When A High Price Is Still Cheap

Price is what you pay; value is what you get.’  – Warren Buffett

When A High Price Is Still Cheap

Let’s consider the price for a product rose from 275 USD in 1980 to over 219’000 USD today. No one would argue against, that this product has become quite expensive.

But with stocks, the exact same price development doesn’t necessary mean the same. It can still be a cheap stock to buy. Of course, this would be an extra-ordinary share – but this share really exists in Berkshire Hathaway: Warren Buffetts investment company based in Omaha, Americas flat-land known as the ‘Great Plains’.

Berkshire Hathaway is not a ‘normal’ company producing and selling products, but a conglomerate who fully owns other companies. Among them are direct-insurer Geico, transport giant BNSF, chemical company Lubrizol, or Net Jets that offers fractional jet ownership. Aside of fully controlled companies, Berkshire holds significant stakes in dozens of companies, notably in American Express, Coke, IBM, Wells Fargo, Kraft Heinz, or dividend star Deere.

First, some milestones in the development of Berkshire’s stock-price:

Since today is April 25, we start and finish with this date.

25 April 1980 – 275 USD

23 April 1981 – 500 USD

26 Aug. 1983 – 1’000 USD

27 June 1985 – 2’000 USD

07 Dec. 1988 – 5’000 USD

23 Nov. 1992 – 10’000 USD

21 Aug. 1995 – 25’000 USD

02 Feb. 1998 – 50’000 USD

02 Oct. 2006 – 100’000 USD

19 Feb. 2013 – 150’000 USD

18 Aug. 2014 – 200’000 USD

On December 23, 2014, the shares of Berkshire were traded at 227’720 USD, making them the highest-priced shares ever on the New York Stock Exchange.

And today, on April 25, 2016 – exactly 36 years after the share was traded at 275 USD – the market in New York will open with Berkshire at 219’038 USD.

That’s undoubtedly a high price for a share, but it’s worth every cent, because the impressive raise of the Berkshire shareprice is not the main point here. When it comes to stocks, you generally shouldn’t think in terms of ‘high’ as expensive or ‘low’ as cheap. Instead think in terms of value. Regardless of the current share price, an overvalued stock is always expensive, an undervalued stock is always cheap.

So, even with a price-tag of almost 220’000 USD, the Berkshire share is still ‘cheap’ because Warren Buffett is adamant when selecting and buying stocks or companies for Berkshire:

He follows the Benjamin Graham school of value investing and thereby never buys ‘overvalued’ stocks with a current price that is not justified by its value. Instead he’s acting with a margin of safety, thereby buying only shares at a significant discount to its value. Buffett pays great attention to the ‘intrinsic value’, meaning he inspects quite thoroughly the actual value of a company based on his underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors.

This stock-selection principle does not only provide high-return opportunities, but also minimize the downside risk. In simple terms, the idea is to buy assets worth 1 USD for a price of 50 cents. He did this evidently very well.

The search for value requires a lot of time and patience. And even with all the available chip-power in the world, no computer-based numeric-formula was and will ever be used at Berkshire to find undervalued stocks or companies. Buffetts long-time business partner and Berkshire Vice-Chairman Charlie Munger explaines why: ‘We don’t use numeric formulas. We take into account a whole lot of factors. It’s a multi-factor thing. There’s never going to be a formula that will make you rich just by going through some horrible process. If that were true, every mathematicalnerd who gets a ’10’ in algebra would be rich.

The result speaks for itself. Berkshire Hathaway averaged an annual growth of 19,7% to its shareholders for the last 50 years (compared to 9,8% from the S&P 500 including dividends). Thanks to this performance, thousands of Berkshire-investors became multi-millionaires over the last decades.

And each year, over a weekend at the end of April/beginning of May, many of them gather in Omaha to attend the annual shareholder’s meeting. This next meeting is just days away, with an expected attendance of close to 40’000 shareholders this coming Saturday at the Century Link Center in downtown Omaha.

In other companies, these meetings are usually boring and full of formalities and re-elections-processes of directors or board-members. But, as you know, Berkshire isn’t a ‘normal’ company, so the necessary formalities are done within a few minutes and then Warren Buffett is taking time (for hours) to answer questions posed by shareholders about investing and other things in life.

I had the fortune to visit a few meetings in the past and each time I was deeply impressed by Buffetts wisdom and modest behavior. After all, he’s among the 3 richest people in the world and could easily distance himself from the crowd – but he doesn’t. At one of the meeting I visited he specifically told the audience that he will first take questions of local farmers, since they should be able to leave early in order to be present on their farms or fields in the afternoon.

That’s why I close with a few Buffett-quotes from these meetings or the annual shareholders-letter to investors over the past decades:

  • After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.
  • At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it. Instead, we try to apply the equation to opportunities in which we have reasonable confidence as to how many birds are in the bush and when they will emerge.
  • I don’t want anybody buying Berkshire thinking that they can make a lot of money fast. They’re not going to do it, in the first place. And some of them will blame themselves, and some of them will blame me. They’ll all be disappointed. I don’t want disappointed people. The idea of giving people crazy expectations has terrified me from the moment I first started selling stocks.
  • Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
  • I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.

——-

Before the meeting

This is not the scene of a concert of a popular band or from an NBA-game – it’s a picture taken at 8 am on a Saturday in the Century Link Center in Omaha prior to the opening of the Berkshire shareholder’s meeting where thousands of investors attend each year.

berkshire annual meeting

During the meeting

Warren Buffett and longtime business partner Charlie Munger explain investment-insights live or via hugh screens to shareholders.

berkshire shareholders meeting

After the meeting

Warren Buffett walks through the nearby exhibit-hall at Berkshire Hathaway annual shareholders’ meeting.

warren buffett

Your ‘Easter/1 May’- bonus:

For a deeper insight into Warren Buffett’s beginnings and as introduction into ‘Value Investing’ – here are two ebooks to read on profit from:

Warren Buffet: The Early Years (Click link to download)
Download your free copy of “The Little Ebook on Value Investing” here

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