Berkshire Hathaway: At a Good Buying Opportunity

I've been a long term owner of Berkshire Hathaway (BRK.A) since March 2000. I bought one A share for $52,500 in a taxable account.

Here are some things I like about it:

1. You gain access to Warren Buffett's stock selection ability at a very low cost. Buffett only takes a salary of $100,000 per year and the Berkshire Hathaway corporate overhead is minimal. Buffett also has an edge over other investors because he often gets access to special securities not available to the general public.

2. Berkshire owns a solid portfolio of publicly traded blue chip companies, along with many other 100% owned businesses (such as Geico). There are some good models out there to estimate intrinsic value. One of the better ones is the Berkshire Hathaway Intrinsivaluator which allows you to estimate the value of BRK.A under many different scenarios. Currently the conservative valuation is about $150,000, so BRK.A appears to be a bargain selling below $120,000.

3. A very simple system has worked surprisingly well in timing purchases and sales of BRK.A. Buffett publishes a book value for BRK.A in each year's annual report to shareholders. Using this system, BRK.A is a buy when the price/book ratio is 1.50 or less. BRK.A is a sell when price/book reaches 1.85 or more. The 2007 book value is about $78,000, so the current BRK.A buy price using this system is $117,000 or less. Today BRK.A dipped below $115,000 to provide a good buying opportunity.

4. When Berkshire Hathaway announces a new stock purchase, there is usually a boost in the stock price. Similarly when a stock sale is announced, the stock drops. These small edges add up over time.

5. Berkshire is very tax friendly compared to a mutual fund. It never pays a cash dividend, and unlike mutual funds it is not forced to pass through dividends and capital gains to shareholders. Since my purchase of 1 share of BRKA in March 2000, I have not paid a dime in income tax, even though the stock price has appreciated by about $70,000.

Full Disclosure: I am long BRK.A.

Comments

[Lisa]

"You gain access to Warren Buffett's stock selection ability at a very low cost." The cost is priced in to the stock, and you're really paying up for it.

[helplessobserver]

Thanks for the simple evaluation model. I own the B shares and they have dropped from about 5.0K to 3.8K so I was wondering when investors will come to their senses. For BRK this is feeding time, assets are at distressed prices, and Buffett knows how to evaluate them. He recently picked up some investments at 63 cents on the dollar. What LBO manager you know regularly does this for their shareholders?

[GeorgeSpritzer]

Lisa-
Buffett's stock selection ability may be priced in, but Berkshire is rapidly gaining other big advantages-
1) Private equity firms have been reneging on many deals. Berkshire is now the buyer of first resort for private business owners who want to sell, especially since the IPO market is almost dead.
2) Private equity firms had big investment inflows in 2004/2005/2006 and need an exit strategy. Right now they are trapped- the IPO market is dead, financing is tight. Many investors will pressure them to cash out. Berkshire will be in a strong position to cherry pick the better firms at bargain basement prices.
3) Don't be surprised if Berkshire is part of a FRE/FNM bailout in the next few years with the government taking most of the risk. These could be the elephants Buffett has been waiting for.

[EbayObserver]

The formula "<1.5X book" is a interesting; though it has nothing to do with value investing W.B. has been using.

[gordo]

i would mention that Berkshire is a citadel of first class businesses run by first class managers...and that to buy berkshire at a moderate to premium price would ...over time... be ok...but to buy it now at under 4,000 for a b share is really quite a good investment...

[gettingstarted]

I've been putting all my money into funds through SRSP, RSP, IRA, 529's, etc. but have not been buying individual stocks. I want to get some BRK/B shares but what is the cheapest ways to buy a couple of them?

[gettingstarted]

What is the least expensive ways to purchase BRK/B shares?