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Berkshire Hathaway in the wake of Barron's
Old 12-22-2007, 05:28 PM   #1
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Berkshire Hathaway in the wake of Barron's

For those who haven't read the Barron's article, they essentially claimed that Berkshire was 10% overvalued. In a seemingly unrelated coincidence, Berkshire has given back a bit over 10% from its all-time high.

I don't want to get into Barron's quality of Berkshire's valuation on this thread, although with our asset allocation I wouldn't buy more. But among all the crap being flung by all sides over the Barron's article, I noticed this small tidbit:

Berkshire Hathaway's outlook raised to stable, IDR affirmed at 'AAA' - Fitch

After over 2˝ years, Fitch's has raised its outlook on Berkshire from "negative" to "stable". They originally dropped the outlook to negative on their assessment of Berkshire's key-man risk and the AIG insurance scandal, yet somehow they've decided that it's no longer a problem. Presumably even Fitch's has noticed that Buffett isn't getting any younger, yet today they think his lifespan is more likely to exceed their 12-24 month outlook than they felt about it a couple years ago. The AIG case is just going to trial next month but somehow Fitch's has already decided the verdict.

What impact does Fitch's have? Anyone here have enough experience with ratings agencies to tell me the significance of this change of heart? (Even I think that nothing has really changed except Fitch's opinion.) Is there a concrete event that caused this shift, or is Fitch's just getting tired of taking a contrarian position? Are institutions required to pay any attention to this? If a ratings agency makes an apparently minor change like this, does it somehow give institutions their necessary permissions to start buying Berkshire shares again?

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Old 12-22-2007, 06:06 PM   #2
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I certainly don't know for a fact but I suspect that this will have zero impact on anything except for possibly Berkshire subsidiaries bonds. AAA credit is such a rare rating that I can't imagine any institutions require that rating before investing. The upgrade is sort of like adding another set of blast doors to NORAD Cheyenne Mountain
facility nice but overkill.

Here is a neat little article from Forbes

Warren Buffett might be spending too much time begging the U.S. government to sock him with more taxes, but the guy sure knows how to make money for shareholders. He’s up 1,000,000%.
Buffett started buying Berkshire Hathaway shares in 1962 and took control of the company in 1965— around the time Berkshire shares hit $15. So when the stock traded above $150,000 for a while on Dec. 11, it was what Peter Lynch (had he had such an object in his portfolio) might have called a 10,000-bagger.
For those few hours when Berkshire shares were above $150,000, Buffett became the world’s richest man, his net worth cresting at $65 billion
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Berkshire shareholder returns vs intrinsic value.
Old 12-22-2007, 06:45 PM   #3
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Berkshire shareholder returns vs intrinsic value.

This is one of the most valuable post I've seen on the Motley Fool's board for some time.

The background is attempt to figure out the stock returns as function of Berkshire's intrinsic value. Estimating Berkshire's value is somewhat of an obsession amoung Buffett-philes. However this calculator seems to do a good job. What is neat is that regardless of the actual accuracy of the calculator your returns as investor are historical coorelated very closely with the values it spits out for a conservative estimate.

Price/IV Price/IV day week month 2 month 6 mon 1 year
min max 1 5 21 42 126 252
0 0.8 31.1% 34.6% 31.2% 30.0% 32.5% 32.1%
0.8 0.95 23.9% 24.7% 23.2% 20.8% 19.8% 19.5%
0.95 1.05 16.9% 7.9% 7.0% 6.5% 7.6% 12.7%
1.05 999 6.0% 7.7% 11.8% 14.4% 13.7% 14.0%

Unfortunately, I couldn't figure out how to get tables to work on this forum.
So the summary is if you buy Berkshire at less than .8x of intrinsic value (IV) you'll make 32% a year between .8 and .95 just under20% and above .95 around 13%. Most of these gains will be seen within 6 months when the stock is really undervalued. The calculator shows a current conservative estimate of 151K giving a current Price to I/V of .93.

Read the rest of the post here
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Old 12-22-2007, 09:06 PM   #4
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Fitch = Fart in a hurricane.
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Old 12-23-2007, 01:25 AM   #5
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As I remember Barron's, they were wrong more often than they were right. It got to be funny.
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Old 12-23-2007, 08:01 AM   #6
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Originally Posted by Ed_The_Gypsy View Post
As I remember Barron's, they were wrong more often than they were right. It got to be funny.
There's a reason why a lot of folks call them BEARron's.

Seriously, though, even at its high of around $5000 on the B share, I think most attempts to "value" Berkshire still put IV at higher than the share price.

However, what one may look at is the historical range of discount to IV to see when the stock is richly valued relative to the range. For example, if BRK usually sells in a range of (say) 10% to 40% discount to IV, once the price approaches a 10% discount one can wonder if the market has valued it as fully as it typically will...similarly, when the stock is selling at a ridiculous discount to its IV (think back a few years in 1999-2000 when I picked off a few B shares at about $1400 each), it's time to buy.

Based on how Berkshire usually trades, I think that's the best way to look at market valuations. "Overvalued" and "undervalued" only make sense within the context of its usual discount range.
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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