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By gdefelice
September 3, 2008

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1) I think it is a tie between mungofith and danquisenberry for best market timing of Berkshire's stock. I didn't sell anything at the top in any taxable accounts. But, I have bought a lot of stock since we broke below $3850. I tend to also agree with mungofitch that Berkshire at these prices is very attractive and I once again have the bulk of my net worth invested in Berkshire.

2) Using the intrinsivaluator (in the way that mungofitch has described) as a steady measure of relative -- if not absolute -- value is useful. As an interesting exercise, Berkshire has not traded at this big a discount to its "optimistic" valuation since 1987. Yes, I know, I know...the optimistic setting is crazy, etc., etc. I'm in the camp that thinks someday -- like after a decade where stocks have actually gone up -- Berkshire will touch the optimistic mark on the intrinsivaluator. At its optimistic value, Berkshire wouldn't be attractive to those who know how to value it, I guess. But, it will probably touch that valuation again (say, during a sustained bull market), as it has in the past. I wouldn't count on it but I wouldn't bet against it. If Wrigley's is worth 30x earnings to Mars, it doesn't seem crazy that a truly great company can be expected to occasionally be very optimistically priced.

3) While it doesn't "bother" me, I am of the feeling that Berkshire should begin paying a dividend. While I still know that any morning we could wake up and see a $50 billion deal done, a few years after such a deal, Berkshire will once again be swimming in cash. Again, this isn't an issue holding me back in any way and I don't want to give any support to those that whine for a dividend. But, it has taken a long time for the stock prices of large market cap companies to come in enough for Berkshire to be a net buyer again -- what if the money isn't put to work before the market prices of buyable stocks moves away from Buffett? With the huge cash generating ability now in place at Berkshire, a dividend wouldn't be a bad thing. That said, I'm more than happy to wait 10 or 15 years for the dividend if that means WEB is at the helm that much longer.

4) Did anyone else notice that Byron Trott -- the I-Banker from Goldman that WEB recommends and who put together the Marmon deal made an interesting comment in the recent article about Penny Pritzker? I can't find the Bloomberg link. Here's another one.

Trott suggests that when all is said and done, Berkshire will dole out $10 to $11 billion for Marmon. I was happily surprised that Berkshire broke out the earnings for Marmon in the 10Q. Are ISCAR's numbers so good that we can't let the competition see them?

5) On the SEC website, there is a recent presentation from MidAmerican that is worth a look for Berkshire shareholders.

Page 17 shows the planned capex at MidAmerican over the next 10 or so years. See page 17, IIRC. It shows planned capex of about $21.5 billion beginning 2008 and going through 2013. IIRC, current depreciation at MidAmerican is about $1.1 billion. If you assume depreciation grows about 10% a year, it will total roughly $8.5 billion. That means planned "growth" capex at MidAmerican will be about $13 billion between now and 2013.

6) I did the work the other day and I'm not going to do it again, but between 2000 and 2004, Berkshire was roughly a net seller of stocks. Between 2005 and the end of Q2, 2008, Berkshire bought a net of just about $25 billion in equities. If WEB hasn't lost his touch, this suggests that after waiting more than half a decade for the vast overvaluations of the "Great Bubble" to subside and earnings to catch up to valuations, Berkshire has found a fair number of reasonable equity investments and I hope most of them are for the long-term. This action suggests that Berkshire's equity portfolio, which has been a drag on the growth of both book value and intrinsic value for most of the decade should finally provide a decent tailwind in the coming decade. If Berkshire can get 7 to 10% annualized gains from the equity portfolio, it will be an enormous boost to growth in book value.

Heck, if Berkshire's equity pile increases IV 7 to 10% per year, it doubles in value every 7 to 10 years. If you look at the equity port carefully since 1999/2000, there's been basically no growth in the holdings...and Coke today is down to a forward PE around 15 (give or take). Why aren't they buying back a ton of stock? Berkshire's share of American Express has gone from 11.8% at year-end 2003 to 13.1% at year-end 2007. So, Berkshire's stake has increased more than 10% in 4 years. At Coke, the ownership has gone from 8.2% to only 8.6% over the same time. Granted, Coke has paid a lot out in dividends versus Amex. But, maybe it is time for Coke to leverage up a bit to buy back stock.

7) If you include the puts that Berkshire recently sold on the indices (and assume they will not be exercised), one can make the assumption (as some have) that they can be included in float. If you do that, float is now roughly $64 billion. Speaking of float, Berkshire has generated pre-tax underwriting profits of over $10 billion from the beginning of 2003 through 2007 and that includes 2005 -- the year of the hurricane (where Berkshire actually finished with an underwriting profit).

8) GEICO has almost tripled market share since Berkshire bought it and is now in almost a tie for 3rd in market share with Progressive. See link, about halfway down.

9) Many of Berkshire's businesses are in a near depression...what will the operating businesses' profits look like when the next expansion finally gets underway? I've often encountered those that argue future acquisitions can't be assumed. Nevertheless, the more strange assumptions is that Berkshire won't keep making deals. In the last few years, Berkshire has closed deals on its three biggest business purchases to date: Pacificorp, ISCAR and Marmon. So, Berkshire has been able to scale the acquisition machine in recent years -- that can't be a bad sign.

10) Berkshire's base of dividends has grown massively in the last few years. rclosch usually does the work on this so I don't want to step on toes, but depending on what is being earned by the stocks that aren't included on the 13f, it looks like it won't be long before stock dividends are closing in on $2 billion (possibly in a year or three). Taxes on these dividends are, I believe 12 or 13% rather than the normal 35% Berkshire pays. Also, the current numbers don't include the $3 billion being put into the Dow preferred or the Mars deal, where more than $6 billion has been earmarked.

11) Berkshire is once again barely earning anything on its cash hoard...depending on how things shake out with short-term rates and cash amounts, that may be costing us $750 million to a billion per year right now (assuming 5% short rates are "normal").

12) I haven't seen much comment about what Buffett actually got with the massive amount of money he put to work in the auction rate market. Who knows if and how he'll report it but between the auction rate securities and the FHLB discount notes, over $8 billion was put to work in this area between 1/1/08 and 6/30/08. If I had to guess, I'd guess that he bought these at big discounts to par but I don't know how this market works. Still, gains here (while "one time") could be pretty big. Here's the relevant section from the Q2, 2008 report:

As of June 30, 2008, fixed maturity securities - Insurance and other included $2.4 billion in Federal Home Loan Bank discount notes that when purchased had maturity dates of more than three months but no greater than six months. Fixed maturity securities also included $6.5 billion (Insurance and other - $2.1 billion and Finance and financial products - $4.4 billion) of investment grade auction rate securities and variable rate demand notes issued by various states, municipalities and political subdivisions. The interest rates on these instruments are variable and are periodically reset at up to 35 day intervals. While substantially all of these securities are insured by third parties, acquisitions were limited to securities where Berkshire assessed and concluded that the underlying credit of the issuers was good without the benefit of an insurer's guarantee. Approximately 80% of these securities were rated A or higher without the benefit of an insurer guarantee and approximately 60% of the remaining securities were not rated on an underlying basis. There were no investments in these securities as of December 31, 2007.

13) Don't want to end on anything unlucky.

14) While I'm thrilled that between net equity purchases (purchases less sales) and business acquisitions (net of cash acquired) a total of more than $45 billion has been invested since the beginning of 2005, I still think that the time when WEB has to pay a dividend can't be more than 5 years away. But, (1) since we're talking about WEB and (2) since the negative cost float allows Berkshire to carry close to $65 billion in assets that earn nothing and still not be a drag on the capital base, I'm still happy to give him all the time he wants to paint his picture. I would also have liked to have seen Berkshire bring on the "new" asset managers so that those of us who will hold the company when he's gone get a chance to see how it will work. But, nothing is perfect and at prices below $4000, it seems like a lot of negatives are baked in. Plus, it could be worse...just ask shareholders of (fill in the name of imploded financial here).

Okay, back to lurking.