BERKSHIRE A SELL, VALUE INVESTING BLASPHEMY!

Duration: 11:52 1638 transcript words EN summary

Video summary

The speaker challenges the conventional wisdom among value investors by arguing that selling a position in Berkshire Hathaway would be considered a form of blasphemy, yet he personally concludes that he would sell if he held ten million dollars in it today. He acknowledges that while Berkshire has been an exceptional compounder over the last decade, growing its net income from roughly 25 billion to 46 billion despite no major recessions or crashes, the current valuation leaves little room for future growth. Using intrinsic value calculations with a 10% discount rate, he demonstrates that even under optimistic scenarios with high earnings growth and P/E ratios, the potential returns do not justify the current price level compared to other opportunities available in the market. The core of his argument rests on the concept of opportunity cost and the distinction between defensive wealth preservation and enterprising investing. He notes that Berkshire's massive cash reserves and safety margin are excellent for protecting capital against a potential crash, but these very qualities mean the stock is already priced in and offers limited upside. He warns that if every investor loves an asset, it is often a bad time to buy, suggesting that the current high price reflects a bubble similar to those seen in 1982 or the recent AI sector. While he admits Berkshire remains one of the best businesses with a long history of success, he believes the future returns will likely be modest, perhaps around 4-5% annually, which is insufficient for an investor seeking double-digit returns who can deploy capital elsewhere. Ultimately, the speaker frames the decision to hold or sell as a matter of personal investment philosophy rather than a universal truth. He categorizes investors into two groups: those who are defensive and prioritize wealth preservation over decades, for whom Berkshire is an ideal vehicle regardless of short-term price fluctuations, and enterprising investors like Ben Graham who seek active growth opportunities. For the latter group, he argues that holding Berkshire now represents a missed opportunity to invest in assets with higher potential returns. His final conclusion is that while Berkshire will likely not crash and remains a safe haven for capital preservation, its current valuation means it no longer offers the attractive risk-reward profile required for his personal portfolio, making selling a logical choice for those willing to take on more risk for potentially superior gains.

Read the full video transcript

Good day, fellow investors. In this Berkshire video, I went for blasphemy because I said, "If I had Berkshire now, I would sell." For a value investor, that's blasphemy. And there was a barrage of comments, "What will happen next? How will this work in the future? Berkshire is never a sell. Berkshire is undervalued, better than the S&P 500." Even my friend that has a few millions in Berkshire said, "Great video, but it made me cry." So, the key question is, "Would I sell Berkshire if I had 10 million in it?" And depends on you, this video will give you the answer on whether you should sell Berkshire or not. Definitely not a buy at these levels, perhaps. And then see what kind of investor you are. That's the key because Berkshire is and will always be Berkshire with all the positives. I'm just looking at another factor that some might overlook in this moment. By the way, this is the same friend that I told to sell gold. He sold it 5,300 or something. So, we are still friends for this year. When it comes to investing, my perspective is, "Okay, what is the true value? What are the likely investment returns going forward? And how does that compare to other things that I own?" Because as Charlie Munger said, "Investing is about opportunity costs." And a disclaimer, I haven't met a bigger fan than Warren Buffett and Charlie Munger than myself. My wife can confirm that. Now, let's discuss Berkshire. People forget that it is a 4x over the last decade. If I look at net income, great chart, growing everything A little bit here the last 7-8 years, ups and downs because of accounting changes where they have to account for the changes in the stock prices. However, if I take the net income from 2015, which is, let's say, 24-25 billion, something like that. I look at the net income for 2025, 45 billion as shown in Greg's letter. 46 divided by 25, 1.84. 10 years, 2015-2025, 6.2% yearly earnings growth. And keep in mind, we had no recession, no insurance, 50-100 billion hits, no stock market crashes, just up, stock market bubble, Apple, everything up, Coca-Cola's everything up. So, in that line, Berkshire has already delivered what it was supposed to deliver. When I look in the next 10 years from the current price level, the situation changes. If we go to our intrinsic value calculation table, here you have Berkshire. You can download this for free in my free value investing course in the link description below. Berkshire, here we have the net income 45 billion. If I attach a 6% growth rate for the next 10 years per year, no recession, no nothing, all great. If I expect a 10% return from my investment, discount rate of 10%. If I put a P/E ratio 10 years down the road of 17, then my terminal value for Berkshire is 1.3 billion. The current market cap is 1. something billion. Not a great return. In the most exuberant case, growth rate 8% of earnings, P ratio of 25, then yes, we are closer to the $1 trillion valuation, but still not there. Worst case scenario, 5% growth rate in earnings, investments take time, insurance hit, P ratio of 12, present value is 300 300 something billion. So, in my calculations, this is not value compared to the current market cap. And now I already know you've already commented, "Sven, you're crazy. The cash, the stock prices, the value of the holdings, insurance." Sven, there is a margin of safety. If Berkshire would liquidate, that they would get a billion. So, there is no way Berkshire can deliver such a bad return over time. Plus, a P ratio of 17, it deserves a P ratio of 25, things like that. Let's go back to the net income of 2015. Since then, we have done 4x, which means the market capitalization was a quarter of what it is now. 25 billion tum- times 12 is 300 billion, where Berkshire market cap was adjusted for buybacks and everything. So, that's it. Of course, then I can say Berkshire's net income doubled. Since then, market cap was 300 billion, now we are at 600 billion. And yes, at 600 billion, I would say Berkshire has a margin of safety. And then you say, "400 billion in cash, 600 billion in margin of safety." Yes, but something that I have learned from Buffett, from Munger, from all the great long-term investors, it's not about what is now. It is what about might be in the future. First rule of investing, don't lose money. Second rule, don't lose money. Third rule, look for an adequate return no matter what. That's why Buffett has been in cash for the last decade. What does that mean no matter what? Yes, valuations now after stock market bubble financial bubble of 44 years that started in 1982. Of course, everything is priced like crazy. However, that might change. The stock portfolio can have easily because it is overvalued. If you look at the Apples, the Coca-Colas, the American Expresses, things like that. Yes, that can happen. The cash the cash can be deployed into things at prices when you say that's crazy. When everyone panics, they will say that's crazy what Berkshire is doing. But that's Berkshire. Now, everyone likes it because the stock is 4X, but Berkshire has been built over the last 60 years on completely different principles that we are looking at now and that you are liking. Berkshire has been built on principles just 1% of the population likes. If everybody likes Berkshire, I know this is not a good time to buy. In my bad case low growth rate, mistakes, disasters, this and that, P ratio of 12 because the market is crashing, things like that. I get to terminal value of 800 billion, 20% down is my let's say worst-case scenario 5-10 years down the road. Let's do the bull case and here we have 8% growth rate, high P ratio, best-case scenario, 2 trillion terminal multiple extremely exuberant. That's still just a 7% return from my investment. Is Berkshire safe as an investors? Is it one of the best businesses out there? Absolutely. No question about it. However, worst case scenario in 10 years I have minus 20%. Still better than all these AI bubble investors, Nvidia's things like that. Nothing wrong against that. In 10 years I can have a 2x. Okay, in the middle likely return 4-5% per year. My key point is at the moment Berkshire's aura, as I already mentioned, safety, cash, value investing, great compounder. I agree with all of that. And I'm also saying it's priced in. Because what is Warren Buffett's key investment thesis? Something that's so ingrained in our cells that he couldn't do it. He had to give everything to Abel to change that now, where he's more of a relative operating investor than an absolute value investor. The price is what you pay, value is what you get. Berkshire will not deliver a 4x in the next 10 years. Berkshire might also crash in the next crash, depending on insurance, financials, things like that, where everything gets repriced, as we have seen in 2009. Will have its specific issues, bad acquisition, mistakes are made, and things like that. The stock price can fall. Apple is crazy at a P ratio 30-40, things like that. And then the comments again, you own America minus the fluff. Yes, but you pay a P ratio of 20-something now. The historical average was 10 to 20. The 13 P ratio has led to the good returns, not the 20-something. And here another comment on another video, but investing is personal, and that is key when it comes to Berkshire, too. I just personally learned that I have to be very careful to invest when everyone loves something. And I'm very fine with the hate. I see it as a compliment. If there is no hate in the comments on my channel, I'm not doing a good value investing job. So, my conclusion for Berkshire the next 10 years simply the rewards are good, the safety is there, great business, you cannot go wrong, but the upside, the opportunity cost there, is not enough for me personally. Is it better than the S&P 500? Absolutely. Now, the question is, if you had 10 million, Sven, would you sell Berkshire and let's say have 10 million in another portfolio? Another great question. And I think that 10 years is too little to think about. This was a great comment. A person sees it as a transfer of wealth 10, 20, 30 years down the road, and Berkshire is one of the few investment vehicles that offers that certainty. Just the principles, everything, you know it's going to be there. Whether it will be 1.5 trillion or 3 trillion in 20 years, it doesn't matter. You know you will preserve your wealth. But that's completely different investing than being an enterprising investor, as would Ben Graham say in his book, the Bible of value investing. So, enterprising, you sell Berkshire now. Defensive investor, you hold forever, you add on the dips, and that's life. So, it's one of the safest investments there, especially for preservation of capital, but it's not a 4X anymore. For me, personally, the opportunity cost of investing in Berkshire now at 5% is too big for the opportunities that I have that are in the double digits. I don't have the size of Berkshire. I can understand different markets, different plays, and that's it. Looking forward to your comments. I'll see you in the next video.