Investing Ideas

Berkshire Hathaway is my biggest stock holding Its “The Security I Like Best”. A lot of people ask me what Berkshire is worth in my opinion. I say the class B shares that are trading at $3100 are easily worth $4000+ (A shares would be $120,000+). How did I come up with the number? Berkshires cash and cash equivalents holdings are valued at cash value. Berkshires equity holdings are valued at market value. Then i value individual business units based on P/E multiples given to comparable companies by the stock market.

Market Cap of Berkshire Hathaway = 145 Billion
Value of Individual Berkshire Parts = 196 Billion (Based on the Interim 2nd quarter report. Numbers used are 6 Months Net Profits *2 for full year estimate values)

• Cash and Cash Equivalents - 42 Billion
• Equity Holdings - 52 Billion
• Subsidiary Insurance companies - 4.372B * 12PE = 52.464B
• Subsidiary Utilities and Energy - .782B * 14PE = 10.948B (Pacificorp excluded)*
• Subsidiary Manufacturing , Services and Retailing - 1.864B * 16PE = 29.824B (Iscar/Russel Atheletic excluded)*
• Subsidiary Finance and Financial Products = 0.744B * 12PE = 8.928B
• Investment and Derivatives gains = 0.8B (Excluded)**

The company has a 35% discount to its actual value (I think it should have a 10% Warren Buffet premium).
Based on this valuation class B shares of Berkshire should sell for $4200 and class A shares for $126,000.

* Berkshire has just acquired PacificCorp, Iscar Metalworking and Russel Atheletic but the earnings of these companies is not part of berkshire earnings yet.

** Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on periodic earnings. However, such gains or losses usually have little, if any, impact on total shareholders’ equity because most equity and fixed maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income. - From the Report

Conflicts: I own Shares of Berkshire Hathaway

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Google is the king of search engines but its kingdom under attack. The invaders are Microsoft’s Windows Live, Yahoo and the newly renamed kid on the block Ask.com.

Google’s advantage: At one time most search engines used to display a list of pages containing the search words without ordering the results by importance. The results were like searching for a needle in a bale of hay instead of a haystack, better but still a pain in rear. Then along came Google and its page rankings, the hay was gone. It has taken years for Yahoo, MSN and Ask.com to realise the importance of ordering results by importance and developing the infrastructure and algorithms to provide results comparable to Google.

Search by definition is imprecise since the search engine has no clue what you’re really thinking about. If you type in Apple are you searching for the Fruit or the Company? The search engine has no idea, neither do the advertisers. The only person that knows is you. Google still returns better results but the difference is negligible.

Yahoo: Losing to Google
Lets get this one out of the way. Yahoo is getting its ass handed to it on a plate by Google. Its losing to Google in every aspect from search, functionality, user experience and on the financial side too.

Microsoft: The threat from Vista
The Microsoft threat is not from its search engine but from Internet Explorer 7. Here is a quote from the Internet Explorer features page

“Internet Explorer 7 brings your favorite web search providers to you. With the built-in search box, you can search the web at any time without having to open a search provider page. You can display search results in a separate tab, and then open the results in other tabs to quickly compare sites and find the information you want. You can even customize your search by setting your favorite search provider as the default.“

As most of you have probably guessed the “default search provider” is Windows Live. What a surprise. So every installation of Vista is potentially a lost user for other search engines. Most users wont bother to change search engines if the default one gives results that are good enough. Search engines can negotiate deals with PC manufacturers to get their search engine set at the default. This will cost money since HP, Dell, Sony wont be providing the service for free. Any future re-installs on these computers from a retail copy of Vista will reset the default back to Windows Live.

Easy to access was another minor advantage that Google had. Type in Google and hit Ctrl+Enter to go to the Google site was easier than “search.msn.com”. Now you just need to type in “live” and hit Ctrl+Enter to get to the Microsoft engine.

Ask.com: A better user experience
Search engines are no longer about getting users a relevant result. All search engines do that. Engines need to differentiate themselves by providing unique features and assisting their users manage the results. Ask.com has done a phenomenal job of differentiating itself. Personally I love the binoculars which give a quick view of the site in a pop-up. I also like the “Narrow your Search”, “Expand your Search” and “Related Names” sidebars. Ask.com also has a nice feature (probably from when it was called AskJeeves.com” where you can ask a question and it will try to answer the question along with providing search results. For all of these reasons Ask.com is the fastest growing search

Conclusion: Google is a good company with good earnings and growth but its dominance is under threat from Microsoft and Ask.com. I prefer IACI for its Ask.com search engine which has a better user experience and is growing faster than Google. While Google is a one trick pony IACI has a diversified economic float and a brilliant CEO in Barry Diller.

Conflicts : I own shares of Microsoft and IAC/Interactive Corp

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A great man once said “If you dont know money, know your money manager”.

If you think you, your money manager or your mutual fund can beat the market youre probably wrong. Sixty five percent of mutual funds wont beat the S&P 500 this year. Most of the ones that do beat it will fall short next year. Why invest in a mutual fund that cant beat the market? You can easily invest in an index fund.
So you still want to beat the market? If you cant beat the market find someone who can. The last thing you want is to be invested in a high flying fund just as its about to dive. You need a money manager who can beat it consistently and has proven it over long periods of time. There are other money managers that i consider superinvestors like George Soros and Bruce Sherman but it is not possible for the average investor to invest with them so they have been excluded. I must mention Masters’ Select Value a mutual fund that is a favourite of mine. Three of its Four money managers Bill Miller, Bill Nygren and Mason Hawkins are in my favourites list. Its a great way to get exposure to multiple superinvestors in 1 mutual fund.

Take a look at my favourite money managers. Most of these superinvestors have beaten the S&P over long periods of time (10 years or more).
Individual Stocks
Warren Buffet: Berkshire Hathaway (BRK.A, BRK.B)
Eddie Lampert: Sears Holdings
My personal preference here is Berkshire Hathaway. It is better than Sears holdings in virtually any comparison.

The 3 dollar Bills
Bill Gross: Pimco Bond Funds (Too many funds to name)
Bill Nygren: Oakmark Select
Bill Miller: Legg Mason
I find it hilarious that my 3 favourite mutual fund managers are all named Bill.

Additional US Funds
William Danoff: Fidelity Contrafund
Joel C. Tillinghast: Fidelity Low Priced Stock
Harry R. Hagey: Dodge and Cox
Ken Heebner: CGM Focus/CGM Realty
Mason Hawking: Longleaf Partners

International funds
Charles de Vaulx: First Eagle Global
Riad Younes: Julius Baer International

There are too many great mutual fund managers and i wanted to keep my list small. I feel that some names need to be mentioned even if they are did not make my favourites list. Here are a few more brilliant managers and management teams

Richie Freeman: LeggMason Partners Aggressive Growth
Christopher Davis: Davis New York Venture Fund
John Calamos: Calamos Growth Fund
Wally Wietz: Wietz Partners Value Fund
Jeffrey Bruce: Bruce Fund
Oakmark International
Dodge and Cox International
Matthews Pacific Tiger

Conflicts : I have investments in Berkshire Hathaway, Fidelity Contrafund and Fidelity Low Priced Stock

Confession: I am the great man who said “If you dont know money, know your money manager”.

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What if i told you there was a mutual fund with one of the best money managers in the world and had returned amazingly consistent growth every year for decades. What if i said that the fund had the flexibility of investing usually found only in hedge funds. What if i also told you that the fund had no load, administrative or management fees. The fund is diversified across sectors and also invests internationally. It holds stocks, complete companies, bonds and foreign exchange. The fund manager puts all of his own money in this very mutual fund thus completely aligning his interest with the mutual fund holders. As an added bonus the fund will never have distributions which force you to pay tax even if you still hold the shares.

The name of this amazing mutual fund is Berkshire Hathaway but its a stock and not a fund. Lets look at the company in detail regarding the claims I made.

Manager: Warren Buffett Nicknamed the “Oracle of Omaha” or the “Sage of Omaha”, Buffett has amassed an enormous fortune from astute investments, particularly through his company Berkshire Hathaway, in which he holds a greater than 38% stake. With an estimated current net worth of around US$42 billion, he is ranked by Forbes as the second-richest person in the world, behind only Microsoft chairman Bill Gates.

Returns: Since 1965 the company has averaged 21.5% returns in per share book value. This is one of the best returns for any company or mutualfund over any large period of time (10 yrs+). During the same period of time the S&P index has returned 10.8% and most mutual funds perform worse than the S&P.

Expenses: Mutual funds have a bunch of expenses and fees. Initial sales fees, Deferred and Redemption fees cut into your investments. The fees I mentioned are incurred only once. There are also Administrative, Management and 12b-1 fees that are charged anually whether the mutual fund makes you money or not. Since Berkshire Hathaway is a stock there are no fees. Warren buffet recieves no stock options and has an annual salary of $100,000.

Diversification: Berkshire Hathaway by defenition is a holding company owning subsidiaries and stocks engaged in a number of diversified activities.

Major stock holdings: American Express, Ameriprise, Anheuser Busch, Coca-Cola, M&T Bank, Moody’s, Petrochina, Proctor & Gamble, Wal-Mart, Washington Post, Wells Fargo, White Mountain Insurance

Minor stock holding: ConocoPhillips, General Electric, United Parcel Service, Nike, Home Depot, Costco

Major Subsidiaries: GEICO, General Re, National Indemnity, MidAmerican Energy, Iscar Metalworking

Minor Subsidiaries: Clayton Homes, Acme Brick, Ben Bridge Jewellers, Benjamin Moore, Borsheims Fine Jewellery, CORT Business Services, Fruit of the Loom, Garan, Helzberg Diamonds, HomeServices of America, Dairy Queen, McLane Furniture, Nebraska Furniture, Netjets, Pampered Chef, Sees’ Candies, Shaw Industries, Wesco Financial and more

Flexibility: Mutual Funds are restricted in what they can invest. Most funds are restricted by the valuation (Value vs Growth), Geographic (US vs International/Emerging Markets), type of Instrument (Stocks/Bonds/Currency). Berkshire Hathaway has no such restriction. It can invest in any type of Company anywhere in the world. It can also invest in any form of investment.

Taxes: Mutual funds are forced by law to distribute at least 90% of its’ realized capital gains and dividend income each year. You then have to pay taxes on the distribution. In the case of Berkshire since you just buy or sell the stock of a company, you only need to pay capital gains taxes when you sell the stock. In the meantime Berkshire can compound your money for you.

Conclusion: A company run by the best money manager of our time. It has the diversification of a mutual fund, flexibility of a hedge fund and the cost and tax advantages of a stock.

Conflicts - I own class B shares of Berkshire Hathaway.

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