Best investment adviser Richard Losch's blog

Berkshire Hathaway’s Second Quarter 2010

I, as investment manager, decided to update my version of the Berkshire Hathaway Two Column Valuation table. This is a method of valuation that Buffett has used to find an intrinsic value for Berkshire Hathaway. While this method is helpful, it is not perfect, as it tends to understate Berkshire Hathaway’s value during periods of market weakness (2008 – 2010). Now, the market has rallied off 2009 lows, and Operating earnings have become a larger factor in valuation with the Burlington Northern merger so I thought it would be interesting to take a look at an update of this table. Figures for 2010 are estimated based on including Burlington’s figures for the full year and estimating the other operating companies based on their results for the first half.

Berkshire Hathaway Performance

In view of the fact that the recent rally is not based only on earnings improvement, and that the hurricane season has not generally been a strong period for the stock, it is likely this rally will be temporary. We reduced our overweight position in Berkshire Hathaway for two reasons. First, the recent correction in the overall stock market has left us with a lot of good quality stocks that are currently selling at attractive prices, and second, the prospect of a bad hurricane season, and/or a lot of petroleum sloshing around in the Gulf of Mexico may provide us with an attractive re-entry price for Berkshire Hathaway.

Long Term Greedy

As long as there are markets, there will be bubbles; and all bubbles end with a crash. Economics is the study of human behavior and markets are a product of that behavior. So, Markets are not efficient and often not very rational. In October of 2007, the Dow and the S&P were making all time highs at a point when disaster was inevitable.

Goldman Sachs

Lewis thinks that Goldman Sachs should be broken up and that it’s high risk businesses sold to hedge funds. Lewis thinks that compensation plans for traders need to reflect the risks the traders are taking. He says that high-risk trades belong in a partnership because then the people taking the risk have all of their own skin in the game. Losch Investment Management Company do not know if this is realistic but have to admit it sounds like a good idea. It would be similar to Buffett’s idea that CEOs of busted banks should end up broke. But Lewis’s solution would be more effective because this way all of the big players — not just the CEOs — would end up broke.

Berkadia and Leucadia

At the end of 2009, we became a 50% owner of Berkadia Commercial Mortgage (formerly known as Capmark), the country’s third-largest servicer of commercial mortgages. In addition to servicing a $235 billion portfolio, the company is an important originator of mortgages, having 25 offices spread around the country. Though commercial real estate will face major problems in the next few years, long-term opportunities for Berkadia are significant.

USG corporation

Based on recent earnings reports, USG corporation could be classified a “dead man walking”. In 2008 the USG Corporation reported a loss of $4.67 per share. Then for 2009 they followed with a loss of $7.93 per share, and the casual observer might be justified in their belief that USG corporation had so much fun in bankruptcy that they have decided to try it again. However the negative earnings were mostly the result of non cash restricting charges and a look at the company’s balance sheet gives us a somewhat different picture.

Berkshire Hathaway 2009 2010

Whitney Tilson estimates that Index funds will purchase $38 billion of Berkshire Hathaway’s stock when it enters the index. This is much larger than Buffett’s estimate of $9 billion, and S&P’s estimate of $12 – $14 billion (see the enclosed article) obviously the stocks entry into average could have a big impact on the stock price. How much of that impact has already been incorporated into the stock’s price is hard to estimate, but in any event February 12th could be an interesting day.

Why Capitalism Works

If I, as investment manager, were writing a story about Minsky’s theory, my slant would be a little different. The title of the essay would be “Why Capitalism Works”, for it is my belief that the business cycle, and the hard lessons that trail in the wake of the economy that has gone off a cliff, are what make capitalism work. A crash provides a nice ego haircut for those egos most in need of a trim, and also provides a reliable antidote to the terminal arrogance that is a part of the human condition at the top of the market.

The Lords of Finance

It should be on the must read list of anyone interested in understanding this particular economic collapse and macro economic cycles in general. More than this, the narrative suggests some very interesting parallels to events going on today. This book offers a perspective that is new and many ways quite different than most of what has been written previously.

Berkshire Hathaway - The $44 Billion Dollar Train Set

Berkshire Hathaway’s 3rd Quarter. Newly arrived in Omaha, 73 years late, but just in time for Christmas a shiny, but not exactly new train set. There may be a bit of a problem placing this package under the Christmas tree because it comes complete with 6,500 locomotives 83,000 freight cars and approximately $2.1 billion in net income.


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