To many investors, Warren Buffett is over the hill. At 83, they
say, he has lost more than a few steps. Over the past five years,
the Class B shares of Berkshire Hathaway (
), the sprawling conglomerate he presides over, returned an
annualized 14.8%--an average of 3.9 percentage points per year less
than Standard & Poor's 500-stock index. There's nothing cutting
edge about the insurance companies, railroads and utilities
Berkshire owns. What's more, when Buffett leaves Berkshire, who
will manage the company?
To all that skepticism, Matthew Coffina, editor of Morningstar
Stock Investor, says, essentially, "nuts." I couldn't agree with
Sure, Berkshire's stock will lag in powerful markets, as it has
in the current one. But Coffina says Berkshire will handily beat
the S&P 500 in flat and down years. Overall, he predicts that
Berkshire will return roughly 10% annually over the next ten years,
and that should easily outpace the S&P 500.
Coffina has made Berkshire the largest position--10.9%--in his
newsletter's model "tortoise" portfolio. (The newsletter also has a
"hare" portfolio, which consists of slightly more-volatile stocks.)
At its current price of $122, Berkshire shares are $21 below
Morningstar's $143-per-share estimate of Berkshire's fair value.
With so few stocks selling below what Morningstar analysts consider
to be fair value, Berkshire looks like a steal. (Unless otherwise
noted, prices and returns are as of April 11.)
Berkshire's long-term record is astounding. Berkshire
high-priced Class A shares have returned an annualized 20.7% since
Buffett took over the company in 1965. That's more than double the
return of the S&P 500. Ancient history? Since October 9, 2007,
just as the catastrophic 2007-09 bear market was getting under way,
Berkshire has returned an annualized 6.3%, an average of 1.7
percentage points better than the S&P index. (Berkshire's Class
B shares came into existence in 1996.)
But Buffett doesn't focus on share price as much as he does on
book value (assets minus liabilities), his preferred method of
figuring his company's performance. From 1965 through the end of
2013, Berkshire's book value has compounded at an average annual
rate of 19.7%. That said, Buffett believes that book value
underestimates the "intrinsic," or true, value of his company by a
"meaningful amount." He has said that Berkshire, which is awash in
cash, will buy back shares when they fall to 120% of book value, or
Buffett's buyback plans, Coffina says, "put a psychological
floor under the stock, not that far below where we are
Perhaps the biggest question on the minds of Berkshire
shareholders is who will replace Buffett and Vice Chairman Charlie
Munger, who are both in their 80s, when they leave the scene.
Buffett has hired two talented stock pickers, Ted Weschler and Todd
Combs, to manage Berkshire's massive stock portfolio; each already
manages $7 billion worth of Berkshire assets. The bigger issue will
be who runs the rest of the company. Buffett and the Berkshire
board say they have a plan in place and have identified potential
successors, but haven't disclosed any names yet.
No doubt Berkshire's price will plunge when Buffett announces
his retirement or dies. But Coffina says Buffett is "taking the
right steps to ensure that Berkshire's culture endures." He adds:
"Berkshire has assembled a unique collection of businesses with
solid management, sustainable competitive advantages and the
ability to compound intrinsic value for years to come."
Buffett likes to say that he stays within his "circle of
competence" when buying stocks or entire companies. That has led
him to avoid technology altogether. The empire he has built
contains an enormous number of companies in a variety of
Berkshire's "crown jewels," says Coffina, are in its insurance
businesses: Geico and reinsurers General Re and Berkshire Hathaway
Reinsurance. Berkshire's financial strength gives it the capital to
underwrite risks that most firms can't--or won't--touch. Coffina
says Berkshire's underwriting discipline and investing discipline
distinguish it from competitors.
The insurance businesses allow Buffett to invest money during
the often lengthy period after premiums are received but before
claims must be paid out to policyholders. This "float" now stands
at $77 billion.
Outside of insurance, Berkshire owns the Burlington Northern
Santa Fe railroad and utility MidAmerican Energy, in addition to a
hodgepodge of other businesses. Among the more recognizable names:
Fruit of the Loom, Benjamin Moore paints, Shaw carpets, Dairy Queen
and Clayton Homes.
To get a sense of just how sprawling Berkshire is, the 30-plus
newspapers it owns represent no more than a rounding error in the
company's $222 billion book value.
Coffina puts it well: "Berkshire's existing businesses can stand
on their own. Although I think management will continue to add
value for shareholders through new acquisitions and investments,
this isn't necessary for Berkshire to be a worthwhile holding."
Plus, of course, Berkshire has major stock holdings in such
companies as American Express (
), Coca-Cola (
), International Business Machines (
) and Wells Fargo (
My bottom line: Buffett is to investing as Albert Einstein was
to physics. Buffett may well be past his prime, but Einstein was a
pretty smart old man, too.
Steve Goldberg[/Link] is an investment adviser in
the Washington, D.C., area.