are called these days. The posted "mungofitch" on the old motley fool message board, and now on shrewdm.com has written about RSP on several occasions. I am bothered by the very heavy weighting of the tech sector in the S&P 500. I've also considered international index funds. But I have not really gone far down that path, even in terms of research.
I agree with your puzzlement. IVV--cap-weighted--is up 24% YTD, while RSP is up only 12%. I’m less likely to buy IVV today, but RSP? The advantage we have owning a company like Berkshire is that we have a large margin of trust in a doorman who will help to keep us from doing something stupid. And Charlie has noted that avoiding stupidity is likely to be our main source of success. Has for me!
Yes RSP was what I was considering also, due to Mungo’s discussion of it. I have about 10% of my Brk in my IRA that I could liquidate for RSP if we ever got to full value (and RSP was cheap), but more likely I will just sell the Brk in the IRA a little each year for living expenses until it’s gone.
🤣🤣🤣
Or if they ever hire a compensation consultant.
Charlie will haunt them for sure if they do that.
My personal opinion is that Berkshire should do better than the S&P 500 over the next decade, maybe similar to the 2000s, and I think Abel could very well be the “Tim Cook” of Berkshire so I'm in no hurry to do anything. But it is something I think about in the longer run. It’s going to be sad to see things become more “normal” over time. Now if the website ever gets modernized, I’m selling everything! (Jk!)