Category Archives: Charlie Munger

No, this isn’t an article about the prospect of Berkshire Hathaway falling from the current price of $121,950 to $32,100.  Instead, this is what Edson Gould’s Altimeter suggests that Berkshire Hathaway’s (BRK-A) stock price is currently trading at.

Edson Gould’s Altimeter compares the current stock price relative to the dividend that is paid by a company.  As we all know, Berkshire Hathaway does not pay a dividend.  So, how did we arrive at a dividend for Berkshire Hathaway?  We borrowed the dividend policy of Charlie Munger’s Wesco Financial (WSC).  We thought that there would be no better corporate dividend policy to replicate other than that of Warren Buffett’s right hand man.

Exactly what portion of Munger’s dividend policy did we replicate? First, we took WSC’s average dividend payout ratio of 13% from 1999-2010 and applied it to Berkshire Hathaway’s 1977 reported operating earnings of $22.54 per share.  This resulted in a dividend of $2.93.

Next, we compared the compound annual growth rate [CAGR] of the dividend for Wesco Financial which was slightly more than the book value from 1999-2010, at 3.37% and 3.01%, respectively.  Additionally, we took into consideration the fact that by 2010 Wesco Financial had a 38-year history of consecutive dividend increases.  Because Berkshire Hathaway has a 19.8% CAGR of their book value (2011 annual report), we opted to cut that figure in half and assign a dividend growth rate of 9.9%.  Our decision to cut the CAGR of the book value in half was in deference to Buffett’s desire to better deploy the capital in other investment opportunities and the possible diminished impact of the succession team upon Buffett’s “retirement.”

After borrowing the dividend policy from Buffett’s primary business partner and creating a hypothetical dividend and a compounded annual dividend growth rate, assuming regular dividend increases for the last 35 years, we believe that we have constructed a reasonable approximation of an Altimeter which is represented in the chart below.

Based on the Altimeter, our best guess is that the period from 1996 to 2008 provided consistent indications of when to add to your positions of Berkshire Hathaway (at or below green line).  The period from 2008 to 2009 provided exceptional opportunities for new investors to buy Berkshire Hathaway as the markets, economy and insurance industry were in crisis mode at the exact same time.

Once the recovery in stocks started it was off to the races for most investors.  Even Berkshire Hathaway was able to participate in the run-up from the 2009 low.  However, on a relative basis, Berkshire’s share price was not increasing  to a level that was reflective of its true value, this is in spite of getting within 10% of the 2007 high in late February 2010.  Based on the Altimeter, Berkshire is currently undervalued by at least 66% and below the 2007 peak by almost 95%.

Those considering the acquisition of Berkshire Hathaway have the following upside targets to consider in the coming 2-3 years, all things being equal:

• $175,280
• $197,190
• $219,100

The following are the possible downside targets:

• $120,767
• $105,606

After constructing a fairly conservative dividend policy, the Altimeter clearly outlines the reasons why Warren Buffett would suggest that Berkshire Hathaway will “very aggressively” buy back shares even though the stock is well within striking distance of the all time high.

Who is Edson Gould?

"Edson Gould spent over 60 years working in and studying financial markets. Gould studied the arts at Princeton, engineering at Lehigh (from where he graduated in 1922), and finance at New York University. In 1922, after working for a short time at Western Electric, he joined Moody's Investor Service as an analyst and later was editor of Moody's Stock Survey, Bond Survey, and Advisory Reports. In 1948, he began at Arthur Wiesenberger & Company, where he developed and edited the well-known Wiesenberger Investment Report and became a senior partner. He also was Research Director at E. B. Smith (which later became Smith Barney), and worked for Nuveen."

(source: Market Technicians Association. Gould, Edson Beers, Knowledge Base. Accessed April 26, 2012. link MTA reference.)

"Market technician Edson Gould always laughed at the idea of having a significant influence on the stock market, but his predictions were the most precise around. He pinpointed major bull markets and prophesied bottom-out markets as if he had his own peephole into the future. But in place of a crystal ball and wacky off-the-cuff schemes, his were smart, intensely researched and time-tested theories that made him a legend in the investment community."

(source: Fisher, Kenneth L.. 100 Minds That Made the Market. Business Classics, Woodside, CA. 1993. page 320.)