Barron’s article over the weekend on Berkshire Hathaway, “Mr. Moneybags”, highlighted the enormous earnings power of Berkshire Hathaway. According to the article, Berkshire could earn between $12 billion and $13 billion in profits in 2011 and could end the year with as much as $50 billion in cash. The stock looks attractive at a projected 1.15x projected 2011 year-end book value.

As optimism begins to return to the stock market, many investors will once again become infected by greed and increasingly lose sight of the very real risks of coming late to the party by buying or holding overvalued stocks.

In contrast, the article pointed out that Berkshire Hathaway’s attractive valuation provides “significant downside support”.

I’d also like to point out one other fairly obvious advantage of owning Berkshire Hathaway. If the economy continues to improve and stabilize, Berkshire’s wonderful collection of businesses will shine and the stock will – over time – reflect its vast, growing stream of earnings, regardless of what sell-side analysts are saying. In the long-term, the market is indeed a weighing machine.

On the other hand, Berkshire is very well positioned if the market were to undergo a major correction in the short-term to medium-term.

At the 1994 Berkshire Hathaway annual meeting, Buffett pointed out that the best thing for Berkshire Hathaway was for the market to go down a “tremendous” amount – although he was not predicting it and he was clear to point out that he was not wishing for such a thing to happen. That way, stocks and businesses would become cheaper, and Buffett would be able to put Berkshire’s cash to optimum use. (1)

Buffett said we should fear a sustained irrational bull market because attractive purchases would likely dry up. Given what we have been through, that’s a problem I’m prepared to live with. If, however, the market goes down, Berkshire shareholders have the advantage of a huge amount of cash and Buffett’s incomparable investing talents. That’s a bet I’m comfortable taking.

(1) Outstanding Investor Digest, June 23, 1994, p. 20.

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