Buying Berkshire

I’m not really a stock-market kinda guy, but there’s a handful of individual stocks, foremost among them Apple, which seem to be able to transcend financial-asset status and be of interest to a much broader audience, including me. And one of those stocks is Berkshire Hathaway.

Berkshire’s interesting because it’s in many ways a publicly-listed conservatively-managed hedge fund, using an enormous quantity of policyholder cash from its insurance operations to make solid long-term investments. Nadav Manham made the excellent point yesterday that no one should invest in a hedge fund unless that hedge fund can compellingly persuade you that it will outperform Berkshire: he calls it the "Berkshire hurdle".

Along the way, Nadav said that "Berkshire’s stock price, $111,770 as we speak, certainly does not seem overvalued, and may in fact be significantly undervalued."

And Whitney Tilson, in today’s email blast, quotes a message-board posting saying that although Berkshire shares could certainly fall further from here, every time (such as now) that they’ve dropped more than 25% from their highs, they’ve gone on to perform spectacularly well the following year.

All the same, to the old Berkshire risks (a hurricane hitting an urban center on the East Coast, or Warren Buffett falling under a NetJet) must now be added a whole bunch of new Berkshire risks, which Todd Sullivan convincingly lays out.

For one thing, the firm is long the financial-services industry generally – not just Moody’s, which reported a 48% drop in net income today, and which, if sense prevails, will become increasingly irrelevant over the long term. Berkshire also has large long-term holdings in American Express, Wells Fargo, Bank of America, US Bancorp, and M&T Bank, one or more of which could easily find themselves in serious trouble if the current credit crisis gets worse rather than better.

Add to that Berkshire’s exposure to the housing industry, via shareholdings in public companies (Home Depot, Lowes, USG) and wholly-owned subsidiaries (Shaw Industries, Clayton Homes, Jordan’s Furniture, Benjamin Moore, Home Services, Acme Brick), and it all adds up to a decidedly dodgy outlook over just about any time horizon.

And yet: Berkshire’s shares still trade above the $110,000 level which they were bumping up against for the entire first half of 2007, before the credit crunch hit. Yes, they’re down from their silly December highs. But I can’t shake the feeling that if $110,000 was as rich as Berkshire got in the first half of 2007, the company’s valuation today should be substantially lower.

All the same, if you’re thinking of investing in a hedge fund which concentrates in US equities with a little global diversification, then you’d probably be well advised to consider simply buying Berkshire shares instead. With the smart money beginning to go long rather than short, why not simply buy the stock that many value-oriented hedge-fund managers invest in, and cut out the middleman? The risk of a blowup is lower, and there’s a non-negligible chance that you could make a very large amount of money indeed.

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