moneyrelations :: Mar.10.2008
Warren Buffett is rich.
Some news flash, eh?
According to Forbes 2008 World’s Richest People list, Buffett made it to number one this year at an estimated fortune of $62 billion. Mexican telecom tycoon Carlos Slim Helú takes the number two spot at $60 billion and poor Bill Gates has to settle for third with $58 billion after thirteen years of dominance at the top.
How did this come about?
Class A shares of Berkshire Hathaway shares rose 25% between July and the time Forbes compiled this list. This is exactly the timeline of the sub-prime crisis when ABCP and the credit crunch came to the forefront of mainstream media. So, you can say that in times of recession in “Warren Buffett We Trust”.
This is in stark contrast to the early days of the dot com era and entering the new millennium. At that time, Buffett was blasted for being old fashion and out of touch with his technophobia.
I guess Buffett is having his laugh now – not a belly laugh but maybe a chuckle.
Despite the fact that 2007 was a glorious year for Berkshire, Buffett proclaimed in his latest letter to shareholders that the “party’s over” for the insurance business. And the insurance business is the corner stone of Berkshire.
The property and casualty business runs in cycles. Obviously, no one can predict catastrophes but when things are calm, the vigilance declines and so does insurance premiums as companies compete for new business of first home buyers.
Buffett is warning of “lower insurance earnings during the next few years”.
While Class A shares are cost prohibitive for most investors, Class B shares are more attainable – pegged at 1/30 of Class A shares. But would buying now be overpaying for Berkshire’s intrinsic value given Buffett’s warning?
An article published in December’s Barron’s magazine entitled “Sorry, Warren, Your Stock’s Too Pricey” certainly seemed to think so. But keep in mind this was when the Class A shares were trading at over $140,000. Its bottom line calculation was that for fair value, the shares should trade at $125,000 to $130,000. Therefore, the Class B shares should fall within the range of $4167 – $4333.
As you can see by the first graph above, Berkshire is still overpriced according to the Barron’s article. But, as we’ve also seen recently in the last decade, never count out Buffett.
When bond insurers like Ambac Financial Group and MBIA were struggling to keep their triple-A bond ratings, Buffett seized the moment to set up Berkshire Hathaway Assurance – his own bond insurer for municipalities. And I’m sure Buffett’s keen eye has spotted other opportunities as well.
So while the tech era was not made for Buffett’s investing style, this recession certainly is in his wheel house. As always, it will be interesting to track his investments as it might be his last hourrah. When you want to learn to invest money, there’s no better person to follow.