weiwentg (98.29)

Bought Berkshire Hathaway for my personal portfolio, my thoughts on the company

March 04, 2009 – Comments (3) | RELATED TICKERS: BRK-B

Bruce Berkowitz of the Fairholme Fund, which at one point had 15% of assets in Berkshire, started selling the stock in about the second half of 2008 and has now sold out completely. From what I remember of Fairholme's public statements and conference calls, it seems that Berkowitz started to reduce his position feeling that since Berkshire had appreciated, he could sell cheap to buy cheaper. Later, he seemed to change his mind. Warren Buffett himself warned not to expect Berkshire to grow book value more than 2% faster than the S&P. Berkowitz, feeling he could do better on his own, sold out and used the proceeds elsewhere.

Now, though, Berkshire has sold off quite a bit. The 52 week range for BRK.B as I write this is $2240-$4700. People are worried about their derivatives contracts, the selloff in their stock positions, and some are saying that Warren's losing his touch because he was way too early in GE and Goldman.

First, their derivatives positions do not require them to post collateral in the unlikely event they are downgraded. Additionally, Berkshire wrote very long term options,  far longer than any you could buy on the market. The likelihood the S&P will be lower than present day in 10 years is quite low. Even if Berkshire has to pay out on the S&P options, it will have reinvested the cash in the meantime.

Second, Warren didn't buy GE and Goldman. He bought preferred shares and stock warrants. If the market price is lower than the strike price later on, he can just buy the common shares outright. As to the rest of his portfolio, he's made far fewer mistakes than anyone else.

Third, he still has a large hoard of cash waiting to be deployed. He's maintained an incredible amount of discipline, holding on to his cash even through the sellout. Others, like me, got in too early.

I bought Berkshire while fully understanding the limitations and risks attached to the company. One, Berkshire is large enough that Buffett needs to find elephants to grow book value. Over the long haul, he's probably right when he says he can't grow book value more than 2% faster than the S&P. In the near term, though, he can likely do a lot better thanks to the cash he has saved. Besides, I would take 2% better than the S&P right now.

Two, he is old. I trust he has not lost his faculties and has established a good succession plan.

All in, those are risks I'm willing to take to get Berkshire near it's 52-week low.