Questor investment trust bargain: Berkshire Hathaway, the investment vehicle of the ‘Sage of Omaha’, has become ‘the S&P 500 without the bad bits’ – with its shares trading at a discount
We are taking a slight liberty with the column this week: the portfolio we feature is not strictly speaking an investment trust and it is not trading at a discount – our normal yardstick for a “bargain”. Or not on paper, at least.
But Berkshire Hathaway, the giant American conglomerate run by Warren Buffett and Charlie Munger, has much in common with an investment trust. And there is good reason, judging by Buffett’s own actions, to think that its shares are trading, in effect, at a discount.
Buffett made his name by buying stakes in companies at what turned out to be less than their true value and holding on to them for the long term. Berkshire Hathaway doesn’t pay dividends, so its value has compounded dramatically. But it has become so big – its market value is more than $500bn (£390bn) – that it has ended up owning stakes in a huge swathe of the American stock market.
In addition, it owns a large insurance business, other operations and some unlisted holdings, as well as $100bn in cash. We could therefore liken it to a multi-asset investment trust.
“It’s a good mix of assets,” said Charlie Morris of Atlantic House, the fund manager. He said Berkshire Hathaway’s portfolio of quoted stocks was “not that dissimilar to the S&P 500 index – except that Buffett is clever enough to leave out the bad bits”.
“He uses his common sense and his nose for hokum to avoid poor companies and instead puts money into stocks run by competent, honest people,” Morris said. “He steers clear of the unprofitable, the heavily indebted and the speculative.”
So Berkshire’s pool of assets may well resemble a conservatively run investment trust. But is it really trading at a discount?
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At first sight the answer is no: the company’s market value is more than its “book value”, which equates to the net asset value of an investment trust. In fact, the former exceeds the latter by about 35pc. But that is not the whole story.
Buffett often keeps the book value of his unlisted holdings at the price he paid, even when their true value is likely to have increased over time. This means that Berkshire’s true value could be much higher, possibly higher than the market value. If this is the case, its shares will be trading at a discount.
“No one can say for sure what the real value is but there is evidence that the shares are indeed at a discount in the fact that Berkshire has been buying back its own shares,” Morris said.
No investment trust buys back shares unless they are at a discount because otherwise it would be paying more for the shares than they are worth. Buffett is far too canny to make that mistake.
However, as this column has pointed out several times, buying a quoted portfolio at a discount is no guarantee of future gains because a discount can always widen. However, Berkshire’s premium to “official” book value has been far higher in the past – it was 170pc in 1998, for example.
Morris also pointed out that, while Berkshire’s shares had tended to rise and fall roughly in line with the S&P 500 since about 2002, they were currently trading towards the bottom of their range relative to the index.
We can also say that, if Berkshire’s shares have tracked the index while its premium has shrunk dramatically, it follows that the actual portfolio has outperformed strongly, even at the official book value.
The company has another advantage: it can invest the premiums earned by its insurance arm in its portfolio of assets. This is in effect free money, “akin to the gearing used by investment trusts but at zero cost”, Morris said.
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Investors should bear in mind that Buffett and Munger are hardly spring chickens at 88 and 95 respectively and can’t be expected to run the company far into the future. However, successors have been chosen and are already involved in its management.
Morris summed up Berkshire Hathaway as follows: “It’s no longer about huge outperformance, it’s a pot of assets. It’s a very nice long-term way to own America.”
Be sure to buy its “B” shares; the “A” class would set you back about $310,000 for just one share.
Questor says: buy
Ticker: NYSE: BRK.B
Share price at 5.30pm: $203.41
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