Feeling the Pain
In essence, after Buffett, Berkshire Hathaway will likely be run well but not likely as well as over the past five decades.
It was in the context of the difficulty in replacing Buffett as well as his advanced age and other factors (above) that has caused me to have a lower intrinsic value calculation than the valuations arrived at by other analysts and money managers, including Whitney Tilson, who I respect immensely and feel has the best analytical grasp of Berkshire Hathaway. Whitney's analysis takes the full value of the company's cash and investments and adds 10x pretax profits of the noninvestment holdings to produce a $178,000 value per Berkshire A share. By contrast, I have taken an 8% percent haircut to cash and investments, and I use a 7.5 multiplier to noninvestment income and come up with a $151,000 per share value (relative to the share price of approximately $119,000 a share).
Yesterday's announcement has made me increase the haircut modestly to Berkshire's cash and investments and to slightly lower the multiplier to noninvestment profits, leading to a reduced intrinsic value of $140,000- $145,000 per share. This has reduced the appeal of reward vs. risk in Berkshire as an investment.
Bottom line: The appeal of Berkshire's common shares has become more common (to me) with yesterday's news.
Within minutes of Buffett's announcement, the media calls came through to my office, and I appeared (separately) with Whitney Tilson on CNBC's "Fast Money" to explain my above analysis of the situation and further discussed the rationale for my investment response in reducing my holdings in Berkshire Hathaway shares -- I am long the B shares -- in after-hours trading.