Today, I was contacted by GuruFocus.com and asked if I would be interested in submitting articles for publication on their site.  GuruFocus is a well known value oriented investment site that tracks a number of legendary investors including Warren Buffett.  I submitted my series of posts on Berkshire Hathaway’s 2008 results and they agreed to run it on their site. 

This link can be used to find the articles published under my name on GuruFocus.com.  I would like to thank GuruFocus.com for running my analysis of Berkshire.

GuruFocus Runs Berkshire Series
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2 thoughts on “GuruFocus Runs Berkshire Series

  • March 11, 2009 at 2:21 pm
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    I love Buffett and am a Berkshire shareholder but you are 100% INCORRECT on your valuation of Berkshire. I have no qualms with the approach you used but rather what you would consider “conservative.”

    About 34% of your 2008 Year-End intrinsic value comes from your estimation about the future growth and return on Berkshire’s float. You are basically saying that the earnings from the return on the float should be worth a 33.3x multiple (TOO HIGH). Thinking about it another way, you are saying that every dollar of float is worth $2.33 in cash. That seems a tad unreasonable…

    On top of that you forgot the IRS, when you say a 7% return (you mean after-tax 7%). You can actually make the argument that Buffett has current tax-losses what would offset future gains. But I think 7% is aggressive with 19% of BRK’s investments in cash that is earning maybe 0.5% after taxes.

    You could make the argument though that the cost is worth 25% -75% more than regular cash. For example, Berkshire earnings 6% after-taxes on investing the float is discounted at 4.5% (this includes the growth and discount rate, so any variation where R-G=4.5%), would bring the value of the float to 1.33x regular cash. Thus BRK.A would be worth around $109K per value at Year-End.
    Buffett has said that BRK’s float is worth more than the worth of investments from the float but I would say that that nothing grows at 5% forever.

    Anyway…your valuation for the insurance piece is aggressive (not conservative).

    • March 11, 2009 at 2:27 pm
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      Thanks for your comments. I think that most float based models can be viewed as somewhat aggressive because, as you point out, the assumptions used to arrive at the present value of the future stream of income derived from float are so sensitive to the assumptions that are used – rate of return, discount rate, and float growth rate. Changing one of these variables by a moderate amount can have a large impact on the present value calculation.

      Having said that, I think that a float based model can be justified because of the level of underwriting discipline at Berkshire and the confidence that I have regarding the ability of the business to generate cost free float. If you can make that assumption (one that I think is supported by the 10 year history of float cost), then it seems prudent to consider the float equivalent to equity in terms of its utility in generating returns going forward. Then of course you have to come up with reasonable expectations for return and discount rate. Point well taken regarding 7% being potentially too aggressive for rate of return, but considering today’s depressed valuations, probably achievable barring a repeat of the Great Depression.

      I posted a much more conservative model (the “two column approach”) that basically takes investments per share (including investments funded by float) and then adds in the operating companies at a 10x multiple. This post goes into more detail: http://www.rationalwalk.com/?p=281

      Thanks again for the comments.

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