Berkshire Hathaway - Solid Investment?

[toittoiger]

Berkshire Hathaway (the holding company managed by Warren Buffet) just published its 2006 annual report. You can access it with the link below:

BERKSHIRE HATHAWAY ANNUAL & INTERIM REPORTS

I've got some questions for you keen investors:

1) How would you describe Berkshire's business model?

2) What is its competitive advantage?

3) How would you value Berkshire's stock?

The last one is the most difficult, but is also very interesting. I'm interested in hearing your views on this incredibly successful company.

[toittoiger]

Anyone? I'd appreciate some insightful comments.

[investoid]

Originally Posted by toittoiger

1) How would you describe Berkshire's business model?

Berkshire is an investment holding company whose mandate is to appreciate the capital that's under its management and subsequently provide above market returns to its shareholders. They can either a) purchase parts of companies on the open market b) purchase companies outright on either the public markets or via private buyouts and c) take advantage of leveraged transactions through exotic financial instruments such as currency derivatives or reinsurance.

Originally Posted by toittoiger

2) What is its competitive advantage?

Berkshire's advantage is in its management team being able to identify undervalued companies and related business opportunities and subsequently being able to capitalize on them. Berkshire has a history of outperforming the typical US stock indices on a return basis.

Originally Posted by toittoiger

3) How would you value Berkshire's stock?

The same way I'd value any other stock. Take a look at other posts on this topic.

Obviously Berkshire's been a great company for a long time. I doubt Warren Buffer will stop doing what he does until he's dead. That said, he's not exactly a spry young chicken anymore, and I don't know how much longer he'll keep it up. Recently his performance has been below his historical average, possibly due to age.

I wouldn't buy the stock since a) I wouldn't want to put such a large proportion of my assets in one company, which I would have to do since they've never had a stock split and buying one share is prohitibitively expensive and b) it is unlikely Berkshire will continue their outperformance once their leader leaves the job, which is likely for one reason or another within 5 years.

[toittoiger]

Thanks for the comment, Investoid.
However, I dont think you can value Berkshire Hathaway like any other company. To whom would you compare it to? What sorts of things would you analyze to decide whether it is worth paying over 100 G's to buy a share? I don't think its very easy to value.

[investoid]

Just because their share price is large and that there are few public companies that are in a similar business doesn't mean the valuation methods are any different. You need to look at its profitability, cash flows, growth etc. and derive a present value for the shares. That doesn't change regardless of what company you're analyzing.There are companies that are somewhat similar, although they don't necessarily do everything Berkshire does. Berkshire is similar to a private equity firm, some of which are publicly traded. One such example is Onex in Canada (TSX - OCX). They buy companies and own them for the long term to unlock hidden value, just like Berkshire.

[aquaswim47]

Companies believe that stock splits help individual investors buy their stock. In reality, shareholders can use Sharebuilder or use a mutual fund if they wish to buy Berksire Hathaway. In any event, the shares have no difference in their valuation.

Nice work, Investoid.

[toittoiger]

Thanks for the excellent comments. I appreciate it.

[Fredledingue]

Berkshire is a good long term investment. It might not be the best one and don't expect stellar returns in the short term but it's relatively safe. And that's because he buy only profitable businesses.
It's even considered as a safe heaven in case of correction. While the dot.com stocks crashed , BRKa/b grew very nicely. Today we see a similar move: When the market is down, BRKa/b is up and vice versa.

I would consider buying BRKa/b as a safe place to park your money like gold, bonds or something thought it's of course not the same.You still depends on a strong US economy with BRKa/b.

If BRKa is too expensive, buy BRKb, it's "only" $4000.
IMO BRKa/b will still do well after Buffet, because he has a team and this team will remains and his phylosophy too.