Berkshire Hathaway is Cheap

Investment Manager's Letter March 2000

Successful investors know it is the decisions that they make in bear markets that yield the bulk of their long-term gain. While the current market can not be described as a bear market in the classical sense, it is beginning to offer opportunities for taking positions that can last for a very long time. As all of you know, Berkshire Hathaway has been one of my favorite stocks for many years. I, as investment manager, have sent out much material describing the gains that have accrued to long term holders of this stock. Now a crazy market has presented us with an opportunity to purchase one of the very best companies in American at a very cheap price. While this is having a negative impact on Losch Investment Management Company's portfolio values at the moment, the upside is we are presented with a very rare buying opportunity. The decline in value should not be a concern to long term holders because the stock will not be sold at this level. Long term clients of Berkshire Hathaway have held the stock for as long as thirteen years, and I, as investment manager, expect to still be holding today's positions thirteen years from now.

There have been only three other corrections of this size in Berkshire Hathaway since Warren Buffett assumed control of the Company in 1965.

Table one Major Corrections

Year

High

Low

Percentage Correction

1973-1975

$90.00

$32.00

58%

1987

$4,270.00

$2,250.00

40%

1990

$8,900.00

$5,500.00

38%

1998-2000

$84,000.00

$43,000.00

49%

As you can see, the current correction the second largest, in percentage terms, since Warren Buffett bought the company. But what about the good part? What happened in the 10-year period after each previous correction?

Table Two The Recovery

Year

Low

Price 10 Years Later

Gain

1975

$38.00

$2600.00

5840%

1987

$2550.00

$50,000.00

1861%

1990

$5500.00

$84,000.00

(Recent high, not ten years yet.)

1427%

The average 10-year gain from the three bear market lows has been 2827%.

$44,500 times 2827% equals $1,258,015.00 per "A" share.

Do I, as investment manager, think Berkshire Hathaway "A" stock will sell for $1,000,000 in ten years? Probably not. Do I, as investment manager, believe Berkshire Hathaway will outperform the S&P for that ten-year period? … yes. Do I believe that Berkshire Hathaway will outperform 99% of all tech stocks for the next ten years? … absolutely. With history as my guide I, as investment manager, would guess that many of the stocks that are the favorites of today's market will not be around in ten years, at least in their current incarnation. Further I feel that valuations of the tech sector are so high today that many of the companies that are still around in ten years, will be worth less than they are today.

I, as investment manger, am sure you have noticed recent purchases of Berkshire Hathaway in your account. These purchases have brought Berkshire Hathaway to a level in most of Losch Investment Management Company's accounts that preclude further purchases without creating an imbalance. Since I consider price represents a rare opportunity I, as investment manager, would recommend that those of you with substantial assists outside your Losch Investment Management Company account, consider further contribution to your account to allow further purchases of Berkshire Hathaway.

There is of coarse no guarantee that the current correction will not continue. My, as investment manager, feeling about the overall market is still bearish. For those segments of the market that have not yet corrected, I think the risks are enormous. But you do not buy the market. You buy companies, and Berkshire Hathaway has unique characteristics that allow it to move against the market. The value today is the best that it has been since 1983. Yes, I, as investment manager, can go lower, but the company has enormous cash available for acquisitions and an announcement could come at any time, that would send the stock so much higher that this opportunity will be gone.

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