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Stocks B / Berkshire Hathaway


Subject:  Re: Buffett premium Date:  2/25/2013  12:23 PM
Author:  rationalwalk Number:  199068 of 237289

So I suppose in a sense you could say that, when you buy Berkshire, you are not paying for a Buffett premium, you get Buffett for free. But I think this is a sloppy way of speaking. You in fact likely are paying a premium for Buffett, you are just getting a very good deal on the rest, so the total overall transaction is still favourable.

I don't think it makes much sense to look at things that way. It is impossible to make any estimate of the value the market is placing on Warren Buffett's presence. Is it $10 billion, $20 billion, $50 billion? Pick a number out of a hat ... there is no objective way to make this estimate.

All we CAN do is make an estimate of the value of Berkshire and be careful to not embed any assumptions that rely on Buffett's unique abilities or reputation. If the estimate of intrinsic value is sufficiently higher than market value, it is unimportant to speculate on the value the market attaches to Buffett's presence since a margin of safety exists.

Although estimates of Buffett value in the eyes of the market are necessarily subjective and speculative, I do not believe that the market is attaching any premium to his presence. More likely, the market is discounting Berkshire because of the "uncertainty" associated with succession. The market could be placing a much LOWER value of Berkshire's long term prospects because market participants overestimate the degree to which Buffett is needed for the ongoing value of Berkshire's businesses to persist.

I believe a stock market reaction similar to what took place with Apple after Jobs died is more likely than a persistent drop in Berkshire's quote when Buffett is no longer there. Also, the degree of a drop will depend on how much of a surprise it is and there is no way to know how that plays out.

This is all too speculative (and morbid) of a topic to warrant much attention and it is probably a mistake to discuss it at all. If Berkshire was trading at $225K, it would be a more interesting discussion.
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