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Andrew Tobias
Andrew Tobias

Money and Other Subjects

More Buffett

October 1, 1996February 6, 2017

“What I don’t understand is why more investors of the long term and hold type don’t just put a majority of their holdings (particularly Keogh and IRA) into BRK and go to sleep for ten years. You have the best money manager money can buy for free. Does anyone really doubt that he will do better than the historical average of 10% growth long term in equities? Are there really more than a handful of money managers who have done as well? The stock has always sold at a premium and always will, so accept the fact and buy it. To me it’s simple: if you think that (1) you can pick stocks better than Buffett, (2) you know he will die soon, or (3) you have found someone better than him to advise you than stay away from BRK. Otherwise load up and wait.”

Well, that one’s a lot harder to answer than the question from a couple of weeks ago about shorting BRK.

In the first place, if you do this at all, I disagree it’s “particularly” for a Keogh or IRA account — quite the opposite. Because BRK pays no taxable dividends, whatever benefit you get from buying and holding will come in the form of long-term capital gains — sheltered from tax until you sell, and then taxed at what’s likely to be a favorable rate. Whereas the same gain within a Keogh or IRA will be taxed as ordinary income, at the full rate, as you withdraw it. I’d use the tax-sheltering power of my Keogh or IRA to shelter the kinds of investments that generate taxable income (including capital gains you actually take every so often, as opposed to those that just mount untouched for decades), and hold investments like BRK in my regular account.

But what of the broader question? I certainly wouldn’t dispute Warren Buffett’s superior skill. But by this logic, NO price is to high to pay for BRK.

It may be instructive that Buffett himself was selling the stock, in effect, earlier this year — not his own, $100 million of new stock . . . but since he controls half the existing stock, it’s at least half like selling shares of his own.

He had a lot of good reasons — for example, at $32,000 a share, giving a child even one share exceeds the annual gift tax exemption — and so he wanted to issue a new class of shares in piddly little $1,000 chunks, 30 of which would equal a “real” share.

It was only a tiny amount of stock being sold (the overall company was being valued at $30-odd billion, so $100 million was spare change).

Still, the smartest investor in the world was selling Berkshire Hathaway stock. So what did the market do? It immediately bid the price of BRK up another $2,000 a share. If Buffett was selling, the market figured, it must be yet another brilliant move for Berkshire Hathaway, and so yet another reason to buy.

After hitting $38,000 a share, the stock is back down to around where it was when he issued the baby shares at $1,000 each (and they, too, are selling around the same price).

Can we assume it’s always a good buy and will “always” sell at a premium? Two events that could shrink that premium are Buffett’s eventual retirement and, perhaps more imminent, a cut in the capital gains tax. If you owned $5 million worth of BRK, almost all of it profit, might you not be tempted to take part of your profit if the tax bite shrank? At least for a while, eager sellers might outnumber eager buyers, damping down the premium.

In sum, if I did this at all, I wouldn’t put “a majority” of my holdings in BRK as my correspondent suggests. But maybe that’s because I feel like such an idiot for never having put ANY of my holdings there. Had I invested $10,000 in the stock when I first wrote about Warren’s brilliant annual reports, in a sort of “book review” for Fortune, I would have a cool million now. A hundredfold gain.

Oh, woe!

But for that same result to hold for the next couple of decades or so, my missed million would have to turn into a missed $100 million — and the total market value of BRK would have to grow to $5 trillion. Somehow I don’t see this happening.

I know, I know: you’d settle for a tenfold gain over 20 years. And do you know what? BRK just might produce it. That kind of appreciation works out to an impressive but not other-worldly 12.2% a year compounded.

But I wouldn’t put all my eggs into even the Buffett basket, and the eggs I did put there would come from outside my Keogh or IRA.

Tomorrow: More on 401(k) Allocation

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