In Search of the Buffett Premium
Thoughts on Berkshire Hathaway's long term future
“If I died tonight, I think the stock would go up tomorrow. And there’d be speculation about break ups and all that sort of thing. So, it would be a good Wall Street story that, you know, this guy that’s obstructed breaking up something that — where some of the parts might sell for more than the whole. They wouldn’t necessarily be — probably be worth less than the whole — but might sell for — temporarily — for more than the whole. And it would happen. So I would bet in that direction.”
— Warren Buffett, 2017 Berkshire Hathaway Annual Meeting
When I purchased my first shares of Berkshire Hathaway nearly twenty-three years ago, Warren Buffett was 69 years old. Shortly before his seventieth birthday, Mr. Buffett was hospitalized for surgery to address was turned out to be a benign condition. Suffice it to say that Mr. Buffett’s health has been a perennial concern for Berkshire Hathaway shareholders for at least the past quarter century.
Conventional wisdom is that Berkshire Hathaway shares have enjoyed a “Buffett Premium”, and perhaps that was the case in the past. However, since the financial crisis, Berkshire shares have consistently traded at a lower price-to-book ratio than before the crisis. This became glaringly apparent during the summer of 2011 when the shares briefly approached book value before Berkshire announced a repurchase program that, in retrospect, put a floor under the stock at 110% of book value. Today, Berkshire has an open ended repurchase program without a price-to-book limit.
For three months starting in December 2010, I worked on a report that I named “In Search of the Buffett Premium” which was released on March 1, 2011 shortly after Berkshire’s 2010 annual report. Perhaps some of you are longtime readers of The Rational Walk who purchased the report when it came out, but I suspect most of you have not seen it. Granted, it is now twelve years old, but it seems appropriate to post it here on Rational Reflections for those who might get some value out of it:
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At the 2017 annual meeting, Warren Buffett seemed to say that there was no “Buffett Premium” in the stock at the time. As ridiculous as it might seem, I think Mr. Buffett is correct in his assessment that the stock might actually go up when a new CEO is eventually named, whether that comes about due to his death or retirement. The “story” on Wall Street will be all about Berkshire’s value on a sum-of-the-parts basis and investment bankers will be salivating over the fees they might be able to charge for spinning off various subsidiaries. Attorneys charging four figures per hour will not be far behind the investment bankers.
For many reasons, I doubt that Berkshire will be broken up for many years after Mr. Buffett is no longer in the picture. Although I have serious concerns about how voting control of Berkshire is likely to change over a long period of time, nothing is going to change immediately. Mr. Buffett’s estate will control a huge block of Class A shares for many years after his death, and those shares, along with a strong board with skin in the game will prevent any precipitous actions driven by short term motives.
In the very long run, how the Berkshire Hathaway story turns out is not knowable. I have a great deal of confidence in how the company will be run in 2030 but not much confidence in what the situation will look like in 2050 or 2060. It is too much to expect Warren Buffett and Charlie Munger to ensure the future of Berkshire Hathaway decades after they are no longer in the picture. Anyone who has prepared a personal estate plan knows that it is neither possible nor wise to try to fully control events decades in the future from the grave. That’s even more the case for the future of a major enterprise like Berkshire Hathaway.
Those of us who have been longtime shareholders will have to keep an eye on the situation in the future and oppose short-sighted attempts to boost the stock price in ways that will actually destroy intrinsic business value. This can be done through the ballot box, albeit with the disadvantage most individual investors have who can only afford to own Class B shares which have limited voting rights. It can also be done by writing about the company which I intend to continue doing myself along with many others. Berkshire is a great American success story with a unique way of doing things. Let’s hope that there aren't books being written in 2053 about how it all fell apart.
For more on Berkshire, check out the Berkshire Hathaway Resource Page on The Rational Walk and stay tuned for content on the upcoming annual report as we get closer to the end of February.
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Disclosure: I own shares of Berkshire Hathaway.
Another great Substack for Buffett and BRK news, and one we highly recommend, is Kingswell.
Great write up Ravi. The valuation section was useful in calibrating my own little model.
Will be interesting to see how the Alleghany acquisition folds into the aggregate. With BRK priced around 1.5 x trailing BV, it looks fully priced.