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Sunday, March 4, 2012

Solid Article on Berkshire and Net-Nets

This article from the 'Science of Hitting' sums up my thoughts on Berkshire and net-nets pretty well. Click here for the full article. But first, here are my thoughts.

I like net-nets but it can often be very frustrating waiting for them to hit intrinsic value. Sometimes (but not all the time!) net-nets are poor businesses and intrinsic value isn't growing (the effects of compounding are working against you). Fortunately, in today's environment Berkshire is selling below $80 per share.  Even if the price takes a while to catch up to intrinsic value, I can sleep well at night knowing the intrinsic value is increasing at a solid rate.

Time is the friend of the wonderful business...
Highlights from the article:

“As investors, we like asymmetric risk/reward; up 50%, down 8% [to 1.1x book, where Buffett can repurchase shares in size], I’ll buy that all day long. We have encountered periods where the stock has traded for whatever reason… there’s no obvious catalyst here, we’ll concede that for sure; but we’ve always been rewarded if we are just patient and here we think we’re going to be rewarded sooner rather than later.” (Whitney Tilson)
....
"One of the problems you have with net-nets is that you have only one side of it. You have downside protection. You don’t have the upside. I really try to look for ones where I can get both. And it’s few and far between but that’s what we try to do.” (Mohnish Pabrai)


Disclosure: Long (an obscene amount) of brk.b 

PS I know the 'Buffett Put' isn't concrete, he made that clear in the annual letter. That being said, I wouldn't want Buffett only to be able to buy just one stock in the event of a distressed market. 


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