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Berkshire Hathaway
BRK Not as Compelling?

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By commoncents33
May 20, 2009

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Disclosure: I now own only one share of BRK-B. At times, I have had roughly 30% of net worth in it. I greatly admire Warren Buffett. I think Berkshire does a terrific job in all respects.

However...

I have basically given up on it as an investment because it simply is not increasing intrinsic value at a compelling rate compared to many, many other great companies out there.

Recently Buffett said that at current prices (roughly $3000/B) Berkshire is not demonstrably below intrinsic value. Sure, Buffett has a history of guiding expectations lower, then surprising on the upside. Yet, Buffett has also had a history of trying to give reasonable direction to his shareholders when the price:IV is too far off his estimate. Indeed, in 2000, he famously offered to buy back B's at 1500.

Well, for arguments sake, let's say that despite recent remarks to the contrary, the true current intrinsic value is as far above the price as during that buy-back-offer period. In that case, the intrinsic value has only increased 7.8% yearly for basically a decade. Disappointing to say the least.

If we take Buffett at his word regarding recent valuation, then the annual increase in IV is significantly worse than 7.8%. (If for some reason the current valuation is much better than in 2000, then his current words and actions are puzzling, to say the least).

It is true that those years provided strong headwinds for Berkshire: insane private equity investors, over-valued stock markets, 9/11, Katrina, etc. However, although many factors have improved for Berkshire, there is the fact that it is not trying to grow from a size roughly twice as large, which is obviously tough. On top of that, as each year passes, the risk of Berkshire being without Buffett, not to mention Ajit and the other Hall-of-Fame managers, increases.

So although I still love the business, I do not think it a compelling investment anymore. I'll hold the one B for now so that I continue to keep my eye on Berkshire. When that sad day comes that Buffett is no longer at the helm, it may be an enormous deal.