Doug Kass
"All good things must come to an end, but all bad things can continue forever."-- Unknown
Last week, I suggested that Warren Buffett's star was crashing back to earth.
Barron's Senior Editor Andrew Bary penned a similar piece over the weekend.
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Jim Cramer: Human After All | HOLD (Get Report) |
Armed with some additional information, I have made tentative conclusions regarding the intrinsic value of Berkshire Hathaway's (BRK.A Quote - Cramer on BRK.A - Stock Picks) common shares.
At year-end 2007, Berkshire's investment portfolio had a cost of $39.2 billion and a market value of $75 billion. Since the end of third quarter 2008, the value of Berkshire's investment portfolio has experienced a pronounced drop.
Berkshire's six investments listed below have fallen by over $16 billion in value; this is more than just a bump in the road:
1. Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) closed at $37.53 on Sept. 30, 2008. Last week, it closed at $15.87. Berkshire owns 290 million shares, a drop of $6.3 billion dollars.
2. American Express (AXP Quote - Cramer on AXP - Stock Picks) closed at $35.43 on Sept. 30, 2008. Last week, it closed at $16.00. Berkshire owns 151 million shares, a drop of $2.9 billion dollars.
3. Coca-Cola (KO Quote - Cramer on KO - Stock Picks) closed at $52.88 on Sept. 30, 2008. Last week, it closed at $42.20. Berkshire owns 200 million shares, a drop of $2.1 billion dollars.
4. Burlington Northern Santa Fe (BNI Quote - Cramer on BNI - Stock Picks) closed at $92.43 on Sept. 30, 2008. Last week, it closed at $63.32. Berkshire owns 63 million shares, a drop of $1.8 billion dollars.
5. ConocoPhillips (COP Quote - Cramer on COP - Stock Picks) closed at $73.25 on Sept. 30, 2008. Last week, it closed at $48.10. Berkshire owns 60 million shares, a drop of $1.5 billion dollars.
6. U.S. Bancorp (USB Quote - Cramer on USB - Stock Picks) closed at $36.02 on Sept. 30, 2008. On Jan. 20, 2008, it closed at $15.34. Buffett owned 73 million shares, a drop of $1.5 billion dollars.
Note: These losses do not include the recent purchase of General Electric (GE Quote - Cramer on GE - Stock Picks) and Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) preferreds and Berkshire's large and so far unprofitable foray into shorting puts on the major stock indices.
If one triangulates Buffett's comments in his annual reports during the late 1990s, he seems to view Berkshire's intrinsic value as the sum of its investments per share plus approximately 12 times pretax profits, excluding all income from investments.
Given many of my concerns expressed initially in March 2008, I am increasingly coming to the conclusion that the above calculation of intrinsic value is too liberal. Considering the high cost of Berkshire's investment style drift into derivatives (massive short put positions), Buffett's refusal to sell and his apparent lack of recognition that investment moats no longer exist in some of his largest investments (especially in banking), I now feel that Berkshire's valuation will steadily suffer, despite the long-term allegiance of its investors who are geared toward evaluating the company over decades, not years. Indeed Berkshire, in the fullness of time, might suffer the same fate of many other listed closed-end equity mutual funds; its shares could trade at a discount to its investment value per share -- plus some multiple to pretax profits.
I have worshiped at the altar of Warren Buffett since the late 1970s -- ever since an investor and acquaintance, Conrad Taft, introduced me to his investment methodology and style at Berkshire Hathaway. Indeed my writings over the last seven years have often been punctuated with Buffett-isms. I have repeatedly objected to, scoffed at and refuted criticisms of Buffett's strategy on this site and elsewhere. That said, the rationale behind avoiding/shorting Berkshire Hathaway's common stock must be segregated from my respect/worship of the greatest investment icon of the last half century.-- Doug Kass, March 10, 2008
As I wrote almost a year ago, Warren Buffett is justifiably revered by investors around the world, and I consider myself one of those who have worshiped at his investing altar over the past three decades. Nevertheless, from my perch, Buffett's salad days seem to be over; the only question that remains is the timing and to what degree investors will abandon the Oracle of Omaha.
Reflecting some of the above concerns and since late September 2008, Berkshire's shares have fallen from $145,000 a share to $85,000 a share. There is no apparent end to the decline in sight.
All good things, it seems, in markets and life, must come to an end.
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