Based on my analysis of Brk, the present value is around 70k if your intent is a historical stock market return in the 9-10% range. If your intent was a higher return (and Buffett would want at least 12-14% judging on his past purchases), then Brk's intrinsic value falls drastically. It makes sense that after this year's annual report, the market moved to value Brk at the price that would return the stock market's historical average, which was 69-70k. Now that's imprecise, but I tried to use Warren's own methodology. He has said that he does not care to carry the margin of safety out to the umpteenth decimal point, so it is fairly obvious that he realized that Brk was getting very overvalued. My guess is he saw a fair intrinsic value around 60k, and when he saw irrational exuberance in his own stock climbing past 75k, he saw the proper margin of safety for buying with stock. It would be against his principles (as he outlines them for us) to buy with undervalued stock, but he would think it is in the long-term shareholders' interest to buy with very overvalued stock. Flight Safety was peanuts. That's not to say he hasn't done very well with peanuts, but this General Re buy is very significant, and it is hard to imagine Buffett doing this with stock anywhere close to fair intrinsic value.
I do not know that Berkshire will ever be a great value again for other than stock-market average returns long-term. I would want to buy it at a discount to intrinsic value, and the recent demonstrations by Buffett of his continued skill have made the market for Brk somehwat rabid. As the legend grows, so does the inability to buy at a discount. Also, as I have said before, his age is a major risk factor for those buying Berkshire now at prices above intrinsic value. The market is now valuing Berkshire for its parts, then adding a premium for additional genius to be thrown into the soup at a later date.
The better strategy now IMO is to try to find small and mid-cap companies that would be buffett buys if they weren't so small. In the event of a market collapse, we may even be able to pick up the larger, true "Buffett" companies.
Good Investing,
Mike |
