Just wanted to follow up here. We’ll see but it looks like you may turn out correct on your technical forecast. I think the LT uptrend is still in place, but there is a clear ST downtrend with a couple of lower highs and lower lows.

I think your $111,000 price target is one potential support level, but I think another is a bit higher at around 120K which is where the 200 DMA and last sideways consolidation sits.

Either way, if the stock does hit those levels I would look at that as being an ABSOLUTE GIFT from the market to pick up a top-tier, high-quality company run by excellent capital allocators at a very attractive fundamental valuation.

Any purchases done at those price levels would most likely set the stage for both LT strong absolute and relative outperformance.

If we get to 4K on the B shares, I’m definitely upping my allocation.

http://boards.fool.com/Message.asp?mid=26262286&bid=101158
http://boards.fool.com/Message.asp?mid=26262337&bid=101158
http://boards.fool.com/Message.asp?mid=26262987&bid=101158

I don’t think I could say it any better than the author of those posts who I will quote below:

“It is my belief that any attempt to value Berkshire that does not include some effort to place a value on this float is a waste of time, and displays a serious lack of understanding of the company. Yet we continue to see pundits ignore this issue. The recent Barron’s article said that Berkshire was overpriced because it was selling a fifteen times earnings, but the authors did not take the trouble to place any value on Berkshire’s float even though it provides almost 50% of the company’s cash flow. This is certainly not the only example we have of sloppy work by people attempting to value Berkshire, but it is the worst I can remember were the author rated a cover story in a major publication.

Buffett tried to address this issue early on with the concept of look-through earnings and more recently with his “Two column” Approach to valuing Berkshire. In my next post I will address the latter approach in some detail.

Currently Berkshire is selling at a larger discount to that intrinsic value than it was in 2000 when Buffett offered to buy the stock, but the company is much larger today so it is harder to move the needle and Buffett is eight years older.”

I continue to hold a 15% allocation to Berkshire

My work suggests that the last 2 days trading in BRK will usher in the very decline I forecasted. I respect that your timeframe is longer than mine may be, and I would not and am not short BRK. However, for those of us who did not have your excellent foresight in owning the stock over the past couple/few years, my analysis provides a decent blueprint (I think anyway!) for a good risk/reward entry point over the intermediate term.

Thanks for the thoughtful response! It is always useful to get another intelligent perspective that differs from your own.

Couple of things.

From a valuation perspective, Berkshire is certainly less attractive now then it was 1-2 years ago when you could pick it up at a P/B ratio below the historical median with BV growth accelerating. Part of the reason I sold 1/2 the position.

On the relative valuation, I think you and I are coming from similar perspectives on what the returns of the S&P 500 might be the next 5 years, especially in terms of potential downside risk (combination of earnings and multiple contraction). So what do you do? What do you buy? I sold most of my REITs in May 2007, and that asset class doesn’t look good to me. I have still have a hefty allocation to commodities, but they’ve run up recently and could have downward pressure in a slowing global economy.

IMO, Berkshire is a good place to “hide” instead of holding a ton of cash waiting for market valuation levels to come down to compelling buy levels.

From a technical perspective, I think we are operating in somewhat different time frames. My use of technical analysis is more oriented around capturing the big moves that happen over a 12 month+ or multi-year time frame, and not necessarily catching the short-term moves up and down over a couple of months.

I see a substantial sideways consolidation/base having been built from early 2004 through late 2006 (almost 3 years). Standard TA theory is the length and magnitude of the uptrend is often proportional to the previous base. The magnitude of the move from Aug 07 to the recent peak of 5K for the B shares was excessive and we needed a correction to work that off. I think the pullback to 4.5K on the B shares accomplished that. There is a support level at 4K on the B shares, but frankly I don’t think we are going to see it.

Philosophically, I would never short a quality company with a history of being a LT winner, arguably still a reasonable valuation, and positive LT technicals just to capture a possible short-term downside correction. I don’t like the risk/reward on that trade. I would think the current enviroment offers up much better candidates for shorting.

Final point on valuation. The Fairholme Fund which I own and which has an outstanding performance record since inception in 1999 has a fair value price target on Berkshire well north of the current price. The P/B multiple may be less relevant then in the past and substantially understate the intrinsic value because the wholly owned operating companies make up a much larger percentage of Berkshire versus marketable securities compared to 5-10 years ago.

I don’t expect “shoot out the lights” performance over the next 3-5 years, but I think the upside potential versus the downside risk is significantly better then the broad stock market. I’m not a Buffett sycophant, but I think one should be careful to not underestimate his ability to create value in a turbulent environment. I know he is a helluva lot smarter then me, so I feel comfortable essentially having him run part of my portfolio for much cheaper then the average mutual fund or hedge fund manager.

First congrats on such an outstanding position for you and your clients over the past couple of years.

I wanted to throw a couple of thoughts at you. First, your discussion of BRK is of a relative nature – i.e. it will do better than the SPX. I think, while important, that is not a great way to assess investment merit. Any reasonable mean reversion methodology over a 5 year period would have the SPX flat to down, so beating that could still result in disappointing results!

Second, it seems to me that the “Buffet Booya” is reaching dangerous levels both on CNBC and elsewhere. You yourself admit it is trading year the upper end of its historical valuation range. I would argue that the “what is BRK worth if it was broken up” is effectively a worthless argument, as that would only potentially occur when Mr. Buffet dies – probably not a multiple expanding event and likely to be well into the future.

Finally, when the stock reached comparable valuation levels in 1997 the stock did ascend into the 1998 peak (score one for your momentum argument!), but it still took until the break out in 2006 until the stock doubled from the 1997 level – or about a 7% per year return. Again, that isn’t horrible but it is not very good on a risk adjusted basis.

My proprietary price analysis suggests that the $151,000 level was significant and the shares have since registered what we call a “daily sell signal”. The stock fulfilled the initial downside target at $131,800 and is now re-testing the area of the intial sell signal. If the stock is repelled by that area, then we would expect the stock to visit the $111,700 area.

The last time the stock was in a comparable situation was in mid December 2006. We also had a daily sell signal at that time but the completion of the signal was very lethargic – taking 38 trading days and never violating the initial downside price area. The stock proceeded to “re-charge” and consolidate before the next big move higher.

In contrast, the current “daily sell signal” took just 2 days to hit the initial downside area and just 7 days to bounce back to the critical initial area. The current price behavior suggests to me there is a high probability that the stock is likely to head lower – by about 20% from its current price.

You don’t know me from Adam, but as a trader I would be far more interested in shorting BRK.A with a stop at about $145k and a downside target of $112k-$115k.

FWIW, my own philosophy is that the best-performing stock-picks tend to happen when one marries reasonable or undervaluation with price momentum because one is buying value that the market is in the process of actively recognizing as opposed to sitting on dead money or worse something that will continue to fall.

Having said all of that:

“2) was up 25% YTD

(3) had a f/w P/E of 23, far higher than S&P 500’s estimated f/w P/E

(4) had a price/book of 2.4

(5) had a price/sales of 2.8″

Your valuation numbers here are just plain wrong. First off, when looking at Berkshire if you are going to use P/E you have to use the “look-through” earnings. The best approach is probably the one Buffett lays out which is the two column approach of market value of investments + reasonable multiple of operating business earnings. Look at the growth rate of the operating businesses over the past 5 years. Blows the S&P 500 out of the water.

Not sure where you got P/B of 2.4 from. Off the top of my head, I think the latest P/B off the last quarter’s book value is like 1.8 to 1.9. Towards the high end of the historical range, but certainly not unreasonable.

As David points out, there is the option value of the cash in terms of picking up bargains when the sh*t hits the fan which is becoming clear in the past couple months. Then you have the fact that he is often the preferred purchaser of private businesses for those who want/need to cash out. Look at the deal he got on Marmon.

In terms of “intrinsic value”, even conservative estimates yield upside from current prices

http://creativeacademics.com/finance/IV.html

Do you really believe the S&P 500 is more attractively valued then Berkshire? I’ll gladly take the bet from anyone that Berkshire outperforms the S&P 500 over the next 5 years. Berkshire should be able to grow book value at a rate well above what the S&P 500 can grow EPS.

At the time I bought LTR, I was interested in the natural gas assets they purchased from Dominion because I was looking to replace COP. Later in the summer as the credit problems became more apparent, I started looking at them as a company that benefit picking up distressed assets. If I was going to choose another, the list would also include BRK, LUK, and IEP (maybe BX).

I confess to not being as good of an individual stock analyst as I probably should be. With my firm I simply don’t have the time or resources to commit, so there are more names I am not current on than I am. I actually only know BRK from a macro level. I feel like I know enough about the general nature of its businesses to get a sense for the stock.

I wouldn’t know the difference between the accounting for life vs P/C insurance reserves, for example. I focus more on macro and asset allocation issues and then drill down to preferred areas for “satellite” positions. LTR appears interesting at first glance, but I can assure your judgment on the name would be better than mine!