Evaluation of Berkshire Hathaway

I looked at the 2Q report of Berkshire Hathaway again, on surface, the book value is 118.8B, translating this to per share of BRK-B, it is $2555. Its stock investment may increased 5B value now since 06/30/2009, that is a $107 increase. That gives a $2662.

There are also two items not reflected in book value:

1. Long term put options on stock index has a liability of 8.2B. This kind of put option is european option, which has maturity in 15-20 years later. Roughly, if 15 years later, the US and european stock index is higher than what it was in 2007, BRK has no obligation to pay anything. To me, this is very likely to be the case. So I like to remove this liability from the book(a little optimistic, but I think it makes sense), after tax, it gives a $114 increase on per share book value.

2. The investment on convertible notes/preferred shares in many deals:a. GS: this one is worth 2.5B capital gains now if converted.b. Swiss Re: this one is worth 2.4B capital gain if converted.These two add together gives $70 after-tax book value. In this calculation, you can see the effective book value for now is $2846.Tax consideration is very important, both for individual investors and corporate investors. Buffett invested on 8.5% bond/preferred stock early this year for Dow company, maybe partially because of the tax considerations: for dividend income, corporate only needs to pay about 10% tax, for capital gains, they need to pay 35% tax. Another reason he likes bond more is because of the safety, I guess.He also likes to own a company as subsidiary, instead of buying a company's stock maybe partially due to tax reason (another reason is better control on management, I guess).

Besides the book value analysis, from P/E, its look through earning is about 14B per year, with P/E of 15, it gives a fair value of at least $4500.

Since Buffett only invests on companies with good management and durable competitive advantages, his collection of companies are among the best ones. Given this rare collection of companies and his cautious investment style, plus his ability to get good deals and find good investment opportunities, I think the current price ($3260) is still a bargain.

From safety side, it may not be as diversified as SP 500, but because it is a good collection, it is better than SP 500 average. Still, it is not as diversified, that is a fact to consider. The maximum on insurance loss would not affect the parent company though, since the insurance are issued by its three major subsidiaries and these are not guarranteed by parent company. The only loan guarranteed by parent company is about 10+ Billion.

So I could argue the downside risk is less than S&P 500 index.