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Old 02-28-2009, 06:03 PM   #81
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I've never looked into Berkshire so forgive me if this question is stupid, but couldn't one replicate it pretty closely and not have to pay 2x book?

Of course some of the investments would be excluded (say the CDS and the long-dated puts), as well as companies that are wholly owned and no longer traded. But aren't those two categories a minority of the fund stock?

I just finished reading the annual letter, but haven't examined the financial in detail yet.

The short answer is no, because the majority of the value in Berkshire is no longer the investments in owns but the operating companies. Roughly speaking (the use of float by Berkshire insurance units complicates matter greatly) 40% of the assets are investments and 60%, GEICO, Sees, PacificCorp, Dairy Queen, Clayton Home, and several other insurance companies and 50+other business.

Book value is roughly 72K per share (as of 12/31/08 it has decreased this year) and even if you subtract out all the good will ~40B. The book value per share is roughly 46K.

Berkshire has seldom sold for anywhere close to 2x book, in this market, I think it is selling near book. Not to mention some of the operating companies are carried at ridiculously low book values. IIRC See's annual profits are near its book value.
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Old 02-28-2009, 08:14 PM   #82
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Where do you get 2x book?

Runningman's post, but I now see he was talking about Sep-07.
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Old 02-28-2009, 08:15 PM   #83
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Berkshire has seldom sold for anywhere close to 2x book, in this market, I think it is selling near book. Not to mention some of the operating companies are carried at ridiculously low book values. IIRC See's annual profits are near its book value.

So do you think its a buy these days?
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Old 03-01-2009, 06:27 AM   #84
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Of course, and I bet Ziggy does also. Which means that a short sale is almost certain in order
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Old 03-01-2009, 04:00 PM   #85
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In 1998 letter Warren stated his goal was to grow net worth, which at the time was 58 Billion by 15% annually or double every 5 years, this was a decline from previous rates mostly because Warren implied he needed elephant sized ideas. This implies Berkshire would need to be at a net worth of 266 billion today, to meet his folksy lower goal, does anyone know what the actual figure is? I think it must be near 120 billion is that right?
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Old 03-01-2009, 04:57 PM   #86
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According the shareholder letter Book value is $70,530/share. There are 1.55 A shares outstanding so book value is 109 billion. The equity investments have dropped between 8-10 billion since the end of the year so call it $100 billion in book value.

The 1998 letter had the Book Value at $37,801 giving a 6.4% CAGR for book value.
Not close to 15% but a far ahead of the S&P 500 and I contend with a lower risk with a Beta of .48 and Warren Buffett at the helm.

Morningstar says the 10 year stock return is .8% vs a negative 4.8 for the S&P 500.
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Old 03-02-2009, 12:38 AM   #87
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I thought I'd start a mini blog on Facebook. I figured I'd add to the hype about Buffett's letter.

Every year Warren Buffett writes a much anticipated shareholder letter. Since his company Berkshire Hathaway (BRKA) is my largest stock position I (along with every stock market pundit and wanta be pundit) read it with great interest. I won't comment much on the letter, but I will try to analysis the stock compared to historical levels based on the annual report.

On Feb 28, 1999 BRKA stock closed at $71,100 a share, ten years latter it closed at $78,600 a 10% gain over 10 years. Hardly a way to get rich, albeit a much better than an investment in the S&P 500 over the same period. The obvious question is BRKA a good buy now. The answer is I don't know for sure.
In fact, I should warn any FB friends that while in theory I know a fair amount about investment, my track record for the last year or two has been as bad as anybody else's down 28% in 2008 and 2009 is starting off horrible. Or to put it another way doing the opposite of what I did last year would be a pretty great way of become rich

Still I can state that Berkshire Hathaway is a heck of a lot better investment today than 10 years ago, and I think that is true of most stocks. Now this is pretty much a duh, but as the late Paul Harvey said here is the rest of the story.

Most people think Berkshire Hathaway is mutual fund run by Warren Buffett, while that used to be true. Over the last decade Berkshire has primarily become a conglomerate owning more than 70 companies with more than 250,000 employee (more than GM), the biggest is GEICO. Buffett still does lots of investing, especially over the last year. Berkshire makes money a lot of ways but one of the secrets is the use of insurance float. This is insurance premium you pay in advance for auto insurance or hurricane insurance, that Buffett and his team invest while keeping enough in reserve to pay for your future accident or Katrina. (Katrina and her sister hurricanes cost each Berkshire shareholder $2200).

Now lets see what has happened to Berkshire in the last 10 years. Probably the most important thing is that company has earned 58 Billion a tidy sum that is almost $38,000 per share. Now unlike some companies that vast majority of this money, hasn't been invested in expensive rugs, and executive retreats. Instead it has been partially invested in stocks, bonds, and preferred shares, but primarily it has been used to buy profitable companies. It is safe to say that Warren Buffett doesn't have a reputation for overpaying for things including companies. A partial list of dozens of companies acquired in the last 10 years, is Businesswire, Pampered Chief, Fruit of the Loom, Acme Brick, Shaw industries (carpets), Clayton Homes (largest mobile home supplier), XTRA (truck leasing), Johns Manfield. Two of the largest acquisitions have large oversees operations Iscar, an Israeli tool manufacturer, and PacificCorp which owns the 3rd largest electric utility in the UK and has 2+ million US customers. Now earnings can be manipulated (especially for companies with a financial component) but cash is tougher to fake, and over the last 3 years, a billion dollars a month have flowed into Omaha for Warren to invest.

Another way of looking at company is its book value (which is basically a companies net worth). Berkshire book value has increased from 58 to 109 billion (70K/share) in ten year, as Buffett explains (better than I could ever hope to see page 90-92 of the annual report), book value is a best an imprecise measure. But right now Berkshire is stock is selling for 1.1x book value, compared about 1.6 for 1999 and up to 2.0 in 2001.

2009, has been a bad year for financial stocks, and Berkshire owns large stakes in banks, this partly accounts for the stock dropping 19% this year. Berkshire has roughly $12-$13 B in Wells Fargo, American Express, US Bank and others. It has also has written insurance contracts (technically puts on stock market indexes) that expire in 2019 to 2029 and has another $35-40 billion in stock investments which have also decreased in value. Still even if we assume bank nationalization, a recession like the Japanese have gone through, it hard to justify wiping out more than 1/2 of the $56 billion in earning Berkshire has had in the last 10 years.

So simply adding the the 1999 stock price 71K to 1/2 the earning ($19K) resulted in a price of $90K. But Berkshire is much different and bigger company today than it was 10 years ago. In addition to all the companies Warren has bought, Berkshire operating companies have also grown revenues and profits, for instance GEICO is on track to become the countries largest auto insurer, and even See's has sold more candy. In aggregate Berkshire revenue have increase from 13.8 billion in 98 to 107.8 billion this year an 8 fold increase. Berkshire profits are very inconsistent due to insurance and investing returns, but if we average 3 years 98 to 2000 earnings per share are about $1650 vs. the last 3 year average of $6300 or an almost 4 fold increase. Even if the stock market was too optimistic in early 1999 about Berkshire (and clearly dot coms were beyond optimistic and well into nut levels then), the earnings potential of Berkshire is several times greater in 2008 than 1998. So in summary anyway you try value Berkshire, by book value, historical measurements, or earning potential it is significantly cheaper than it was 10 years ago, when Warren hoped to achieve a 15% return going forward.

In the 2008 letter Buffett says this
"The investment world has gone from underpricing risk to overpricing it. This change has not been
minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."


I am perfectly happy to take the risk that an investment in company like Berkshire will pay off in the long run, better than loaning my money to Uncle Sam or a bank at couple of percent. I wouldn't be surprised to see another 25% drop in the market, and I am mindful that market can remain irrational longer than you can remain insolvent, but eventually sanity will prevail.
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Old 03-04-2009, 06:33 AM   #88
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I can't tell you, but here are Afew of IMO's and experiences with owning it:

1. I bought Berk B as soon as it came out and every year there after in lieu of funding My Roth IRA.. In a way it is a ROTH IRA and You only pay 15% CG's taxes when you sell it( assuming have a profit ) unlike a Roth IRA, you pay Ordinary Income taxes when you start WD/Selling out of it..

2. Like having a Rolex Watch In your Dressor Drawer..It pays No Divs, it goes Up and Down in Price and All depends on Wether or not your Going to Ever Sell it or pass it onto Heirs..

3. 5 yrs prior to Wanting to Retire, I was Advised to watch the Price and Sell it..It is not a Retirement Investment 'IF you will need Dividend Income"...
and thus I did, Last yr..

4. I also Owned A Good Berkshire Advocate and Watch Dog> FAIRHOLME Fund ( FAIRX) He has a Pretty good inside track on tracking Berk. and Has a Knack of Knowing when to Sell/Reduce it and When to Add more/Buy it. ( He sold a major % portion Last yr and that Was the Final Decision Maker for me as well )

5. Buying it for the future? Well evaluate His Stock Holdings and what are the Potentials for them for the Foreseeable Future of say (a) Recovery and (b) Next Bull market ...
6. His stock was ( and still is) mostly for the Wealthy that can afford to Tie up Some $ for Decades..and not need it.. Sequioa Fund was the same way for Decades..and A vast majority are Those who bought it in it's early yrs...when their was only Individual Stocks or Indexes to Own back then..

7. Berkshire is Like a Mid Cap Mutual Fund of Several Stocks...

8.And as with any 'Active Managed Mutual Fund", they eventually either Go Flat or Underperform it's comparable Indexes... mostly due to Either getting too Big, Do a Close OR The Mgr. gets to Mentall Old, Complacent or Retires and does not have a Good Chain Of Command to take over the Helm...

9. It HAS been a Canary In the Coal Mine for the Near future of the market.. But ave of 3-6 mos Ahead of the Curve..

Bottom Line? Either Hold or Buy at these Low Levels.. Value is Not more than $2,000 PPS

It was a Nice ride while I owned it..and Wanting Dividend Income , Sold most of it.. I only kept a few shares to leave to my Kids..

I also own BUD, WMT and 3 other Div. paying Stocks for Decades..and am keeping those , mostly since they have Split so much over the Yrs and/or the Divs were Reinvested and have the ave of 6x as many shares..with them now.. Something I wish WB /Berk. would have done..If he did? I'd keep it..
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Old 03-04-2009, 10:22 AM   #89
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I thought I'd start a mini blog on Facebook. I figured I'd add to the hype about Buffett's letter.
Your analysis is much more worthy than what I've been reading on SeekingAlpha.

Investing in Berkshire has come down to a limited number of choices. I don't want any more international stocks. I don't want any more small-cap stocks. I don't think I really should touch any more attractively-priced dividend-paying financials, as if there are any left. I'd like to buy shares in a company whose management I respect and trust. Hmm.

I wish his letter had talked more about the CFO/CIO wannabes he was hiring a couple years ago. I wonder if that experiment is working out or if they all quit for high-paying Wall-Street careers.
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Old 03-04-2009, 11:49 AM   #90
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According the shareholder letter Book value is $70,530/share. There are 1.55 A shares outstanding so book value is 109 billion. The equity investments have dropped between 8-10 billion since the end of the year so call it $100 billion in book value.

The 1998 letter had the Book Value at $37,801 giving a 6.4% CAGR for book value.
Not close to 15% but a far ahead of the S&P 500 and I contend with a lower risk with a Beta of .48 and Warren Buffett at the helm.

Morningstar says the 10 year stock return is .8% vs a negative 4.8 for the S&P 500.
I read your analysis and it is very good, and agree with all the major valuation issues and the outlook going forward with the exception of one thing - what concerns me is the stocks he has been selecting lately have performed very poorly since he became America's bull market rock star of choice by 1998. Not just this year but some of his decisions in the last 10 years, not selling Coke at a 50PE warning about upcoming financial problems and increasing stakes in banks. Buying an oil company at the top of oil and a railroad at the same time which was also a play on oil prices. Buying 20 percent of the world silver supply and selling just before a 300 percent increase. Selling a put at the very top of the market. Buying fixed preferred securities now when he is expecting big inflation to kick in soon with all the stimulus needed. It is those decisions that made him only reach his goal of 15 percent return on equity twice in last decade and instead of averaging 15 percent average 6.5 percent, I think the 6-10 percent return on equity is what I'd plan for going forward, but I agree with you there is with much less downside risk on Berkshire now than most any other stock. Just seems like such a perfect candidate of a stock to begin paying out some of their excess equity through dividends instead of struggling for investment ideas. He could reliably help many individuals fund their retirement.


On top of that this year a review of his top holdings gives me a fall of 13 billion in value from the start of the year, which would indicate book value now of $62,000.

The amazing thing to comprehend is to think of how Warren started with next to nothing and has built it into this powerhouse with 100 billion book value - and that in the last year the market wiped out the dollar equivalant in BRK stock of his lifetime achievment of all that value and effort with such ease.
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Old 03-13-2009, 11:51 AM   #91
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Interesting development: Fitch drops Berkshire's credit rating to AA+, the same grade as S&P ranked GE yesterday.
Quote:
"Fitch views the company's potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the 'AAA' level," the ratings agency said in its statement on Berkshire
Berkshire Loses Top Rating on Investments, Buffett Role - Companies * US * News * Story - CNBC.com

Edit to add:
Quote:
Fitch lowered Berkshire's senior unsecured ratings by two notches to 'AA'. However, it affirmed its 'AAA' insurer financial strength ratings on the company's insurance and reinsurance subsidiaries.
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Old 03-13-2009, 11:53 AM   #92
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Despite the downgrade, Berkshire was up for a while in early trading, over 2800 on the B shares. I used that opportunity to sell half of my stake, most of which I bought in the 2300s to the 2500s. And if it drifts back to that level again, I'll repurchase what I sold.

Dirty market timer!
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Old 03-13-2009, 09:54 PM   #93
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Interesting development: Fitch drops Berkshire's credit rating to AA+, the same grade as S&P ranked GE yesterday.
Boy, that came out of nowhere.

Rumor is that Fitch is being used by the bigger companies (S&P and Moodys) as a quick-reacting trial balloon. If nobody piles on in a few more months then Fitch will quietly upgrade again, but in the meantime they can count coup and claim that they were all over the problem before it happened. And this time they really mean it.

I've been reading a Berkshire blogger with a contrary take on the downgrade:
Fitch Downgrades Berkshire Hathaway | The Rational Walk

Here's his interesting five-part analysis on the company's intrinsic value:
Berkshire Analysis - 2008 | The Rational Walk
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B Share arbitrage
Old 03-14-2009, 02:57 AM   #94
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B Share arbitrage

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Despite the downgrade, Berkshire was up for a while in early trading, over 2800 on the B shares. I used that opportunity to sell half of my stake, most of which I bought in the 2300s to the 2500s. And if it drifts back to that level again, I'll repurchase what I sold.

Dirty market timer!
Nice!

Did you see this article on B share pricing?

The Rational Walk
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Old 03-14-2009, 04:08 PM   #95
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Did you see this article on B share pricing?
The Rational Walk
I think this is the direct link to the article:
Berkshire Arbitrage Opportunities Revisited | The Rational Walk
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Old 03-16-2009, 07:38 PM   #96
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Despite the downgrade, Berkshire was up for a while in early trading, over 2800 on the B shares. I used that opportunity to sell half of my stake, most of which I bought in the 2300s to the 2500s. And if it drifts back to that level again, I'll repurchase what I sold.

Dirty market timer!
You, dirty market timer you ...



Just kidding. Good for you. Maybe a touch of envy here. I bought BRK/B at $3900 to $2900 levels. I was above water for a while, but am in the red for this stock and most other positions too! During the recent dip, I was too busy with w*rk to watch the market, and even if I did, would be too scared to commit more of the cash that I have left.

If this kind of market doesn't make a trader out of us, then I don't know what would. I have nothing against trading, only that my attempts have been more failures than successes. Oh well ...
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