Yet More Buffett

Earlier this month, I suggested that a capital gains tax cut could trigger some heavy selling in a stock like Berkshire Hathaway, which at $32,000 a share, up from around $16 thirty years ago, could have some long-term holders eager for a chance to cash in a few chips.

The last thing I want to do is turn this page into a sort of ongoing Motley Fool-like discussion of BRK. But Buffett’s is, after all, a remarkable story, both personally and mathematically, and — because I am anything but expert in valuing Berkshire Hathaway stock — I thought I should share two of the responses I got, both bullish. My apologies if what follows reads more like an accounting text. Tomorrow I’ll go back to ostriches or paper towels or something.

The first bullish message came from Chuck:

If long-term capital gains rates were cut (or even eliminated ala the flat tax proposal), do you have any idea what would happen to the ‘liability’ holding down BRK’s intrinsic value? Presently there is $5 or $6 Billion ‘accrued’ on the supposition that if holdings were sold at today’s prices, this is the amount which would have to be paid.

My own thinking is that the market intrinsically values BRK’s public holdings at 65% of market value- reflecting the PRESENT VALUE of the double taxation which will eventually have to be paid under an optimal buy-and-hold-forever strategy. This 35% tax discount REPLACES (it should not be combined with) the ‘liability’ which the accountants accrue on the ‘unrealized gain’ in Buffett’s public holdings portfolio.

The flat tax idea was never a certainty but the serious attention it enjoyed in the Primary season explains a lot about BRK’s run-up to $38,000 and it’s subsequent decline back to $32000.

Interesting! I hadn’t thought of that. But if the $6 billion paper liability you speak of were instead halved by a 50% cut in the capital gains rate — adding $3 billion to the value of BRK shares — that would work out to $2,500 a share ($3 billion divided among about 1.2 million shares).

(This also assumes that if Berkshire Hathaway someday did sell its highly appreciated stake in, say, Coca Cola or Wells Fargo, it would not drive down prices in the process. Or that even if it didn’t, some nasty Congress a decade hence might not have ratcheted the long-term capital gains tax back up.)

So the impact here, at “only” $2,500 a share, would not justify a run up from $32,000 to $38,000. My own thought is that many BRK holders, even knowing of the felicitous accounting change, would still want to take some profits if the capital gains tax rate were cut — while relatively fewer investors would be rushing in to buy.

But as I say each time: I’ve foregone many fortunes underestimating BRK’s future.

Now, for those of you who are still with me, this second bullish analysis may be of interest, as well. It comes from a man who recently bought 55 BRK class A shares at an average cost of $30,500 each. (Ah, to be such a man.)

He writes:

Here is why I do NOT believe Berkshire stock is currently overpriced (all these numbers are approximate):

Book value per share as of June 30:	$16,600
Increased value in major stock holdings since June 30 (very rough estimate, includes dividends)	1,250
Add back about 80% of listed deferred tax liability on security holdings, since most profits will not be taken for a very long time [the item Chuck was talking about — A.T.]	4,000
Value of wholly owned non-insurance businesses above carrying price (1995 pre-tax earnings were $244 per share, against book value of $705 per share. True value should be at least $2900 per share)	2,200
Non-Geico Insurance float (this number is essentially worth face value because it will probably continue to rise, which more than cancels out any risk of their insurance arm becoming smaller or going bust, and BRK will receive the entire income on this float indefinitely.)	3,000
Value of non-Geico insurance business exclusive of float. (Premiums minus losses and expenses for 1993 was $26; 1994 was $108; 1995 was $17)	500
Add back profit based on present value of unearned insurance premiums	250
Value of Geico above carrying value (this is merely imputing the same value on Berkshire’s original holdings as Berkshire just paid for the rest of the company)	900
Value of finance business (earns about $20 per year)	200
TOTAL REALISTIC VALUE PER SHARE	$29,000

I’m sure I’ve overlooked a few nuances in both directions, but I think
the figures above represent a fair approximation of Berkshire’s value
WITHOUT Buffett.

If these approximations are right (I can’t vouch for them), then BRK stock is selling at just 5% or 10% above its fair value “without Buffett,” as my friend puts it — the not unreasonable implication being: would you not pay an extra 5% or 10% to have Warren Buffett managing your money?

Well, I’m still not buying. But if the past is any guide, that bodes well for BRK.

Footnote: I was surprised to see that Standard & Poor’s STOCK GUIDE — that ubiquitous horizontal monthly paperback — is inaccurate. It shows Berkshire Hathaway being divided into 1.8 million class A shares, more or less (of which my friend owns the aforesaid 55) . . . plus the recently issued class B baby shares . . . when in fact the true number is more like 1.2 million. What’s more, S&P has been wrong about this for some months now. One result: in my October 1 comment, I misestimated the “$50 billion” market value of the company, multiplying the price by too many shares. It’s more like $37 billion, give or take. Geez: if you can’t trust the STOCK GUIDE . . .

Tomorrow: The Not-So-Wealthy Barber