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Berkshire is ‘not a get rich stock, it’s a stay rich stock’: Tilson

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Whitney Tilson, Empire Financial Research founder and CEO, joins Yahoo Finance to discuss top takeaways from Warren Buffett’s annual letter to shareholders and Berkshire Hathaway’s valuation.

Video Transcript

MYLES UDLAND: Let's turn our attention now to the news we got over the weekend. Warren Buffett out with his latest annual letter to Berkshire Hathaway shareholders. Joining us now to discuss is Whitney Tilson, he is the Empire Financial founder and CEO. Julia La Roche also joins us as well from warm and sunny Miami. Whitney, let's start with something you highlighted in your notes over to us which is the buybacks. We saw $25 billion, just under $25 billion of Berkshire cash spent on repurchasing shares.

How are you thinking about the likely path of buybacks going forward? I mean, are you thinking about it as a percentage of free cash flow? How does that factor in because you do see it as a significant driver of returns for Berkshire going forward.

WHITNEY TILSON: Yeah, from 2019, Buffett bought back less than $5 billion worth of stock, and this past year, ramped it up fivefold, up to almost $25 billion, retiring 5% of Berkshire shares outstanding. And this is, keep in mind, this the fifth or sixth largest market cap company in the US stock market. So buying back 5% of your stock in a year is substantial. And Buffett dedicated an entire page of his annual letter singing the praises of buybacks, something that I've been calling for for the better part of a decade, in fact. So I'm delighted as a longtime Berkshire follower to see him finally taking advantage of Berkshire's depressed share price, enormous cash hoard, and tremendous cash flows.

So as that chart you just showed pointed out, it's been ramping up. Even during the year, it was $9 billion per quarter the last two quarters. And he indicated in his letter that he continues to buy aggressively already this year. So I expect this to continue at the level of the last two quarters. And it should be a major driver of Berkshire's increasing intrinsic value per share over time.

JULIA LA ROCHE: Hey Whitney, it's Julia La Roche. And I do want to talk about your own price target for Berkshire Hathaway shares, for the A-shares specifically, and a bit more on how we get to that price target, a price target of $439,000.

WHITNEY TILSON: Yeah, correct. We've been valuing Berkshire the same way for 20 years. We think it's the way Buffett and Munger value Berkshire. And it's really-- there's no mystery to it. It's the way you would value any company, which is Berkshire has enormous piles of cash bonds and liquid publicly traded stocks, which are easily able to value. And that comes out to about $290,000 per A-share. And then you have Berkshire's wholly owned operating companies, nearly 100 different businesses, the largest being Burlington Northern Railroad and the utilities businesses.

We actually keep the insurance businesses separate because they have so much float, that's sort of picked up in the investments per share. So long story short, you get about $13,500 per A-share of pre-tax earnings. That's actually down about $1,000 from $14,500 year over year because of the pandemic. Berkshire does own a number of economically sensitive businesses. They took a big write down on Precision Castparts, for example. You can imagine what the earnings of that company were last year, that makes components for aircraft engines and aircraft during the pandemic. So we put an 11 multiple on the $13,500, add it to the $290,000 per A-share of cash and investments per share, and you get to $439,000. And this methodology that we've been using for 20 years has actually been quite a good predictor of Berkshire share price over time.

BRIAN SOZZO: Whitney, should Berkshire investors, should they be hearing more from Warren Buffett on some of the really important issues of our time right now? He mentioned COVID I believe once in reference because his furniture stores had to close down for some period of time because of COVID. Didn't mention any of the trading activity frenzy. Didn't mention anything about stimulus plans or the frenzied activity in the markets overall. Should Berkshire be hearing more from him on these topics?

WHITNEY TILSON: Yeah, I mean, look, I think if there were one fair critique about an absence of commentary in his letter, it would have been that-- it was only, I think, two years ago, maybe three in his annual letters, Buffett said, we're not finding a lot to do, but someday it will rain gold and we will be out there not with thimbles but with buckets to scoop up that gold. And a year ago almost, 11 months ago, when the market dropped 35% in a matter of weeks, and Berkshire Hathaway's stock dropped to a low, intraday low of $240,000 per A-share, I was pounding the table myself to anyone who would listen that it was the best time to buy stocks since the global financial crisis.

And I was certainly hoping that Warren Buffett would be taking advantage of that, picking up all sorts of depressed stocks or Berkshire Hathaway stock itself. And he really didn't. And it's sort of OK. He's a very conservative person. And particularly any company, financial company like Berkshire, when markets were on the verge of freezing up, so he played it conservatively. I think he left a lot of money on the table. I think maybe a 10 years younger Warren Buffett would have been able to put a few tens of billions of dollars of capital to work. But it's OK.

Berkshire Hathaway is not a get rich stock, it's a stay rich stock. And so its shareholders should know this is not a stock to make you rich, but it's a great retirement stock for the foundation for your retirement portfolio. But I would have expected Buffett in his annual letter to have a little bit of a mea culpa, and say, in hindsight, I should have been more aggressive when the markets gave us-- it was really only a month or so, where there was an incredible window of opportunity.

JULIA LA ROCHE: Hey, Whitney, I was going to ask you about deal activity, but I'll do a different topic here-- about the future of Berkshire Hathaway and the leadership. We just saw Charlie Munger speak at The Daily Journal, clearly sharp as a tack at age 97. And now we're hearing from Buffett and the annual letter. What are your thought process for this long-term play and the future management of the company?

WHITNEY TILSON: Yeah. By the way, a very nice interview you did with Charlie. He's a treat, isn't he? And I encourage viewers to just go to YouTube where the two-hour session there is posted from last week of The Daily Journal annual meeting. Look, we're clearly coming to an end of a half century run of two of the greatest investment minds in the world. I do think Buffett has another few years at Berkshire. Munger is seven years older. And Buffett is still sharp as a tack. And while Munger is really aging physically at age 97, Buffett is still spry. He seems to be in good shape and he's trying to eat more healthily and is exercising more because he just loves what he does.

They've already identified the two people who will run the investment portfolio. And they seem to be doing a good job over the last few years. What the CEO's job, managing the operating businesses, they haven't yet revealed that person. It may be two people, could be a Greg Abel on the operating side and then Ajit Jain running the insurance operations. But Berkshire will be in very good hands. And there's certainly no Buffett-Munger premium built into the stock right now. With the stock at 364, I'm pegging intrinsic value at 439. That means it's trading at a 17% discount to its intrinsic value.

Over the past 20 years at points in the global financial crisis, for example, it was trading at a 50% discount to its intrinsic value. But look, we're in a very fully valued market. And as you guys commented earlier in the show, with the rotation away from the nosebleed valuation stocks and tech, into the banks have been doing very well. And I think Berkshire will be a beneficiary of that rotation, combined with substantial share repurchases, Berkshire should be-- I think is quite likely to outperform a passive index fund. The S&P 500, for example, over the next five years. But you need to have realistic expectations.

JULIE HYMAN: Whit, it's Julie here. Of course, in that Q&A, Charlie Munger also talked about Robinhood. And he made some not very approving comments of that platform, said it was sort of dirty money. Although ironically, the thing that sort of sparked the latest meme stock craze was a deep value play. I'll leave out one of the words that was the tag of the person who advocated for that. But it was GameStop, was the advocacy for GameStop. I mean, we were talking about these guys' age and wisdom. Do you think that they're sort of missing the zeitgeist a little bit, though, when it comes to the popularity of Robinhood and its reputation as a sort of platform of the people?

WHITNEY TILSON: No, I don't. I actually happen to agree with them. I think when we as a country-- and this has happened so many times before. My initial introduction to investing was growing up in the internet bubble a little more than 20 years ago. And when we allow our stock markets to be turned into casinos, and it draws in the most naive investors and inexperienced investors who don't have any sense of history, and then you combine that with sort of social media today, it's a real toxic brew. And I tried to warn my readers about it, literally the day GameStop, I call it "GameStink," peaked. I called the peak to the hour almost.

And I said, this thing's going down huge and fast, and in fact, declined by 90% in two weeks. And that was something like $20 billion was lost by investors. And I promise you, it wasn't sophisticated institutional investors who were buying "GameStink" at $483 its peak. So I hope the SEC-- I don't think anything illegal occurred. Going back to the Dutch tulip bulbs, human beings tend to speculate. But I don't think it's healthy at all for income inequality, or our economy, or our stocks, our stock markets. And so I think a very simple penny a share transaction tax or something like that that discourages very short-term thinking and this hypermanic behavior in the markets fueled by the bots, the computer systems that are out there trading like maniacs on top of human behavior, would be a good idea.

And Robinhood, of course, gamifies investing. I actually signed up for an account. And it uses all the tools of Facebook, and Snapchat, et cetera, to make it highly addictive. But in this point, you're not just talking about wasting people's time, you're talking about people incinerating their savings. And these are generally people who cannot afford to lose the money that they're losing.

MYLES UDLAND: All right. Whitney Tilson with Empire Financial Research. Whitney, really interesting stuff as always, Thanks so much for joining the program. Julia La Roche, thanks for joining us as well. We'll talk to both of you quite soon, I know.

WHITNEY TILSON: My pleasure.