Thoughts on Berkshire Hathaway

Berkshire Hathaway is a holding in Insight's model portfolio. I heard Buffett speak at a news conference with Melinda and Bill Gates. He talked of the effect of his donation of Berkshire stock on the stock price. He strongly hinted that with the increase in float as a result of the gift that Berkshire would now be a greater candidate for inclusion in the S&P 500. I think this is correct. One stock that I follow Consol Energy was recently added to the S&P 500, and jumped by more than 10% on the announcement. More broadly though for the last several years Berkshire has shown little price appreciation, and I think the big concern has been succession after Buffett dies. My concern had been that after Buffett, Berkshire would be in the hands of Buffett's family who would be resistant as he is to financial engineering such as spin-offs, a sale to an acquirer, a going private LBO, etc. which I think is crucial to unlocking value in Berkshire. Now with the donation and Buffett no longer ultimately a huge controlling block of the stock, there may be some selling as the Gates foundation sells the stock to fund their goals. But in the long run Berkshire stock now has a greater chance to end up in the arms of hedge funds, for example, who could exert the kind of pressure required to unlock value, and I do think the stock is 10% undervalued, perhaps more. So net net I see the donation as a positive development for the stock, though because the donation will be made incrementally over a number of years, it may take some time for the stock to begin to move.

Philip Frank, PhD
President and Portfolio Manager
 Insight Asset Management LLC
 e-mail: insight-asset@earthlink.net