Friday File — More Berkshire, and some Good Friday Musings about Bad Performers

By Travis Johnson, Stock Gumshoe, March 25, 2016

We’re just about shut down here at Stock Gumshoe HQ for the market holiday today, but I do have some updated thoughts and musings for you about a few of the companies I own and write about with some regularity: Leucadia (LUK), Medical Properties Trust (MPW), and Fosun (FOSUF).

And I should also update you on the one small change I made to my portfolio this week: I bought a little bit more Berkshire Hathaway (BRK-B). We’ll start with that — the Berkshire annual report and Warren Buffett’s annual letter came out a couple weeks ago, and give us an update on valuations for the mega-conglomerate.

I like to look at Berkshire Hathaway’s valuation in two ways — shorthand, by using book value and calling it a “buy” whenever it gets to 1.25X book value or lower, because there’s a very strong chance that Berkshire will do substantial share buybacks if the price gets down to 1.2X book value or below. Downside at valuations like this is limited, unless you believe that many of Berkshire’s businesses (railroad, utilities, industrial companies, major positions in publicly traded stocks) will fall substantially in value at the same time. Right now, the price/book valuation is about 1.35 as the stock has been moving up with the market, so I didn’t make a major move into more shares but did bump up my position a little bit.

And the other way to think about Berkshire’s valuation is a little bit more complicated, but not terribly so — you basically take the market value of all their publicly traded stock (leaving aside the inconvenience that Berkshire would have major tax obligations if they sold them all), and add the value of all of Berkshire’s fully owned companies by taking the earnings that Berkshire reports on those companies and applying some conservative PE ratio to those earnings.

Berkshire’s cash and investments stood at $158 billion as of the end of 2015, of which $66 billion was funded by “float” that doesn’t actually belong to Berkshire. GAAP Accounting requires that this float be considered a liability, but free access to a rolling source of funds (from new policies and renewing policies that replace existing policies, at theoretically similar underwriting cost) is also, conceptually if not accounting-wise, an asset, particularly because Berkshire’s insurance operations are so consistently profitable (meaning, the float never shrinks because ...

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