Berkshire Hathaway Shares Are Trading at the Lowest Valuation In Nearly a Decade
Berkshire Hathaway shares are now trading at around the lowest valuation relative to earnings and assets that they have since the dot-com bubble in the late 1990s. How is that possible? As the famed holding company of Warren Buffett has added businesses such as Burlington Northern Santa Fe, the stock price has treaded water so each dollar invested at today’s price represents more profit and equity than it did in the past.
For the past week, I’ve been buying shares of Berkshire Hathaway for the family’s “permanent” capital, including in the retirement accounts of myself, Aaron, my siblings, and even one of the operating businesses.
The purchase price we’ve paid for our fresh shares is approximately 1.15x book value, meaning that with reasonable earnings, it will only take 12 to 18 months of profit for the adjusted cost basis to equal liquidation value (assets – liabilities = net worth).
At that point, the long-term return should match fairly closely the exact change in book value from year to year plus or minus any dividends that are distributed or shares that are repurchased (which I doubt will happen until long after Warren Buffett is no longer running the place), although it goes without saying that the market price may diverge in either direction substantially at any given time. On top of that, there is a chance for some valuation multiple expansion because for much of the holding company’s history, it has sold at between 1.5x to 1.7x book value and that book value now represents far more intrinsic value than it did 30 or 40 years ago.
Of course, as I’ve stated before, it is entirely possible that Berkshire Hathaway stock, like any stock, could lose 70% of its value tomorrow. There could be a catastrophic earthquake in California, a global economic crisis that freezes the stock exchanges, an alien invasion that threatens all of humanity, or just the usual suspects of folly and greed rearing their irrational heads and influencing equity valuations.
I won’t lose any sleep over this. On the whole, I am comfortable with the funds I am risking because I believe that I am getting more intrinsic value than I am paying for at these prices. I am not risking more than I can afford to lose. My earnings and assets are diversified so that a meltdown in one firm won’t threaten my standard of living and long-term plans. That belief may or may not turn out to be correct, but my personality is such that I like studying systems and then risking my own capital on the conclusions at which I arrive.
Why I Am a Net Buyer of Berkshire Hathaway Stock
I’ve made no secret of the fact that, on the whole, I am a net buyer of Berkshire Hathaway shares. That is not because of my admiration of Warren Buffett and Charlie Munger, but rather because I truly, passionately love the collection of businesses that make up the enterprise. The furniture in my home is from Nebraska Furniture Mart. The Montblanc watch on my wrist is from Borsheim’s. My own operating businesses extensively use American Express. My pantry is often stocked with See’s Candies and Coca-Cola. I don’t love these businesses because they are owned by Berkshire Hathaway, I love Berkshire Hathaway because it has a stable of entities of such high caliber. That is a vitally important distinction.
Make no mistake, there are occasions when I may sell shares, almost always for a major life event (e.g., buying a house) or because I find a better bargain, but as long as the company continues to exist and follow the same business model of acquiring low-cost capital and then sourcing it to businesses that earn high returns on non-leveraged equity, I expect that my ownership will be higher as the years pass. It is virtually certain that the trajectory line will be uneven since I am an opportunist and take advantage of market crashes, but I’d be genuinely surprised if I don’t own exponentially more Berkshire Hathaway stock when I am 50 years old than I do when I am 30 years old.
It is important to note, though, that my expectations are perfectly rational with Berkshire Hathaway because there is virtually zero chance that it can compound at anything significantly exceeding the return on the S&P 500 over the next 50 years. It is simply too big. As for my portfolio, the money allocated to Berkshire shares isn’t the money that I’m using to get rich in my 30’s, 40’s, or even 50’s. Those are my family businesses and other companies that I’ll likely start in the next few years.
There Is No Law in the Universe That Says Berkshire Hathaway Must Compound at Better-Than-Average Rates of Return
This is all predicated upon the assumption that the company culture remains in place after Warren Buffett and Charlie Munger are gone. If I think the firm is taking on too much risk, I’ll do exactly what I did with AIG years ago as a result of their derivative book and avoid it like the plague. Furthermore, I fully expect that at some point in my life, the firm will become so large that the management will have no option but to begin reducing the float of shares outstanding by repurchasing stock and/or paying out enormous dividends. As a result of the latter possibility, I try to buy as much as I can through retirement trusts, plans, and accounts so that the eventual income will be tax-advantaged.
But the point is, right now, I have the opportunity to buy ownership of an extraordinary business at barely above accounting liquidation value. Present known factors considered, it is a business that I will likely want to be included in my estate long after I am dead; something I want to be able to have in my portfolio when I am, God willing, 80 years old and looking back on trade confirmations I placed when I was in my early 20’s. (Although, I’d be shocked if by that point there hadn’t been some sort of spin-off or reorganization. That is 52+ years in the future, meaning that is longer than Warren has been managing the company himself so it will be a completely different enterprise by that time.)
I feel that way because I’m around to pay attention and monitor what the company is actually doing, giving me peace of mind about the risk profile new management takes in future decades. If, instead, I were asleep like Rip Van Winkle, Berkshire Hathaway wouldn’t make my list of top five stocks. Unlike, say, Coca-Cola or Johnson & Johnson, Berkshire Hathaway isn’t necessarily an easy business in the sense that it can survive a lot of abuse. If 30 years from now, a moron got in control of the reinsurance division, the damage to owner wealth could be significant.
Note: This is not a stock recommendation. I am not a financial adviser, I have no fiduciary responsibility to you, and any action you take or fail to take is completely your responsibility. Be an adult and do your own thinking. Read annual reports for yourself, only buy what you understand, never risk money you can’t afford to lose, and stop looking for stock tips. Find great businesses to own for the long-run, pay a fair price relative to earnings and assets, and focus on letting time and compounding do the heavy lifting for you.
Update: Several years ago, I placed this post, along with thousands of others, in the private archives. The site had grown beyond the family and friends for whom it was originally intended into a thriving, niche community of like-minded people who were interested in a wide range of topics, including investing and mental models. On 05/22/2019, I decided, after multiple requests, to release selected posts from those private archives if they had some sort of educational, academic, and/or entertainment value. This special project, which you can follow from this page, has been interesting as I revisited my thought processes about a specific company or industry, sometimes decades later. In this case, reading about how we approached the analysis of a real-world business was helpful to many of you and the information contained herein is now so old there is no chance a reasonable person might mistake it for current market commentary.
On the day this post was originally written, Berkshire Hathaway Class A shares traded between a low of $111,800 and a high of $113,589. Today, they closed at $304,300. The Class B shares, in contrast, traded between a low of $74.48 and a high of $75.74. Today, they closed at $202.60. The company paid no dividends and engaged in no split-offs or spin-offs during those years, making the experience as straight-forward as possible in the capital markets. The company’s management, which is still headed by Warren Buffett and Charlie Munger has, in fact, begun significant share repurchases as a way of deploying excess capital. Despite this, the company’s cash reserves recently topped an astonishing $112 billion due to the ever-expanding collection of operating enterprises that can be found under the conglomerate’s corporate umbrella. The situation, particularly on a risk-adjusted basis, has been highly satisfactory, in our experience.
One major change that has occurred in the eight years since this post was originally published is that Aaron and I relocated to Newport Beach, California in order to have children through gestational surrogacy. Within a window of a couple of years around that relocation, we also sold our operating businesses and launched a fiduciary global asset management firm called Kennon-Green & Co.®, through which we manage money for other wealthy individuals and families. That means we now are financial advisors (or, rather asset managers operating under a investment advisory model as we are the ones making the capital allocation decisions rather than outsourcing those to fund managers or third-parties), which was not the case at the time this was written as you can tell from the original disclaimer. Accordingly, let me reiterate that this post was not intended to be, and should not be construed as, investment advice. Also, for the sake of full disclosure, I’ll state outright that Aaron and I still own shares of Berkshire Hathaway personally and that the stock represents one of the major equity holdings of our firm’s private clients. We express no opinion as to whether or not you should buy it. Any company can do poorly or even go bankrupt. There are no guarantees Berkshire Hathaway will generate a profit or make money for shareholders. We may buy or sell Berkshire Hathaway for ourselves or our clients in the future and have no obligation to update this post or any other historical writing. You should talk to your own qualified, professional advisors about what is right for your unique circumstances, goals, objectives, and risk tolerance.