Recently I began to think about the price and performance of Berkshire's shares. What triggered this was conversation I had with a friend of mine. We were talking about stocks and he told me that some of the funds he was in have had staggering losses in the past few years. I said I thought that type of performance from professional money managers is unacceptable. As Ben Graham said, there are two rules to investing: Rule #1 � Never lose money, Rule #2 � Never forget Rule #1. Become a Complete Fool
My friend, knowing what an admirer of Buffett I am, then asked me about Berkshire's performance. I told him about the performance of the various businesses that make up Berkshire and where I thought they were going. He then asked how the stock has performed. I though about it and told him it been trading between $45,000 and $80,000 for several years now. After providing my friend with a little more detailed information about the fall from $80,000+ to less than $50,000 a share a few years ago, he asked, "Isn't that performance also unacceptable?"
The best I could think to say at the moment was that it's different. Looking back on it, I still feel Berkshire is different. But what is it? Why is it ok for Berkshire to fall 50% in the course of a year and still be satisfied with your performance?
We all know that it is better to buy good companies at half-price and so on, but why is it we feel that it is bad performance if a money manager were to post sizeable losses over the course of a few years.
I think there are two reasons. The first reason has to do with turnover. If your portfolio fell greatly in a given year, and you sell (or a manger sells), that is essentially admitting defeat. You were wrong on your analysis. You have now forever locked in those losses and permanently separated the performance of the stock from the business.
On the other hand, if your portfolio was to fall greatly and you chose not to sell, this may not be nearly as bad. If you don't sell after incurring large losses you are either kidding yourself about the fundamentals of the business and hoping to merely "get even," or you truly believe in the quality of the business and, feeling that the market is mis-pricing the stock, may possibly consider adding to your position.
Berkshire is a classic case of the latter example. The performance of Berkshire as a business and Berkshire as a stock may forever be out of sync. There are simply too few in the investment community (I of course mean relative to the entire investment universe) who understand Berkshire as more than "Gee, that's Warren Buffett's investment company," to keep Berkshire at least somewhat efficiently priced (I really do not want to have a discussion about EMT, but I think most of us would agree that it is more likely that widely followed Microsoft would be more accurately priced than miniscule National Service Industries). Adding to this discrepancy at times between price and value is one additional factor: price.
The fact the Berkshire trades at north of $60,000 a share is amazing. I know share price and the value of a company are unrelated, but by never splitting the stock, Buffett has made the stock so illiquid that occasional drops of 10% (or greater) are viewed as nothing more than an imbalance between supply and demand. Berkshire trades less on its fundamental and more on basic economics: if there are more sellers Berkshire may fall, and perhaps greatly, and vice versa. This reality will only get increase as time goes by.
My final point in this long and rambling post has to do with a ceiling on Berkshire's price. I want to preface this comment by saying Berkshire is one of the greatest companies out there. Its business will be tremendous in the future and I am a proud shareholder. With that said, I do think at certain point, as Berkshire's stock goes higher and higher up, buyers will thin out. I just don't believe there will be a huge market for a $500,000 stock.
I know, I know, share price and value aren't related. But at the same time, I think we as shareholders must be realistic. Do you really see Joe Mutual Fund Manager buying a single share of a company for a half a million dollars?
I think there will be individual and institutional investors in the future who will be able to see beyond the price of Berkshire and see its value, but as Berkshire's business becomes increasingly more valuable, its stock may have a hard time keeping pace.
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Recently I began to think about the price and performance of Berkshire's shares. What triggered this was conversation I had with a friend of mine. We were talking about stocks and he told me that some of the funds he was in have had staggering losses in the past few years. I said I thought that type of performance from professional money managers is unacceptable. As Ben Graham said, there are two rules to investing: Rule #1 � Never lose money, Rule #2 � Never forget Rule #1.
Become a Complete Fool