I do not have buyer's remorse from adding more shares of Berkshire Hathaway (NYSE: BRK-A), currently priced at about $120,000 per share, to my private financial services fund. At the end of each year I make an effort to invest any spare cash that has accumulated in this portfolio; Berkshire was one of the three stocks I purchased at that time.
The ‘Buffett Discount’
For the last few years, along with my wife, one of my sons and good friends, I have attended the Berkshire Hathaway shareholder meeting in Omaha, one of the world’s largest such gatherings. After last year’s meeting, I wrote about the “Buffett Discount” in my blog entitled Observations from Omaha. Normally, stock prices pay a premium for a history of successful management, sometimes too much. In my opinion, last year the reverse was true. The uncertainties as to who would, in time, replace Warren Buffett and Charlie Munger, weighed on the price of the shares. This was a concern for a number of years, but last year became a headline event when the presumed CEO replacement left the company under trying circumstances.
The last Saturday in February is the usual time that Berkshire publishes its annual report, including a much anticipated letter from Mr. Buffett. On Saturday, like many portfolio managers and other investors, I devoted a number of hours poring over the document. While there was additional, welcome, detail on the progress of the company, there was very little of new information that would have changed my mind at year end, when I decided to increase our investment. What was news was the disclosure that the next CEO and two backups is known to the board, but not yet revealed to the other shareholders. For some investors this may close the Buffett discount, but I was confident that it would happen one way or another relatively soon.
My rationale for buying more
Our most recent purchase of BRK-A is already up 4.6%. (I mention this to our blog community and fellow shareholders only because we bought in the midst of what was considered by many as a troubling stock market.) Below is a brief outline of my thinking.
- We bought at a small (15%) premium to a very much understated book value. The company itself has a policy of only paying 110% of book when buying back stock. The book value of Berkshire's operating assets is essentially its purchase price, but after acquisition earnings. As many of these acquisitions were made years ago and at bargain prices, I am guessing a multiple of book is a more appropriate measure. (This might suggest that the return on investment would be lower, based on the higher augmented book value.)
- The Buffett discount mentioned in my prior Berkshire blog is being addressed. There is now an undisclosed CEO, with two backups in reserve. In addition, two value-focused investment managers have been hired.
- The five largest operating subsidiaries are reporting record operating income.
- “Float” production remains ample, aided by nine years of underwriting profits (even if there is an occasional loss year).
- Recognition of past mistakes is acknowledged by management, both in terms of acquisitions and portfolio decisions. This is comforting compared with many CEOs and portfolio managers.
- Berkshire benefits from others providing leverage for its regulated activities. Operationally, Berkshire is leveraged to housing, which appears to be getting better.
- As the company is primarily US-based, after much of its US business is improving, our multi-year outlook is encouraging.
- Averaging up at a lower valuation is generally a good thing.
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