Berkshire Hathaway owns and operates over 70 businesses in addition to investing in undervalued equities and bonds1. The initial company was founded in 1888 and the current management was founded in 1965. The current CEO and Chairman is Warren Buffet. The current Vice Chairman is Charlie Munger. Over the last 25 years, the company has seen an average annual return of over 25%2. Berkshire is the world’s only AAA rated reinsurer3.
February 2, 2007, a decision was made to convert the existing single share of BRK-A stock into 30 shares of BRK-B stock. From there, the class sold 15 shares to stay below the 5% holding limit set by the Investment Fund Management Manuel. The basis for converting the Class A stock into Class B stock was to create more flexible liquidity when holding Berkshire Hathaway stock—especially when there is a limit to how much of the portfolio’s value can be concentrated in one holding. The Class B stock was valued at 1/30th the price of the Class A stock. So it was possible to sell smaller portions of the investment. The logic behind adding the liquidity characteristic to holding Berkshire Hathaway stock is still one that makes perfectly good sense with the current portfolio and the IFM Manuel constraints.
When the class converted the single share of Class A stock into Class B stock, they were able to purchase 30 shares at $3,516.67 per share. Of the converted stock, only 15 shares were kept at a total cost of $52,750.01. As of June 22, 2007, the market value of the 15 shares of BRK-B was worth $53,670. The performance of the stock since converting to Class B stock is a 1.74% increase, where performance is calculated by subtracting the buying cost from the current value and dividing that number by the buying cost.
As it can be seen, the total performance is not particularly high at the moment. However, when initially making the decision to buy this stock, the class understood that this would benefit the portfolio in the long term rather than the short term. Considering the past performance history of Berkshire Hathaway, BRK-B holdings are stocks that create a steady foundation to build the rest of the portfolio on. I believe that this is one reason that the class chose to invest in Berkshire initially.
As it can be seen from the Chart 14, the Berkshire Hathaway stock has continuously out performed the S&P 500, but has not performed better than the General Insurance industry since 2003. Chart 25 shows that in the last year, the S&P 500 has occasionally out performed the Berkshire Hathaway stock. Additionally, BRK-B has not performed better than the S&P 500 since the middle of April 2007.
It can be seen in Figure 16 that currently Berkshire Hathaway is performing extremely well compared to the Industry Average and to its peers. Morningstar gives BRK-B a grade of A in both the Growth and Profitability categories. Any of the stocks presented in the figure that have an A or A+ in one category receives a grade lower than an A in the other. Therefore, based on these grades, BRK-B is one of the best—if not the best—performing stocks within the General Insurance industry.
Figure 1 Economic Consideration
With a newly run congress and the presidential elections a little over a year away, there is the possibility of several new legislations passing that could force several companies to grow significantly. The key for Birkshire Hathaway is that, in the past, Warren Buffet has been very intuitive when it comes to investing in companies that show promise.
Mortgage rates fall to 6.69% for 30-year fixed-rate mortgages. This could increase the purchase of homeowner’s insurance, which would benefit BRK-B. However, there has been a lack of mortgage applications that suggests the U.S. housing remains in a downturn.
The National Oceanic & Atmospheric Administration (NOAA) is predicting a 75% chance of an above normal 2007 Atlantic Ocean hurricane season with 13 to 17 named storms—seven to ten of which are predicted to become hurricanes (See Appendix B for the full article). Any companies dealing solely in insurance and reinsurance will see low performance if these predictions are accurate. However, Berkshire Hathaway’s diversity will result in less of an impact on the company in an above normal hurricane season than regular insurance and reinsurance companies.
Even though currently BRK-B is not performing as well as the class’s benchmark of the S&P 500, there are many positive characteristics to this company that make it a strong holding to have within the Investment Fund Management’s portfolio. These characteristics are:
Berkshire Hathaway Inc. has had a strong performance for over 25 years.
Warren Buffet is the CEO and Chairman.
Berkshire is the only AAA rated reinsurer in the world.
The company is extremely diverse and has investments in several well-known companies.
The Morningstar grades for BRK-B are at the top of the General Insurance industry.
Staying with BRK-B would give a more secure holding in the Financial sector because of its diversity.
Based on the previous 25 years of performance that Birkshire Hathaway Inc. has had over the S&P 500, I believe that the performance will rebound from its current downturn and outperform the S&P 500 shortly. Therefore, I recommend that the class hold at the current quantity of Birkshire Hathaway Inc. Class-B stock. With 3.9% of the portfolio’s holdings, I do not believe that more of BRK-B should be purchased.
NOAA PREDICTS ABOVE NORMAL 2007 ATLANTIC HURRICANE SEASON 13 to 17 Named Storms Predicted
May 22, 2007 — Experts at the NOAA Climate Prediction Center are projecting a 75 percent chance that the Atlantic Hurricane Season will be above normal this year—showing the ongoing active hurricane era remains strong. With the start of the hurricane season upon us, NOAA recommends those in hurricane-prone regions to begin their preparation plans. (Click NOAA image for larger view of NOAA’s 2007 Atlantic hurricane season outlook. Please credit “NOAA.”)
"For the 2007 Atlantic hurricane season, NOAA scientists predict 13 to 17 named storms, with seven to 10 becoming hurricanes, of which three to five could become major hurricanes of Category 3 strength or higher," said retired Navy Vice Adm. Conrad C. Lautenbacher, Ph.D., undersecretary of commerce for oceans and atmosphere and NOAA administrator. An average Atlantic hurricane season brings 11 named storms, with six becoming hurricanes, including two major hurricanes.
Climate patterns responsible for the expected above normal 2007 hurricane activity continue to be the ongoing multi-decadal signal (the set of ocean and atmospheric conditions that spawn increased Atlantic hurricane activity), warmer-than-normal sea surface temperatures in the Atlantic Ocean and the El Niño/La Niña cycle.
Last year, seasonal hurricane predictions proved to be too high when an unexpected El Niño rapidly developed and created a hostile environment for Atlantic storms to form and strengthen. When storms did develop, steering currents kept most of them over the open water and away from land. (Click NOAA image for larger view of conditions in the Atlantic Basin that can produce an above normal hurricane season. Please credit “NOAA.”)
"There is some uncertainty this year as to whether or not La Niña will form, and if it does how strong it will be," said Gerry Bell, Ph.D., lead seasonal hurricane forecaster at the NOAA Climate Prediction Center. "The Climate Prediction Center is indicating that La Niña could form in the next one to three months. If La Niña develops, storm activity will likely be in the upper end of the predicted range, or perhaps even higher depending on how strong La Niña becomes. Even if La Niña does not develop, the conditions associated with the ongoing active hurricane era still favor an above-normal season."
Bell also noted that pre-season storms, such as Subtropical Storm Andrea in early May, are not an indicator of the hurricane season ahead. "With or without Andrea, NOAA's forecast is for an above normal season."
"With expectations for an active season, it is critically important that people who live in East and Gulf coastal areas as well as the Caribbean be prepared," said Bill Proenza, NOAA National Hurricane Center director. "Now is the time to update your hurricane plan, not when the storm is bearing down on you." (Click NOAA image for larger view of tracks of major hurricanes forming in the main development region as indicated by the green box over a 24-year period. Please credit “NOAA.”)
The Atlantic hurricane season runs from June 1 through November 30, with peak activity occurring August through October. The NOAA Climate Prediction Center will issue an updated seasonal forecast in August just prior to the historical peak of the season.
The Atlantic Hurricane Seasonal Outlook is an official forecast product of the NOAA Climate Prediction Center. Instituted in 1998, this outlook is produced in collaboration with NOAA scientists at the NOAA Climate Prediction Center, NOAA National Hurricane Center, NOAA Hurricane Research Division and the NOAA Hydrometeorological Prediction Center. The NOAA National Hurricane Center has hurricane forecasting responsibilities for the Atlantic as well as the East Pacific basins. The NOAA Climate Prediction Center, NOAA National Hurricane Center and the NOAA Hydrometeorological Prediction Center are three of the NOAA National Weather Service's nine NOAA National Centers for Environmental Prediction, which provides the United States with first alerts of weather, climate, ocean and space weather events.
NOAA, an agency of the U.S. Commerce Department, is celebrating 200 years of science and service to the nation. From the establishment of the Survey of the Coast in 1807 by Thomas Jefferson to the formation of the Weather Bureau and the Commission of Fish and Fisheries in the 1870s, much of America's scientific heritage is rooted in NOAA. NOAA is dedicated to enhancing economic security and national safety through the prediction and research of weather and climate-related events and information service delivery for transportation, and by providing environmental stewardship of the nation's coastal and marine resources. Through the emerging Global Earth Observation System of Systems (GEOSS), NOAA is working with its federal partners, more than 60 countries and the European Commission to develop a global monitoring network that is as integrated as the planet it observes, predicts and protects.