Warren Buffett on Market Fluctuation & Is Berkshire A "Value" Now?

Every investor ought to be forced to read Berkshire’s (BRK.A) Buffett at least once a week..

From 1997

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

For shareholders of Berkshire who do not expect to sell, the choice is even clearer. To begin with, our owners are automatically saving even if they spend every dime they personally earn: Berkshire “saves” for them by retaining all earnings, thereafter using these savings to purchase businesses and securities. Clearly, the more cheaply we make these buys, the more profitable our owners’ indirect savings program will be.

Furthermore, through Berkshire you own major positions in companies that consistently repurchase their shares. The benefits that these programs supply us grow as prices fall: When stock prices are low, the funds that an investee spends on repurchases increase our ownership of that company by a greater amount than is the case when prices are higher. For example, the repurchases that Coca-Cola, The Washington Post and Wells Fargo made in past years at very low prices benefitted Berkshire far more than do today’s repurchases, made at loftier prices.

At the end of every year, about 97% of Berkshire’s shares are held by the same investors who owned them at the start of the year. That makes them savers. They should therefore rejoice when markets decline and allow both us and our investees to deploy funds more advantageously.

So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)

We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate “saver,” Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited.

On another note, In March of this year I claimes that Berkshire shares proiced at $133,000 a share were no bargain. Then in July I said “priced at $111,000 a share, more downside is in store”.

Today we sit at $81,000 a share, a 39% drop from March and 27% since July alone. Now at 2003 price levels, Berkshire looks enticing. The current environment reminds me of when I first bought Berkshire shares late in 1999 (I sold them in 2003 for a 63% gain, don’t cheer, I sold before another 60% would have been realized)). Buffett then was being called “out of touch” and Berkshire shares had taken a beating as folks rushed into tech stocks.

Flash forward to today and Berkshire’s situation is similar. Buffett is being questioned about investments in GE (GE) and Goldman Sachs (GS) and the market is pricing the risk of default by Berkshire higher on a daily basis. Currently the market thinks Berkshire has a higher default risk on its debt than Allstate (ALL), defying all rational thought.

Buy? Well, not so fast. It all comes down to insurance for Berkshire. We know the operating businesses will not improve during a recession. Will insurance? The operating environment will stop sliding but probably not turn. There are less homes to insure, less autos and those that are being insured are being done for for lower values. Both those add up to lower insurance results and lower earnings for a while.

I still think there is more downside to shares, maybe another 10% to 20%. We’ll see….If I see that, I will be buying…

Disclosure (“none” means no position):Long GE, GS, none
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