Is Berkshire a Long Run Buy?

Many people are saying now is a good time to buy shares in Warren Buffett’s Berkshire Hathaway (BRK.A). They are down about half from their peak and are trading below book value. Get in now, say fans. Look what happened when Berkshire took a beating during the dot-com era: afterward, the shares tripled.

“You can buy the stock for its liquidation value, paying zero premium for the great management and fairly dependable earnings stream …. This may not happen again for decades,” said one.

But as one doubter said in the comments section: “If you buy Berkshire’s stock, what happens to your investment on the day Buffett drops dead?” The Oracle is nearly 80 years old and won’t be around forever. His absence from Berkshire could leave a rather serious gap.

There surely must be a premium in the shares simply because of Buffett’s reputation. That could come out of the price. Moreover, Berkshire appears to be an extension of Buffett: It’s been his show. I’m not sure if his replacement will have quite the same magic. There could well be a rally along with the market, but the long run might be a different matter.

Comments

[PenName Dave:]

“You can buy the stock for its liquidation value, paying zero premium for the great management and fairly dependable earnings stream …. This may not happen again for decades"

"There surely must be a premium in the shares simply because of Buffett’s reputation."

Book value is 70,000 per share... price on Monday was 72,000 per share... no Buffet premium there

Mar 12 01:59 AM

[Dave Shafer:]

You can't have it both ways, either there is a premium for Buffett or it is at liquidation value! Sure there will probably be a dip in price when Buffett is no longer at the helm, but there will be no change in intrinsic value. And whoever takes over will have to prove themselves, but will be running a company set up to succeed for the long run. Investors will have several years to judge the new guys. And you really don't understand Berkshire if you think it is a proxy for only Buffett. Munger and lots of good managers running companies have as much to do with the success as Buffett!

Mar 12 08:27 AM

[long_on_oil:]

When Buffet dies you split the A shares 1000:1, start paying a dividend, sit back and watch the stock go through the roof. There are thousands of investors that would love to own Berkshire but due to the high price of the shares they stay away. You bring the price down to $80 a share and pay a 3% dividend then you will hear Warren who?
Buffet has set Berkshire up to run without him and in the end it will.

Mar 12 09:18 AM

[ajit:]

IT IS NOT BUY NOW , SEE ITS PORTFOLIO, HE HAS NOT ANTICIPATED FALL OF BANK ,INSURANCE ETC. SO HE IS A HISTORY.

Mar 12 01:25 PM

[Owen:]

Thank you for quoting me, Larry! I still stand behind my March 4th comments on Investment U's article from the same day.

Like other Berkshire shareholders, I too am worried about the company after Buffett is gone. Warren has a unique ability to close a multi-billion dollar deal with a handshake after a 30 minute chat, and the talent to write annual reports that are both clear and fun to read.

But as to his investment acumen, there are two or three people at Berkshire who will do as good a job as him in managing the company's ever growing investment portfolio. One is Ajit Jain, and another is Lou Simpson--who may very well be an even greater investor than Warren, albeit not much younger than him. Neither of these gentlemen possess Warren's folksy charm, but the company will be in good hands with either of them at the helm.

The company doesn't need a "manager" at the top. Each of the 80 or so individual businesses essentially manage themselves. The sole job of the 18 people working at headquarters is to allocate capital. But remember, this is an operating business, not a mutual fund. Berkshire will do reasonably well even if all excess funds are invested in the S&P-500 index. Perhaps not as well as they've done so far, but well enough to justify paying more than book value for their shares.

Buffett often says, "Buy a business that even an idiot can run, because sooner or later an idiot will run it." I don't think that's likely to happen any time soon with Berkshire Hathaway, and if the stock does fall on news of Warren's retirement or death, I'll use that opportunity to buy more shares.

Mar 13 07:46 PM

[Vox Rationalis:]

"There surely must be a premium in the shares simply because of Buffett’s reputation. That could come out of the price. Moreover, Berkshire appears to be an extension of Buffett: It’s been his show."

Two points.

Decomposing BRK can provide support for both the undervalued and overvalued positions. My feeling is that on a price to tangible book value basis, it doesn't look cheap, but on a cash flow basis it does.

I think the net Buffett effect right now on the stock is very close to zero. Buffett's age and succession questions present risks, and I think the market is in effect overvaluing risk premiums due to heightened risk aversion, and many share prices are discounted more than is appropriate. This is countered by the undisputable Buffett premium, but right now I think the net Buffett effect is as low as it's been since 2000.

I'm long BRK.

Mar 14 02:17 PM

[Larry MacDo...:]

Fitch cuts certain Berkshire Hathaway ratings
The Associated Press March 13, 2009

Fitch Ratings has downgraded Berkshire Hathaway Inc.'s triple-A issuer default rating and senior unsecured debt ratings by one notch, saying a top rating isn't appropriate for financial-oriented holding companies in the current volatile market.

The agency also said its ratings continue to reflect Fitch's long-standing concerns that Berkshire's fortunes are intimately tied to Chairman Warren Buffett and his investment expertise.

www.businessweek.com/a...

Mar 18 10:25 PM