"Warren Buffett's gotta die someday, right?"

[Nords]

Lately I've been using Dory's server space to archive blocks of text that I seem to use a lot. Here's another one split off from the thread on index funds expressing concern over a very common subject of discussion. Berkshire Hathaway has recently enjoyed its biggest price run since 2003 and the technicals are as peaked as I've ever seen them.

It's also very tax-friendly. I used to hold it but sold recently, fearing the inevitable (?) slide when Buffett kicks off.

TH and I recently had the same discussion when he said "I'm convinced it'll take a decent double digit dumper when Warren finally goes to the Great Dairy Queen In The Sky."

I think that there's another side to the double-digit-dumper theory. In the last three years Susie Buffett has died, Bill Gates has joined the BRK board, Buffett's agreed to donate the bulk of his shares to the Gates foundation, and the succession plan has been stated more clearly than ever.

I think Susie's unexpected death was a poignant tragedy that really forced Buffett to take a look at his estate & succession planning. If he devotes even half the effort to planning for his demise that he's devoted to reinsurance & buying off-the-wall companies...

Admittedly Bill Gates can hardly be viewed as an unbiased independent board member, but between his foundation (Melinda will kick his assets if he screws that up) and his competitive nature I think he'll keep Berkshire's best interests at heart while continuing to run the place the way Buffett is running it now. Gates & Buffett have very similar brains, eidetic recall, and personalities... although Buffett has benefited much more from maturity than Gates has.

The advantage to Buffett's shares going to the Gates foundation every year is that share volume is starting to pick up a little. The foundations have to sell off the shares to spend their money and I think a lot of institutions/pension funds are finally able to invest a substantial portion of their portfolios in what used to be a very thinly-traded stock. (Now it's merely lightly traded!) When everything else is fairly valued, a mutual-fund manager can't lose by parking a bit with Berkshire.

The company is still trading at a very low multiple of intrinsic value, hurricane season is over, and reinsurance rates (plus property/casualty rates) are going through the roof. Even at over $100K/share analysts are claiming an intrinsic value of about $129K. Take a look at the latest quarterly report: http://www.berkshirehathaway.com/news/nov0306.html . They've made more than twice as much money in the last nine months as they did in the same period last year.

Did I mention that Alice Schroeder got a $7M advance for her Buffett biography, which Amazon lists as a 31 Dec publishing date? If that's true then I think the publicity will guarantee more upside.

I can understand a price drop if Buffett wakes up dead. But the board is either going to have to back the record of the team of Jain, Simpson, Santulli, & Nicely, or start paying out dividends, or sell off the individual companies. Either way I think a lot of arbs are going to hope to make a killing off the confusion. Of course the potential sting of a double-digit drop has been considerably lessened by the last month's price runup. I had a few "Yikes!" moments myself, and spouse was inspired to start the mother of all "Pay off the mortgage?!?" rebalancing discussions.

But we're keeping the mortgage. We'll have to revisit the rebalancing discussion when Berkshire gets to 35% of our ER portfolio.

 

[brewer12345]

35%?! You have drunk long and welll of the Kool Aid, my friend. I consider myself to have a fairly high risk tolerance, but I start to think about rebalancing when an individual stock or bond goes over 10%. Don't care if the company is run by JC himself.

 

[Cut-Throat]

But we're keeping the mortgage. We'll have to revisit the rebalancing discussion when Berkshire gets to 35% of our ER portfolio.

I actually had a single stock once that was 30% of my portfoilo. It rebalanced itself automatically to 15% of my portfoilo.

I don't own any single stocks any more!

 

[Sam]

I actually had a single stock once that was 30% of my portfoilo. It rebalanced itself automatically to 15% of my portfoilo.

I don't own any single stocks any more!

I don't know what the percentage should be, but I don't consider Berkshire a single / individual stock.

 

[macdaddy]

I don't know what the percentage should be, but I don't consider Berkshire a single / individual stock.

I agree with this... it's more like a fund representing a whole bunch of different companies. Even so 35% may be a little high. I am looking forward to the Buffett biography coming out.

 

[Cut-Throat]

I don't know what the percentage should be, but I don't consider Berkshire a single / individual stock.

Would you say the same about Phillip Morris (Or their new name)? - various food companies like Kraft, tobacco etc. etc

 

[unclemick]

Hmmm

I look at things slightly differently - income wise, pension, early SS, and Target Retirement(counted as 2.7% current yield) cover core budget plus a little lagniappe, aka wiggle room.

So my hot blooded hormonal quest for THE ONE GREAT stock to place me in a villa in the Bahamas is not constrained by rebalancing requirements, etc.

However - I don't have any WB or ??Dell?? which I thought I read somewhere Greany did well with. So I'm still looking to find 'the stock' for me and still have a lot of dividend producers that haven't sold for tax reasons.

Should I find it - no rebalancing - and long as expenses are covered - I'm willing to swing for the fences with a wildly unbalanced portfolio - unfortunately it's 'too' well balanced currently.

heh heh heh heh - Go Saints.

 

[Danny]

http://intelligentspeculation.blogspot.com/2007/03/warren-buffett-and-berkshire.html

 

[wabmester]

When I read that he recently took a position in Target ( only $300 mil, but still its a start) - my favorite stock - it only confirmed to me what a genius he is- wab you still got your holding?

Happy anniversary, DT! It has been just over a year since your hot stock tip!

While TGT has underperformed the market in that year, you've outperformed several other picks on this forum (NT, INTC, MOVI, etc). I think the best pick I've seen so far on this forum has been from unclemick. He picked AT&T (T) a while back. The stock is up over 40% in the last year, and it pays a 4% dividend!

 

[Danny]

Happy anniversary, DT! It has been just over a year since your hot stock tip!

While TGT has underperformed the market in that year, you've outperformed several other picks on this forum (NT, INTC, MOVI, etc).

Remember I have until the end 2010 to hit $109! We must be patient wab, just like Warren.

 

[Cut-Throat]

I think the best pick I've seen so far on this forum has been from unclemick. He picked AT&T (T) a while back. The stock is up over 40% in the last year, and it pays a 4% dividend!

Don't encourage him! - You'll stimulate those male hormones he's been trying to suppress for years! 8)

 

[unclemick]

Wow!

Still have AT&T - the stock is so boring I haven't even checked this yr.

Go figure.

heh heh heh

 

[Sam]

Would you say the same about Phillip Morris (Or their new name)? - various food companies like Kraft, tobacco etc. etc

I don't know enough about Phillip Morris to form an opinion.

 

[dmpi]

I don't like a stock thats traded so lightly. Intrinsic Value won't mean sqwat when a million shares hits the market. Bill Gates took 10 years to unload his hoard and look what MSFT has done in the last 10 years.

 

[lazyday]

Intrinsic Value won't mean sqwat when a million shares hits the market.

Maybe BRK can buy back its own shares, as the foundation slowly sells?

Might make sense, since it's having trouble investing the huge cash pile and cash flow. And it's (mostly) harder to outperform when BRK is bigger.

If you're thinking of when WEB has health problems or dies, I wonder if there's a plan to make some announcement while trading is halted, about some massive spinoffs, dividends, and/or buybacks. Not that such measures would keep price at current levels, but could help reduce the panic.

I thought of buying when B shares were around $2800, but couldn't get a handle on what's the intrinsic value, and TH convinced me that price could plummet when WEB health fails.

 

[terminator]

Nice strategy. If I had 35% of my portfolio in one stock I'd be pumping it too.

Seriously, I personally wouldn't have an issue with 35% of my portfolio in BRK. Even if things go bad, it's not going to drop all that quickly and it would be easy to get out without a huge loss since it has real assets buttressing its valuation. Personally, I wouldn't worry about the increasing trading volume as BRK isn't a stock where the value is being propped up by a low trading volume (IMHO).

The only reason I don't own any is that it doesn't pay a dividend and there are too many good dividend-paying fish in the sea for me to go with BRK.

 

[brewer12345]

Seriously, I personally wouldn't have an issue with 35% of my portfolio in BRK. Even if things go bad, it's not going to drop all that quickly and it would be easy to get out without a huge loss since it has real assets buttressing its valuation.

Um, not to overstate the case, but you do understand that BRK is primarily an insurer/reinsurer, right? That means they get paid to accept other people's risks. Real assets or no, it is conceivable that they could have a very major loss.

 

[rmark]

Berkshire Hatahway is an individual stock. (or its a fund with an aging, though talented, manger. Sounds like something to sell, not buy.)

 

[FinanceDude]

Berkshire Hatahway is an individual stock. (or its a fund with an aging, though talented, manger. Sounds like something to sell, not buy.)

Or buy at the right price. IMO, Buffett is a disciple of Benjamin Grahm, making him a value manager. So, why don't you approach BK was a value play, and buy accordingly? If there is a pullback in BK due to a large loss, I'm looking at a price point with it, much like any value play. An example of this is when PG had to restate their earnings in 2001. Their stock pretty much dropped 50% almost overnight.

I bought a bunch of it for myself and clients. The stock doubled and split in the next 4 years, and is doing fine. At $60, it was highly valued, with the same dynamics, at $30 I felt it was a value to buy.........

 

[Danny]

Can't a case be made that BRK can survive Warren and prosper?
I mean Graham died. He's no longer around to advise Warren, he left behind 2 books. Warren is a disciple of G I'm sure he only has people working for him that follow the Graham principals. Why wouldn't they be able to find more investment opportunities in the market bargain bin after he is gone?

 

[FinanceDude]

Can't a case be made that BRK can survive Warren and prosper?
I mean Graham died. He's no longer around to advise Warren, he left behind 2 books. Warren is a disciple of G I'm sure he only has people working for him that follow the Graham principals. Why wouldn't they be able to find more investment opportunities in the market bargain bin after he is gone?

Well, there may be ONE big reason: It can be argued that Warren/Charlie are two of the most PATIENT investors the world has seen. Warren waits DECADES to buy the right company at the right price. I don't see the folks that take over being that slow to act............which could go against the track record. Warren himself has said that he gets about 200 proposals a year, but only looks into 5-7 of them..........

 

[free4now]

The thing about BRK is that it has always been run in such a way as to keep the stock price close to the the intrinsic value (basically the discounted future earnings plus assets). Those fundamentals won't change when Warren dies because Warren doesn't run the day to day affairs of the individual companies.

The only thing that gets affected when Warren dies is the ability to pick new acquisitions... and since the rate of acquisition is so slow these days it would be many years before bad acquisitions would even make a dent in the intrinsic value of the company.

I'm pretty convinced that Warren's death will have almost no effect on the intrinsic value of the company, at least not for many years after his death. So if the stock price does fall significantly, it will temporary... If the new guys run the place more conventionally than Warren, they will soon pump the stock price up way above intrinsic value like most other companies

 

[saluki9]

I don't know what the percentage should be, but I don't consider Berkshire a single / individual stock.

If it has one corporate address and trades under one ticker symbol it is one stock.

If I remember correctly, it didn't matter too much to the Enron shareholders that several of the divisions (i.e. engergy trading desk) were profit machines. Even risk holds true for any company.

 

[wildcat]

C-T -

Just curious, how did that stock do for you until you scaled back? Did it significantly add to your wealth prior to that day (recall you saying $80k in a day maybe?)?

 

[Nords]

35%?! You have drunk long and welll of the Kool Aid, my friend.

So my hot blooded hormonal quest for THE ONE GREAT stock to place me in a villa in the Bahamas is not constrained by rebalancing requirements, etc.

These quotes are from a number of what are all good points, as well as part of a continuing discussion at the Nords household. ("Hey honey, guess what Berkshire did today?") I wouldn't bring the subject up if I didn't need to check my logic and to test our resolve.

But I'm more on UncleMick's side of the fence. The only reason Berkshire's not 40-50% of the ER portfolio is because the rest of the portfolio's funds have had an outstanding year as well. You're not properly diversified when everything goes up at once, and it makes it darn hard to rebalance when everything is fully valued.

There's not much rebalancing incentive because if Berkshire went to 15% of our portfolio tomorrow it wouldn't change our lifestyle. We have the two years' expenses in cash and a few more years' expenses in a taxable account of Tweedy, Browne shares to spend down before we even get to a Berkshire decision. We should probably think about selling the 9th grader's college shares for an I bond or a CD but again the first of that portfolio to go would be Tweedy, Browne. I just really have a hard time selling an asset that's valued so near its book value, let alone below its intrinsic value. If we liquidate the kid's college fund and she wangles a USNA appointment I'll be triply pissed.

Maybe BRK can buy back its own shares, as the foundation slowly sells?
Might make sense, since it's having trouble investing the huge cash pile and cash flow. And it's (mostly) harder to outperform when BRK is bigger.
If you're thinking of when WEB has health problems or dies, I wonder if there's a plan to make some announcement while trading is halted, about some massive spinoffs, dividends, and/or buybacks. Not that such measures would keep price at current levels, but could help reduce the panic.
I thought of buying when B shares were around $2800, but couldn't get a handle on what's the intrinsic value, and TH convinced me that price could plummet when WEB health fails.

Well, by my calculations a buyback's not happening because there are more shares today than a year ago. IIRC one of this year's acquisitions was partially funded by issuing more BRK shares.

Before Buffett would buy back his stock you'd have to convince him that it's undervalued by a substantial percentage, right? Otherwise he'll sit on that cash pile until he finds another distressed insurer or cheap utility or who knows what in some godforsaken corner of the globe. One of the better intrinsic value calculators is the "Intrinsivaluator". Still undervalued.

I agree that the board would ask for a trading halt until the press release goes out. And I'm almost positive it would be a combination of a buyback and a dividend to encourage the arbs to leap in with both feet. Heck, I'd probably liquidate my personal account and go on margin to join in, but that's "only" a $30K bet.

Nice strategy. If I had 35% of my portfolio in one stock I'd be pumping it too.

Damn, busted. It worked for Jonathon Lebed!

Seriously, I personally wouldn't have an issue with 35% of my portfolio in BRK. Even if things go bad, it's not going to drop all that quickly and it would be easy to get out without a huge loss since it has real assets buttressing its valuation. Personally, I wouldn't worry about the increasing trading volume as BRK isn't a stock where the value is being propped up by a low trading volume (IMHO).
The only reason I don't own any is that it doesn't pay a dividend and there are too many good dividend-paying fish in the sea for me to go with BRK.

I think it's likely that the stock would be hammered 30-50% on day one and would need a couple weeks for everyone to sort out their trading strategies. But I'm also pretty sure that the big brokerage houses have their plans in place and would soak up as much of the selling as they could.

If there's an undervalued asset out there among all the high prices, oddly enough I think it'd dividend-paying stocks. In 2008-9 investors are going to realize that dividend tax rates are expiring in 2010, the second year of a presidential election cycle, and those two factors will hit dividend-paying stocks pretty hard if Congress hasn't extended the tax rates. The smallest percentage of our portfolio is U.S. blue chips (DVY) and that's what we'd probably rebalance Berkshire into. But not just yet.

To put this conversation in context a year from now, today's price on "B" shares is around $3560.

I am looking forward to the Buffett biography coming out.

Me too. Our kid has done quite well jumping in & out of Scholastic stock between Harry Potter books. I suspect the same will happen with Alice Schroeder's book...