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Subject:  GenRe and the S&P500 index Date:  12/21/1998  5:15 PM
Author:  TMFRalegh Number:  726 of 5673

Intrinsic value as Buffett or many good value-oriented people define it is "the net present value of all the cash that can be taken out of a business over its lifetime." And that's from here until the end of time. That's why Mr. Buffett uses "look-through" earnings in assessing the intrinsic value of Berkshire, in my opinion. The inclusion or dis-inclusion of Berkshire in the S&P 500 doesn't effect the vital moving parts in that definition. Therefore, it can't effect the company's intrinsic value. It can effect the market in the short-term. As Ben Graham said "In the short term, the market is a voting machine, in the long term, it's a weighing machine."

This is particularly pertinent to the situation with Berkshire's non-inclusion and GenRe's dis-inclusion in the S&P right now. In the short-term, it will effect the price, through perceptions and through the actual selling of GenRe by index funds and closet-indexers (the money managers that mirror big chunks of the index to keep up with the benchmark against which they're judged). But that is the voting machine at work, not the weighing machine. In the short term, the voting machine can be an 800 horsepower motor torquing the market price of a company. In the long term, the voting machine is a rubber band-driven toy car working against the Titanic boilers and engines of the drivers of intrinsic value. To distill that mixed metaphor, in the long term, the value of the company and the performance of the company will be driven by fundamental factors and not the workings of the S&P 500 index.

To illustrate, look at the performance of Cincinnati