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Buffett's Latest Bargain: Berkshire Hathaway


twacowfca
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Barron's has a great, short article in today's paper.  Try googling the above if you don't have a subscription.  Let me add something that doesn't appear in the article.  BRK's annual growth in BV/SH has averaged only about 10%/ year for the last decade, a lot less than the 20%+ annual growth before that.  Interestingly, BRK's BV/SH growth in the last decade was still about double the average annual increase in the value of the S&P500 plus dividends.  That's about the same difference as it was in the earlier years when BRK's BV/SH was growing at about double the higher growth rate of the S& P500 then.  :)

 

 

The Barron's article makes a very good case that the $22B elephant that got away this spring because they couldn't agree on price was Chubb.  If that's the one, the purchase price that Warren was willing to pay was probably about $82/SH or 1.4 times BV for a company with decent underwriting, but mediocre investing results.  That's still a good deal for BRK  because Chubb's returns on their $44B or so investments could be much improved.  Even without improvement, Chubb's normalized earnings per share should add about $2B to BRK's bottom line.

 

Chubb halted their buybacks after taking a big hit from Sandy.  Could that be a motivator to resume talking with BRK?

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Anecdotal experiences from the storm:

 

I was speaking to a roofing specialist last night here in NJ.  He said if you hold a Chubb homeowners policy, repairs are covered no questions asked.  If however you hold a policy from State Farm or Allstate, NJ homeowners are not covered due to a 'fine-print' clause which excludes any damage caused by wind from a hurricane that makes landfall in your home state (in this case NJ).  He said homeowners were outraged.  I thought:  whatever moat they had is now smaller.

 

Also, my wife was in a minor auto accident rear-ended by another driver who was insured by GEICO.  When she came home at the end of the day, she said she couldn't believe GEICO.  Aside from the fact that GEICO wasn't even her insurance company, they called her within one hour to confirm her information.  They called back in another hour with arrangements for her to have her car repaired at their expense and offered her a loaner car.  Fifteen minutes later the car repair place called her to confirm her appointment and get her choice of loaner car.  Another half hour later GEICO called to see if there were any loose ends, and then asked to give her a rate quote.  She said, "OMG, these guys are good!"  I proudly reminded her of our long position in Berkshire Hathaway.

 

 

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If Buffett is looking for an elephant in the insurance industry, I have along with the U.S. government and many others, AIG available at $60 or $70. A bargain relative to Chubb.

 

If he is not able to pay or willing to invest $100 billion now and still interested in owning a stake in a well managed company, then he could always spend almost $8 billion to purchase the remaining stake held by the U.S. government and maybe buying another $5 or $6 billion on the open market. He would then own 26 or 27% of the company paid at half of book value and as Berkshire grows larger, he could acquire the rest eventually like he did with GEICO.

 

Cardboard 

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Anecdotal experiences from the storm:

 

I was speaking to a roofing specialist last night here in NJ.  He said if you hold a Chubb homeowners policy, repairs are covered no questions asked.  If however you hold a policy from State Farm or Allstate, NJ homeowners are not covered due to a 'fine-print' clause which excludes any damage caused by wind from a hurricane that makes landfall in your home state (in this case NJ).  He said homeowners were outraged.  I thought:  whatever moat they had is now smaller.

 

Also, my wife was in a minor auto accident rear-ended by another driver who was insured by GEICO.  When she came home at the end of the day, she said she couldn't believe GEICO.  Aside from the fact that GEICO wasn't even her insurance company, they called her within one hour to confirm her information.  They called back in another hour with arrangements for her to have her car repaired at their expense and offered her a loaner car.  Fifteen minutes later the car repair place called her to confirm her appointment and get her choice of loaner car.  Another half hour later GEICO called to see if there were any loose ends, and then asked to give her a rate quote.  She said, "OMG, these guys are good!"  I proudly reminded her of our long position in Berkshire Hathaway.

 

Very interesting story regarding coverage at Statefarm vs Chubb. Hard to know these things until it's too late.

 

Also thanks for the story about GEICO. I hope they keep growing and keep their service levels so high.

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Here is a good quote from the annual meeting of Berkshire Hathaway with regards to growth:

 

"Charlie added that the first $200 billion (in market capitalization) was hard for Berkshire to create, but the second $200 billion with the momentum Berkshire has will be pretty easy given Berkshire’s culture."  :)

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I am unimpressed with Andrew Barry's coverage of Berkshire.  He seems to be Barron's authority on Berkshire but I don't feel he has a very good understanding of the business.  Barry seems to rely entirely on Price/Book in determining the value of Berkshire.  Also, using a P/E analysis based on reported earnings only tells 1/2 the Berkshire story.  Wishing Barron's could find a journalist that could dissect the true intrinsic value. 

 

I remember reading in the past that Buffett had these same frustrations.  This was the reason he began communicating with Alice Schroeder.  He wanted the intrinsic value of Berkshire to be understood by the public so  the stock would trade close to that value.

 

 

Barron's has a great, short article in today's paper.  Try googling the above if you don't have a subscription.  Let me add something that doesn't appear in the article.  BRK's annual growth in BV/SH has averaged only about 10%/ year for the last decade, a lot less than the 20%+ annual growth before that.  Interestingly, BRK's BV/SH growth in the last decade was still about double the average annual increase in the value of the S&P500 plus dividends.  That's about the same difference as it was in the earlier years when BRK's BV/SH was growing at about double the higher growth rate of the S& P500 then.  :)

 

 

The Barron's article makes a very good case that the $22B elephant that got away this spring because they couldn't agree on price was Chubb.  If that's the one, the purchase price that Warren was willing to pay was probably about $82/SH or 1.4 times BV for a company with decent underwriting, but mediocre investing results.  That's still a good deal for BRK  because Chubb's returns on their $44B or so investments could be much improved.  Even without improvement, Chubb's normalized earnings per share should add about $2B to BRK's bottom line.

 

Chubb halted their buybacks after taking a big hit from Sandy.  Could that be a motivator to resume talking with BRK?

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