Wednesday, September 14, 2011

Buffett & Munger on Berkshire's Stock

From this Bloomberg article:

Buffett Can't Get Analysts to Say Buy After Berkshire Drop

Warren Buffett's Berkshire Hathaway Inc. (BRK/A) can't get a buy recommendation from equity analysts, even as it trades in New York at the cheapest price relative to book value since March 2009.

I think the best quote award goes to the analyst in the article who said the following:

"It's the cheapest that I've seen it in a while," said Tom Lewandowski, an analyst with Edward Jones & Co., who has a "hold" rating on Berkshire shares. "It's hard for me to get really positive on that."

Geez. What would it take to get positive? For it to be more expensive than it has been in a while?

From the 1988 Berkshire Hathaway shareholder letter:

...we do not want to maximize the price at which Berkshire shares trade. We wish instead for them to trade in a narrow range centered at intrinsic business value (which we hope increases at a reasonable - or, better yet, unreasonable - rate).

The Bloomberg article goes on to point out that Berkshire is of little interest to brokerages and research firms because its trading volume is low then references this comment by Warren Buffett from the 1988 letter (I've included a slightly longer excerpt from the letter than the one used in the article):

...we wish for very little trading activity. If we ran a private business with a few passive partners, we would be disappointed if those partners, and their replacements, frequently wanted to leave the partnership. Running a public company, we feel the same way. 

Our goal is to attract long-term owners who, at the time of purchase, have no timetable or price target for sale but plan instead to stay with us indefinitely. We don't understand the CEO who wants lots of stock activity, for that can be achieved only if many of his owners are constantly exiting. At what other organization - school, club, church, etc. - do leaders cheer when members leave?

The article also mentions a comment made by Charlie Munger on Berkshire's valuation at the final Wesco Financial meeting in July.

He doesn't seem to think it's exactly expensive.

Munger apparently said:

"Berkshire's stock is at a point Buffett and I never anticipated it would go to."


"Investors owning Berkshire at current prices will do quite all right just sitting on their rear ends."

The Class A shares traded between $115,230 and $117,250 on that day.

The Bloomberg article points out:

Buffett said on Jan. 20, 2010, that Berkshire was "undervalued" in the market. That day, Class A shares traded between $100,000 and $105,001.

As I write this, the Class A shares currently trades at $ 102,300/share.

It's at least notable that Munger and Buffett would even comment on  Berkshire's stock (never mind say or imply that it is cheap). They are not exactly known for pumping Berkshire's stock in the past.*

Actually, they have historically done very much the opposite.


Long BRKb

* For example, they thought the stock was overvalued enough so in 1996 that Berkshire issued the following warning in its prospectus for the Class B Common Stock: WARREN BUFFETT, AS BERKSHIRE'S CHAIRMAN, AND CHARLES MUNGER, AS BERKSHIRE'S VICE CHAIRMAN, WANT YOU TO KNOW THE FOLLOWING (AND URGE YOU TO IGNORE ANYONE TELLING YOU THAT THESE STATEMENTS ARE "BOILERPLATE" OR UNIMPORTANT)...

The prospectus then added: Mr. Buffett and Mr. Munger believe that Berkshire's Class A Common Stock is not undervalued at the market price stated above. Neither Mr. Buffett nor Mr. Munger would currently buy Berkshire shares at that price, nor would they recommend that their families or friends do so.


In recent years the market price of Berkshire shares has increased at a rate exceeding the growth in per-share intrinsic value. Market overperformance of that kind cannot persist indefinitely.
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