Tilson: Berkshire Stock a Dollar for 75 Cents

Ryan Leggio: You mentioned Berkshire Hathaway; you write about that in your book. I believe your intrinsic value at the time you wrote the book was about $110,000 or so.

Whitney Tilson: Right.

Leggio: It's about $100,000 as we speak today. What's that intrinsic value look like today?

Tilson: Keep in mind, when we submitted the book to the publisher, it was literally the week the market bottomed, in the first week of March.

We were using extremely conservative assumptions. Particularly, we were marking Berkshire Hathaway's stock portfolio, Wells Fargo, at $10, American Express at $10. Naturally, that deflated Berkshire Hathaway's intrinsic value.

Today, Berkshire's stock portfolio has rallied, the outlook for the economy and so forth, so that's reflected now in a higher estimate of intrinsic value, in the mid-$130,000 range. The stock's just above $100,000, so we think you're buying a $0.75 dollar, 25% discount to intrinsic value [for] the world's strongest balance sheet run by the world's greatest capital allocator with decent growth prospects going forward. So it's just the kind of safe, conservative stock--you sleep well at night--in an environment where we're nervous.

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Leggio: Sure. You followed Berkshire for a very, very long time. I know you go to their annual meeting every year and write notes for your readers.

The interesting thing that I saw there is at the end of 2007, when you were giving presentations, you estimated its intrinsic value around $160,000.

Tilson: Right.

Leggio: Now it's obviously much lower. Can you tell us what specifically led to that big discount there?

Tilson: Sure. Berkshire is a very large, complex conglomerate, but in valuing it, it's actually fairly simple. You have cash and investments that you value at market-to-market. Cash is worth cash. The stocks are worth whatever the stock price is.

Then you have 75 operating businesses that are generating substantial earnings. You take the cash and investments, put a multiple on the earnings, and just add the two together.

When we were coming up with a valuation in the $150,000 to $160,000 range, we were putting a 12 multiple on the pre-tax earnings, then adding the cash and investments.

The main reason our intrinsic value estimate declined is we stopped putting a 12 multiple, which was a fair multiple back when the market was doing OK. The average company in the S&P 500, we were applying a market multiple.

Well, today the market multiple's a lot lower, so we're now applying an eight multiple to pre-tax earnings, not a 12 multiple. That brings the intrinsic value down substantially, but we try and be conservative.

I mean, I actually think some day Berkshire, when the market returns to health, the 12 multiple will again be appropriate. But today, we're using very conservative assumptions as we value all of our stocks, hence the lower estimate for Berkshire today.