A case for selling Berkshire?

Lately, some of the big value names have been selling Berkshire. The famed value funds include Sequoia fund. The Sequoia fund has a long term association with Buffett but has recently got some new management. Mohnish Pabrai, a rising value investor has also diluted his Berkshire holdings significantly. Also, popular hacks such as Jubak have started writing negative articles about Berkshire.

Before jumping on to the bandwagon and selling off our Berkshire holdings, let us do some analysis. Currently, the Berkshire consensus IV is ~130K. It is likely to reach 134-135K by end of FY06. The growth in earnings from the operating companies, the equitas deal and the growth in the BRK stock portfolio should contribute another 10% to IV growth in FY07. The hurricane season is a wild card but it can trim earnings for one quarter at worst. We are looking at an IV of about 148 to 150K by year end FY07. The current stock price at 106K is selling at around 40% discount to next year's IV. Following this year's bull market across all segments, there arent as many good businesses selling at such a discount.

Let us consider a typical scenario for an investor this year. Assume the investor bought BRKA at 91K and has seen the gains to 106K. This comes to 16.5% short term gain. If we follow Jubak's advice and sell the stock, our gains reduce from 15K to 10.8K at 28% short term capital gains tax. Now, there is the secondary problem of investing the money in another investment that will provide bigger gains while providing the same AAA balance sheet.

For long term investors, following the likes of Jubak is like applying sand paper to one's portfolio. While the reasons for Mohnish Pabrai and Sequoia funds selling may never be known, it will not affect their performance as the performance is calculated before tax and the tax burden is borne by the fund investor.

From a cursory analysis of Berkshire, it is clear that it is still significantly undervalued and the bull market in all segments of the stock market has left very asset categories that are undervalued.