March 20, 2013
In his most recent annual letter to shareholders, Warren Buffett calls out his own four-year underperformance, making some people question whether Berkshire Hathaway can be great again.
Austin Smith points out that Berkshire's large size makes it hard for Buffett to allocate capital creatively and increase book value faster than the S&P 500.
Smith states that Buffett will maintain his status as the "world's best capital allocator" and believes in Berkshire, citing Apple and Wal-Mart as examples of companies that have maintained their greatness. He discloses that Berkshire is his largest holding, but warns that Buffett's task is getting tougher because of the company's large size.
Asked to compare Berkshire's merits to those of an S&P 500 or Dow index fund, Smith points out that Berkshire has a unique safety net: It essentially has a price floor of 1.2 times book value, the valuation at which Buffett will repurchase shares. Given that the shares trade just a little bit above this valuation, he concludes that Berkshire is a better buy because its shares are "too cheap to ignore."
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