Berkshire Hathaway
BRK Musings

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By Tode
June 2, 2003

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1. Jeremy Grantham says trendline on the S&P500 is 680, plus or minus 10%. We were within 3 or 4% of the upper band of that range last fall. Now we are back to 42% over the 680 midpoint. Might not be a bad time to reread Grantham's case, which is succinctly and entertainingly stated in his April 2003 report.

2. While retracing to trend would not be a cakewalk from here, the really depressing fact is that according to Grantham, EVERY bubble in EVERY asset class over the past 100 years has gone BELOW trendline before the bear went away. And that can take years. :-(

Very similar to what WEB said in the 2002 annual:

"Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find VERY few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge."

3. If you really want to get yourself worked into a funk, after studying Grantham's logic and trying to find holes in it, add to your odds making the low probability--but devastating possibility--of a derivatives meltdown. One thing we know for sure: in Grantham's 27 prior bubbles (across all asset classes during the last 100 years) popped, they all had one thing in common. Derivatives had not yet been invented. Each post-bubble scenario has had something new, and derivatives are one of the new things we have now, for better or worse.

4. So what are WEB and CM doing? As usual, they aren't saying a whole lot. They say the phones are ringing a little more often on potential acquisitions, which is terrific news. They have already sold a bunch of their junk bonds. They just cashed out of that lovely, 34% loan shark deal with Williams. They apparently have converted some of their 9% LVLT bonds to stock and sold at least some of those shares. They have put a few hundred million into Petrochina (BTW, Grantham thinks emerging equity markets may be one of the few relatively safe havens from the S&P's regression to mean). And they have more cash than ever, earning 0.7% after-tax.

Maybe there's a grain of wisdom hidden in there somewhere.

5. I am pretty much a market agnostic, but I find to hard to disregard Grantham's history lesson. That's one reason why I like BRK as a hedge against bad stuff. If history repeats in a "normal" way, BRK should do far better than the S&P. If this turns out to be the first bubble popping in the last 100 years that does NOT regress to mean (due to Greenspan's and Bush's pump-priming, Internet productivity gains or whatever else you care to hypothesize), BRK won't do as well relative to the S&P, but it still will do pretty well, and I would bet it still beats the S&P even in this rosier scenario. Grantham can go put his stash in emerging markets, REIT's, and timber, and he'll probably do fine. I will probably stick with my own favorite "asset class" in Omaha.

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