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Berkshire is not mispriced--find the flawed argument


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I happened across an article in Seeking Alpha titled Berkshire is not mispriced.

 

http://seekingalpha.com/article/427701-berkshire-hathaway-is-not-mispriced

 

For those of you who are knowledgeable about these things, the flaws in the arguments are pretty transparent; however for any newbie out there, without reading the comment section find as many flaws in the argument as you can. (This is a timed quiz, starting now. ;))

 

This is NOT to say that you should not know countervailing argument, just in this case the argument is not very good.

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Well I'm going to have to invoke Munger here and invert . . .always invert.  The inverse of the argument is that the market has not accurately priced Berkshire (as evidenced by daily fluctuations in price) therefore proving the flaw in the argument.  ;)  Everything is always mis-priced, it is merely a question of by how much and in which direction.

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While I also argued Tilson's valuation was a little aggressive, let me be the first to say I think this analysis on seeking alpha is flawed. 

 

-The analysis gives no benefit to the fact insurance liabilities on average have cost Berkshire nothing.  Tilson gave full benefit to this.  I argued it should be somewhere in between, because even though on average the liabilities have cost nothing, they still pose risk for large losses in any given year. 

-The analysis compares the free cash flow yield on berkshire to AAA bonds in order to conclude it is fairly valued.  He understating free cash flow yield by using an overstated denominator by including operating liabilities (insurance liabilities) as part of EV.  Furthermore, he does not give benefit to the fact berkshires FCF will grow, while a AAA bond's cash flow is fixed.  And finally, a AAA bond is not even the correct instrument to compare Berkshire too.  Berkshire's debt is not even rated AAA, and its cost of debt is higher than the FCF yield he calculated, so his conclusion is illogical. 

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Furthermore, he does not give benefit to the fact berkshires FCF will grow, while a AAA bond's cash flow is fixed. 

This is what I latched on to.  The author ignores the share of profits that Berkshire "owns".  i.e. if you only count the dividends then you need to give fair play to retained earnings.

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