Why are you invested in Berkshire?

Our main focus at Fairholme is investing in undervalued securities run by talented managers where we feel the risks are modest and the upside is large. Despite Berkshire’s notoriety and several decades of incredible success, we believe that it’s still not fully appreciated by the market. In our view it’s trading at the low end of its fair value. It appears to us that the market assumes that Buffett never finds any interesting investments, any high return investments, for the $40 billion in cash that the company is holding. We disagree. BRK is in the process of acquiring the utility company PacifiCorp, which is a $5 billion- plus transaction. With the repeal six months ago of the Public Utility Holding Company Act [which had previously placed restrictions on non-utility companies investing in utilities], Berkshire has the opportunity to invest many billions more into the utilities arena.

Berkshire is also one of the strongest players in the insurance business. Property and casualty insurance rates in the aftermath of the devastating losses in 2005 from hurricanes Wilma, Katrina and Rita, are leading to higher rates which should benefit the company. It’s one is one of the very few AAA rated companies left in the insurance/reinsurance area, and one of the very few AAA rated companies left – period.

What about the fundamentals?

The stock is currently trading at 1.5 times book value. It strikes us that for a company of Berkshire’s track record that is incredibly cheap. This is a company run by arguably the best investor and businessman in the country, it’s unbelievably profitable, and it holds some very strong investments. Many mediocre investment companies are trading far above its numbers. The market hasn’t factored in any real premium for the company’s track record and for Buffett’s acumen. We think that intrinsic value is anywhere up to about $140,000.00 per A-class share.

Why has the stock been so stagnant?

People are impatient. The company’s cash flow is very strong. Cash builds up at an incredibly fast rate and people get frustrated when there isn’t a big investment made, they get frustrated that he’s sitting on all that cash. I think that there’s a good chance that Buffett will make a substantial investment in the next few years, either through wholly owned acquisitions or activities in the stock and bond markets. The point is, we implicitly trust him as a steward of shareholder capital. Keep in mind, too, that he is the biggest shareholder.

What are the risks?

Berkshire is a Fort Knox corporation in our view. I honestly can’t think of any significant risks at the current price. A more difficult economic or financial market environment would actually be helpful, it would give the company the opportunity to invest money attractively. Buffett thrives in those sorts of markets. At Berkshire it’s really a case of heads they win tails they win.