The case for selling Berkshire Hathaway

One investment firm writes about why it decided to dump half its holdings in the company.

By Kim Peterson Mar 25, 2010 3:31PM
Warren Buffett. Image credit: © Chip East/ReutersDumping a big chunk of Berkshire Hathaway (BRK.B) is a bold move, and one investment firm decided to write a lengthy explanation about it.

The firm, Reed Conner & Birdwell, says it manages about $1.7 billion for wealthy clients. Berkshire was one of its larger holdings going back to 2000, but last month it sold half its position.

Why? The investors there think Berkshire is at best worth around $83 per share (it was trading just under $82 Thursday). Here are some of RCB's concerns about the stock, and the company:

Age: Berkshire's holy trinity is getting old. Warren Buffett is 79, Charlie Munger is 86 and Ajit Jain is 60. And so the question of succession is important.

"Morbid thoughts aside, who the next person to run Berkshire and in what form is a matter of legitimate concern to an investor," writes Jeffrey Bronchick, the chief investment officer at RCB. "There is a long history of legacy problems following the retirement/replacement of a larger than life CEO."

It's too big: Berkshire is buying the Burlington Northern (BNI) railroad company in a huge deal. So huge, in fact, that it reeks of an attempt to make Berkshire so large and diversified that Buffett doesn't matter anymore, Bronchick writes.

That leads to questions about Berkshire's size and ability to move the needle with future deals. Unlike Wal-Mart (WMT) or Costco (COST), Berkshire is so decentralized that it cannot benefit from scale, Bronchick writes.

Splitting wasn't helpful: Berkshire split its B shares to finance the Burlington Northern deal, and that enabled it to enter the S&P 500 index. But that's not necessarily a good thing, Bronchick writes.

"Berkshire now enters the world of indexed money, which means its stock will often trade without regard to an analysis of its fair value, but merely as one of 500 pieces of paper to be tossed about by advanced degrees from the finest business schools."
It's hard to see any benefit from this, according to Bronchick. It removes that perception of exclusivity among the Berkshire faithful, that feeling that the shareholders understood investing and could outperform in a down market.

So, with these concerns in mind, RCB decided to hedge its bets and sell half its position. Bronchick said there are still many reasons to hold the stock: Berkshire should outperform in a choppy market (although it didn't in 2008), and it should have a big tailwind in an improving economy. The stock is usually strong heading into the annual meeting.

But for one last reason against holding the stock, Bronchick points to something that Berkshire itself said in its last annual report: "The past growth rate in Berkshire's book value per share is not an indication of future results ... our book value per share will likely not increase in the future at a rate even close to its past rate."
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.