Thus, ironically, while Berkshire’s stock is down 30.1% since the beginning of 2008 (-31.8% in2008 and up 2.5% this year), the company’s intrinsic value has actually risen.Berkshire Hathaway reports earnings on Friday and we are confident that it will be a blowoutquarter. Operating earnings of the wholly owned businesses will be mixed: the largestbusinesses, insurance and utilities, probably held up well, but businesses exposed to theconsumer likely did poorly so, in aggregate, earnings should be around $1.0 billion. In addition,investment income should add another $1.2 billion.The truly exciting news is in Berkshire’s investment portfolio, which we calculate grew by over$8 billion in the quarter. This gain was driven by stock appreciation as well as gains in warrants(mostly Goldman Sachs) and the conversion feature in the Swiss Re fixed income investment.Another contributor was the Chinese company, BYD, a $230 million investment that is nowworth over $2 billion. Finally, the equity put contracts generated another roughly $1 billion of gains.In total we expect that Berkshire’s book value grew by approximately $9 billion (after taxes), orapproximately $6,000 per A share. This represents an 8% gain in book value for the quarter,resulting in book value of $80,000 per share, an all-time high for Berkshire. We believe thecompany has never been worth more. We believe Berkshire’s intrinsic value is approximately$135,000/share, a 36% premium to today’s price of $99,000.We believe Berkshire is safe, cheap, growing nicely and has a near-term catalyst (the quarterlyearnings), so that’s why it’s among our largest positions.
Our Presentation at the Value Investing Congress
At the Value Investing Congress on Tuesday, October 20
th
, we presented our latest work on thehousing/economic crisis and shared our best long and short investment ideas: Iridium and thehomebuilders, respectively. Attached are the slides we presented.Regarding the former, we think Iridium is a very good business, will be able to grow at a highrate for many years, and the stock, at around 4x EV/EBITDA, is a steal. As for homebuilders(many of the specific stocks are noted on the previous page), we think the national housinginventory overhang today totals nearly 10
million
homes, almost two years supply, and thisnumber is still growing every month. Needless to say, therefore, we see little need for any newhomes, which simply exacerbate the already severe excess inventory problem. We believe thatthe fundamentals for homebuilders are dreadful and will remain so for years, yet the stocks haveroughly doubled since March based on the belief (mistaken, we think) that the housing marketand housing prices have bottomed. When investors realize this is not the case – likely within thenext few months – we see substantial downside in these stocks.
Tax Estimates
As we do every year, we asked our bookkeeper to prepare tax estimates for the fund reflectingrealized gains and losses as well as interest and dividend income through September 30
th
. Whileevery investor’s report will be different, the estimates show modest short-term realized gains,which are more than offset by somewhat larger long-term realized losses. In other words,despite our fund’s substantial gains this year, it had net realized losses through September 30
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.
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