How to Buy Berkshire on the Cheap
by Carl Delfeld, Investment U Senior Analyst
Thursday, November 15, 2012: Issue #1905
There are a lot of Warren Buffett wannabes out there.
And why not associate your fund with this legendary investor and his conservative strategy?
The problem is pulling it off…
You need the patience of a saint to wait for the right combination of quality and value, and the steely discipline to stay the course. Many try, but few succeed.
Leucadia National (NYSE: LUK), a conglomerate with a Buffett-like strategy and roots going back to 1854, is a good example. It’s doubling down on its investment in investment bank Jefferies (NYSE: JEF), recently announcing that it will buy the entire bank.
It’s a bold move, but a bit at odds with the company’s nickname – “Baby Berkshire Hathaway.”
The price Leucadia is paying for Jefferies seems very un-Buffett like to me. Bloomberg reports a price of 1.2 times tangible book value, double that of the value Morgan Stanley is trading at. And Leucadia is down 12.5% year-to-date and down 54% over the last five years.
I have a better idea. Why not take a look at the Boulder Total Return Fund (NYSE: BTF)? Right up front it lays out its investment philosophy:
“We look for a consistently high return on assets and favor those having an improving return on assets.
“We look for growth. We favor companies whose per share earnings have grown at a rate of 15% per year over the last 10 years. Since we like a long history of earnings, this makes investing in startup companies less attractive.
“We favor companies who, within their industry, have the highest profit margin as a percent-of-sales. The company having the highest profit likely will be the last survivor in a price war.
“We look for low total debt and prefer it to be less than 50% of total footings. Debt always has to be paid back, usually at an inconvenient time.”
This closed-ended fund is closely connected to Stewart Horejsi and his family. He began investing profits from his family’s welding business in Berkshire stock as far back as 1980 when it was trading at only $265 a share. That’s a good sign…
But the key evidence that Boulder’s strategy is in sync with Buffett is the sheer size of its stake in Berkshire Hathaway.
Berkshire Hathaway makes up 36.7% of the Boulder Total Return Fund’s holdings, and the fund’s philosophy seems very much in tune with Buffett and his mentor Benjamin Graham’s Intelligent Investor.
Here are Boulder Total Return Fund’s top 10 holdings right now.
| Company | Ticker | % Holding |
| Berkshire Hathaway Class A | BRK-A | 26.1% |
| Yum! Brands | YUM | 17.4% |
| Berkshire Hathaway Class B | BRK-B | 11.6% |
| Wal-Mart | WMT | 8.0% |
| Johnson & Johnson | JNJ | 4.4% |
| JPMorgan Chase | JPM | 4.0% |
| Cohen & Steers Infrastructure | CNS | 3.9% |
| Wells Fargo | WFC | 3.9% |
| Diageo | DEO | 2.5% |
| Sanofi | SNY | 2.3% |
Boulder Total Return Fund is up 17.4% so far this year, but a big attraction for me is that the fund is trading at a 22% discount to its net asset value (NAV).
As usual there are some concerns. The fund’s expenses seem on the high side to me, and I hope the legal expenses start trending down soon. The other issue is when and how the fund’s management will take vigorous action to unlock the market value of this fund for its investors.
But if you’re a fan of Buffett and his investment philosophy, BTF certainly warrants a closer look.
Good Investing,
Carl
How to Buy Berkshire on the Cheap,Any investment contains risk. Please see our disclaimer.
6 Responses to “How to Buy Berkshire on the Cheap”
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One correction: BTF doesn’t have a 37.6% stake in Berkshire; far from it! It has 36.7% *of its own portfolio* invested in BRK.A and BRK.B — big difference. The rest of the portfolio isn’t bad, either.
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Good catch on our semantics. Thanks!
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Help. What is the difference between BTF having a 37% stake and having 36% of its own portfolio invested? 1%??
Barrons shows discount as not available and 52 wek return as 17.3%
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Your BTF article was interesting……..only one thing wrong……..THE FEES!
Management Fees 1.64%
Other Expenses: 0.47%
Baseline Expense: 2.11%
Interest Expense: 0.00%
Total: 2.11%
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Good find and thanks for sharing. Those fees are a bit much.
Of course, if the 22%+ upside is realized, 2.11% isn’t too hard to swallow.
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I found this closed end fund recently and noticed the large concentration in Berkshire Hathaway and also considered it as a way to own the venerable fund at a nice discount.
The problem is, it has been trading at a steep discount for a long time. In fact, it has averaged almost a 17% discount for the last 5 years. Unless the fund management does something to shrink the discount–like buy back its own shares, the discount is likely to persist and the high internal management fees will eat away at your profits. Do you know of such a catalyst any time soon? Stocks can stay undervalued for a long time. Buying cheap only works when there is a reason for fair value to be realized.
Disclosure: I have no position in this fund and no intention to establish a position in the next 72 hours.
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