Sunday, March 04, 2007

Know nothing about stocks? Then buy this hedge fund like stock.

Berkshire Hathaway (symbol BRK.B) is the best stock to buy if you know nothing about investing. Unlike a mutual fund manager; CEO Warren Buffett has no limits on what he can do. He runs the company like a fund holding investments in stocks and directly owning several companies like GEICO. His track record is exceptional and the shares (brk.b at US$3550) trade at a price/book of around 1.55 which I feel is cheap for its class and historical average. Morningstar rates it as trading below their buy point which is around 3900 USD per share.

Of late the stocks growth has slowed as Buffett has found few companies of adequate size to invest the 40 Billion US $ in cash he has lying around. However he remains confident of doing better than the broad markets over the next decade and sees no need to declare a
dividend or share buy back.

He has taken in a big way to international investing buying shares in Israel, China and recently Korea.

There is no chance that he will match his historic 21% rate of return but he should do better than broad markets. Note the advantages to US Tax sufferers,this stock pays no dividends to be taxed on and unlike a US mutual fund you only pay taxes when you sell the stocks.

As for valuations buffet himself uses book value to measure his performance, so a buy when price to book is below 2 and consider selling when price/book is greater than 3 is my opinion.

But hey! you decide for yourself, go read the annual letter from Buffett himself at
http://berkshirehathaway.com/letters/2006ltr.pdf

Another good source of information where you may post queries is the yahoo group
http://finance.groups.yahoo.com/group/chucks_angels/


The yahoo finance link for class A shares is
http://finance.yahoo.com/q?s=BRK-A
The yahoo finance link for class B shares is
http://finance.yahoo.com/q?s=BRK-b

One class B share is 1/30th of a class A and so should trade at 1/30 of a class A share. For most ordinary folks the difference is not important you may buy any of these and get the same value for money.

2 comments:

returntomean said...

Just testing this site out.
I own brk.b. The article represents my personal opinion and not that of my employer or anyone else. I don't claim to be better than anyone. I will update the disclaimer to state that I usually take a position in everything I recommend. You may lose money following what I say, so do your own research.

rich said...

Fine. But how will you convince a person who knows nothing about stocks to invest $3500 for one stock?

The most common question a financial adviser faces when dealing with clients is that $3500 is too high for a stock,they want something that is more reasonably priced.

How do you explain that value of a stock is different from its market price?