Q&A: How to value Buffett's Berkshire Hathaway
A Berkshire Hathaway cell phone case and a USB port featuring the cartoon likeness of Warren Buffett, right, and Charlie Munger, left, are offered for sale at a reception held for Berkshire Hathaway shareholders. (Photo: Nati Harnik, AP)
Q: I own shares of Berkshire Hathaway. Since some of the market value of Berkshire Hathaway is not equity, shouldn't I value this stock at less than 100% when calculating asset allocation? Since the share price is so high, to value it at 100% could throw my entire asset allocation. Donald Garvey, Southampton, N.Y.
A: Yes, you and other investors should "look through" an investment structure at the underlying assets to get an accurate assessment of its asset allocation, says Stephen Horan, a managing director the CFA Institute, Charlottesville, Va.
As for Berkshire Hathaway (BRK.A , BRK.B ), Horan says the vast majority of that company's assets are equity.
Yes, a significant portion of Berkshire Hathaway's investments are in operating companies rather than public-market securities. But those operating company investments still represent equity, he says.
Horan says he would make asset allocation adjustments for the company's fixed-income and derivative holdings.
"Berkshire Hathaway has about $27 billion of fixed-income holdings and another $15 billion in loans for a total of $42 billion in fixed income," says Horan. "Berkshire Hathaway has borrowed about $200 billion, however. So, their net fixed-income holdings are negative $158 billion. This levered position implies that investors should adjust their equity allocation upward, not downward."
In addition, Horan says Berkshire Hathaway has about $3.5 billion in derivative positions, including puts that he sold in 2008. "These derivative positions can be decomposed into equivalent amounts of equity and bonds to adjust the equity allocation upward further," says Horan.
In the absence of having the market value of operating company holdings, Horan said he would value Berkshire Hathaway as at least 100% equity, not less.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email firstname.lastname@example.org .
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