Whitney Tilson gives his thoughts on the news of Warren Buffett’s prostate cancer. Warren Buffett, CEO of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), revealed the the news yesterday. Tilson has not changed his opinion on the company and remains very bullish.
- Of course this news reminds people that Buffett is 81, won’t live forever, hasn’t identified his successor, and that Buffett will never be completely replaced – he is unique. But we didn’t need a reminder, as none of this is news to us. We were fully aware of these factors as we bought the stock in recent weeks, making our largest position even larger, and knowing what we know today, we wouldn’t have done anything differently.
- · To their credit, investors seem to have gotten this right, as the stock is down only 1% right now.
- · Prostate cancer is quite common among older men. According to the Centers for Disease Control and Prevention, 12% of 70-year-old men will develop it within 20 years (www.cdc.gov/cancer/prostate/statistics/age.htm). The vast majority of them will die with the disease, not from it.
- · I’ve heard from many people on this email list who, directly or via family members, have experience with prostate cancer and they confirm that, medically speaking, this is a non-event.
- · A couple of people took issue with my analogy to Steve Jobs and Apple Inc. (NASDAQ:AAPL), saying that Apple Inc. (NASDAQ:AAPL) is a product company and therefore isn’t as dependent on Jobs as Berkshire is on Buffett. We disagree. One of the main takeaways for me from Isaacson’s book was how extraordinarily integral Jobs was to Apple Inc. (NASDAQ:AAPL). Also, nearly all of Apple’s business is dependent on a few hit products – and not just any products, but technology products that have to be virtually reinvented every year. Now consider the major elements on Berkshire’s value today: the investment portfolio of cash, bonds and stocks (will the value of IBM, Coke, Amex, Wells Fargo, etc. change when Buffett’s gone?), Burlington Northern, insurance, utilities, etc. Other than Buffett’s daily consultations with Ajit Jain on the supercat business, it’s hard to see the value of Berkshire’s current business being affected in the near term by Buffett’s absence. However, it would clearly affect the creation offuture value at Berkshire. As we wrote on page 21 of our slides (www.tilsonfunds.com/BRK.pdf):
o There is no investor with Buffett’s experience, wisdom and track record, so his successors’ decisions regarding the purchases of both stocks and entire business might not be as good
o Most of the 75+ managers of Berkshire’s operating subsidiaries are wealthy and don’t need to work, but nevertheless work extremely hard and almost never leave thanks to Buffett’s “halo” and superb managerial skills. Will this remain the case under his successors?
o Buffett’s reputation is unrivaled so he is offered deals (such as the recent $5 billion investment in BofA) on terms that are not offered to any other investor – and might not be offered to his successors
o Being offered investment opportunities on terms/prices not available to anyone else also applies to buying companies outright. There’s a high degree of prestige in selling one’s business to Buffett (above and beyond the advantages of selling to Berkshire). For example, the owners of Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm
o Buffett’s Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that his successors might not
It’s hard to know how much future value would be lost in Buffett’s absence, but we don’t need to calculate this because we assign zerovalue to it when calculating Berkshire’s intrinsic value. All we do is take investments per share of nearly $100,000 and put a 10 multiple of the current pre-tax earnings of $8,000/share to arrive at nearly $180,000.
