Buying Berkshire

I'm not really a stock-market kinda guy, but there's a handful of individual stocks, foremost among them Apple (AAPL), which seem to be able to transcend financial-asset status and be of interest to a much broader audience, including me. And one of those stocks is Berkshire Hathaway (BRK.A)(BRK.B).

Berkshire's interesting because it's in many ways a publicly-listed conservatively-managed hedge fund, using an enormous quantity of policyholder cash from its insurance operations to make solid long-term investments. Nadav Manham made the excellent point Tuesday that no one should invest in a hedge fund unless that hedge fund can compellingly persuade you that it will outperform Berkshire: he calls it the "Berkshire hurdle".

Along the way, Nadav said that "Berkshire's stock price, $111,770 as we speak, certainly does not seem overvalued, and may in fact be significantly undervalued."

And Whitney Tilson, in yesterday's email blast, quotes a message-board posting saying that although Berkshire shares could certainly fall further from here, every time (such as now) that they've dropped more than 25% from their highs, they've gone on to perform spectacularly well the following year.

All the same, to the old Berkshire risks (a hurricane hitting an urban center on the East Coast, or Warren Buffet falling under a NetJet) must now be added a whole bunch of new Berkshire risks, which Todd Sullivan convincingly lays out.

For one thing, the firm is long the financial-services industry generally - not just Moody's (MCO), which reported a 48% drop in net income today, and which, if sense prevails, will become increasingly irrelevant over the long term. Berkshire also has large long-term holdings in American Express (AXP), Wells Fargo (WFC), Bank of America (BAC), US Bancorp (USB), and M&T Bank (MTB), one or more of which could easily find themselves in serious trouble if the current credit crisis gets worse rather than better.

Add to that Berkshire's exposure to the housing industry, via shareholdings in public companies -- Home Depot (HD), Lowe's (LOW), USG (USG) -- and wholly-owned subsidiaries (Shaw Industries, Clayton Homes, Jordan's Furniture, Benjamin Moore, Home Services, Acme Brick), and it all adds up to a decidedly dodgy outlook over just about any time horizon.

And yet: Berkshire's shares still trade above the $110,000 level which they were bumping up against for the entire first half of 2007, before the credit crunch hit. Yes, they're down from their silly December highs. But I can't shake the feeling that if $110,000 was as rich as Berkshire got in the first half of 2007, the company's valuation today should be substantially lower.

All the same, if you're thinking of investing in a hedge fund which concentrates in US equities with a little global diversification, then you'd probably be well advised to consider simply buying Berkshire shares instead. With the smart money beginning to go long rather than short, why not simply buy the stock that many value-oriented hedge-fund managers invest in, and cut out the middleman? The risk of a blowup is lower, and there's a non-negligible chance that you could make a very large amount of money indeed.

Comments

[mags:]

What happens to BRK when Buffet leaves?

2008 Jul 30 03:19 PM

[Wefwef:]

That's a big unknown as Munger is no spring chicken himself. We haven't heard much of the younger management. And after Buffet goes Gates foundation may start slowly realizing the shares Buffet donated. All downhill since $150,000 tops?

2008 Jul 30 04:35 PM

[najdorf:]

The Buffett age risk is relevant. You have to try to figure out whether those who follow him will be well chosen. He seems to have an eye for good management given his investing history, but it's hard to be sure.

The risk of Gates selling is irrelevant to a long-term investor. If the company remains highly profitable and continues to grow, large blocks of shares on the market will create buying opportunities. Stock price follows earnings: it just takes a while and so in the short-term trading determines prices. This is especially so for a company like BRK that isn't going to issue new equity or buy any other companies with stock (as long as they listen to Buffett's advice, that is) - the managers can almost entirely ignore the stock price and focus on long-term earnings.

2008 Jul 30 04:56 PM

[Wefwef:]

That's my point exactly, that we haven't heard much if anything about the younger generation of managers, it's all about Buffet and Munger. Thus the "next gen" is a huge risk.

2008 Jul 30 05:19 PM

[Urbane Gori...:]

OK... Get ready to buy BRK.B (I dug around in my couch and couldn't come up with enough loose change to buy BRK.A) ..But why not wait till it starts moving up. Looks to me like it's still moving down.

jegan ;-)

2008 Jul 30 06:32 PM

[Brk.And:]

On John Egan's comment, to quote Buffett, "The dumbest reason in the world to buy a stock is because it's gone up."
Once you've determined that BRK is selling for significantly less than any price it can reasonably be expected to fetch in 3 to 5 years, than buy it. And if it drops another 15%, then add to it in direct proportion to your conviction in its true value. BRK is NOT a stock to be traded based on the anticipation of short-term earnings. It is only for money that you don't plan on needing for 15 years.
If things get really bad, Berkshire could own 2% of the US next year! Based on a $13 trillion value for the S&P 500 and BRK's $72.5 billion equity portfolio, BRK currently owns 0.56% of all US equities. And this number goes up every year.
Also, as of March 30, 2008, BRK has $72 billion in equities, $32 billion in bonds, and $31 billion in cash. Together that's $135 billion. The market cap is $176 billion, so essentially you are paying $41 billion for all the wholly-owned operating companies of Berkshire. Excluding energy companies, of all the companies in the index, Berkshire has the fastest growth in operating earnings over the past 5 years. That is very impressive considering how big the company is.
So that's a steal, to me. Where's the risk?
Good luck to all that posted in this blog.
Sincerely,
Brk.And.

2008 Jul 30 10:36 PM

[xtronics:]

Why not look at BRK in terms of industrial metal? Or in Euros? If you use real inflation figures BRK hasn't really done very well after 2000 even if it did better than S&P. (search shadow stats)

2008 Jul 31 12:17 AM

[DaveinHacke...:]

Imagine what Berkshire would be trading at today had Buffett dumped all of his housing and financial stocks before the burst of the credit/real estate bubble. Judging from the posts on GuruFocus over the last couple of years, it seems like a fair number of individual investors got burned buying those stocks simply because they were trading for less than what Buffett paid for them.

Perhaps I'm alone in this opinion, but I think Berkshire would be better off if Buffett stopped investing in publicly traded stocks. Since he has constraints on his stock investing due to Berkshire's size, and since he himself has acknowledged that Berkshire will probably generate higher returns from its wholly owned companies going forward, why not just focus on those and special situations?

That said, I still own a few of the b-shares, and am fairly bullish on them. I think we'll see an upturn after hurricane season is over.

2008 Jul 31 09:54 AM

[truthinvesting:]

This article above is wriiten by someone who UNDERSTANDS value. BRk.b is a great risk reward ratio

2008 Aug 02 11:16 AM