berkshire hathaway

[technologic]

does anyone have any volatility measure of berkshire hathaway against the S&P? i feel like berkshire has less volatility agasint the s&p 500 and better returns, but am not sure how to calculate the volatility exactly.

[PRE]

Yes, it does. BRK-A has a beta of .17.

[technologic]

so if this is the case, and brk-a has historically had greater returns for a long time and is a diversified company, what's the reasoning in indexing vs. buying brk-a?

[PRE]

Beta is a measure of systematic risk (i.e. a beta of 1.5 means a stock is 50% more volatile than the overall market). The beta I listed came from Yahoo and it measures the monthly price volatility of a stock over the past 3 years compared to the S&P. Systematic risk cannot be eliminated.

Unsystematic risk, which is the individual risk of a single security (ex. panera bread affected by the price of flour), can be eliminated by indexing. The S&P has much less unsystematic risk than any individual stock, even Berkshire. This is why it would be foolish to feel a portfolio consisting of only BRK would be a much better investment that that of the S&P 500.

[edtost]

[ QUOTE ]
The S&P has much less unsystematic risk than any individual stock, even Berkshire. This is why it would be foolish to feel a portfolio consisting of only BRK would be a much better investment that that of the S&P 500.

[/ QUOTE ]

while true, this is not the biggest problem with his logic. the beta, vol, and return estimates he is basing his opinions on are historical, not expected, meaning that they will mostly fail to have predictive value. there is a level of expected return where BRK will be a better investment than the index based on their relative levels of vol (note that beta in this instance is unimportant for the comparison). the problem is, by only looking at historical return series, there is no real way to estimate the correct levels of vol and expected return to use when figuring this out.

[JuntMonkey]

Buy one share of A.

[PRE]

[ QUOTE ]
[ QUOTE ]
The S&P has much less unsystematic risk than any individual stock, even Berkshire. This is why it would be foolish to feel a portfolio consisting of only BRK would be a much better investment that that of the S&P 500.

[/ QUOTE ]

while true, this is not the biggest problem with his logic. the beta, vol, and return estimates he is basing his opinions on are historical, not expected, meaning that they will mostly fail to have predictive value. there is a level of expected return where BRK will be a better investment than the index based on their relative levels of vol (note that beta in this instance is unimportant for the comparison). the problem is, by only looking at historical return series, there is no real way to estimate the correct levels of vol and expected return to use when figuring this out.

[/ QUOTE ]

Yep, OP was essentially equating historical and future returns/risks. On a side note, BRK has actually been pretty volatile on a 10-year basis.

[RicoTubbs]

As others have alluded to, if you're concerned about volatility, you don't care about beta. Just download the closing prices from yahoo and take the standard deviation of daily/monthly returns and compare that to the same measure calculated for spy or vti. (This won't tell you what future volatility will look like, of course, but it's better than nothing.)

The very low beta indicates a low correlation with the market, not a lower absolute volatility than the market.

[DiamondDave]

1) Berkshire's huge cash position is not a problem. Without all that cash, Berkshire wouldn't be able to charge such handsome premiums for underwriting such big risks. I like having the use of >$50 billion of cheaper-than-free float, and we wouldn't have it without a large, liquid balance sheet. Besides, all that cash provides a great deal of flexibility in today's volatile markets. ^^

2) Yes, Warren is not as young as he used to be. But we shareholders, as a group, understand business and human nature pretty well. We have a much-better-than-average chance of electing directors who have the shareholders' best interests at heart, will hire capable executives, and put incentives in place that will encourage those executives to maximize the per-share value of the business.

3) Some people think they can measure risk very precisely by computing the variances and covariances of returns using historical data. However, statistical inference is valuable only to the extent that the future will be "similar enough" to the past and only to the extent that the important variables can be quantified. (Einstein prefered to say, "Not everything that counts can be counted and not everything that can be counted counts.") There is no substitute for thought. Don't let them tell you otherwise.

[img]/images/graemlins/diamond.gif[/img] (shareholder since before 9/11 and Hurricane Katrina)

[technologic]

[ QUOTE ]
As others have alluded to, if you're concerned about volatility, you don't care about beta. Just download the closing prices from yahoo and take the standard deviation of daily/monthly returns and compare that to the same measure calculated for spy or vti. (This won't tell you what future volatility will look like, of course, but it's better than nothing.)

The very low beta indicates a low correlation with the market, not a lower absolute volatility than the market.

[/ QUOTE ]

ah yes, now i remember about beta...i should reread my corporate finance notes...