written by reader Why would I buy Berkshire?

By downedperiscope, March 15, 2021

Somewhat of a clickbait title, but let me explain myself.
I love the idea of potentially being able to live off dividends when it becomes my time to retire. I would love to be able to never have to actually sell my retirement stocks to fund my retirement or do so at such a low rate that I should have plenty left over to pass on to someone when I die.
So if I never make a dividend from Berkshire, the only way to actually use it to retire is sell it back for cash or to reinvest it into a stock that DOES pay a dividend, which then cuts into the prospect of having stocks/bonds/etc left over to pass on to someone. And since Berkshire’s rate of return has been historically lower than the S&P it just doesn’t quite make sense to me.
So I ask again, why would I buy Berkshire?

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

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Travis Johnson, Stock Gumshoe
March 16, 2021 9:59 am

No real reason to choose Berkshire over an S&P 500 fund or a portfolio of large and stable dividend payers if you want to transition to retirement without selling anything and begin to live off of dividends — they might start to pay a dividend in the next decade, when Warren and Charlie have presumably moved on and they have trouble coming up with uses for their cash, but I wouldn’t count on it. The market has gotten a little excited about the larger buybacks Berkshire did last year, and it is often seen as an antidote to the “market has gotten awfully nutty” growth mania stocks, so it’s a little above my buy price, but this is some of what I noted a month or so ago in my last review:

I’ve been saying more or less the same thing about Berkshire Hathaway for a decade or more — it’s not likely to beat the market in a good year, and it’s likely to do better than the market in a bad year, as Warren Buffett gets an opportunity to add to Berkshire’s holdings with lower-cost acquisitions.

I’ve held Berkshire Hathaway for about 16 years now, and have added many times over those years but never sold, so you know my bias up front. I’ve been to a couple Berkshire Hathaway annual meetings, and I’ve drunk the Kool-Ade to some degree. I agree that Warren Buffett and Charlie Munger are among the most admirable investors of the past century, thanks more to level-headedness and patience than to brilliance, and I’m pleased to be invested with them, even as their partnership chugs through its sixth decade and Warren is now in his 90s.

But the stock is not always a screaming buy, and I’ve also overpaid for some of my shares, which is why my compound return for my Berkshire position is now only about 11% a year. Still, that’s not so bad and I expect it to continue to be a solid investment — even the shares that I paid too much for, right before the market crash in September of 2008 (I paid about 1.7X book value for those), ended up being a great investment over time. It just took patience, as Berkshire took five years (with plenty more buying opportunities along the way) to get back to its highs.

When Berkshire is either washed out with the dirty water (falling in a market-wide decline), or when headlines proliferate about how Warren Buffett has “lost it” and missed out on a big bull market, that’s generally a good time to buy. The company is far more cyclical and interest rate sensitive than it used to be, thanks to the massive investments in railroads and utilities, and the exposure to “growth” is very limited to its huge stockholding in Apple, but I think owning Berkshire will continue to be a comfort for me. Safer than the market, stable in its operations, and unlikely to get sucked into a bubble. The stock has trailed the market over the past one, three and five years, almost entirely because Berkshire “missed” the bull market surge from mid-2019 to today that was driven almost entirely by high-growth stocks and the building of what feels like a speculative bubble, but I expect it to make up for much of that the next time the market valuation really resets, going down less than the market whenever we have another collapse. That’s not guaranteed, particularly in the short term, and Berkshire is not going to blow the market away… but at current valuations for Berkshire, with the valuable assets they’ve built up over time, I feel quite safe.

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