Here’s a link to an article regarding Berkshire Hathaway’s valuation. Traditionally Berkshire has traded at between 1.3-1.8 times book value. The reason for this is that the majority of the market capitalization was represented by Buffett’s investment portfolio which are marked to market, therefore any valuation in excess of book value represents what is known as the “Buffett Premium.”
As Berkshire has grown the business has changed dramatically as they have purchased huge operating companies such as Burlington Northern, Marmon Group, various utilities businesses, and top of the line insurance companies such as Geico and General Re. These non-insurance entities should trade at 2-3 times book value if you look at comparable valuations, but this change in the composition of Berkshire’s earnings and assets is not reflected at current prices.
For many of you we own Berkshire stock and have created a substantial artificial dividend by selling calls way out of the money which is working out quite well. For others we have taken advantage of Buffett’s willingness to buy back his own stock around book value which is just below $70 per share. To do this we have sold puts at $70 or below which are extremely unlikely to be exercised, and if they did would represent huge value in that Buffett would likely be buying back stock at hugely accretive prices. While Berkshire isn’t likely to double in the next 3 years like many of our other investments can, I think you can expect 10% returns over the next decade by owning the stock at this valuation, particularly by employing the effective utilization of covered calls. Many of Berkshire’s business are related to the housing industry so I’d expect to see earnings growth accelerate as housing recovers over the next 3-5 years. The internal businesses are great on their own and I think the stock price already assigns absolutely no premium for the one of a kind investment skills that Buffett possesses. As always if you have any questions please don’t hesitate to ask!
INVESTING IN THE FINANCIAL MARKETS INVOLVES RISKS. OPTIONS ARE NOT SUITABLE FOR ALL INVESTORS.