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Morningstar on Berkshire


giofranchi
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Guest hellsten

I know: nothing new! And I really hope they are dead wrong! But at least some of it seems logic reasoning to me.

Table on page 29 is a sad thing...

 

giofranchi

 

I agree. They've built a business empire and I fear that when Charlie and Warren leave or die the empire will slowly crumble or at least become average. I don't think anyone can replace the two.

 

According to YCharts, BRK's P/B is currently ~1.2. Interestingly the lowest it has been in the last 10 years was on September 11th this year:

http://ycharts.com/companies/BRK.A/chart#series=calc:price_to_book_value,type:company,id:BRK.A&maxPoints=650&zoom=10&format=real

 

I continue to hold the stock, but will most likely sell and buy something cheaper it if there's a major market crash.

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M* builds the case around the point that most of BRK's operations are insurance, and therefore low moat. This point is logical in that insurance is a commoditized service. However, they do fail to point out that the second way insurance firms make money is by investing float, something at which Berkshire is stellar at. In that regard, there is far less concern for the economic moat.

 

They also hint at skepticism over capital allocation, but we know for a fact that Berkshire has skilled capital allocators apart from Buffett, and that particular job can be done by many within the firm.

 

Simply the combination of negative cost of float + excellent investment performance (likely) + deep moats in non-insurance businesses make me pretty confident regarding BRK's future. But that's just IMO.

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Guest hellsten

Lowest p/b on that graph was September of LAST year - also the exact moment Warren announced the share buy back.

 

Yes, sorry. The year was of course 2011. Time flies…

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This article helped me see BRK in a new light.  Maybe Berkshire Hathaway is an ingenious work of Financial engineering, and I think that he is actually widening its moat.  Please don't let my using the phrase 'financial engineering' set the tone for my thoughts.

 

I read a paper (Sorry I dont have a link) which showed that through regression most of WB's success can be explained by his cheap float and his insistence on steady cash flow streams, he didn't have to knock the ball out of the park to get above average returns with this cheap float (He did knock the ball out of the park anyways haha).  This is similar to what Allen Mecham is doing with his cheap leverage owning BRK as a huge position.

 

Buffett is now buying capital intensive assets that already have a competitive advantage by nature and increasing this moat by creating a utilities type company that will have by far the lowest cost of capital because of the insurance mix.  This will allow his shareholders to count on those streams of cash long after his retirement.  In addition to this he is creating a cash flow stream that also allows him to offset some risks in insurance allowing him to take long tail risk which others cannot, creating another competitive advantage.

 

By offsetting insurance with these cash flow positive companies he might be increasing the moat of both businesses more than I realized.

 

As a young guy I often consider BRK as a stock which I wont have to pay taxes on anytime soon that may one day contribute to my income, and if nothing else it will allow me to grow capital at a decent rate.

 

Just throwing my thoughts out there

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