a reprint of the motley fool article follows - let me add
as preamble that if you in fact believe that BRK is a mutual
fund and want to buy major shares of companies owned by that
fund be prepared (even in his major conjecture Tyson is wrong):
KO: sells for 41 times earnings
AXP: sells for 28 times earnings
G: sells for 51 times earnings
BRK sells for 28 times earnings - on earnings that were
temporarily (we hope) reduced by the GRN acquisition and
are filled with potential on returns of 15B to invest.
BRK is in reality a consortium insurance company with options
and prerogatives regarding investing float and earnings like
no other company on the planet.
As to Tyson, the Hungarians have an epithet: "It is insufficient
to be wrong, you must also be insulting."
But let the following article from Motley Fool speak for itself.
*******
"Berkshire the Mutual Fund
In a recent Stockpoint commentary, Investing for Dummies author Eric Tyson said he didn't like Berkshire (which he said is like a mutual fund because of its huge equity stakes in companies such as Coca-Cola and Gillette) because it trades at a premium to the value of the stocks it holds in its portfolio. He also said investors could buy the stocks in the portfolio, implying that's the way to coattail Buffett.
Well, hey, I guess we really should forget the fact that the company is the largest reinsurance company in North America and one of the largest in the world, the fact that it's one of the largest and most respected supercatastrophe underwriters in the world, that it owns companies such as GEICO and Executive Jet Aviation -- which you cannot buy in the open market since they're wholly owned subsidiaries -- as well as some other stuff that is critical to looking at this company in a way that is anywhere within the same neighborhood of being analytically competent.
One of these would be the fact that Berkshire last year generated revenues of $11.42 billion before realized investment gains. You would also have to add to that the revenues of its General Re subsidiary. Through Q3 1998, that's annualized revenues of $7.62 billion before realized investment gains. You'd also have to consider Berkshire's pre-tax income (before realized gains and goodwill amortization) of $1.79 billion and GenRe's annualized pre-tax earnings before realized gains and goodwill amortization of $1.37 billion.
You might also want to consider that the tens of billions of dollars of insurance float, written such that there is no cost to that capital (and there's even a negative cost of capital to the company on that money), enhances the company's spread between cost of capital (WACC) and return on invested capital (ROIC) such that it really doesn't need to show huge returns on invested capital to get into the upper echelons of the S&P 500 on its ROIC-WACC performance. Some years, Berkshire's ROIC is going to be small. Given its ultra-low cost of capital (which, even better, is achieved without lots of leverage relative to its peers in the insurance industry), in the worst investment performance years the company will not kill that much value. In the years where its investment performance is very good, you get an ROIC-WACC spread in the 2,000 basis point range. That's huge.
On the one hand, you've got a guy who's written Investing for Dummies telling you to look at the price of the company relative to only some of its assets, forgetting all other cash flows, and forgetting the cost of capital incurred by the company in supporting its assets. On the other hand, you've got a guy working for The Motley Fool saying a different thing. Strange times. You can take your pick on whomever you want to believe"
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