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Oracle on Offer

(The following are extracts from an article that appeared in the Money supplement of the
Sydney Morning Herald and the Melbourne Age on 15 November 2005

By Barbara Drury

Warren Buffett is the pin-up boy of investors everywhere, and it's easy to see why. Over the past 40 years shares in his Berkshire Hathaway investment company have grown at an average rate of 21.9 per cent a year, making a $US10,000 investment in 1965 worth $US50 million ($68 million) today.

But with the shares trading at about $US88,000 a pop, few investors have enough cash to join the gravy train.

John Price, who follows Buffett's investment methods for his Conscious Investing share analysis service, thinks investors could just as easily gain exposure to Berkshire through its B shares, which are trading at $US2900. A B share is one-thirtieth of an A share. The B shares have less voting rights, but the price moves in tandem with the A shares.

For example, investors could set up an account with CommSec and for brokerage of $US65 buy a few B shares, and their money would be invested purely in Berkshire Hathaway shares. By comparison, the Global Masters Fund plans to invest up to 80 per cent of investors' funds in Berkshire shares, with the remainder in managed bond funds and cash to provide liquidity. As Berkshire doesn't pay dividends, the income from the bond funds will pay management fees and a small cash dividend to investors, which can be reinvested at a discount of 5 per cent on the prevailing share price.

John Price says Berkshire is difficult to value since it is a mixture of equities and fully owned private companies.

Among Berkshire's largest equity holdings are American Express, Coca-Cola, Gillette (now Proctor & Gamble), H&R Block, Moody's Corporation, PetroChina, The Washington Post Company and Wells Fargo.

Some of the largest totally owned companies are insurers General Re and GEICO. It also owns 80 per cent of MidAmerican Energy Holdings as well as numerous home furnishings and jewellery stores. One of the companies Australian travellers would be familiar with is See's Candies, which are sold in most US airports.

Price says Berkshire is probably undervalued at the moment because its share price has not been keeping up with growth in equity.

"A big drag on the company is that it has about $40 billion in cash because [Buffett] hasn't found anything that meets his investment criteria in big enough volume," he says.

Buffett has said he would consider a share buyback or introduce dividends if he hasn't reduced this cash in a few years' time.

Price says owning a B Share can have spin-off benefits for investors. Not only does it ensure you receive an annual report, but you can gain admittance to the annual meeting.

"You may even get to meet the man himself since for the past two years there has been a special reception for overseas visitors," says Price, who has made the pilgrimage himself. Long-term investors should also keep in mind that the so-called sage of Omaha is already in his 70s and if anything happened to him shares in Berkshire would come under selling pressure.

Appointing Microsoft founder Bill Gates to the board was a shrewd move to allay investor fears, but there is no doubt the company would lose its almost mythical status without Buffett.

[ Complete article ]


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