Berkshire’s A Bargain

In Investment ideas on October 18, 2011 at 2:14 pm

For those of you who have been waiting to buy shares of Berkshire Hathaway, now might be a good time to consider it. The shares are trading at a historic low in relation to book value. Book value (or the accounting value of the firm’s assets less its liabilities) is a metric Warren Buffet himself uses to measure the performance of the company and gauge the price level of its shares.

Over the last decade, the price to book ratio of Berkshire shares has ranged between approximately 1 and 2 times. Currently it’s trading at 1.11 times (current share price – $109,649, book per share – $98,716). In fact, the shares are so cheap right now that Berkshire has gone the unusual step of initiating its first share buyback plan in many years.  The Company will use excess cash to buy back shares if it can manage to do so at any price below 1.1 times book.

There is a reason why Warren Buffett is the world’s third richest man.  His investment approach has outperformed the overall stock market by a wide degree.  As measured by book value, shares of Berkshire Hathaway have grown by a compounded rate of 490,409% since inception in 1965 versus merely 6262% for the S&P 500 index.  In dollar terms, this means $1000 invested in the S&P 500 in 1965 would be worth around $63,000.  That same amount invested in Berkshire would be worth $5 million dollars.

1965 was a long time ago so let’s look at more recent history.  How has Berkshire performed lately? Looking back at just the last decade – 2000 to 2010 – Berkshire’s book value increased 251%.  The rate of return for the S&P 500 over the same period? A mere 105%.

Like every investment, Berkshire shares aren’t without some risk.  The most obvious one is management.  Warren Buffett is 81.  Vice-chairman, Charlie Munger, is even older – 87!  The company has announced transition plans but nothing has materialized.  This understandably makes investors nervous.  Will new management be able to run this massive company and make the same types of savvy investment decisions Buffett did? Add to this the fiasco with David Sokol, long thought to be Buffett’s successor on the management side of the Company, and people start to worry.

Regardless, Berkshire owns dozens of great operating companies and publicly-traded investments in diverse industries ranging from carpet manufacturing to utilities to soda pop. These businesses have all been handpicked by Buffett to meet his tests of durability and ability to earn superior returns on capital.  Berkshire is the kind of stock you can buy and forget about.  It is well worth your time to look at.

See also my blog post from 2009: Buy Now, Buy Buffett


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