S. Raj Rajagopal has provided a guest post outlining his argument for a short position in Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B). Raj is an MBA student at Johnson Graduate School of Management at Cornell University graduating in May this year. He has worked as a portfolio manager at the Cayuga Fund, LLC, the Johnson Graduate School’s $12M hedge fund, and is currently seeking full-time employment in the investment management area. Here is his resume and his website, Gordian Knots. Please contact Raj if you would like to see his valuation on BRK.A / BRK.B.
Raj’s short case for Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B) is set out below:
(Click to enlarge)
Click here to download the Short Case for Berkshire Hathaway in full (.pdf)
[Full Disclosure: I do not hold BRK.A or BRK.B. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
Extremely, extremely weak arguments. I did not find one argument of substance in here. Raj, this type of fame is not good, if it leaves you with a permanent legacy of looking like an idiot.
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I think the Burlington acquisition was very bad and when it happened I knew it was the end of Berkshire Hathaway’s stellar returns. I viewed it as a direct signal from the Oracle that he couldn’t find any truly great businesses any more. A great business does not require large capital expenditures.
However I think BRK is at least 25 percent undervalued.
I found the short case unpersuasive, poor reasoned and self contradictory.
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Why are we wasting our time on this clown? This guy is a know-nothing MBA desperately looking for a job. 30 seconds through this presentation makes it plain as day that this guy knows less than zero about investing and only marginally more about Berkshire Hathaway.
Hey Raj — you should apply for a job at CNBC. They love this kind of sensational, analysis-free “research.”
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I think this is more about Raj trying to get a good job by posting something that is very much contrarian. A good risk/reward bet. If BRK/B goes down, he will look like a genius. If it goes up and he said it will go up, he is one in millions of people who say it.
Good marketing ploy. He learned a lot from his Cornell MBA studies – not exactly finance, but marketing. Being the Purple Cow, being dramatic…. kudos for that. Hey, it got him a WSJ article.
And he will probably get a job because of this coz Wall Street is dumber than you think.
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[…] 17, 2010 by greenbackd Yesterday I ran a guest post on the short case for Berkshire Hathaway Inc. (NYSE:BRK.A, BRK.B) by S. Raj Rajagopal, an MBA student at Johnson Graduate School of Management at Cornell […]
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I thought this was weak. I can think of better reasons to criticize Buffett. The author does not understand how Berkshire is primarily an insurance enterprise that uses its cheap source of funds to fund profitable businesses.
I received a copy of this as well, and did not think it was worthy of a personal response, much less publication.
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I enjoyed this post and would have to say I agree with Raj, albeit for different reasons.
As Graham noted, (paraphrasing) any company, no matter wonderful, becomes a speculation if the price is high enough. Berkshire is that for me. Due simply to its size, it cannot continue to grow at the same rate it has in the past 30 years in the next 30 years, as it would become larger than the US economy. Wonderful company that Berkshire has been and still remains, I don’t think a share price of $123,575 constitutes a rational assessment of its current position and future prospects.
If I’m honest, I’m also a little uncomfortable with Buffett buying up bank stocks then giving advice to Obama on bail outs etc.
As a speculative effort I’ll say that I think a fair price for BRK.A shares would be more like ~$90,000. That is approx 15x average earnings for the trailing 5 years and 1.5x book value. Thoughts?
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Is Raj one of the few who has the guts to stand up and say the Emperor has no cloths on? In doing so has he put a BRK fatwa on his head? I don’t know. But I do think the author does deserve a right of reply to these comments. I think he deserves an opportunity to expand on his quantitative rationale for why BRK is a short. Over to you ‘Greenbackd’. Can you get the author to expand on his thesis?
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His valuation is coming out tonight.
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here’s the biggest problem with shorting BRKb – and I don’t think I’ve ever encountered another stock like this – certainly not one of this size: there are no natural sellers. Period.
think about that – owners of BRK are mom and pop Buffet disciples who will never sell. Now, in addition, of course you have the index funds, but more importantly – the shadow indexers: all the big funds who will own BRK just because it has a huge SPX weight and the fund managers don’t want to risk underperforming based on being underweight BRK.
the lack of natural sellers makes this a very very hard stock to be short – and i think it’s probably why the stock never came back in after the rip into the SPX index inclusion.
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Bill Gates is what you’d call a natural seller since Gates is aware, and moreso than most, that you can’t sell IV in order to raise cash. And the Gates Foundation is committed to undertaking a variety of worthwhile endeavors that consume gobs of cash — like curing sub-Saharan Africa of AIDS, for example.
The Gates Foundation, as Buffett’s principal beneficiary, is probably the biggest natural seller of BRK out there, and no one else is even on the radar screen, imho.
GLTA
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well yes, absolutely – but they can only sell a teeny bit at a time – not enough to matter i don’t think.
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[…] […]
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I have to agree with Nate, Ravi and Will. There is a lot of qualitative assessment, but very little quantitative backing. I know that the post says to contact Raj to see his valuation, but would he be willing to disclose it publicly?
I’d also be curious about his views on Whitney Tilson’s analysis of Berkshire Hathaway posted on the Tilson Funds website.
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[…] The short case for (really against) Berkshire Hathaway (BRKA) stock. (Greenbackd) […]
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There are plenty of reasons to believe BRK is overvalued at current levels. But he doesn’t hit on a single one that anyone with a quantitative bone in their body would take seriously. “Options market makers will have a field day?” Seriously??
If this is one of his better efforts in justifying an investment opinion, then Cornell clearly hasn’t done its job in educating its students. Keep looking for that investment management job.
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I looked forward to a Berkshire short case, but there is not much valuation or reasoned argument in this post.
Obviously the folksy thing is partly staged, but how does that affect value? No argument is made.
Whether or not Berkshire received a bailout has no bearing on today’s share value, in the absence of a real valuation.
The law of large numbers only makes a short case if high growth is priced into BRKB today. That argument wasn’t made.
Stock-for-stock deals are not all bad (though most are). It’s a question of opportunity cost. You would need to argue that Burlington, long run, was worth less than alternatives, including the existing Berkshire portfolio. This by itself would have made a great post, but again, no argument was made.
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Raj here. I will be happy to provide more details if you are interested. Here is a summary:
EPS will need to increase from $3.46 in 2009 to more than $6 by end of 2010 to justify the current market price. Obviously, not realistic under current economic conditions.
Other assumptions include a discount rate of 9%, which is very generous considering the risk in the balance sheet. The company is huge so a beta of 1 is appropriate, so perhaps 9% discount rate is in the ballpark. Long-term EPS growth rate is same as that of historical book value growth at 20% for the next six years. Further, I assumed it grows with the market at 10% per year after six years till perpetuity.
One another data point is that about $10 per share is the worth of its equity investments (market value – book value). The implied EPS of $6 is solved for by keeping the per share of BRK at $72 ($10 lower than market price of $82)
I can share the valuation model with folks who are interested.
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This is less a short thesis on Berkshire than a short thesis on Buffett. I completely agree, the euphoria that surrounds him is unwarranted if you want to go on his actions in the past ~5 years.
It also doesn’t matter if the public doesn’t know who Ajit Jain or David Sokol are in the long run. I woldn’t argue that Berkshire won’t drop a good amount the day that Buffett dies. In the long run though, nobody seems to quibble over who Buffett has in charge of GEICO or MidAmerican, so why is his judgment less reliable for Berkshire? Jain will continue to run the insurance operation adroitly, Sokol will keep the operations in line, and there are probably very admirable people lined up to manage future investments.
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Raj, how are you calculating your terminal value since your perpetual growth rate is higher than your discount rate?
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Sir, when you write things like “Ajit Who Jain” and “David Who Sokol” in an attempt to disparage men who are literally at the top of their industries, you do not build up any credibility. When you then fail to provide any valuation information to support your target price and then start referring to “beta”, I can tell you have failed to absorb any of the lessons taught by Buffett. I seriously suggest that you revisit the manner in which you are going about your valuation work along with thinking about how to respectfully construct an argument.
BTW, If you think that people here and on Guru Focus are upset merely because a short case against Berkshire was made, you would be wrong. It is the lack of analytical rigor and the rather silly and insulting personal attacks that have caused the reaction.
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Raj’s valuation is coming out tonight.
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Gotta agree with Ravi.
Raj’s analysis is devoid of any real substance (note the lack of valuation work) while filled with conspiracy theories and speculation.
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I was pretty excited to see a BRK short presentation. Takes some balls to make that call. But, I have to agree with Nate. This is a collection of the existing criticism of the company; some of which have existed for many many years. I would love to see a more quantitative valuation before shorting anything.
I have a quick question though: Shouldn’t volume spike after splitting shares? There are 50X more B shares (or more counting dilution from the acquisition) at a more liquid price. Wouldn’t it be odd if volume didn’t take off?
Thanks for posting the presentation.
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The short case by Mr. Rajagopal offers little beyond the usual hyperbole related to Buffett’s age, etc, and nothing in the way of valuation or facts supporting his target price. A very weak case.
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Interesting points while many are valid I don’t see any valuation details supporting the 30% decline. It would have been nice to see why it should be worth less such as sum of the parts is worth less than whole, or on a relative analysis, or even just showing a simple cash flow analysis with a slower growth rate creating a terminal value less than the current value.
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This is pretty weak, the guy simply doesn’t know what he’s talking about. He actually made the specious derivatives argument, so you know he is either ignorant or just trying to get a rise out of people.
If you aren’t familiar with how Berkshire does derivatives, it’s nothing at all related to what he was saying. For those super-long term puts BRK took payment upfront (so not only is there no counterparty risk, they get to invest the premium for 20 years. They get something like $8b up front and if, in 25 years the market goes to ZERO they owe 37b. If the market is 25% lower in 25 years BRK will owe $9b I believe. They just made it 5 years shorter, I forget the details, but that’s pretty close to accurate, and if you know anything about derivatives or the financial meltdown, you’d see the pretty obvious difference. It’s easier to be pithy and say “hypocrisy, thy name is Buffett” but there’s no actual analysis of anything there. That doesn’t strengthen the short case for anything at all.
God, he even mangles life expectancies, this thing is really sorry. If you look at the actuarial tables: http://www.ssa.gov/OACT/STATS/table4c6.html Buffett is expected to have 8 years left and Charlie’s expected to have 5 or 6.
It’s funny that this guy is looking for a job and puts this up here. Good luck man. It’s just a very very weak case where he’s trying to throw enough shit at the wall and hope some of it sticks. Lots of goofy moral arguments, absolutely no logical, mathematical arguments. “Because I don’t like Buffett” is not a short thesis.
I find Whitney Tilson’s long thesis much more convincing:
Click to access BRK.pdf
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I agree completely that Berkshire is overvalued but Burlington Northern, in particular, was not a mistake. The market wasn’t ascribing any value to the land on its books held at cost – probably $75b+ in “hidden” assets.
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