Very good point, on semi's and BRK. BRK is one of the top holdings of most of my LC value funds.
First, a disclosure.I own BRK. Have since 2001, with meaningful additional purchases in 2009. And I’m buying more.
In my view, it is as safe a business to own as I’ve encountered. To a certain extent, you could substitute it for the S&P 500 in holdings. I suspect BRK will do a little better over time, but not a lot better. because it pays no dividend today, it is more tax efficient outside of a retirement account. And I think it’s somewhat cheap, though not as cheap as it’s been and not as cheap as it will be once WB is no longer in charge,
Analyzing Berkshire takes a long time. There are many substantial businesses, and some are not great businesses but many are irreplaceable Think BNSF Or MidAmerican Energy. But for purpose of laying out why I think it’s attractive, I’ll simplify.
Berkshire consist of two broad categories. First, you have the ownership in publicly listed stocks, bonds and cash. These investment are largely possible due to the vast amount of insurance float at Berkshire. On a per share basis (all of these figures are for the “A” shares. For the B share, divide by 1,500), the value of their portfolio is about $303,000.
The second part of Berkshire is the wholly owned businesses (Excluding insurance). For the last twelve months, those businesses generated pretax earnings per share of $14,644. Reading historical annual shareholder letters, you can see that WEB has placed a value of 12x on this figure. Seems reasonable. Berkshire has a large set of growing businesses, Using that multiple leaves you with a wholly owned business value per share of about $176,000.
Together with the stock, bond and cash portfolio, you have a total value of $479,000 per A share ($319 per B share).
this valuation ignores the premiums earned in the insurance business because we’ve assumed that insurance float funds the security portfolio. However, Berkshire is unique in that it does earn premiums in excess of claims nearly every year (literally has had one loss in the last 20 years). So as a Berkshire owner valuing the business as outlined, you get the insruance premiums for free, wouldn’t matter for most insurers who, over time, have premiums roughly equal to claims. That, however, is not true of Berkshire. Think of that as an extra margin of error in valuing Berkshire,
So, BRK A is potentially worth $479k (the sum of the securities portfolio per share and the wholly owned businesses) per share and is currently trading at $430k per share, you have a modest margin of error at these levels, but one very powerful force in your favor. Buybacks. WEB is buying back stock, albeit at a slower pace now that the shares are higher but he’s still buying. I’m ok being on the same side of a trade as WEB for a rock solid business trading at a modest discount to intrinsic value.
of course, what about when WEB is no longer in charge? My guess is the shares drop about 15%, and I’d be a buyer. today, the market places no premium on Buffett. We now know who will take over for him, and we have talented investors to manage the portfolio. And the shares already traded at a discount. Could they trade at a persistently larger discount without WEB? Maybe, can’t over look it. That said, intrinsic value has been growing at a heathy clip, so that gap would be closed fairly quickly.
In summary, I think BRK is as safe an equity as you can buy. You have a modest margin of error in the valuation, and a continued catalyst in buybacks, I suspect you could have annual compounding in the low single digits over an extended time. That compares favorable to the S&P for longer term holders due to the tax benefit of no dividends.
of course, I could be wrong. But, that‘s what I think and why.
