brk

All posts tagged brk

About four months ago I made the case for going long Cisco. At the time, Google shares (GOOG) had popped 20%, and I was looking for a new company to invest in.

In the middle of July Cisco (CSCO) was trading at $15.66.  From a fundamental perspective, Cisco was cheap – selling at less than 10 times free cash flow, and had just started paying a 1.5% dividend. However, the market was discounting the stock price  because they didn’t believe the CEO, John Chambers, could revitalize the aging tech giant.

But regardless of the management, based on just the numbers, the stock was too cheap too pass up.

And numbers don’t lie.

Yesterday, Cisco announced stellar results. It seems that growth is picking up.

Since that last post, shares of Cisco are up almost 20%, at $18.61.

Cisco isn’t the only company doing well this economic environment.

Large cap blue-chip companies like Intel (INTC), Microsoft (MSFT), Walmart (WMT), Johnson &  Johnson (JNJ) are also doing well.  Even my old favorite Vodafone (VOD) which I bought over a year ago is doing well. The share price, currently at $28.39, is up nearly 23% from my purchase, and it currently yields 6.75%.

So what stock is worth buying today?

Believe it or not, it’s Warren Buffet’s Berkshire Hathaway (BRK-A or BRK-B).

Buffett recently announced that Berkshire would buy back shares below 1.1 times the book value. The world’s best value investor definitely recognizes value in his company stock price and has effectively put a floor underneath the stock.

Currently trading at a Price/Book  of 1.15,  the stock is close to that floor.

Let’s look at the B shares, or the baby Berkshires (BRK-B), which currently trade at $76.

Buffett’s 1.1x of book value puts the stock price floor at $72.69. But how much is the stock actually worth?

This is actually very simple to calculate.

The value of the publicly-traded securities owned by Berkshire is $63.66. The rest of the companies made $4.8 in earnings. These companies are worth about 10 times the earnings or another $48.

Add the $48 to the $63.66 and we get $111.66.

So buying Berkshire today means we have a floor at 5% below today’s price, and an upside of 31%.

Disclosure: I’m Long CSCO, BRK-B, MSFT, INTC, WMT and JNJ

Today the baby Berkshires (BRK.B) split 50 to 1. And it’s up 4%! This was to be expected. The stock is now affordable to many small investors and there is talk about it being added to the S&P500 index.

When the stock split was first announced, I had a brilliant idea to sell my baby Berks on the news and then re-buy them just before the split. I figured that the euphoria of the split news would push the stock higher and then the enthusiasm would die down and I could buy them back lower.  So the stocks that I bought at $2,550 (split adjusted price of $51) were sold at $3,500 (split adjusted stock price of $70).

My plan worked. The stock drifted down to $3,250. I would’ve been happy to buy them at $3,300. Especially since the current price is $72.25 or just over $3,600 pre-split price. Unfortunately, with my busy school schedule, I totally forgot to put in a buy order and ended up buying the stock back at $71.

Sometimes it better to not try and optimize everything! How many of you are buying BRK-B now that it’s more affordable?

The meeting started off with a humorous cartoon video of Charlie Munger running for US president. There was also a short video of Warren Buffett playing a role on tv-soap “Days of our lives” and Susan Lucci actually appeared live at the meeting.

Rather than a boring annual meeting discussing the various aspects of BRK’s business, Warren Buffett instead started fielding questions from the audience, which went on for several hours. Except for which stocks BRK was buying, no question was taboo.

Here’s some interesting points from meeting:

1. Most of what you learn about Business school is crap.

You only need 2 courses, how to value a business and how to think about stock market fluctuations. Unfortunately most professors end up teaching what they know, which consists of complex formulas and other useless stuff.

I kind of knew this, even though I am going to start B-school in the fall.

2. Develop good communication skills.

That’ll be useful in life regardless of what you do.

3. Non-professional investors should diversify their investments, both in terms of stocks and also in terms of time.

Buffett also recommended buying a low-cost index fund.

4. Be frugal, spend less than you earn, and invest a portion of your income.

5. The best investments are simple ones.

If an investment is overly complex it is usually never a good one. Buffett invested millions in PetroChina (PTR) after only reading the annual report. He realized the business was worth several times more than its current stock value and that there was sufficient margin of safety to invest.

6. Always be ethical and honest in your business deals.

All of the managers of the individual business owned by bRK are upright and ethical. As a result, Buffett doesn’t feel the need to micro-manage them and lets them do whatever they want. This fits in well with BRK’s philosophy. Whenever Buffett and Munger agree to buy a business, its set in stone. Whether there is “a nuclear explosion in New York, a flu epidemmic or Federal Chairmain Ben Bernanke runs off with Paris Hilton to South America“, the deal will go through. Yes, he actually said that.

7. Invest in yourself.

A person’s potential always greatly exceeds his realized performance. Invest in yourself and try to maximize your performance.

8. Read good books.

Two of the books Munger recommends are Yes and Influence. I strongly recommend Poor Charlie’s Almanack: The Wit and Wisdom of Charles T Munger, which is a beautiful hardcover book filled with Munger’s wit & wisdom. It also makes a great gift. One of my friends even called it one of the “all time best finance books“.

9. America is a rich country and may not need to save as much as other countries.

Maybe saving money isn’t necessary for the US, although it does look like we’re exporting ownership in US assets which is not good.

10. Financial innovation for risk diversification should be banned.

The current credit crisis and meltdown in the banking sector was caused by innovative financial products that were designed to make money for the financial institutions. Munger said that the online grocery delivery company, WebVan was a pretty asinine idea, but compared to the current bankers, those execs looked like geniuses!

11. The US Dollar is likely to weaken over the next decade.

A lot of BRK’s businesses have global sales, so a weakening dollar will result in improved profits. For example, BRK owns 200 million shares of Coke, of which 80% of its income comes from global sales.

12. We’re likely to see very high inflation over the next several years.

Inflation is bad, but BRK will profit more, than if there was no inflation.

13. Don’t buy BRK stock.

If you have time to go through the universe of stocks and pick winners, then do that instead of investing in BRK. BRK can only buy huge companies because buying a small company barely puts a dent in the annual revenue. You might be able to get better returns on your own.

Of course, there were several hours of Q & A so this is just a small tidbit. If you’d like to read the whole script you can do so at The Investment Advice of Warren Buffett.