Berkshire Hathaway
Should have Listened to Buffett

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By rclosch
October 3, 2008

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There has been on this board for the last few years a small group that have had fun nipping at ankles of the Buffet followers here. I am sure that this was a source of amusement for this group of heretics, but I wonder at the consequences to these unbelievers. It has by now become painfully obvious that all you needed protect your assets from the current economic meltdown was portfolio heavily weighted toward Berkshire and cash, so how much of the opposition was making this recommendation a year ago?

This was not a hard choice if you were reading this board and paying attention to what Buffett was doing. I would be lying if I did not admit that the above strategy has worked out better than I expected. I do not think that we have seen the bottom of this market cycle. It is certainly possible that T bills will out-perform Berkshire in the next six months but for the last year Berkshire is up 11% and the S&P is down 24%. Berkshire's competition with this kind performance could only come from a short only hedge fund, and what rational person do you know who would prefer to commit a large share of their assets to a short only hedge fund for a long period of time. 

There is short term risk in Berkshire today as there is in any equity, but balancing that risk is the fact that no other company has the architecture that has been carefully designed to benefit from this type financial crisis. Buffett has been able to use not only Berkshire's cash but also its reputation to great advantage. It is impossible it estimate the impact on intrinsic value of Buffett's recent purchases, because it will take a couple of years before they will begin to show up in the two column approach. But if you assume that he has committed $36 billion to long and medium term investment, and if you assume they will earn 12% (some will earn more some will earn less), further let's say the cash was earning 1% in t bills. The 11% difference would add about $4 billion to Berkshire's earnings. If you capitalize $4 billion at 12 times it could eventually add $40 to $50 billion to Berkshire's intrinsic value. Charlie would probably label this as wildly optimistic accounting but it's a guess and thought I would throw the figure out and see if I generate some more intelligent comment.

Keep in mind that because of tax law Buffett's 10% preferreds are almost tax free. If I told you a year ago that Berkshire (or anyone else for that matter) would be able to get a AAA 10% tax free security with an equity kicker what would you have said?

Certainly Elias is correct when he says that the GE deal is scary when you consider what it is telling us about the equity market, but on the other hand you have to also consider the magnitude Buffett's recent commitments and what that tells us about the values available in the current market. No, we cannot as individuals get the same value Buffett can, and while the bottom is probably not in yet, still I think it is time to get serious about deciding about when and where to start committing cash.