Inflation

So that's something less than 3% of the population. How many of the them are

37 years old?

Elizabeth Richardson

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

It can depend on the product/service. With prices increasing across the board, consumers will cut back on certain luxury goods/services, due to being forced to spend more on necessities.

So "necessity" companies would have earnings inflate, while "luxury" companies would have reductions.

"dapperdobbs" wrote

As I noted earlier, if one wishes to view Berkshire Hathaway stock as a kind of mutual fund, I might be persuaded of this; depends. E.g. If BH's insurance side is as small a fraction as the stock positions it holds, then this would also be compelling. From my general reading, I believe BH's business remains largely insurance.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

First off, that 9 million out of 115 million or so households. (or 300+ million individuals, but I don't think that's the right measure).

That puts him in the top 10% - and he's only 37 years old - his best earning and investment growth years are still ahead of him.

$1 million at 37 is VERY special and out of the ordinary. While only maybe top 10% nationwide, for his age group, it's almost certainly top 1%.

Um, kind of. It's a holding company which wholly owns several companies, as well as managing a portfolio of publicly traded equities and, at last check a huge wad of cash, too.

But it's overwhelmingly an insurance company. Geico and General Re account for a very large swath of BRK's earnings.

The insurance operations account for about 1/3 of BRK's revenues (and a somewhat higher proportion than that of earnings, IIRC).

(McLane company is responsible for nearly as much revenue as the insurance operations, but is far far less profitable - margins for a "wholesale distributor of groceries" are way tighter)

Insurance makes far more in earnings than the investment portfolio, too, though that's somewhat misleading because "earnings" in the investment portfolio at BRK only count realized gains, not untaxed capital appreciation.

Anyway, the market cap of the publicly traded equity portfolio held by BRK is only about a third of the market cap of BRK. Add in the cash and you still have only about half the market cap. The rest is mostly those insurance operations.

BRK is nowhere near as diversified as a typical diversified mutual fund. But it is better diversified than a typical insurance or other finance company.

If you're looking for diversification, having a disproportionate allocation of BRK is a better bet than most other individual equities, but it's not the same thing as a fund by any stretch. A single position in BRK is more like taking half that position in a closed-end fund (which is trading at a premium) and taking half of it and buying an insurance company.

If the OP has 30% of his assets in BRK, it's like he has

15% of his assets in insurance and 15% in a CEF. For my taste, that's still a bit concentrated in the insurance and potentially somewhat risky. But not horrible.

(see BRK's 2007 annual report. My numbers about BRK above are from there, but only approximately)

It's clear that if one is 55 and separated, they can annuitize their 401k into a fixed, level, single premium annuity and comply with the 'substantially equal' payments rule. What happens, though, if you "inflation proof" yourself, as ignoramus puts it, and get an annuity with a 5% annual bump in the payout (or, as AIG puts it 'Graded Payment Option'

)? Is this no longer 'substantially equal'? Or does *any* annuity still qualify?

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Those wealth statistics refer to families and the US has slightly more than 100 million families.

Peak wealth occurs as the head of the family approaches 60, so there are proportionally more older millionaire families.

-- Ron

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

-HW "Skip" Weldon Columbia, SC

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I may be over thinking this, or thinking about it incorreclty, but I recall from somewhere, that the mechanics of annuitizing a 401k required that it first go into an IRA, if only for an instant. Now, the 55 and separated rule saves you for that transfer to the IRA, but then the new problem is annuitizing the IRA. I don't think 55 and separated applies to the IRA, does it?

Am I completely off the rails here?

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

On Aug 23, 6:40 pm, snipped-for-privacy@fractious.net wrote: [snip]

Elle and Bread,

Thanks for your clarification and Bread for your analysis. (I'll take your word for it since I'm looking over the 10Q for the first time, and Buffett describes the insurance business as "the cornerstone of Berkshire", but I make the insurance underwriting income of $360m to be about 13% of total, since $884m is investment income from equity investments, the balance of the $2,880m total falling outside the insurance industry. The underwriting is down subtantially from 2007 (about 25% of total), which may be down slightly from 2006.) BRK is still an analysis-oriented investment manager, with 76 company holdings, and acquired primarily manufacturing interests in it's $4.5b purchase of 60% of Marmon. "During the past two decades, however, we have put ever more emphasis on the development of earnings from non- insurance businesses." (Letter to Shareholders," 2007.)

I just wondered if it was good to recommend the OP lighten up on his shares (even if he did convert "A" to "B" beforehand). The capital gains tax issue comes in. As far as I can tell, there is no dividend, but OP may not need the current income and would prefer to defer taxation. New money could be invested outside, contributing to better diversification that way. Still, diversification is not synonymous with returns.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

"dapperdobbs" wrote Re Berkshire Hathaway's financial report 10Q

So I can be clear: I gather you are saying that equity investment is an essential part of any insurance company's operations. Big picture, the insurance company takes its customers' premiums and invests them in a diverse portfolio of stocks as a long term actuarially-based bet. Are you saying that one should take this insurance company equity investment to be more like BH's other non-insurance-related equity investments? Perhaps it is naïve on my part, but I am not yet sure this is an appropriate way to look at things. If the insurance side suffers calamities due to weather yada, it is going to tap on those equity investments, it seems to me.

I am looking at the 2008 2nd Qtr 10Q, printed page 12, from the berkshire hath web site, and the numbers are similar to what you mention above. Yet the bottom line earnings are: "Total insurance group" = $1,764m All operating businesses (including total insurance group) $3,632m This puts the fraction of earnings due to the total insurance group at about 48%. Looking at other figures from the 10Q, I lean towards Bread's take and my original impression.

snip

Interesting aside: Buffett has been emphatic about not paying dividends as long as BH can prove reinvesting earnings gets more bang for the buck. The very folksy BH documents at the web site talk about this. There is also talk at the site about how, as Berkshire gets larger, reinvesting earnings is less likely to be superior to paying a dividend.

Two other things that concern me. First, Buffett and his second-in-command Charles Munger are 77 and 84. Documents at the web site authored by Buffett show consciousness of how, well, they could go at any moment. When Mssrs. Buffett and Munger are gone, I wonder about BH's direction. Second, finance.yahoo shows BH's ROA and ROE to be 4% and just shy of 10%, respectively. BH is listed by yahoo and morningstar as being in the financial sector and in the insurance industry. Again pardon any naiveté here, but to me BRK is by far more like a bank or insurance company than any other animal.

I still look forward to Buffett's comments on buying into Bank of America last year. Granted BH documents make clear BH buys for the long run, and owners of BH stock need to have the same attitude, Buffet urges. Still, Buffett spoke about the housing bubble and subprime mortgages with some derision before buying BAC near a stock price peak, yet he bought BAC anyway. Was he fooled?

I frequently celebrate Buffett's general public comments on stocks and investing. Yet I do not care what kind of wizard Buffett is. I think it good advice to avoid betting more than 5% of one's stock portfolio on any one man or company.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

The following data may help everyone's understanding of insurance company operations. This is just raw data. I am deferring offering my opinion on the current discussion at hand.

The vast majority of insurance companies do not invest in diverse portfolios of stocks. Berkshire is an anomaly and even they only invest 22.5% of their insurance subsidiaries assets in stocks. Of the remaining assets, 55.6% is in bonds and 21.8% in short term/cash. On average insurance companies invest only 2-3% of their assets in stocks/ equities. The vast majority of investments are in bonds and cash. The

5 year average yield on Berkshires total invested assets was 5.38% (all this according VitalSigns Carrier Reporting System).

Simply put, insurance companies go to great lengths to assure existing and potential clients that they will be around long enough to honor future claims. For better or worse, having large holdings in "safe" investments is one of the primary ways in which they do so.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Should be interesting.

Two things - as we've discussed here so many times before, Buffet himself suggests massive diversification and indexing for those who don't have the time or knowledge or skills to manage active, more concentrated portfolios.

But the second thing - a question - when you say to avoid betting more than 5% on any one man or company - do you apply that to actively managed funds as well?

By that rule, sure, you could put 50% of your assets into an index equity fund. But would you limit actively managed funds to

After reading more on Buffett and Berkshire Hathaway, I think maybe he is given too much messianic, celebrity credit. I think illustrating this well is the fool.com piece from December 07,

. It seems a very erroneous piece. Buffett himself seems humble enough, but finance "journalism" now often seems to cross the line to sell sensationalism and create prophets where they are not.

snip; agreed with all comments

I think you know this, but to be clear: I do not like actively managed funds in the first place. I am not convinced such funds' fees pay for themselves in the long run. But if I was stuck with actively managed funds because, say, my 401(k) had only them, then I think how much I limited my investment in each fund would depend on the fund's mission and its legal obligation to conform with this mission. (Not sure of the vocabularly here. I trust you know what I mean.) I can imagine instances where I would not want to put more than 5% in certain actively managed mutual funds, for some of the reasons I gave earlier.

Somewhat related and interesting is the paragraph comparing BH to a mutual fund at

I think we are on the same page. That is, the more actively managed the fund is, the closer I want my exposure in it limited to a low percent, generally speaking.

kastnna, thanks for the elaboration.

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Exactly!

Even if we accept the oft-quoted figure of 9 million millionaires in the US (I don't), millionaire households are heavily skewed towards older individuals. An EBRI study from 2007 reported that 96% of working Americans age 35-44 had savings of under $500k. Home equity wouldn't be a substantial addition to their collective balance sheet, as most homeowners in that age range still have large mortgages. I agree that the percentage of 37 year olds with net worth of $1M+ is probably in the

1% range, even counting principal residence.

If 1% isn't enough to be special and out of the ordinary, what is?

-Tad

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I don't know what you've been reading, but I know that I've been reading about inflation in financial planning for quite some time. Perhaps Google this group, you'll see plenty of hits in that time period.

-Will

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I don't know, I've heard (on CNBC) Buffett say to just go out and buy an S&P 500 index fund. Is that what you meant by massive diversification?

-Will

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I would bet that if you collected every book, newspaper article, and newsgroup posting written about financial planning over the years, counted the number of times the phrse "inflation protection" appeared and plotted the results on a graph as a function of time-- and then compared that to a graph of actual inflation statistics--there would be a close relationship between the two, with possibly a slight time lag from the former to the latter. I can't prove it, but I can speculate!

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

I just do not feel that it is a lot of money or that I could afford something extravagant without negatively impacting other priorities.

I think that the current deficits (trade and budget) are very substantial, the political process to rein them in does not work well, the projected deficits are routinely underestimated, and also that the current Fed policy of "stimulating" the economy is inflationary. The wars that we are in, are not going away.

The projected inflation number, as always, is a matter of opinion, but I think that inflation will be very noticeable.

5 years of 15% inflation roughly halves the value of the cash that one would hold (and bank interest, after taxes does not fully compensate). So the utility value of all those years of working more than I needed, not spending money etc will be halved in value. Not a very pleasant thought.