POST OF THE DAY
Berkshire Hathaway
Duke Energy

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By rclosc
October 2, 2003

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According to recent 13-f filings, in December Berkshire reported no position in Duke Energy; on March 31 they owned 4.8 million shares, a position that had been reduced by June 30 to 1.4 million shares. While this type of trade might seem out of character for Berkshire, (holding period somewhat short of forever) a look at the chart provides some interesting insight.

From a high of $21 in January DUK fell briefly below $13 in early March and then recovered to trade above $20 in late June. While we will never know for sure Berkshire entry or exit points, it is possible set up a theoretical trade in hope of gaining some insight into classic value investing.

Buffett clearly does not time the market so how do you explain this quick turn in DUK? "We Like to Place the emphasis on value" Buffett says, and in truth this is the critical difference between trading and classical value investing.

Link to Chart

So Lets assume that some at Berkshire (most Likely Lou Simpson based on the size of the position) was watching as DUK tanked in January and February and when stock arrived a price that included the requisite margin of safety they put in a 4.8 million-share position. In the three days that the stock trade below 13 the volume was about 18 million shares, so it is conceivable that Berkshires bought below that level, and logic tells us that it was probably not much higher than this or they would have been able to put in a bigger position.

At 4...8 million shares the purchase would only have amounted to about $62 million a position so small that leads me to believe the price recovered to above Berkshire's target price before they could put in a decent position. Then as the stock recovered to 20 in June it was felt that it was approaching full value and was sold. Notice the difference between classical value investing and market timing. The "Emphasis is on value" You buy at a price that includes a margin of safety and sell when stock approaches fair value.

Sometimes classical value investing can look like market timing but the distinction is very important because instead of trying to guess what the market is going to do, you can ignore the market and focus only on the price of the individual stock. It is always important when establishing a position to make sure that your purchase prices includes a margin of safety. Perhaps just as important, given the secular nature of today, is to have a clear idea in your own mind of a price at which you feel the stock will be over valued...


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