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globalsailor (42.35)

Is BRK-B the most overvalued stock in the market?

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November 19, 2009 – Comments (23) | RELATED TICKERS: BRK-B , BRK-A , XLF

It looks like BRK-B has only 1/200 of the vote of BRK-A.  There is no dividend associated with the stock and it cannot be combined to form the BRK-A.  Buffet claims that it has 1/30 of the rights but how does that make any sense if you can't choose the board of directors?  If any major investor wanted to claim a share in the company he would use the BRK-A and pay much less for the BRK-B.

Right now the B is at $3436 and the A is at $103181: a ratio of 30.02:1.  By my surprising calculation if the ratio should be 199:1 then the B shoud be priced at $518.  I know the market doesn't agree with this, but it seems like BRK-B is overvalued.

Warren Buffet also disagrees:

http://www.berkshirehathaway.com/compab.html

Why is that?

23 Comments – Post Your Own

#1) On November 19, 2009 at 10:18 AM, SkepticalOx (99.52) wrote:

Uh, because when you value shares, you account for a hell of a lot more than voting rights. Just check out the many other companies with dual-class stock structures.

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#2) On November 19, 2009 at 10:32 AM, brickcityman (< 20) wrote:

The lack of dividend is what kills me... 

 

If Buffet was focussing alot on new and risky investments then a growth case could be made.  But Insurance? railroads? and other more stayed investments?  If you're not going to return me a piece of the pie from that then I'll find someone else who will.

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#3) On November 19, 2009 at 10:42 AM, walt373 (99.87) wrote:

For decades, Berkshire has gotten a much higher return on investment than most investors could if a dividend was paid to them, so it's been a huge positive that no dividends were paid.

Most people don't worry about voting rights as much as the economic rights - claim on assets and future profits. Voting rights usually aren't even included in stock valuation, and for the most small investors, this is the way it should be. To each investor personally, voting rights have no value, because they cannot change the direction of the company by themselves. When small investors buy stock, they are just along for the ride...

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#4) On November 19, 2009 at 10:44 AM, SkepticalOx (99.52) wrote:

Berkshire hasn't paid a dividend in who knows how long. Besides, Buffett thinks he can beat the market over the long-term, despite Berkshire's size (how many smaller investors are beating the market again? Exactly... despite it's size disadvantage, most people are probably losing to the market, and they'll have better odds with Buffett managing that money).

And here's one thing people seem to forget when they complain about the dividend. Buffett can pull off deals that you can't (GE, GS, humongous naked puts with very favorable terms).

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#5) On November 19, 2009 at 10:48 AM, globalsailor (42.35) wrote:

SkepticalOx you just told me nothing.  So far I've looked around at dual class structures and it usually turns out that the inferior shareholders often get screwed.  I would again say that if an investor wished to buy a major stake in Berkshire, they would buy the A because the B has much less value for its price.

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#6) On November 19, 2009 at 10:49 AM, globalsailor (42.35) wrote:

How do you get shares of the profits if you can't vote on how to distribute them?

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#7) On November 19, 2009 at 10:51 AM, globalsailor (42.35) wrote:

walt373: How can you get shares of the profits if you can't vote on how to distribute them?

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#8) On November 19, 2009 at 10:52 AM, SkepticalOx (99.52) wrote:

You realize that Buffett has suggested in the past that people should be buying the A shares? Berkshire wouldn't even be selling the B-shares if it weren't for all those funds selling "mini-BRK" shares awhile back.

Regardless, the way you value the shares is totally borked, and walt explained it better than me why.

 

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#9) On November 19, 2009 at 10:55 AM, SkepticalOx (99.52) wrote:

AND, if Berkshire were to issue a dividend (which Buffett considered doing in the past when it was sitting on a bunch of cash), I'm pretty dang sure it would be evenly distributed according to the 1/30 split.

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#10) On November 19, 2009 at 10:56 AM, globalsailor (42.35) wrote:

SkepticalOx: If a group shareholders can pull together a majority they can liquidate the company and give themselves all sorts of ridiculous perks like private airplanes.  Having voting rights allows small investors as a group to keep the company honest as well as pass those rights to the private airplanes to other shareholders at a large profit.

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#11) On November 19, 2009 at 10:58 AM, globalsailor (42.35) wrote:

Ox: How are you so sure about the dividends anyway?  The B shares were given away so that Buffet could give some of his shares to charity without losing voting rights.

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#12) On November 19, 2009 at 11:06 AM, globalsailor (42.35) wrote:

I'm frankly unconvinced by your guys' arguments.  You're going to have to try harder to get through to me.

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#13) On November 19, 2009 at 11:14 AM, chk999 (99.97) wrote:

Short the Bs and see how it works out.

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#14) On November 19, 2009 at 11:36 AM, anticitrade (99.66) wrote:

"I'm frankly unconvinced by your guys' arguments.  You're going to have to try harder to get through to me."

I love statements like this. 

Globalsailor, you have a rediculously bad understanding of how the stock market works.  Since your theory is based on a total abondoment of logic and reason, it is difficult for anyone who lives in a logical world to provide you with a convincing argument. 

Consequently, I can only suggest that you band together with a group of likeminded investors, liquidate companies and give yourself "all sorts of ridiculous perks like private airplanes".

(+1 rec from me because this post explains why I get so angry when I drive)

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#15) On November 19, 2009 at 11:55 AM, globalsailor (42.35) wrote:

I don't have the money nor the risk tolerance to short it.  It's kind of a black swan event.  I'd like to do an option on one share but I think that they are just on 100 shares.

I'm still unconvinced.

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#16) On November 19, 2009 at 12:03 PM, Gemini846 (45.90) wrote:

Berkshire regulates the B shares to keep them about 30:1. If they get too far ahead of A then Berkshire buys A in the open market and issues more B.

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#17) On November 19, 2009 at 12:10 PM, TMFHousel (90.74) wrote:

You're assuming the allure of owning BRK stock rests solely on voting rights. If investors' goal was to kick management out of the company, this might be true. But undeniably, it's the opposite. People own BRK because they want Buffett to manage their money. I couldn't care less about voting rights. I own shares because I want Buffett to vote for me. 

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#18) On November 19, 2009 at 12:11 PM, TMFBabo (100.00) wrote:

There's a HUGE difference between "overvalued" and "the most overvalued stock in the market."  BRK-B is so far from the most overvalued stock in the market that it's ridiculous.  The "most overvalued" designation should be placed on a company that won't survive much longer, loses money all the time, has diluted the stock down to nothing, and much more yet trades at a high price.  Your title is absurd.

Shareholders participate in profits through direct distributions (dividends) or appreciation in stock price.  If you buy a part of a business for one price and sell it for a higher price later, are you receiving profits? (Answer = yes)

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#19) On November 19, 2009 at 12:20 PM, globalsailor (42.35) wrote:

Gemini846: I understand that's how people keep the price of B low.  But my question is how does it stay so high?

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#20) On November 19, 2009 at 4:16 PM, globalsailor (42.35) wrote:

bullishbabo: I understand that the title is absurd.  However a mega-cap stock that is supposedly more than six times overvalued is almost as absurd.

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#21) On November 19, 2009 at 4:19 PM, globalsailor (42.35) wrote:

In evaluating any stock I think like this:

The value of a stock is the:

([Net present value when it is liquidated/bought out]+

[Net present value of all of all future dividends]+

[Net present value of the marginal increase in total earnings that a large shareholder would gain from being a more influential boardmember])

Note the last one: it isn't worth it to buy B's to become a board member, but if anyone ever wants REAL (not paper) access to that company, they will buy the A shares.

The middle one is important too: would Buffet give B shareholders 1/30 the dividend of the A shareholders or would it be proportional to their 1/200 vote?

The big question is the first one: if Berkshire is broken up or acquired (improbable but possible) what would the B be valued at?

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#22) On November 19, 2009 at 6:02 PM, chk999 (99.97) wrote:

This is a cigar-butt valuation formula. For companies with significant going-concern value it produces a uselessly low value, the stock will never get down there.

For the example, think of the liquidation value of Coca-cola (KO) without the brandname. Now think of the going concern value with the brandname. The two values are at least 100X apart and maybe more than that.

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#23) On November 19, 2009 at 6:29 PM, globalsailor (42.35) wrote:

chk: Okay fine.  I can understand goodwill for Coca Cola.  But goodwill can't account for differences in the two classes of shares being so small can it?

By the way these values are all expected NPV's.

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