I have a contrary rule that has worked well over the years. When the sirens of Wall Street are trying to canonize Warren Buffett, don't get too excited about his company, Berkshire Hathaway. When the street is treating him like a guy whose run of luck has run out, get interested in his stock.
I noticed this contrary indicator during the tech bubble. Buffett was excoriated for not getting on board that wave to nowhere. I remember a writer on one of the financial websites saying that Buffett should apologize to his shareholders. Well history shows that Mr. Buffett was wise in staying far away from the tech bubble.
In the intervening years, his ascent to cult figure status began again when it was clear that Buffett had made the right moves during the tech craze.
Over the last 12 months, Berkshire Hathaway stock has fallen nearly 30%. That is less than the S&P 500, but very un-Buffettlike. Lately, he is being chastised for making what now look to be bad investments in Goldman Sachs and GE. His insurance company has not had a good year, and his options bets seem to be going in the wrong directions.
To all this, I say only look at the body of this guy's, work and you see something we are never likely to see again: a guy who not only makes a lot of profitable decisions; he makes them in tough times.
Our valuation model for Berkshire Hathaway Class A shares (above) shows that its price is buried deep into its value. The model says that BRK should sell for nearly $140,000 twelve months from now (striped bar). Today it closed at just over $100,000 per share.
Our model is based on a multiple regression of BRK's book value and interest rates. It isn't a guarantee or a promise. It is just a model that has done a pretty good job of tracking BRK's price over the last 15 years.
In these crazy markets, has Mr. Buffett lost his touch? With his track record, I don't think it would be wise to bet against him.
We own the stock. Do not make investment decisions based on this blog. It is for information purposes only.
Wednesday, November 26, 2008
What's Berkshire Hathaway Worth, Anyway?
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3 comments:
My 12 year old started reading a book about Buffett yesterday. I've been talking to her about how stock dividends work, as well as the importance of short-term savings and charitable giving. I think she's got the basics. Now if only the 10 year old would start paying attention. 8-)
Happy Thanksgiving to you and your family Shawn. I'm hoping before your children are voting age that I can get the book that I have been writing writ. It is the story of how I came to understand the value of dividend investing. The funny thing is that I learned a lot about dividend investing from Warren Buffett, whose company does not pay a dividend. However, as you know, all of the companies he owns pieces of or, buys outright produce dividends or high free cash flows.
Blessings again,
Dividends are a way to make sure that corporate executives and shareholders have their interests aligned. Corporate executives are sometimes distracted by things like wanting additional professional challenges, adding experience to a resume and being as famous as Jack Welch (while ignoring what made Jack Welch famous). Shareholder want to make money, don't particularly care if the executive suite feels professionally fulfilled.
Buffett on the other hand doesn't need to pay dividends because his interests are well aligned with the shareholders. It will be interesting however to see what happens when Buffett is no longer on the scene, to make sure his successors can continue to churn out the profits without feeling the need to be seen to be the next Warren Buffett.
Looking forward to the book. Maybe you need to schedule some time off to work on it? I had a couple of articles that I needed to work on, and took a week off to work on them. Done, as of this morning!
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