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Whitney Tilson on Berkshire Hathaway


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Just a few comments on Tilson's valuation:

 

1.  I've argued, too, that the insurance businesses are worth more than just the value of the investments, provided that the combined ratio over time is less than 1.0.  However valuing the insurance businesses as investments plus 8x normalized earnings seems to be a little bit of a stretch.

 

2.  On the other hand, valuing the other operating companies at 8x operating earnings is pretty conservative.  Most people who use this model use 11x-13x.  Happ8714 applies different multiples to different types of subs.  I like happ's approach because it helps to understand the various businesses better.   

 

3.  If we apply Tilson's math to Dec 31, 2008, we get an IV of 77,793 + 8*5000 = 118K.  I'm not sure what number to put in my summary as Tilson's estimate as of Dec 31.  He doesn't explicitly say $118K for Dec 31, and less than one month ago Tilson said that BRK was conservatively worth $130K-$140K/share.  That was before the annual report came out, though.  Changinging Tilson's estimate from 135K to 118K moves the average for the seven authors from $131K as of Dec 31 to $129K. 

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apparently they are out of FFH....which jives with my thesis that a lot of people piled in FFH for the CDS, equity puts and Tys as protection...

 

now we need time for the weighting machine to caliber FFHs earning potential...

 

 

 

 

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what ever happened to normalizing earnings?  What about all that stuff about the market not being your master?     

 

Why 8x earnings for the ops?  8x earnings is equivalent to 0 or slightly negative earnings growth in the future. And thats not taking any consideration for where the risk free rate is today.  A whole lot of Berkshire's business's have been impacted by the housing bust since all the way back to 07, the earnings are depressed.

 

Its not the market value of Berkshire's investments that you need to be concerned with, a good chunk of that is float and doesn't belong to you anyway.  You need to figure out the look through earnings of the portfolio going forward, which w/ 0 cost float will accrue to shareholders.  I know its a little harder than just looking at the stock prices but if thats all you do you might as well index.

 

This is value investing 101, not rocket science.  If the market is inefficient, why are you even considering it as part of your valuation method?

 

 

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I don't think Tilson accounted for the loss reserves and debt in his $71k per share deduction off the share price. Not all of that $71k will go to the company because insurance claims will have to be paid out in the future. The loss reserve on the balance sheet is $36.5k per share. Even if this figure is conservative and overstates the true future claims expense obligation of the insurance policies, I think some amount should be deducted. Also, the total debt is ~$24k per share. This definitely needs to be deducted from $71k. Is it not fair to deduct the investments on the balance sheet off your purchase price and not add the debt?

 

After making the above adjustments, I get closer to $66k per share of intrinsic value. The difference is from 36.5k and 24k in loss reserves and debt, respectively.

 

With this being said, I think Whitney Tilson is a smart, accomplished investor and I do enjoy reading his writing.

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Buffett has made it pretty clear that loss reserves have npv of zero ($1 of float is worth at least $1).

 

if you're capitalizing earnings (which includes interest expense), you don't have to take into account debt, since you'd be double counting.

 

 

 

 

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