knpstr wrote: ↑
Sat May 18, 2019 8:21 pm
Are asset prices high?
Warren Buffett says if interest rates stay this low in the long term, that asset prices are "ridiculously cheap" right now.
He discusses this in his shareholder letter for 2017 regarding the bet and the wager of 1,000,000 or 500,000 each for Buffett and Protege Hedge Fund’s placed into U.S. Treasuries in 2007. He points out that by 2012 the Treasury was yielding only .88%. So they sold the bonds and put the proceeds into BRK/B shares and distributed the earnings to the winners charity of choice.
“Protégé and I, meanwhile, leaning neither on research, insights nor brilliance, made only one investment decision during the ten years. We simply decided to sell our bond investment at a price of more than 100 times earnings (95.7 sale price/.88 yield), those being “earnings” that could not increase during the ensuing five years.”
“After our purchase, however, some very strange things took place in the bond market. By November 2012, our bonds – now with about five years to go before they matured – were selling for 95.7% of their face value. At that price, their annual yield to maturity was less than 1%. Or, to be precise, .88%.
Given that pathetic return, our bonds had become a dumb – a really dumb – investment compared to American equities. Over time, the S&P 500 – which mirrors a huge cross-section of American business, appropriately weighted by market value – has earned far more than 10% annually on shareholders’ equity (net worth).
In November 2012, as we were considering all this, the cash return from dividends on the S&P 500 was 21⁄2% annually, about triple the yield on our U.S. Treasury bond. These dividend payments were almost certain to grow. Beyond that, huge sums were being retained by the companies comprising the 500. These businesses would use their retained earnings to expand their operations and, frequently, to repurchase their shares as well. Either course would, over time, substantially increase earnings-per-share. And – as has been the case since 1776 – whatever its problems of the minute, the American economy was going to move forward.
Presented late in 2012 with the extraordinary valuation mismatch between bonds and equities, Protégé and I agreed to sell the bonds we had bought five years earlier and use the proceeds to buy 11,200 Berkshire “B” shares. The result: Girls Inc. of Omaha found itself receiving $2,222,279 last month rather than the $1 million it had originally hoped for.”
So he basically he took 1/.0088 to get 113 P/E for 10 year Treasuries.
With that metric, looking at today:
S&P 500 5% ‘yield’ with P/E of 20/1
10 year Treasuries are 2.4% or a P/E of 41/1
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett