from Barron's interview with Wally Weitz;
We have been adding heavily off and on during the past year or so to Berkshire Hathaway. Berkshire is down about 15% from its
high of five-six years ago, but it is a much more valuable company today than it was then.
Q: How do you figure?
A: It was five or six years ago that they bought General Re Insurance, and when they announced that deal Berkshire was selling at about $84,000 a share. Warren,
who hates to part with a single share of Berkshire and would typically much prefer to pay in cash for most of his deals, happily gave $22 billion worth of Berkshire
stock to buy General Re, which was a business with earnings power and a $35 billion bond portfolio. That was one of the rare instances of him giving stock, and it
was a very big instance, and it gave every indication the stock was not a terrific bargain at $84,000. Though I have owned Berkshire continuously since 1975-76,
during the 'Nineties it got to be a relatively smaller position as our assets grew.
Q: But now you've been adding to it?
A: Yes. It is our firm's biggest position at 6%. Since Berkshire bought General Re, the underlying book value has grown. The insurance float has grown, and that is
one of the wild cards that I think people don't give enough thought to. It is a different kind of leverage than taking on debt. If a bank can earn 2% a year on assets,
they are considered very profitable and good operators. Consider that Berkshire is earning 4% a year on its assets. A different way, and the most simplistic way, of
looking at it, is to say stated book is about $43,000 a share at the end of the first quarter.
Warren expects the insurance float, the money that has been reserved to pay future losses but that doesn't have to be paid out today and may not have to be paid
out for several years, to have roughly a zero cost over the next several years. So he gets the use of that money pending a payout. The insurance float has grown to
around $30,000 a share and, if Warren is right and it turns out to have a zero cost -- meaning the insurance underwriting business is break-even -- then you have
$73,000 a share of net assets working for you and they are in the hands of Warren, who is not only a great stock-market investor but a great buyer of companies
and individual assets. The stock is trading slightly above that adjusted book value of $73,000. If Warren can make a 10%-12% return on those assets, then the
stock is worth at least 1.5 times this adjusted book.
This is all sort of hard for the investing public to understand because the stock trades at such a high price. No one minds the idea of a stock going from $7 to
$10.50, but a $70,000 stock going to $105,000 is somehow disorienting. There is also concern about what the company is worth once Buffett isn't around
anymore. |
