'Prediction X' event tonight; My updated estimate of Berkshire's intrinsic value; Alice Schroeder interview; Wonking Out: Is a U.S. Debt Crisis Looming? Is It Even Possible?; TUP and YELL; Increasing political polarization
1) Tonight is the night...
At 7 p.m. Eastern time, I'm revealing the 10th major prediction of my career – one I'm calling "Prediction X."
Given the nature of this prediction – how I risked my life (twice!) this year to even be able to bring it to you, the far-reaching, global effects of this prediction, and the extremely rare investment opportunity it will hand you if I'm right – I'm pounding the table harder on this than ever before.
Don't get blindsided by what I believe is to come... Just go to this page tonight at 7 p.m. Eastern time for full access. See you then!
2) For a number of years, I've been calling Warren Buffett's Berkshire Hathaway (BRK-B) "America's No. 1 Retirement Stock" because it offers a unique combination of safety, growth, and undervaluation.
While the undervaluation isn't as great as it has been at certain times in the past (see analysis below), I still think the stock should be the bedrock of any conservative portfolio.
I've used a consistent method to estimate Berkshire's intrinsic value for the past two decades, which I believe is similar to the one Buffett uses: take the cash and investments per share and add the value of the operating businesses.
At the end of the second quarter, cash and investments were $380,000 per A-share. Since then, Berkshire's stock portfolio has risen by $8,000 per share, so that's $388,000 today.
Berkshire's pretax operating earnings over the past 12 months were $19.1 billion per share (excluding volatile insurance and investment income, but adding back an estimated $1.4 billion of annual normalized insurance earnings). To this, I apply a conservative below-market multiple of 11 times to arrive at a value of $210,000 per share.
Thus, my estimate of Berkshire's intrinsic value is $388,000 (investments) plus $210,000 (operating businesses), for a total of $598,000 per A share or $399 per B share.
This table shows this calculation for each year-end starting in 2002:
The A-shares closed yesterday at an all-time high of $551,920, meaning that the stock is currently trading at an 8% discount to my estimate of its intrinsic value.
That's the smallest discount since the stock hit its prior all-time high in March of last year, but I still like it because it's still somewhat undervalued, incredibly safe, and its intrinsic value is growing nicely.
That said, it's important to have reasonable expectations...
Given its moderate undervaluation today, I think over the next five years, Berkshire's stock is likely to do perhaps two percentage points (compounded annually) better than the S&P 500. In other words, if the S&P compounds at 5%, I'd expect Berkshire will do 7%.
3) I just discovered a Q&A that my old friend Alice Schroeder, author of the incomparable The Snowball: Warren Buffett and the Business of Life, did with Reddit readers nine years ago. Here's the full thread (click the plus signs to see Schroeder's answers), and here's a summary of the highlights: Alice Schroeder Reddit AMA. Here are a few of my favorites:
What advice has for a 16-year-old investor like myself?
As I mentioned in the intro, I've been inside the sausage factory and know how complex business is in the real world. In that context, a lot of investor opinions display a high level of confidence based on a relatively sparse set of facts. So as you develop your skills, it's important to be mindful of the risk of overconfidence. This is where the margin of safety and circle of competence have done wonders for Warren. I would look at how he's applied those in investing and really think through the implications of "don't lose money."
At what point in your life did life get easier? It sounds like now you invest and serve on boards. Has life taken a turn for the better and how did you go about achieving this status?
Well, I will tell you a little story.
When I was 47, I was having a difficult year for a variety of reasons and Warren sat me down and said look, when I was 47 I thought my life was over. Susie had left me, and I had already accomplished everything I thought was worthwhile as an investor. Berkshire, as far as I knew, was at its peak. And to my surprise, my life kept getting more and more interesting since, and most of the really important things I've done happened after I was 47 and thought my life was over.
The reason, he said, was that he had stored up so many experiences, good and bad, in the first part of his life, and as a form of compounding, their positive consequences unreeled over the next thirty-some-odd years.
So that's something to ponder.
You had mentioned in one of your interviews that you've changed how you manage your time as a result of writing your book. Could you explain that a little more? How has it changed?
Sure, there are several things.
Warren is a master of time management. He knows how to ease people off the phone without making them feel dismissed. He is great at saying no and I learned a lot about saying no tactfully. That's an important time management technique. Also, he manages his energy, reading when it's optimal, talking on the phone when he's got the right energy for that and so forth. It's fairly compartmentalized and he does not multitask through his day. That was a useful lesson.
Can you tell us some non-investing stories of you with Buffett? Maybe 3 instances where he made you laugh or helped you in a difficult time? We'd like you to help us get to know him as the person, not as the investor. What moments which you've shared with him stand out to you?
Sure. Dining with Warren is such an experience. Once, we were at a restaurant and Warren ordered a steak. The waiter offered him truffle sauce. The look on his face was priceless. it was as if someone said, would you like some arsenic, Mr. Buffett?
He's a terrible driver. There's always something going on in his head and he's also talking to you, meanwhile the car wanders between lanes and goes through yellow lights. He drives slowly to make sure it won't cause too much damage if he gets into an accident. I think he is doing less driving these days and being driven more, thank goodness.
Here's a good one. I bought a house in 2004 and when I told him he was aghast. That's when I knew we were in a serious housing bubble. Finally he said, well, don't worry, you'll be able to sell it in ten years, so just hold on until 2014.
What is your favorite Buffett quote/memory?
On who influences him:
When I get up in the morning I look in the mirror, and at that point, everybody's had their say.
4) Last week, Fitch, one of the three major credit ratings agencies, downgraded the U.S. from AAA to AA+, which led the usual cast of gloom-and-doomers to have their day in the sun, confidently predicting a looming debt crisis.
This is silly... and I recommend ignoring Fitch's downgrade, for reasons economist Paul Krugman outlines here: Wonking Out: Is a U.S. Debt Crisis Looming? Is It Even Possible? . Excerpt:
Let's note that most economists believe that there is some limit to how much debt the U.S. government can take on as a percentage of gross domestic product. (Pro tip: The ratio is what matters, not the absolute dollar value. Never take anyone who rants about TRILLIONS OF DOLLARS seriously.) But history and the experience of other countries suggest that we're still a long way from that limit.
The most obvious example is Japan, which has accumulated a lot more debt relative to GDP than we have but has defied predictions of an imminent debt crisis for decades:
An even more striking example is Britain, which spent much of the 19th and 20th centuries with debt levels far above that of the United States today, without ever facing a debt crisis:
So what might make people suddenly concerned about U.S. debt? One thing that has attracted considerable attention lately is rising interest payments. The Federal Reserve has been raising rates to cool off inflation, and this has translated into a spike in government interest payments both in absolute terms and as a percentage of GDP:
Even now, interest payments are substantially lower relative to GDP than they were in the early 1990s, but they're up a lot from recent years.
5) Last Wednesday, I wrote about "the foolishness among a new class of meme stocks" and named two that my colleague Herb Greenberg was warning about, Tupperware Brands (TUP) and trucking company Yellow (YELL).
Tupperware is hanging in there (for now) thanks to a debt restructuring that investors don't appear to understand, as Herb explained in yesterday's Empire Financial Daily. As he concluded:
If you didn't know better, you might even think these kind of debt restructurings of companies with big, well-known brands are part of a deliberate (and I would say brilliant) strategy...
It's a strategy designed to stoke the emotions of the Robinhood investing crowd, which in turn helps goose these types of stocks higher, with the express intention of bailing somebody out.
There I go with my silly conspiracies again. Onward.
At least some sanity is returning to Yellow's shares, which had spiked 700% in a week. But the company filed for bankruptcy yesterday, causing its stock to fall more than 30%.
Mark my words: both of these stocks are zeros...
6) Wow, it's really shocking how much more politically polarized we've become over the past two decades, as these charts show:
Best regards,
Whitney
P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.