Monthly Archives: July 2011

10 Ways to Improve Your Investment Process – Introduction

You would not be reading this if you did not want to improve your investing results. Provided that you already have a rational investing philosophy, the key to improving your results lies in improving your investment process.

I have been investing for over twenty years. Like you, I want results.  If over time I can’t beat the market averages, what’s the point? I’d rather buy an index fund and forget about it.

The good news is there’s plenty of evidence that this goal is achievable – not easy, but achievable.

One thing I have learned in studying the great investors is that they all have a great investment process that drives everything they do.

There’s no secret formula. No valuation algorithms hidden away in Omaha. No short cuts. You need to create a solid investment process based on a rational investing philosophy that has been proven to generate market-beating results.

The outcome of some activities is entirely a function of skill.  Examples include chess and the 100-meter dash. Other activities, such as rock-paper-scissors or roulette, are based entirely on luck.

Investing is somewhere in the middle. Its outcome is a function of both skill and luck. That is why it is difficult to identify if an investor has skill. A know-nothing investor can be lucky and a skilled investor can have periods of under-performance.

Serious investors recognize this reality and focus on what they can control. They focus on their investment process knowing that – over time – real skill will reveal itself in superior long-term performance.

This leads us to a definition of process.

A process is an organized group of activities designed to constantly improve skill and increase its role in an outcome, thereby minimizing – to the degree possible – the role of luck.

AN EXAMPLE FROM SPORTS

You can learn about the power of process by studying football coach Nick Saban. He won college BCS National Championships at LSU in 2003 and at Alabama in 2010.

Saban’s success comes down to an almost maniacal focus on getting better in all aspects of the game – an effort he simply calls The Process.

Saban’s process includes recruiting, conditioning, practicing, work ethic, strategy, and organizational structure.  His recruiting process alone has five distinct steps.  The process begins as soon as the season ends and it continues year round.

Saban’s process is an effort to squeeze chance from the equation and increase the odds of winning.

Saban talks about how you can’t skip steps.  You can’t get from point A to point Z without passing through point B and that if you skip a step, you won’t achieve your desired outcome.  Saban talks about finishing.

Saban’s process is not about genius, better information, or even better athletes.  It’s about sweating the details.  It’s about working harder and smarter and looking to exploit the weaknesses of your opponents.

In this series of blog posts, I’d like to share ten ideas to improve your investment process. I’ve learned these ideas from my own experience and from studying the great investors.

PASSION

Before laying out the ten ways to improve your investment process, I want to say a word about passion. Passion is essential if you want to be a great investor. You need to love what you’re doing.

If you choose to pursue becoming a great investor, you will spend a great deal of your time reading and thinking. Many days your work will not appear to be fruitful. Only occasionally will you find a truly worthwhile idea. Then, if the idea checks out and you make a purchase, you will need to patiently wait for your thesis to play out. This may take several years.

Unless you love what you’re doing and can derive pleasure from the process of learning and mastering your craft, it’s unlikely that you will persevere. This requires passion.

Links of Interest – July 15, 2011

Steve Forbes Interview: Michael Mauboussin, Professor and Investor – Steve Forbes – Fact and Comment – Forbes – Great stuff on the investing process and how to get an edge.

M&T Bank Corporation – Annual Reports – At the last shareholders meeting, Buffett called letters by M&T Bank CEO, Bob Wilmers must reading.

Michael Burry’s Value Investors Club Ideas Revealed « Robert Pio Molloy – Worth looking at Burry’s write-ups and reverse engineering his approach. Burry has a special mind that can dissect complexity. The common thread of his picks: they’re very cheap!

Best Stock Fund of the Decade: CGM Focus – WSJ.com – More evidence that fear and greed are very much alive and that investors need to take steps to spot shooting themselves in the foot.

Markel Corporation – News Release – Markel continues to purchase operating businesses and pursue Berkshire’s proven two-pronged approach. This is a powerful idea because it increases the chances of Markel finding something intelligent to do with its capital. Buffett quoted Woody Allen in this regard.

John Wooden on true success | Video on TED.com – Here’s a definition of success grounded in wisdom.

TED Global 2010: When Ideas Have Sex | The Rational Optimist… – Sound, rational argument that in spite of challenges things are going to be much better in the future.

Intrinsic Value: a range, not a precise figure

Yesterday, I wrote a blog post that described Tom Gayner’s approach to valuing Berkshire Hathaway. Gayner is a great investor with deep knowledge of Berkshire, in particular, and the insurance business, in general. In the post, I used Gayner’s framework to calculate a range of intrinsic value for Berkshire.

The blog post was also published on GuruFocus.com, where it received some criticism for the range of intrinsic value being too wide, and, buy extension, not particularly useful.

Admittedly, the range produced (for the B shares) is a wide: $55 to $208. Arguably, an analyst could pin that range down by narrowing the range of assumptions and/or tweaking the model.

On the otherhand, such a wide range may be useful to an investor if the stock is trading near, or below, the low of that range.

Why?

Because the wider the range, the greater the probability that the value is actually within that range.

Put more precisely, the greater the range, the greater the probability that the ACTUAL future free cash flows discounted by the ACTUAL future prevailing interest rates will be within that range.

If you can buy a security at a discount to this range you may have found a winner and, equally important, you’re unlikely to loose your capital.

When you insist on a margin of safety when buying a stock – for example, requiring at least a 30% discount to your estimate of intrinsic value – you are implicitly making allowance for the fact that your estimate of value may be materially higher than the business’s actual intrinsic value. This is really just another way of looking at intrinsic value as a range.

Here’s what Graham had to say on the matter in Security Analysis.

“The essential point is that security analysis does not seek to determine exactly what is the intrinsic value of a given security. It needs only to establish that the value is adequate – e.g., to protect a bond or to justify a stock purchase – or else that the value is considerably higher or considerably lower than the market price. For such purposes an indefinite and approximate measure of the intrinsic value may be sufficient.”

Here’s what Seth Klarman had to say on the matter in Margin of Safety.

Many investors insist on affixing exact values to their investments, seeking precision in an imprecise world, but business value cannot be precisely determined. Reported book value, earnings, and cash flow are, after all, only the best guesses of accountants who follow a fairly strict set of standards and practices designed more to achieve conformity than to reflect economic value. Projected results are less precise still. You cannot appraise the value of your home to the nearest thousand dollars. Why would it be any easier to place a value on vast and complex businesses?

Not only is business value imprecisely knowable, it also changes over time, fluctuating with numerous macroeconomic, microeconomic, and market-related factors. So while investorsat any given time cannot determine business value with precision, they must nevertheless almost continuously reassess their estimates of value in order to incorporate all known factors that could influence their appraisal. Any attempt to value businesses with precision will yield values that are precisely inaccurate. The problem is that it is easy to confuse the capability to make precise forecasts with the ability to make accurate ones. [emphasis added]

Although I stress that the valuation range for Berkshire is based on my assumptions using Gayner’s framework, Gayner’s approach exhibits wisdom when viewed through the lense of Graham and Klarman.

See also:

Ben Graham on the Role of Intrinsic Value in Analyzing Stocks (Part 1)

Ben Graham on the Role of Intrinsic Value in Analyzing Stocks (Part 2)

Tom Gayner’s approach to valuing Berkshire Hathaway

The June 30, 2011 edition of Value Investor Insight includes an interview with Tom Gayner, the President and Chief Investment Officer of Markel Corporation. Gayner is a highly respected value investor.

In the interview, Gayner explains his approach to valuing Berkshire Hathaway. Per GuruFocus.com, Markel has a 7.15% equity weighting in BRK.B and a 6.39% equity weighting in BRK.A. Combined, Berkshire Hathaway is Markel’s largest equity position.

Gayner uses a sum-of-the-parts analysis and looks at the company in three parts: 1) the investment portfolio, 2) insurance operations, and 3) non-insurance operating businesses.

Gayner’s approach is of particular interest not only because he is a great value investor, but also because of his expertise in the insurance business.

For the investment portfolio, he considers a range of values. On the low end, he figures it will earn 3% up to a high-end of 10-12%.

For the insurance premiums, he considers a low case where Berskhire does not earn an underwriting profit, a middle case where its earns a 4 to 5% profit on insurance premiums, and a high case where it earns 8 to 9%.

Finally, he calculates his estimate of normalized earnings for the non-insurance operating businesses. He does this by looking at Berkshire’s cash flow over the past three years and then trying to estimate what this will look like over the next few years.

He then sums the earnings from the three parts and applies a 10x, 14x and 18x multiple. This gives him a range for his estimate of Berkshire’s intrinsic value.

I used Gayner’s general approach to value Berkshire and came up with a intrinsic value range for BRK.B of $55 to $208 with an average value of $128. Here is my data (click to enlarge).

 

 

 

 

 

 

 

I used Berkshire’s investment portfolio value from the 2011, first quarter 10-Q. To calculate insurance earnings, I used Berkshire’s 2010 insurance premiums. For normalized operating earnings, drawing upon Buffett’s own estimate of normalized earnings given in the 2010 shareholder letter, I used $9 billion as my estimate of normalized after-tax earnings for the non-insurance operating businesses.

I stress that this is my own estimate of intrinsic value based on Gayner’s approach as put forth in the interview. I am not privy to Gayner’s input data, particularly his estimate of Berkshire’s future cash flows for the operating businesses.

In the interview in Value Investor Insight, Gayner stated that based on his estimates, “At even the low ends of the range, the resulting value is significantly higher than today’s share price.”

The absolute low of my range, $55, is actually lower than Berkshire current share price of around $76. However, Berkshire is certainly selling near the bottom of my range of intrinsic value.

In closing, Gayner made an interesting observation that, although Berkshire is widely known, many don’t get around to actually analyzing the company. There are Buffett devotees who are “all in” because of Buffett, and those who dismiss the stock because they’ve already made up their minds without looking at the facts.

Perhaps that creates opportunity for those of us willing to do a little math.

Does Google deserve a high multiple? (part 2)

This is the second part of an article entitled “Does Google deserve a high multiple?”.

The article is based on a blog post by venture capitalist Bill Gurley entitled “All Revenue Is Not Created Equal: The Keys To The 10X Revenue Club”. The blog post discusses ten business characteristics that drive the multiple at which a company trades.

My argument is that Google stacks up pretty well based on Gurley’s characteristics.

5. “Gross Margin Levels”

According to Gurley, “Lower gross margin companies will trade at highly discounted price/revenue multiples.”

Google enjoys high gross margins. As Google states in its annual report, its cost of revenues consists primarily of traffic acquisition costs. Google pays members of its AdSense program for displaying targeted ads on the members’ web sites. Google’s cost of revenues also includes the expense of operating its data centers.

2008
Revenue: $21,796
Cost of revenue: $8,622
Margin: 60%

2009
Revenue: $23,651
Cost of revenue: $8,844
Margin: 63%

2010
Revenue: $29,321
Cost of revenue: $10,417
Margin: 64%

6. “Marginal Profitability Calculation”

In his blog post, Gurley actually uses Google as his example in explaining the idea of marginal profitability.

If a business is scaling nicely, you will see a gradual increase in marginal profitability as its fixed costs are spread out over a growing revenue base. Investors love this because it portends higher future cash flows.

Gurley points out that, in Google’s case, the recent data is not positive. Google’s marginal profitability for Q1, 2011 was lower than both Q1, 2010 and Q4, 2010. On its conference call, Google attributed the uptick in spending to an expansion in hiring to drive future growth.

On a longer-term basis, the picture is positive. According to Value LIne, Google had a net profit margin of 29% in 2010. In 2005, it was 24.7% and in 2002, the earliest year for which Value Line has data, it was 22.7%.

Google marginal profitability is something to watch. Google is fighting on numerous fronts – search, mobile, browser, local, enterprise, etc. These efforts require large numbers of engineers. An investment in Google is, in part, a bet that some of these efforts, particularly those outside of its core search business, will generate a good return.

7. “Customer Concentration”

A company has a problem if a large percentage of its revenue is controlled by a small number of powerful customers.

In 2007, the New York Times reported that Google had 1 million advertisers based on a regulatory filing with the SEC. That number is likely materially higher today.

Google’s business has no risk from customer concentration.

8. “Major Partner Dependencies”

Just as a business is at a disadvantage if it is dependent on a small numbers of powerful customers, a business is at a disadvantage if it depends on a major partner.

For example, Nokia’s recent decision to use Microsoft’s Windows Phone 7 on most future Nokia smart phones has certain built in risks because it creates a dependency on Microsoft. Going forward, although it will surely have input, Nokia will be dependent on what Microsoft decides to do with its OS and how it evolves.

Also, Microsoft’s OS will be available on smart phones from other phone manufacturers which will tend to commoditize Nokia’s offering.

Google has no such dependencies. Google goes out of its way to be self-reliant. For example, its data centers run on Google’s own software which give it cost and performance advantages.

9. “Organic Demand vs. Heavy Marketing Spend”

Some companies requires heavy marketing spending to grow and compete and some businesses grow because there is strong organic demand for their products or services. All else being equal, the latter are the better businesses because 1) they don’t need to spend a lot on marketing which leaves more free cash for shareholders and 2) it tells you something important about a business if the demand for what its does is so strong that it can grow virally through word of mouth.

Google has enjoyed organic growth and it did not require marketing to achieve its dominant position. Only now are we beginning to see some limited marketing spend to accelerate the adoption of Chrome, which Google is using to protect its advertising castle. (For more on this see “The Freight Train That Is Android”; more on Google’s moat…)

10. “Growth”

According to Gurley:

“Nothing contributes to a higher valuation multiple like good ole’ growth. Obviously, the faster you are growing, the larger, and larger future revenues and cash flows will be, which has direct implications for a DCF. High growth also implies that a company has tapped into a powerful new market opportunity, where customer demand is seemingly insatiable. As a result, there is typically a very strong correlation between growth and valuation multiples, including the price/revenue multiple.”

Google’s revenues and earnings have grown at an annual rate of 50% over the past five years. This rate of growth will not continue given Google’s size. Going forward, it’s simply starting from a too large a base.

As Buffett stated, “The investor of today does not profit from yesterday’s growth.” In Google’s case there is reason to believe that strong growth lies ahead. Google is benefiting from four huge secular waves.

  1. This first is the continued increase in Internet usage around the globe.
  2. The second is the ongoing increase in online advertiser spending.
  3. The third is the rise of mobile Internet usage. Cisco projects that global mobile data traffic will increase 26-fold between 2010 and 2015.
  4. The forth is the massive amount of new data that will continue to be placed on the Web. This will only accelerate as more and more devices are connected to the Internet.  This will benefit Google because it will make Google’s core search engine more valuable.

In conclusion, Google seems well positioned with regard to Gurley’s criteria. Investors will need to decide if these factors are already priced into the stock or if the current price undervalues Google’s future cash flows.

 

New Audio: Ten Ways to Improve Your Investment Process – #9. Be Patient & #10. Continuously Improve

If you want to be a successful investor, you need a great investing process. Ironically, focusing on the outcome can lead to poor results.

This is part four of an eleven-part audio series on improving your investment process. It is based on a presentation I gave to the CFA Society of Columbus on May 19, 2011 at The Ohio State University.

#9. Be Patient & #10. Continuously Improve (audio)

PDF of presentation slides

 

Previous audio recordings in this series:

Ten Ways to Improve Your Investment Process – Introduction

#1. Know Your Outcome

#2. Define Your Investment Process

#3. Don’t Focus on the Outcome

#4. Use Checklists

#5. Improve Your Search Strategy

#6. Improve Your Risk Management

#7. Improve Your Self Management

#8. Pay Attention to the Details

Links of Interest – July 8, 2011

Walter Schloss: The Essence of Value Investing – Pure gold from a guy who trounced the market for decades.

CNBC Transcript: Warren Buffett on Russian Roulette, Tax Breaks for Corporate Jets, and America’s Bright Future – CNBC

Valuing Pfizer’s Divisions – Matthew Herper – The Medicine Show – Forbes – Pfizer may still be undervalued.

Want to Fight Inflation? Build a Moat – NASDAQ.com – A reminder of the most important question in investing: “where’s the moat?”

Citigroup Aims to Boost China Outlets by 50% in 2011 – WSJ.com – Another reminder that Citi’s global footprint is the best among U.S. banks. With the U.S. facing slow growth this is a differentiating factor.

7 life lessons from the very wealthy – The Washington Post – A few good lessons/reminders.

Markel Breakfast 2011.pdf – Powered by Google Docs – Pay attention to what Markel is doing. Like Berkshire, they are ramping up the purchase of operating businesses where they can control and efficiently redeploy free cash.

Ohio University Commencement Address « Atul Gawande – Good reflections on the rewards of mastery.

Borders and bankruptcy: Goodbye to bricks and mortar | The Economist – Retailing is a tough business: what you’re doing is on display for everyone to try to copy. Doing it without a moat may be dangerous to your wealth.

Understanding Compounding: Berkshire’s Not-So-Hidden Dividend Contrarian Secret – Seeking Alpha – Good primer on why Berkshire does not pay a dividend.

Dimon’s Global Growth Pains – WSJ.com – More evidence that large U.S. banks need/want exposure to emerging market growth and that wanting and getting are two different things.

Pro picks: Investing in stocks with growth potential – Jul. 5, 2011 – A few ideas from value investing veteran Bill Nygren.

The Inoculated Investor: Notes from the Final Conversation with Charlie Munger – Many thanks to the Inoculated Investor for once again putting together such great notes.

Why Google+ Will Take Half of the Social Networking Market from Facebook (or “There Calacanis Goes Again”) – Launch – Getting a piece of the social networking pie may be a free option available to Google owners.

Steven Romick on WealthTrack — GuruFocus.com – Romick is always worth listening to.

Interview with Amitabh Singhi, Managing Director at Surefin Investments — GuruFocus.com

Does Google deserve a high multiple?

A few week’s ago, I wrote an article about venture capitalist Bill Gurley’s business traits which determine whether a company deserves a high-multiple valuation. As I wrote in the article, “The multiple at which a stock trades is nothing more than a shorthand proxy for its DCF.”

Here’s my take on how Internet juggernaut Google stacks up against Gurley’s criteria.

1. “Sustainable Competitive Advantage (Warren Buffett’s Moat)”

I just finished reading Steven Levey’s excellent book In The Plex: How Google Thinks, Works and Shapes Our Lives. The book is must reading if you are interested in Google. It was also recommended by Charlie Munger who thinks highly of Google’s moat.  I’ve written before on the strength of Google’s moat.

Google is the leader in search, and they work hard at keeping it that way.

Googlers continually measure the effectiveness of their search algorithm by analyzing whether it achieves a good outcome. Basically, they judge a search to be successful if a person quickly selects a link and “goes away”.  Multiple successive clicks indicate dissatisfaction.

Based on these observations, Google is constantly tweaking its algorithm and running hundreds of simultaneous tests on small but meaningful subsets of their users. If a tweak improves the outcome, it is rolled out and another baby alligator is added to the moat.

This Darwinian process makes it tough for someone to catch up and pass them.  In The Plex sheds light on the large number of significant search problems that Google has already solved. Cumulatively these comprise a strong moat.

That being said, a technology centric company like Google will always be more susceptible to disruption than an entrenched consumer product company such as Coke or Wrigley’s.

Google’s data centers are another source of competitive advantage. Google is in a unique position to deliver globally-synchronized data in real time at a cost that is materially lower than it’s competitors.

According to In The Plex, “By perfecting its software, owning its own fiber, and innovating in conservation techniques, Google was able to run its computers spending only a third of what its competitors paid.” (Levy, Steven (2011). In The Plex, p. 198) [emphasis added]

Is also worth mentioning that the Internet seems to favor companies that establish an entrenched position. Amazon, eBay, Google, and Facebook have all proven difficult to disrupt by their rivals.

2. “The Presence of Network Effects”

When a product or service enjoys a network effect, the utility of the product or service increases as the number of people using it increases.

Google benefits from a network effect.

The more people who use Google, the more data it has to improve its search results and related products such as Google Translate. This leads to happier users who are more likely to continue to use Google because they are increasingly likely to find what they’re looking for.

Advertisers benefit from this because the more people who use Google, the more likely it is that users will click through and purchase something. The more advertisers there are on the system, the more likely it is that Google can deliver a relevant add to a user when he or she does a search.

A Darwinian ranking system of multiple variables continuously ranks ads and rewards better ads with better placement, further reinforcing this virtuous circle.

3. “Visibility/Predictability Are Highly Valued”

In business there is a continuum between highly predictive sources of revenue – such as a subscription based service – and one-off, non-recurring lumpy revenue – such as a business that sells major construction projects and which can only expect to sell a few per year.

Obviously the former types of business will sell at higher multiples – all else being equal – because their revenue is more predicable.

Google enjoys highly predictable revenue because it operates as a kind of toll-booth on Internet advertising, and its revenue is derived from millions of individual advertising clients – none of which controls more than a tiny fraction of Google’s overall revenue.

Moreover, just like there is a hard limit on prime real estate such as beachfront property in Los Angeles county, there is a large, but limited number of key words that drive Internet commerce. Google controls the lions share of this “real estate” for these invaluable search words.

It should be noted that advertising revenue is tied to the general economy and as such is cyclical. Google did experience softening revenues in the latest recession although this was mitigated by the strong secular growth in both Internet usage and advertising.

4. “Customer Lock-in / High Switching Costs”

There is nothing that locks users and advertisers into using Google in the classic sense of switching costs. This may slowly change as more users adopt Google applications such as Docs and Gmail. Google’s + initiative, if successful, may also make Google’s offerings more sticky.

The real issue is that, if an advertiser leaves Google, where do they go?  Leaving Google means conceding visibility to your competitors for the 65% of Internet users who use Google in the U.S. and a much higher percentage in numerous other countries.

(to be continued in a second part)

Value Investors Club write-up values Berkshire Hathaway B shares at $125

A member of the Value Investors Club named Den1200 has valued Berkshire Hathaway B shares at $125.05 per share in his March 28, 2011 write-up of the company. I think his approach and logic are sound. (You can sign up for guest access to the Value Investors Club to see the actual write-up.)

The $125 valuation is over 60% higher than Berkshire’s current trading price of about $77.

Let’s walk through Den1200’s logic.

He starts with the fact that in Warren Buffett’s 2010 letter to shareholders, Buffett estimates Berskhire’s normalized pre-tax earnings power to be $17 billion. This figure does not include insurance cat losses as Berkshire has shown the ability to operate at a combined ratio of less than 100%. (In my judgment, there is reason to believe that Berkshire’s insurance operations will be net profitable over the long-term which would further add to Berkshire’s value.)

Den1200 then proceeds to use a two-track approach to value Berskhire which values the business as the sum of its investments – which includes equities, fixed income, cash, and cash equivalents – and capitalized non-insurance operating earnings. This is the general approach used by Buffett in multiple shareholder letters.

Non-Insurance Operating Earnings

After subtracting all Berkshire’s investment income, Den1200 calculates that the non-insurance operating businesses earn normalized earnings of $12.07 billion pre-tax. If you include Lubrizol’s earnings, Berkshire pre-tax operating earnings grow to $13.04 billion. That equates to $9.13 billion after tax, given Berkshire’s 30% tax rate. Lubrizol is being acquired by Berkshire and its earnings were not included in Buffett’s normalized earnings estimate.

Den1200 then assumes that Berkshire’s earning can conservatively grow at 5% and will be $9.88 billion by December 31, 2012. That equates to $4.00 per B share or $60 of intrinsic value if valued at 15 times earnings.

Buffett has traditionally hinted at a higher multiple when valuing Berkshire. Given the high-quality nature of Berkshire’s operating businesses, a market multiple seams reasonable.

Investment per Share

In addition to the non-insurance operating businesses, Berkshire has $155.86 billion in investments. Den1200 makes several adjustments to this figure. He first subtracts $5.56 billion to account for deferred taxes on the equity holdings. He then subtracts $9.7 billion to account for the cash used in the Lubrizol purchase and adds $1.06 billion for pre-payment penalties from Goldman Sachs, GE and Swiss Re related to redemptions.

These adjustments yield $141.65 billion in investments or $57.40 per B share.

Finally, he notes that this figure probably understates the intrinsic value of Berkshire’s large equity holdings as several may be undervalued, namely AXP, JNJ, KFT, Munich Re, POSCO, WMT, USB and notably WFC.

Berkshire’s Intrinsic Value

Den1200 then estimates that Berkshire will earn $18.90 billion or $7.65 per B share between the time of the write-up (March 28, 2011) and December 31, 2012.

Adding it all together, Deb1200 calculates that the intrinsic value of Berskhire will be $125.05 in December, 2012 ($60.00 for its capitalized operating earnings + $57.40 for its investments + $7.65 future earnings through Dec 2012). That figure is 60% higher than Berkshire’s current price.

Closing Thoughts

Berskhire’s derivative book has been a source of concern for several years now as investors have seen several companies blow up as a result of poor derivative bets. Den1200 argues that this level of risk is not likely present in Berkshire’s portfolio and calculates that even a major hit on those contracts would only equate to a relatively modest reduction in Berkshire’s intrinsic value.

Regarding Buffett’s eventual departure, Den1200 suggests that the negative case may already be baked into the stock; it’s hardly a secret that Buffett is 80. At the current price, if Buffett lives several more years – or even longer – his capital allocation decisions are available now as a free option.

Finally, Berkshire operates in a highly decentralized manner with highly skilled division CEO’s. Couple that with Berkshire’s strong culture and a talented board with plenty of skin in the game and it is not a stretch to conclude that Buffett’s departure will have little effect on day-to-day operations.

Long-term it is unreasonable to expect to find a capital allocator as good as Buffett. There was only one Michael Jordon. That doesn’t mean there are not very capable, talented players in the NBA today.