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Warren Buffet thinks Berkshire is undervalued


valuecfa
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Anyone happen to catch this in the recently released annual report.

 

I am surprised this isn't getting more attention in the media just yet.

 

 

Starting with the last sentence in the third paragraph down from the top on page 93:

 

 

"Now, our book value far understates Berkshire's intrinsic value, a point true because many of the businesses we control are worth much more than their carrying value.

 

Inadequate though they are in telling the story, we give you Berkshire's book-value figures because they today serve as a rough, albeit significantly understated, tracking measure for Berkshire's intrinsic value. In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value."

 

 

~emphasis on "far" is Warren Buffet's , not mine

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" Now, our book value far understates Berkshire’s intrinsic value, a point true because

many of the businesses we control are worth much more than their carrying value."

 

-That line is nothing new. It can be found in last year's annual report as well on page 73 at the very bottom!

 

 

 

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Well for this to be actual "news", we'd have to go through all the reports in the past and see if the word has always been emphasized. If it has, it means nothing. If this year is the only one where the word is emphasized, than you may have something.

 

I just skimmed the ARs back to 2001, the word "far" is always emphasized.

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regardless, we don't need positive reinforcement to know the stock is far undervalued. keeping it simple, the stock sells at 1.1 x book value versus the traditional value line yard stick of 1.6 x book. that would give it a near 40% discount. When you factor in the fact that the derivative book value impairment of 7 billion is bogus as per his explanation on the shortcomings of accounting, the stock is substantially more underpriced. And then of course the market value of his holdings is artificially low....

to me,all in all, his annual letter reads like a decent year in absolute terms and excellent year in relative terms.

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as i write this, approximate value of investment book as described in letter would be $101B with total mkt cap of company at $114B using A share prices, which overstates value to a small degree.

 

Earnings of non insurance operating companies was 1.7 (after tax utilities), 2.2 (after tax m,s,r) and .78 pre tax (finance exclusive of derivatives).

 

Can buy 4.7B in last year's mostly post-tax earnings exclusive of derivatives for 13B today.

 

 

 

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Mungerville, you are right,  book value is a moving target and is obviously different today than it was 2 months ago.

 

The point is however is that the element driving the book value down such as the  long term put options value derived from various stock indexes contribute mightily  to the book's apparent deterioration when they do not have a meaning in the context of short term emotionality of the market. ( As per Buffetts discussion on the Black Sholes formula and its implication on financial statements p 20  and his note 3 page 26); same can be said about the securities held in aggregate way below intrinsic value but temporarily devaluated by a depressive Mr. Market.

 

Book value is therefore significantly understated, Berkshire price today is near an artificially low book value and is therefore far below intrinsic value.

 

Anyway, what is remarkable is that operationally Berkshire did not have a bad year in 2008: to paraphrase Buffett the two most important businesses (insurance and utility) delivered outstanding results and have excellent prospects, on top of that capital allocation went also very well (apart from his confessed unforced errors with Conoco and the irish banks) and prospect look bright in this illiquid market.

 

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"operationally Berkshire did not have a bad year in 2008" ... right on!  And I think the "confessed unforced errors" aspect is overstated.  It may be helpful for Buffett to think in those terms, and may be helpful protective colouration, but seen by a passive spectator, it looks more like Conoco was a trend-following hedge run out to end of trend, and Irish banks was a soundly conceived contrarian bet.

 

Some of Buffett's macro trend following, eg currencies or oil & gas pricing, seem to involve being right initially - because of the discrepancy of price from value, plus pressures on price, are so strong - and then putting about half of profits back into following position re same trend. So Conoco can be seen as trend following begun with PetroChina, for instance.  Or, if you prefer, think of it as a hedge against possibility that oil and gas prices would keep going up extraordinarily, and cause distress to other Berkshire enterprises.  In either case, not a bad move seen in context.

 

The Irish banks - completely outside my scope - but Buffett likely had sound analytical reasons for making the investments, and it probably depended on a binary decision of Irish bank regulators / government.  Part of Berkshire's basket of financials, not bad investing strategy if some go down - like insurance writing.

 

Maybe more problematic, but not yet clarified re loss ratio, is municipal bond insurance.  Buffett's letter describes increasing premium and also projects a potential risk due to cultural shift in propensity to default, sticking far-away insurer with municipal debt default costs.  It is still to be seen to what extent that risk might materialize.  I'm sure Berkshire's people are very aware of the considerations though and do not really personally anticipate there will be material loss even if default rates in general population of municipal issuers gets severe.

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