Satyajit Singh

Satyajit Singh
Contributor since: 2012
Company: Singh Investment Funds
Good Analysis.
Couple of points to consider:
- Vivendi is also a play on Euro (if it remains intact) or any future French Currency. While buying the ADR the growth can come from currency and business improvement. So it is dual levered with both currency and business down.
- Instead of VIVHF buy VIVEF. The former is an ADR where JP Morgan, Deutsche and Citibank hold shares. It is an "unsponsored" ADR and the banks charge 2.5 cents for every transaction. So if a dividend is given the bans will charge that fee. In return the investors get liquidity. The other one VIVEF is the true common stock which can be sold in Paris stock exchange by any broker.
I bought it at $16.4/share
The equation "Total market cap = Enterprise Value + Non-Operating Assets" , even though concise, tells everything about the value of a company if it is to be bought as a whole i.e. complete ownership.
Benjamin Graham used this equation in the 'Security Analysis' book and so does Buffett when he values a company. There is nothing rocket science within this equation.
Yes reinsurance, in the long run, will go broke. Its only a matter of time.
General Re was close to going bust in 1998.
Take a look in 2008 when most reinsurance businesses went from AAA rated to junk in matter of weeks.
Even GEICO, which is not in re-insurance, went bust in 1975.
1) Fairfax
2) Wells Fargo
3) Citibank
4) Bank of America
See all my replies and I hope you would get your answer.
Here is an example of insurance business.
Example 1:
Assets = 100 (mostly liquid investments), Liabilities = 60, Equity = 40. So in this example the market value should be close to 40 (may 45 or 50).
Example 2:
Assets = 60 (liquid investments) + 40 (Pvt held companies; EPS: 4) = 100, Liabilities = 60, Equity = 40.
So in example 2 I fail to understand why the mkt value should be 60 + 4x10 = 100 . Allocating the funds to different places should not change the valuation UNLESS the FCF increases.
You can look at it from two ways:
1) One can buy whole BRK for $386B and you get FCF = ~$15B/yr
2) You can buy 'equity' of BRK for $224B (leaving liability of $34B; the liquid investments cancel out the reinsurance claims). This would leave a FCF of ~$7.2B (or ~$9B if Lubrizol numbers are considered for full year). Dividends would not be available as part of FCF.
The FCF yield does not change much in both scenarios.
First of all let me thank each one for valuable comments. Also it is important to state that I value BRK as a great company and I see it growing close to 15% per annum (as long as Buffett is at the best of his game). My only contention is with Tilson's opinion that it is under priced and selling at 70 cents on a dollar.
Here is a brief synopsis of BRK and I hope it addresses most of the queries.
A major portion of Berkshire float comes from reinsurance business (~$54B out of ~$70B). Reinsurance is not a commodity business and so getting to know the true price of a reinsurance policy not only involves history but intuition as well. Reinsurance business can go for decades without any loss but eventually the reinsurance company will go broke. That is a fact of life. Buffett is doing a great job investing all the funds in the best possible manner but sooner or later the funds will be needed to repay the claims. During those catastrophic periods the liquid investments will come handy. During those periods the deferred taxes will come into existence too.
So out of ~$190B liability ~$110B is contingent upon the catastrophic event. Now would it be a five sigma event i.e. its probability is very less, only time will tell. As a rational investor and keeping a margin of safety one should consider liabilities (as if it will happen tomorrow) and then figure out the true worth of BRK.
The equity market capitalization of $190B for FCF of $12B (or $15B, if full year lubrizol numbers are considered) is appropriate. BRK is not undervalued.
What do I expect of Berkshire in next 5 years ?
- Buffett is physically well (i am keeping my fingers crossed)
- Buffett is going to buy big companies (similar to Lubrizol)
- FCF should reach $30B
- Equity market capitalization should be close $400B and hence a compounded return of 15%.