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Yes, Buffett Can Still Beat the Market on Berkshire's Behalf!

By Alex Dumortier, CFA – May 2, 2013 at 10:22AM

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Berkshire's first international acquisition was a success

On the back of yesterday's drop, U.S. stocks opened higher this morning, with the S&P 500 (^GSPC 1.42%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI) gaining 0.44% and 0.39%, respectively, at 10:10 a.m. EDT.

Berkshire: Going abroad pays off
If I had a dollar for every comment asserting at the end of a Berkshire Hathaway (BRK.A 0.68%) (BRK.B 0.99%) article that CEO Warren Buffett has lost his touch, I'd have a small fortune myself. Those opinions are an affront to reality when there is so much evidence to the contrary -- and yesterday, Berkshire supplied even more.

On Wednesday, the candy-to-bricks conglomerate announced that it had acquired the remaining 20% of Israel-headquartered International Metalworking Companies -- more commonly known by the name of its largest subsidiary, Iscar -- for the sum of $2.05 billion. The transaction values Iscar at $10.25 billion. In 2006, when Berkshire acquired its initial 80% stake, it paid $4 billion for a $5 billion valuation. A doubling in value over a seven-year timeframe is a respectable return, especially in relation to the stock market's performance over the same period:

Increase in value*

Berkshire's initial 80% stake in Iscar


Berkshire Hathaway


S&P 500


Dow Jones Industrial Average


Source: Author's calculations, based on data from Berkshire Hathaway and Yahoo! Finance. *The return, which does not include dividends, is calculated from the date of the initial announcement, May 5, 2006, through May 1, 2013.

What's the secret to Buffett's success? It's hardly mysterious or complicated. In the Iscar acquisition, he paid a reasonable price for an outstanding business led by world-class management. What's odd is not the result, but rather the fact that more people aren't imitating the process in order to achieve that same result.

Of course, that suggests that the process remains repeatable. As Warren Buffet put it at the 2006 Berkshire Annual Meeting, "The nice thing is that there are many others [like Iscar] out there, but there aren't really other Berkshires out there."

Warren Buffett has said for a number of years that Berkshire's size will make beating the market increasingly difficult. However, he still expects to beat the S&P 500 by several percentage points, and Iscar's acquisition suggests it's an achievable goal.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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