Berkshire Hathaway is a great company. But as Warren Buffett has said, you can still pay too much for the greatest of companies. This is the difficulty in deciding whether or not to invest in Berkshire Hathaway, how to determine the price you should pay for its stock. To do this, at the very least we would need to know the total earnings of BH plus the retained earnings of all its equity holdings.
Of course, to properly analyze BH you would need to know a lot more than this. But let's just look at the problems involved in determining its earnings.
BH owns a large number of subsidiaries. At last count there were 36 ranging from Acme Building Brands through to XTRA Corporation. It also has equity positions in a range of public companies, the three largest being Coca Cola ($8.8 billion), American Express ($5.4 billion) and Gillette ($2.9 billion). But Buffett does not tell us all that he owns. In a recent annual report, we can glean that he has an equity position valued at $5.4 billion in ?other? companies.
We know the total earnings of BH. These are reported in its financial statements and are made up of the earnings of its subsidiaries and the dividends of its equity holdings. We also need to know the earnings generated by its equity positions but which are retained by the individual companies. These are referred to as retained earnings. Sometimes Buffett reports an estimate of these for his major holdings after allowing for tax. He refers to them as ?look-through earnings.? We do not, however, have any estimates of retained earnings for his ?other? equity positions.
Without this information it is difficult to make a rational investment decision.
If we cannot determine whether or not to invest in BH, perhaps we can just try to invest in the same companies that Buffett invests in. Alas, this also does not work since most of the time he buys the whole company. And for equities he does not announce what he is buying or selling unless required by security law.
The surest way to get the benefit of Buffett's expertise is to have a system that steps you through his underlying investment principles. This is what Conscious Investor does.
