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December, 2009


Berkshire Hathaway is an excellently managed investment selling at a substantial discount. A conservative intrinsic value estimate of Berkshire Hathaway, Class B (BRK/B), is $4091 per share, according to Berkshire Hathaway Intrinsivaluator, which also provides an optimistic assessment of BRK/B's per share value as $5508. Yet the current market value of BRK/B is just $3280 (per MSN, as of 8:55 AM, Central Time, 12/18/09). This is 80.2% of the conservative Berkshire Hathaway estimated worth or 59.5% of its optimistic value. There exist few other such bargains for a superbly managed company's stock.

Berkshire Hathaway's record is better than that of the best mutual funds. From the time its chairman, Warren Buffett, purchased the company, in 1965, through 2008, BRK has provided a 20.3% compound annual return after taxes, based on the increase in its book value per share.* (By comparison, the S&P 500 Index in the same period, without taxes but with dividends included, performed at an 8.9% rate, compounded annually. 80% of actively managed mutual funds do not match the S&P 500 Index.) A $10,000 investment in Berkshire Hathaway when Buffett took over, more than 43 years ago, and assuming no subsequent sales of shares, would have been worth $28,000,000 in 2008 end of year book value.

But BRK's book value per share is now only 80.0% of its market price. Based on current market value, such a lucky investor would today have over $35,000,000. We judge whether a mutual fund is likely to be a good investment partly on the basis of its historical performance, looking back at how it has done in 1, 3, 5, or 10 year periods. Only a handful of mutual funds exist that have a 10-year record of over 20% compounded annual performance. But there is no mutual fund in the world with such a record for even half as long as Buffett has been at the helm of BRK.

Some, however, suggest that now is not the time to purchase Berkshire Hathaway. It has had a good run, they say, but now its best times are behind it, and the shares will shrink dramatically after Buffett passes on. Mutual fund managers are frequently replaced. Does this mean we ought never buy a mutual fund that has a good record? In fact, Buffett has a trained and experienced management team, well versed in his value-driven investment philosophy, and he has picked the best among them to head the company upon his own death. There may be a drop in share price when he does eventually die, but that will almost certainly just be another good buying opportunity.

A few years before he died, in 1995, my father had used a small fraction of his and Mom's assets to buy a handful of BRK/A shares. "If you can't beat 'em, join 'em," he not so originally advised. Those shares alone would now, even after the 2008 financial meltdown, be worth about half a million dollars. One can always find a rationale for not doing something or not doing it just yet. There may be a cost though for such inaction or delay. Berkshire Hathaway stock is about 45% higher now than its 52-week low. Yet trying to time one's purchase for just when it is down the most may not be the smartest approach in this case. A better tactic might be to buy shares at a number of different times so that the overall average is lower. This should soon be much easier for the average investor, for Berkshire's Class B shares (BRK/B) are due next quarter to have a 50-to-one split, effectively reducing the share price to about $66, based on today's quote. This development is likely to generate increased enthusiasm for the equity.

Owning Berkshire Hathaway is better than having most tax deferred accounts. The typical tax deferred account has an automatic 20% withholding on distributions, even more when they are made prior to age 59 and a half. Also one is limited in how much can be added to the account per year. In addition, they almost always have annual management fees, transaction fees, etc. However, with BRK one can add as much as can be afforded annually, there are no annual fees, and, so long the shares are simply held, no transaction costs beyond the purchase. If one is in a low income bracket when some of this asset is from time to time eventually sold, for instance to offset retirement living expenses, chances are overall taxes after the sales will still remain reasonably low.

BRK is a good benchmark against which to measure one's own performance. If you are like me and most other investors, you tend to see yourself as cut from finer cloth when it comes to the matter of buying and selling equities. As with Garrison Keillor's Lake Woebegone children, we are all "above average." But such hubris can stand a bit of bubble bursting at times. A not unpleasant way to accomplish this is merely to have in one's possession a yardstick such as Berkshire Hathaway against which to measure one's relative success (or lack of it). Hopefully, one will do better than the record of the world's greatest investor. If so, then of course there is no need for any changes! On the other hand, if it turns out that Berkshire Hathaway goes up faster than the results of one's own efforts, there is no need to tell anyone else about it. One may then instead casually let it be known one was wise enough to have gotten some Berkshire Hathaway into one's own nest egg when it counted! Indeed, if one cannot figure out how Buffett managed to do better, it might just be advisable to sell whatever else one has and use it to buy more BRK. Think how smart you could look in a few further years down the road!

Berkshire Hathaway's management provides a great education in "Value Investing 101." Through a number of media vehicles, both Warren Buffett and Charlie Munger, BRK's vice-chairman, take on teacher roles, doing so with extraordinary skill and humor. Owners of at least one Berkshire Hathaway share receive the company's annual report, in which is a highly readable and edifying letter from the chairman, Warren Buffett. These yearly letters are collectors' items and periodically are compiled into book form for sale. They show their author's wit, investment acumen, insight about life in general, and humility. Reading them is like a combined introduction to value investing fundamentals and synopsis of what is going on in the economy. They are also a concise exposition of what has gone right and wrong at Berkshire Hathaway over the previous year. Buffett makes mistakes, as we all do, but he owns up to them and shows how he can avoid them in future.

Buffett is not shy about telling it like it is. He was, for example, warning of the two latest stock market bubbles and the reasons for them long before stock prices collapsed. Some of his advice made its way to Washington and into the boardrooms of our largest corporations, but evidently went unheeded.

Warren Buffett speaking to students at KS University School of Business, May 6, 2005 (Wikipedia)
The annual report itself is a marvel of clarity at a time when obfuscation in business seems to be abundantly rewarded. The individual investor may find there multiple pearls of investment wisdom, dropped like bread crumbs on the path toward possible financial independence, for those who care to follow them.

Besides the annual report, Buffett and Munger are famous for their talks and lengthy, spontaneous question and answer sessions, at the late spring BRK annual meetings in Berkshire Hathaway's headquarters city and Warren Buffett's hometown of Omaha, NE. It is a dream of most BRK Investors to one day attend these annual meetings. Sometimes they are so large they need to be held in big sports arenas. Nonetheless, Buffett and Munger treat even the smallest co-owner of the company, in terms of numbers of shares held, with absolute respect and answer directly any and all questions that come their way during these marathon sessions, almost as if they were talking to the persons one on one. Typed and published transcript records of such annual meeting Q & A sessions are in great demand. Like the annual letters, they are filled with gems about the basics of investing (as opposed to speculating).

Hundreds of thousands, if not millions, are now often eager as well to read or hear and see interviews of Buffett or Munger, unfailingly rewarding to those seeking a better understanding of either the current state of business in this country or how to keep and grow one's nest egg over time. Part ownership in Buffett's corporation adds extra incentive to take such opportunities seriously and his counsel to heart.

While I have provided a few first-rate grounds for Berkshire Hathaway ownership, I have barely started to do justice to this topic. Others have accomplished the task better and more broadly. For example, it might be interesting and amusing to read Robert P. Miles' 101 Reasons to Own the World's Greatest Investment, Warren Buffett's Berkshire Hathaway.

*Neither Warren Buffett nor I suggest Berkshire Hathaway's book value will continue to rise at 20% a year annualized. It has grown too large to make that any longer feasible. However, it is, in my opinion and in Buffett's stated intention, likely to continue to do better over the long haul than the S&P 500 Index and the vast majority of actively managed mutual funds or professionally managed individual portfolios.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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