The Model Portfolio bought 2 shares of Berkshire Hathaway Class B stock at yesterday’s closing price of $4095/share. The cost was $8190 for the two shares and $40 for the commissions, or a total of $8230. This brings the cash balance down from $79,966.58 to $71,736.58.
The Model Portfolio now consists of:
$71,736.58 in cash
2 shares of Berkshire Hathaway Class B
222 shares of DFJ
103 shares of FXY
For the Doppler Value Model Portfolio, I am buying 2 shares of Berkshire Hathaway Class B stock, which will be 8%-9% of the portfolio. Under the rules for the model portfolio, this transaction will take place at the end of the day on Monday, May 12th at the closing price. I already am a Berkshire Hathaway shareholder, and I hope you are as well.
Berkshire Hathaway stock is a real blue-chip investment. It’s hard to argue with the long and successful track record of Warren Buffett and Charlie Munger. They have both created a pro-shareholder, pro-value culture that will live on through their successors long after they move on to the great See’s Candy store in the sky. Berkshire Hathaway owns a diversified collection of high-quality businesses, so intrinsic value will not be seriously affected by negative economic conditions or company-specific bad news.
Berkshire Hathaway is also a safer inflation hedge than gold. A Motley Fool article from this past January summarized the case for Berkshire Hathaway over gold.
Although I am convinced that inflation is a major issue, I have not and will not buy gold. Gold is a very risky investment that can go down as well as up. In the long run, gold tracks inflation. Most importantly, gold has no intrinsic business value. A business has a balance sheet and earns income and cash flow. You can analyze the business and make a rough estimate of its intrinsic business value. The same does not apply for gold. If I bought gold, I’d have no exit strategy. I cannot tell you if gold should be selling for $300/ounce or $3000/ounce. Just because inflation is heating up now doesn’t mean that will always be the case. There is always room for surprises. Maybe Helicopter Ben’s efforts to inflate the dollar into oblivion will fail, perhaps because a big enough collapse in housing or credit begins to destroy money faster than it is created. Maybe Helicopter Ben will get caught lip-syncing on “Saturday Night Live” and get replaced by Paul Volcker. If I buy gold but something unexpected happens, I could lose a lot of money.
Berkshire Hathaway, on the other hand, has intrinsic business value and is selling for a reasonable multiple, 1.67 times book value. Berkshire Hathaway has thrived in a variety of different economic conditions, averaging 21.1% annual growth in book value from 1965 to 2007. This period has included multiple recessions, the oil embargo of 1973-1974, multiple bear markets, a 16-year period of stock price stagnation, double digit inflation, double digit interest rates, a prime rate as high as 21%, the decline of General Motors and IBM, Democratic and Republican presidents, the S&L bailout, and much, much more. As Buffett has explained in past annual reports, the best hedge against inflation is a superior business franchise. A company with a superior business franchise can raise prices with little capital investment and with little or no penalty in sales volume. Capital-intensive companies in highly competitive industries, on the other hand, are hit hardest by inflation. A company in a highly competitive industry risks losing sales volume when it raise prices. High inflation means that companies requiring heavy capital investment need to spend even more money just to maintain current operations while the later payoff from such investment is devalued by the higher inflation rate.
Berkshire Hathaway has better long-term returns than gold AND has proven to be MUCH less risky at the same time. Berkshire Hathaway has intrinsic business value while gold does not. If my predictions of higher inflation ahead turn out to be wrong, Berkshire Hathway stock will likely continue to grow in value while gold will likely fall in value. The choice is clear: Berkshire Hathaway is a better and safer inflation hedge than gold.
