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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.

3 Comments – Post Your Own

#1) On March 04, 2009 at 5:36 PM, jgseattle (26.54) wrote:

I agree with most of what you say.  However, I do not think BRK can battle the overall trend, which is down, so why buy now?

Also, I would put in one additional risk.  Insurance requires investments to pay a cerrtian % over time.  If the investments are low or negative insurance can be a very bad place to be and I see this as the case for at least 2 more years.

Also, BRK has purchase a lot of companies that are very cyclical, housing and construction supply.  When the economy is going well these companies produce a lot of cash flow, in a bad economy they loooosssss a lot.  Again I cannot see a change here for at least 2 years.

So why now?

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#2) On March 04, 2009 at 7:34 PM, weiwentg (98.40) wrote:

I try to buy stuff cheap. Berkshire, because of all the underserved negative press, is cheap.

Berkshire's balance sheet is like Fort Knox. The company has an AAA credit rating and clearly deserves it. Their insurance businesses have observed very conservative underwriting and have successfully limited losses. They would only need to draw on the equity portfolio if their insurance businesses took heavy losses. That hasn't happened - and their equity portfolio has also escaped a lot of the damage that other stock portfolios have.

I also believe that in the long run, your estimate of their private investments is overstated. I agree that Berkshire has made a number of economically sensitive investments there, but the bulk of their total portfolio is wide moat.

That about sums it up. As to why right now, I can't predict the short-term movements of the stock market. Berkshire is trading under half its 52 week high, so I think now's as good a time as any.

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#3) On March 13, 2009 at 12:35 PM, dwiprut (85.13) wrote:

Do you happen to have the original source of the "2% faster than the S&P" comment from Buffett?

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