Post of the Day
March 14, 2000

Board Name:
Berkshire Hathaway

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Subject:  Risk and Reward Divergence
Author:  tedwarin

One apparent difference between the pro-Techs and the pro-BRKs seems to be a simple difference of risk and reward tolerance. Buffett himself said that the glory days of plus 20% returns on BRK are over. That is clear. It is too large a capital base to consistently return over 20% for the next few decades. What he was also clear about was that it would beat the S&P 500 and, more importantly in my mind, most large industrial corporations. BRK is a low risk stock, in spite of its recent downturn.

"BRK is a low risk stock, in spite of its recent downturn."

Even with the inevitable demise of Buffett in the next thirty years, I am extremely confident that the constituent parts of BRK from the insurance groups to the investments to most of the companies (World Book and Dexter aside) will still be profitable and INCREASING profits in thirty years. I am very confident that both Coke and Gillette will be market leaders over a long period of time. Barring a welcome evolution in male genetic therapy, I will have to shell out ungodly amounts of money for the Mach 15 twenty-five years from now. What is the percentage return I am looking for? I am looking for two to three points better than the historical long term return on equities, which is around 10.6 percent. I would like between 12 and 13 percent, with what I consider to be an acceptable level of risk.

Of course tech stocks will return ten and even twenty times this level---they should, as their risk is profoundly greater. Tech stocks, and biotech stocks, simply can not be viewed in the same thirty year time frame in which BRK and Buffett view other investments. Microsoft has been publicly traded since 1986; Cisco, since 1990. I can not predict that either one will be the market leader of any industry fourteen and twenty years from now respectively. What industry, exactly? Remember, fourteen years ago state of the art was the fax machine. Will Cisco be about to respond to optical networks correctly? What operating system will run most microdevices? Microsoft's? Apple's? Be's? Linux?

There are individuals out there who will guess correctly and be profoundly rich. No doubt about it. Every revolution in production and distribution creates titans and moguls with a bit more vision than their competitors. I invite anyone with that vision to place their bets, and I wish them luck.

That is not what is going on at BRK, no matter how much Jim Cramer or various posters want it to happen. They are seeking a validity to their analysis by praying that the Master will endorse their strategies. Why would Cramer want Buffett's validation in the form of tech purchases if Buffett is so horrible? Why wouldn't he simply reject Buffett's antiquated investing style and go off to make his 30% a year on four hundred million in capital? I have no idea, but he wants Buffett to assume the same risk profile with his fifty-plus billion dollar corporation that Cramer assumes with his one/one-hundredth sized hedge fund. It can't and won't happen, and Cramer, who I enjoy reading and find provacative, is being intellectually dishonest by assuming it could happen.

"Anyone with 100% of their investing assets in equities should seriously consider their risk profile."

Again, I am not a Buffett freak. Anyone with 100% of their money in BRK should seriously consider their risk profile. Anyone with 100% of their investing assets in equities should seriously consider their risk profile. But anyone who wants Buffett to start investing in technology, I plead to simply take their money to one of the many mutual funds that have a commesurate risk/reward ratio. BRK is a low risk, medium return equity investment. It is precisely the investment that many of us want for long periods of time. I do not condemn technology stocks, and in fact I have actually traded short term several technology stocks for modest profit. However, in no way do I confuse stocks I might profit from over the course of one month, one year, or even a decade from a stock I want to own thirty years from now. I hope that the individuals who want to convert BRK into a higher risk higher reward entity would simply take their risk profiles into the technology world. I wish them well---I have nothing but respect for anyone who is brave and smart enough to see the future just before everyone else. I just want them to respect that BRK is not that company, never has been, and hopefully never will be.

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