Dear Mr. Buffett_ What an Investor Learns 1,269 Miles From Wall Street - Janet M. Tavakoli [117]
Warren invested in ISCAR with his eyes wide open, and he is a long-term investor. One of my British friends complained that Warren’s investment in Israel is highly risky. I responded that financial risk is relative, and I saw people making much riskier bets in the mortgage market and in hedge funds for the promise of much less return.
Warren does not ignore risk, but he has a unique perspective.When we first met, Warren asked me what I thought the greatest global risks and surprises might be, and if I think of anything else later, to let him know. He asked what might happen if, for example, global computer communication were knocked out. How would we track trades? I responded that we might exhibit ingenuity. I recall that in Apollo 13, stranded astronauts and their Houston-based colleagues reached for pencils and slide rules. We sent men to the moon before computers were in every middle-class home. It is an unwelcome thought that we would go back to those days, but Warren tries to consider all angles.
While the 33-day Lebanese-Israeli war was still waging, on August 1, 2006, Bear Stearns Asset Management launched the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage fund. The fund invited investors with comforting words like “high grade” and “enhanced,” and the investors seemed to be persuaded that they were getting a relatively safe and rewarding investment. Yet a terrorist attack would have posed less risk to their investment. Within a year, Bear Stearns told the fund’s investors they would probably get nothing. Had the investors put their money in Berkshire Hathaway instead, they would have had more than $1.2 million for every $1 million they invested. Furthermore, the hapless investors in the hedge fund will have no peace.They hired lawyers.
Warren looks for companies that create value for consumers. ISCAR continues to thrive, and once he finds value, Warren’s favorite holding period is forever. As a result, Berkshire Hathaway still owns the major part of a company that creates economic opportunity for both Jews and Arabs in Israel. Perhaps one day, it will be part of a Middle East renaissance. I like to think that Warren’s investment has a chance to make the world a better place.
Chapter 14
Finding Value
[T]here was an absolutely open-ended, no-score-kept generosity of ideas, time, and spirit.
—Warren Buffett
on Benjamin Graham, 1976
After I met Warren for lunch, I began spending more time on my personal ideas of value. I bought energy and energy-related stocks, a potash manufacturer ripe for takeover, metals stocks, and some value stocks. I kept my Berkshire Hathaway holdings, of course.
I could write a long book on valuing Berkshire Hathaway. Instead I will offer you my completely unauthorized and lazy shortcut to understanding the value of Berkshire Hathaway. You can play around with balance sheets, discount rates, multiples, and the like; but basically Berkshire Hathaway invests in sound business that will stick around, and the businesses it owns have growing earnings.
A thorough analysis is hard, but understanding that there is a lot of value in the stock is easy. Getting the annual report brings a smile to my face and I dive in and get right to the action. Warren wrote in the 2007 shareholder letter that investments (about 40 percent financed by insurance float) are worth $90,600 per share. Now you add to that the value of $4,093 per share of a growing stream of earnings from the non-insurance operating businesses. As a long-term investor, you might use a 10-times multiple to earnings (as some long-term investors do) for a combined value—including investments—of $131,530. If you apply a 15 times earnings multiple (as other long-term investors do), you get a value of $151,995. No one knows what may happen in the super-cat insurance business managed by Ajit Jain who runs Berkshire Hathaway’s reinsurance business, and I did