DETTA INLÄGG ÄR ETT UTDRAG UR KVARTALSBREVET JAG SKICKADE TILL PANDIUMS ANDELSÄGARE 2 FEBRUARI 2015.
BRK was the first investment I did for the Fund. So far it has been the most successful, gaining 44% this year (including currency effects).
BRK is a holding company run by the 84-year old Warren Buffett. BRK is a diverse collection of listed and non-listed businesses in various industries such as insurance and reinsurance, freight rail transportation, finance, manufacturing, services and retailing. Most of these businesses have superior managements, strong competitive advantages and operate in stable industries.
Warren probably needs no introduction. He is rightfully regarded as one of the best investors of all time. If you had invested $10,000 with Warren in 1957 when he started his partnership the value of your shares would be worth about $630 million today. (For the period ending December 31, 2014. Assuming that you would move the money from the Buffett Partnership to Berkshire when he closed the partnership.) Putting the same amount of money into an US index had given you about $2.7 million. A pretty decent track record to say the least.
The investment thesis was simple. BRK was, and still is, slightly undervalued compared to its intrinsic value and I think it is likely that the value will compound faster than the general market in the future. When we purchased BRK it had $129,000 in cash and investments per share and the operating business produced $9,100 in pre-tax earnings per share. Applying a 10x multiple on the earnings I estimated the value per share to be $220,000, or c. 20% above to the share price at the time. Since then the value of BRK has increased but not as much as the share price, leading to a smaller discount today. For an average company the current discount would not be enough, but BRK is not average. The margin of safety in BRK lies in its ability to continue compounding its value at an above average rate over time.
Given Warren’s importance and age an important question is: what will happen when he is no longer around? I am not too concerned about it, and here is why:
- The current valuation does not include a Buffett premium so his death should not lower the value of the company.
- There is a succession plan. Warren’s job will be split into three: chairman, chief executive and chief investment officer and he has told the board of directors who he recommends. Given his track record of judging people I am confident that the managers replacing him will do a superb job. The two investment managers, Ted Weschler and Todd Combs, that Buffett has hired have already proven to be great. Their portfolios have even outperformed Warren’s.
- The culture and people. Warren has spent the last 50 years collecting great businesses and great people. BRK is filled with high quality people that share the BRK values. This enables Warren to give the managers of the subsidiaries almost complete autonomy, since he can trust that they will do what is best. (An indicator of BRK’s decentralization is that there are only 25 employees in the BRK head office. That is not much for a company employing 330,000 people.) The benefit of a strong culture is that once it is in place, it maintains itself by only attracting and keeping people that fit it. When Warren is gone, the culture and people will remain.
- The competitive advantages of the companies that BRK already owns are generally strong. Most of them will continue to compound their value with or without Warren. There is a saying that “the best business is one that even an idiot can run, because sooner or later, one will”. BRK has a lot of such businesses.
That said, Berkshire will lose Warren’s network and reputation. Berkshire will probably not to be able to do the kind of favorable deals it did during the financial crisis, when it served as a stamp of quality and safety to various companies. (During the crisis, BRK lent money to and invested in companies such as Goldman Sachs, Mars, General Electric and Bank of America. BRK was asked to invest to provide liquidity but equally important to show the market that the companies were safe and strong. ) But then again, that is not required for this investment to work out well.