Wednesday, November 26, 2008

What's Berkshire Hathaway Worth, Anyway?

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.