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Long Term Assets are Valued on Short Term Expectations

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June 14, 2011 – Comments (0) | RELATED TICKERS: BRK-A

Board: Berkshire Hathaway

Author: EliasFardo

Berkshire is so cheap right now, where the heck are the buyers??????

When I am asked why the stock of a healthy company is falling, the most honest answer I can give is “I don’t know.” Outside of an announcement of some material change or result, I believe that it is a mistake to have much confidence in the explanations, mine or others’, for price movements in any specific company. Asset prices often rise or fall for reasons that are overdetermined – that is there are several interacting reasons, the impact of any one of which is impossible to determine. It is often too complicated to understand.

The problem with trying to understand the “why’s” behind price movements is that undue importance is attached to understanding. To a value investor, ultimately it does not matter. The only question of any real importance is “Is the asset grossly undervalued, slightly undervalued, fairly valued, slightly overvalued or grossly overvalued. If one can determine that, he knows how to act, regardless of the reasons.

I think that in the short term, which can last for a year or more, almost all price movement in any one particular asset is caused by price movements in its asset class as a whole. Or even in investible assets as a whole. Cash flows this way and that, based mainly on the prevailing emotion of the day. A wonderful company, such as Berkshire, gets valued not on a rational expectation of its long term future free cash flows, but the emotional mindset of the people who are conducting trades during that period of time. Long term assets are valued on short term expectations.

The job of the investor is to get his or her own emotions under control. ( I always have a slight inward cringe when I talk of controlling emotions because of implications of numbing down, which is not what I am talking about. ) The best way to get your emotions under control is to have confidence in your valuations. Then, as Mark Twain said, you can act “with the serene confidence which a Christian feels in four aces.” When the world is burning, it is hard for me to act contrarily based upon hope, gut feeling, desire, should-happen, always-has-happened-in-the-past, the opinions or recommendations of others, instinct, experience or even discipline. All of that will often fail me. I have to know that I am right and about the only way I can get that confidence is through the analysis of value.

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