Whitney Tilson, founder and managing partner of T2 Investors LCC, was on CNBC's Squawk Box yesterday saying that Buffett's prostate cancer diagnosis was virtually a "non-event" both for him personally and for Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial)'s stock. Here he adds more to his comments:
· Of course this news reminds people that Buffett is 81, won’t live forever, hasn’t identified his successor, and that Buffett will never be completely replaced – he is unique. But we didn’t need a reminder, as none of this is news to us. We were fully aware of these factors as we bought the stock in recent weeks, making our largest position even larger, and knowing what we know today, we wouldn’t have done anything differently.
· To their credit, investors seem to have gotten this right, as the stock is down only a bit more than 1% right now.
· This news doesn’t change our view of the succession “issue” (it’s not an issue to us, but it seems to be to other people). Our views on this are covered in pages 21-25 of our Berkshire deck (posted at www.tilsonfunds.com/BRK.pdf).
· Note the comparison to Apple (AAPL) on page 25 – and the fact that the stock is up 65% since Steve Jobs died six months ago. This underscores that what matters is the underlying performance of the business over time. A couple of people have taken issue with this analogy, saying that Apple is a product company and therefore isn’t as dependent on Jobs as Berkshire is on Buffett. We disagree. One of the main takeaways for us from Isaacson’s book was how extraordinarily integral Jobs was to Apple. Also, nearly all of Apple’s business is dependent on a few hit products – and not just any products, but technology products that have to be virtually reinvented every year.
Now consider the major elements on Berkshire’s value today: the investment portfolio of cash, bonds and stocks (will the value of IBM, Coke, Amex, Wells Fargo, etc. change when Buffett’s gone?), Burlington Northern, insurance, utilities, etc. Other than Buffett’s daily consultations with Ajit Jain on the supercat business, it’s hard to see the value of Berkshire’s current business being affected in the near term by Buffett’s absence. However, it would clearly affect the creation of future value at Berkshire. As we wrote on page 21 of our slides:
o There is no investor with Buffett’s experience, wisdom and track record, so his successors’ decisions regarding the purchases of both stocks and entire business might not be as good
o Most of the 75+ managers of Berkshire’s operating subsidiaries are wealthy and don’t need to work, but nevertheless work extremely hard and almost never leave thanks to Buffett’s “halo” and superb managerial skills. Will this remain the case under his successors?
o Buffett’s reputation is unrivaled so he is offered deals (such as the recent $5 billion investment in BofA) on terms that are not offered to any other investor – and might not be offered to his successors
o Being offered investment opportunities on terms/prices not available to anyone else also applies to buying companies outright. There’s a high degree of prestige in selling one’s business to Buffett (above and beyond the advantages of selling to Berkshire). For example, the owners of Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm
o Buffett’s Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that his successors might not
It’s hard to know how much future value would be lost in Buffett’s absence, but we don’t need to calculate this because we assign zero value to it when calculating Berkshire’s intrinsic value. All we do is take investments per share of nearly $100,000 and put a 10 multiple of the current pre-tax earnings of $8,000/share to arrive at nearly $180,000 (see page 14 of our slides).
· Finally, we commend Berkshire Hathaway for the timely and open disclosure of this news.
· Of course this news reminds people that Buffett is 81, won’t live forever, hasn’t identified his successor, and that Buffett will never be completely replaced – he is unique. But we didn’t need a reminder, as none of this is news to us. We were fully aware of these factors as we bought the stock in recent weeks, making our largest position even larger, and knowing what we know today, we wouldn’t have done anything differently.
· To their credit, investors seem to have gotten this right, as the stock is down only a bit more than 1% right now.
· This news doesn’t change our view of the succession “issue” (it’s not an issue to us, but it seems to be to other people). Our views on this are covered in pages 21-25 of our Berkshire deck (posted at www.tilsonfunds.com/BRK.pdf).
· Note the comparison to Apple (AAPL) on page 25 – and the fact that the stock is up 65% since Steve Jobs died six months ago. This underscores that what matters is the underlying performance of the business over time. A couple of people have taken issue with this analogy, saying that Apple is a product company and therefore isn’t as dependent on Jobs as Berkshire is on Buffett. We disagree. One of the main takeaways for us from Isaacson’s book was how extraordinarily integral Jobs was to Apple. Also, nearly all of Apple’s business is dependent on a few hit products – and not just any products, but technology products that have to be virtually reinvented every year.
Now consider the major elements on Berkshire’s value today: the investment portfolio of cash, bonds and stocks (will the value of IBM, Coke, Amex, Wells Fargo, etc. change when Buffett’s gone?), Burlington Northern, insurance, utilities, etc. Other than Buffett’s daily consultations with Ajit Jain on the supercat business, it’s hard to see the value of Berkshire’s current business being affected in the near term by Buffett’s absence. However, it would clearly affect the creation of future value at Berkshire. As we wrote on page 21 of our slides:
o There is no investor with Buffett’s experience, wisdom and track record, so his successors’ decisions regarding the purchases of both stocks and entire business might not be as good
o Most of the 75+ managers of Berkshire’s operating subsidiaries are wealthy and don’t need to work, but nevertheless work extremely hard and almost never leave thanks to Buffett’s “halo” and superb managerial skills. Will this remain the case under his successors?
o Buffett’s reputation is unrivaled so he is offered deals (such as the recent $5 billion investment in BofA) on terms that are not offered to any other investor – and might not be offered to his successors
o Being offered investment opportunities on terms/prices not available to anyone else also applies to buying companies outright. There’s a high degree of prestige in selling one’s business to Buffett (above and beyond the advantages of selling to Berkshire). For example, the owners of Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm
o Buffett’s Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that his successors might not
It’s hard to know how much future value would be lost in Buffett’s absence, but we don’t need to calculate this because we assign zero value to it when calculating Berkshire’s intrinsic value. All we do is take investments per share of nearly $100,000 and put a 10 multiple of the current pre-tax earnings of $8,000/share to arrive at nearly $180,000 (see page 14 of our slides).
· Finally, we commend Berkshire Hathaway for the timely and open disclosure of this news.
