Berkshire Holding

We are going to use a series of posts to talk about some of our holdings.

Berkshire is the single largest holding at Beowulf Capital and we have bought at three separate occasions and sold once. (Green circles are buys and red circles are sells)

Everyone knows the Berkshire story and it has been a good stock to own at Beowulf as well. We have been following it for years now and have  acted only occasionally on it.

The first occasion when we bought the stock, it was fairly evident that BRK was going to get included in the S&P index but the market was shrugging it off and not pricing it in the stock. We thought it was a great opportunity and a chance to get even with the efficient market thesis guys and bought a fair amount of the portfolio at that time and we sold shortly after making a tidy sum!

The second occasion was in the Aug / Sep time frame in 2011 when Berkshire was trading at book value and I started buying the stock as I was comfortable with the assets I was getting at that price. Three days after we bought it at about $66 to $68 / share, Warren announced a buyback that immediately took the price up. We bought some more but not a lot. (Thanks Warren for nothing because if the prices had gone down further, we would have built a bigger position)

There was an event that happened in between. I attended the Berkshire Annual meeting in Nebraska in 2012. I recall concluding at the end of the meeting that this was a company I wanted to be associated with for a longer period of time but I was uncomfortable with the price. Later in the year, Warren's book 'Tap dancing to work' by Carol Loomis came out. In one of the articles, an reporter in 2002 asks Berkshire, 'Is it a good price to buy Berkshire now?' (Not exact words but along the same lines) Warren's reply was approx. 'Mumble... Mumble... Not now... It was a singing endorsement when I offered to buy back in 1998/9'

We made a mental note to buy Berkshire the next time we got an endorsement from Warren. We kept our intrinsic valuations regularly updated but never got comfortable on our own with the price.  It was a high quality asset but we wanted it at book value or at a value with the same deal terms as Warren.

In December 2012, Warren offered to buyback around $1.3B of stock from an owner at 1.2X Book. The key was the board authorized Warren to buy unlimited amount of stock at or below 1.2X book for an unlimited time. This time, we leapt at the chance. Close to 25% of our portfolio in the US markets were re-directed to Berkshire. We were not disappointed! (Thanks Warren)

What are we doing in a mega-cap company run by a 82 year old?

a. We don't care whether it is a small cap, medium cap, large cap etc. The market run-up in the last couple of years have dried up opportunities that we are ready to settle for acceptable rates of return from high quality assets irrespective of their asset class. We have bought only one other stock in the US since we purchased BRK in December.

b. We are not worried about the succession plan. Berkshire has a lower risk profile than other similar large cap companies. We actually know more about Berkshire's second line managers than at other large cap companies.

c. Quality of the assets are good and will continue to deliver acceptable rates of return.

However, it must be noted that we continue to be concerned with the run-up in the markets in the last one year. We do not plan to do anything with our Berkshire holding. If there is a downturn, Berkshire will put the massive cash-pile to work and come out stronger. With such a high concentration of Berkshire and cash in our portfolio, we actually wish for a downturn.

However, our wish has got nothing to do with what the market will do.Six months ago, we would not have predicted the markets would have run-up this much by today. To now claim that we have a clue what will happen in the next 12 months is foolhardy. If markets are up now, they will go down in the future (don't know when), if they are down now, it will go up in the future. Basically, we have no clue about the market. We only act on stocks we know at a price we understand.