Eddy Elfenbein submits: The New York Times looks at Warren Buffett’s Berkshire Hathaway (BRKA) and asks: "How should one value it?" That’s always a good question to ask. I think investors get unnecessarily tangled up by categories like "value" or "growth." All companies are trying to grow. And a company can offer a compelling value due to its growth potential. But what about a company worth $137 billion (slightly less than Google)?
The problem I have with Berkshire is the "Warren Premium." The company is almost always slightly overvalued due to the presence of Buffett. Investors have so much confidence in him that the stock is given that extra, say, 10% or 15% valuation. The stock is currently going for slightly more than 20 times this year’s estimate. That’s fairly rich.
Now that Buffett is moving on in years, what will happen when he’s no longer at the helm? Could Berkshire even exist? The difficulty is that Berkshire is Warren Buffett:
In a parallel world, where a 55-year-old Mr. Buffett with a fondness for kale was running the show, Berkshire stock might be trading higher as investors gave more weight to his involvement with the company. Yet Mr. Buffett's presence is still valued enough that a suddenly Buffett-less Berkshire would be a real shock to investors. "If there was a sudden announcement that Warren was going to go sit on the beach and not run Berkshire, it's very possible the stock would go down a lot initially," Mr. Weitz said. "But the board might then choose to buy back a lot of stock."
Yes, it could. But that’s not what will concern the market. Investors will be looking at the empty captain’s chair.
Think of it this way. Berkshire is largely an insurance stock (Geico) along with a smattering of consumer businesses. But that’s even an overly wide generality. Last year, Buffett took a big loss in shorting the dollar. I highly doubt any post-Warren board would allow such a move. The backlash would be too great.
Valuing an insurance company is hard enough, but how does one place a price tag on the investing whims of a genius? This is where the textbook meets the real world and it doesn’t come away looking so good. One of my problems with the field of finance is that it tries to rationalize things that are really very hard to rationalize. All we’re doing is estimating a guess of an assumption of something we’re not very sure of in the first place.
The variables that affect a stock’s price are monumentally complex. That’s one of the reasons why I stress stable stocks so much. Once Mr. Buffett retires, I think the best move will be to divide up the company he took a lifetime to build.
BRKA 5-yr chart:
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