Back in May 2011 I wrote
an article on this blog making the case that Berkshire Hathaway was looking
cheap (Click here
to see the article or go to my May 2011 folder). At the time Berkshire
A shares were trading at around $120,000 and the B shares were approximately
$80.
I reasoned that Berkshire
looked cheap because the price-to-book value was at a historically low level
(1.24). I then assumed a more realistic ratio of 1.44 and estimated an 8
percent growth in book value per share to the end of 2013 (the logic for those
figures were explained in the original article).
By doing that, I arrived at
a forecast year-end 2013 price of $173,000 for the A shares and $115 for the B
shares.
So how did I go? Berkshire
A shares as of 27 November closed at $174,625 per share and the B shares closed
at $116.58.
It just goes to show that
it doesn’t always take rocket science to spot a good investment opportunity.
I also added back in May
2011 that I had bought Berkshire shares using Australian dollars. At the time I
purchased the Berkshire shares, the Australian dollar was worth $US1.10 (this
part was just good luck). So I picked up the A shares at an effective price of
around $113,000. The Australian dollar then depreciated to around $US0.92
(again, good luck).
Therefore, in Australian
dollars it worked out to a 23% annual compound return over the 2.5 years. An
investment in $US would have yielded closer to 15% compound per annum, not as
good as my return, but still a very nice return.
I will add that I’ve now
sold the shares. I don’t think Berkshire looks anywhere near as cheap today and
I have plenty of algorithmic trading opportunities (which is really my bread
and butter these days).
Decades ago, one could buy
Berkshire at almost any price and have obtained excellent returns. Those days
are long gone. Today, those kinds of returns will only have a chance of being
achieved if Berkshire is bought when the price-to-book value is at a very low
level.
This is a very basic,
long-term mean reversion strategy - buy when price-to-book is very low and hope
it reverts to the mean. Well, it worked this time. And of course, my thanks go to
the US Federal Reserve for allowing it all to happen.*
I’ve commented in other
articles on the legions of Buffett acolytes out there, but perhaps the best
observation on this is attributable to the hedge fund manager Michael Burry
(who foresaw and profited immensely from the sub-prime crisis), quoted in
Michael Lewis’s brilliant book The Big
Short:
“At one point I recognized that Warren Buffett,
though he had every advantage from learning from Ben Graham, did not copy Ben
Graham, but rather set out on his own path, and ran money his way, by his own rules.
I also immediately internalised the idea that no school could teach someone how
to be a great investor, if it were true, it’d be the most popular school in the
world, with an impossibly high tuition. So it must not be true.”
Most people have the
opposite reaction, they see what Buffett has done, it looks relatively straight
forward, so they attempt to emulate him, but they can’t. And this is why I
wouldn’t be giving a cent to Buffett clones, but I may have more to say on this
in a future article.
