Berkshire Hathaway: A Safe, High-Quality, Growing

Company With 42% Upside Over the Next Year

Whitney Tilson
Kase Capital
August 9, 2015

This latest version of this presentation is always posted at:

www.tilsonfunds.com/BRK.pdf

Kase Capital Management

Manages Three Hedge Funds and is a
Registered Investment Advisor
Carnegie Hall Tower
152 West 57th Street, 46th Floor
New York, NY 10019
(212) 277-5606
[email protected]

Disclaimer
THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL
PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE
INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE
A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR
SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT.

INVESTMENT FUNDS MANAGED BY WHITNEY TILSON OWN SHARES IN

BERKSHIRE HATHAWAY. HE HAS NO OBLIGATION TO UPDATE THE
INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT
DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN
THIS PRESENTATION.
WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE
ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION,
TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION.
WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN,
OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION
CONTAINED IN THIS PRESENTATION.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND
FUTURE RETURNS ARE NOT GUARANTEED.
-3-

The Basics

Stock price (8/7/15): $215,463

$143.55 for B shares
Shares outstanding: 1.64 million
Market cap: $355 billion
Total assets (Q2 '15): $541 billion
Total equity (Q2 '15): $246 billion
Book value per share (Q2 '15): $149,735
P/B: 1.44x
Float (Q2 '15): $85.1 billion
Revenue: (TTM Q2 '15): $199 billion
Berkshire Hathaway today is the 15th largest company in the
world (and 4th largest in the U.S.) by revenues

-4-

History

History
Berkshire Hathaway today does not resemble the company that
Buffett bought into during the 1960s
It was a leading New England-based textile company, with
investment appeal as a classic Ben Graham-style "net-net"
Buffett took control of Berkshire on May 10, 1965
At that time, the company had a market value of about $18 million
and shareholder's equity of about $22 million

-5-

The Berkshire Hathaway Empire Today

Stakes in Public Companies Worth $750M+
Company

Shares

Price Value ($B)

Wells Fargo

483.5

$57.47

$27.8

Kraft Heinz

325.0

$78.46

$25.5

Coca-Cola

400.0

$41.77

$16.7

Bank of America

700.0

$17.75

$12.4

American Express

151.6

$79.72

$12.1

IBM

77.0 $155.12

$11.9

Wal-Mart

67.7

$71.25

$4.8

U.S. Bancorp

96.9

$45.11

$4.4

Procter & Gamble

52.5

$75.48

$4.0

Munich RE

20.1 $190.52

$3.8

Moody's

24.7 $109.81

$2.7

Goldman Sachs

13.1 $203.44

$2.7

DirecTV

24.6

$93.55

$2.3

DaVita

18.5

$81.02

$1.5

Deere

15.4

$95.85

$1.5

GM

41.0

$31.74

$1.3

USG

39.0

$31.45

$1.2

6.2 $183.85

$1.1

Charter Comm.
Bank of NY Mellon

22.0

$44.75

$1.0

Verisign

13.0

$70.90

$0.9

Note: Shares as of 12/31/14 13-F; Stock prices as of 8/7/15.

Excludes holdings (if any) in POSCO and BYD.

-6-

Berkshire's Culture Is Powerful and Unique:

"A Seamless Web of Deserved Trust"

Berkshire operates via extreme decentralization: though it is one of the largest

businesses in the world with approximately 340,000 employees, only 25 of them
are at headquarters in Omaha

There is no general counsel or human resources department

"By the standards of the rest of the world, we overtrust. So far it has worked very
well for us. Some would see it as weakness." Charlie Munger, 5/14
"A lot of people think if you just had more process and more compliance
checks and double-checks and so forth you could create a better result in the
world. Well, Berkshire has had practically no process. We had hardly any
internal auditing until they forced it on us. We just try to operate in a seamless
web of deserved trust and be careful whom we trust." Munger, 5/07
"We will have a problem of some sort at some time300,000 people are not all
going to behave properly all the time." Warren Buffett, 5/14
"Behavioral scientists and psychologists have long contended that 'trust' is, to
some degree, one of the most powerful forces within organizations. Mr. Munger
and Mr. Buffett argue that with the right basic controls, finding trustworthy
managers and giving them an enormous amount of leeway creates more value
than if they are forced to constantly look over their shoulders at human
resources departments and lawyers monitoring their every move." NY Times,
5/5/14
-7-

Earnings of Non-Insurance Businesses Have Soared

Earnings before taxes*

Insurance Group:
GEICO
General Re
Berkshire Reinsurance Group
Berkshire H. Primary Group
Investment Income
Total Insurance Oper. Inc.

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

970
3
417
161
2,824
4,375

1,221
-334
-1,069
235
3,480
3,533

1,314
526
1,658
340
4,316
8,154

1,113
555
1,427
279
4,758
8,132

916
342
1,222
210
4,896
7,586

649
477
250
84
5,459
6,919

1,117
452
176
268
5,145
7,158

576
144
-714
242
4,725
4,973

680
355
304
286
4,454
6,079

1,127
283
1,294
385
4,713
7,802

1,159
277
606
626
4,357
7,025

4,741
1,659
370
992
3,675
774
12,211

5,377
1,644
403
3,911
1,272
1,393
14,000

5,928
1,806
486
4,205
1,469
1,564
15,458

6,169
2,711
435
4,811
1,546
1,839
17,511

17,184

20,079

23,260

24,536

Non-Insurance Businesses:**
Burlington Northern Santa Fe
Berkshire Hathaway Energy
McLane Company
Manufacturing
Service & Retailing
Finance and financial products
Total Non-Insur. Oper. Inc.

466
228

485
217

1,476
229

1,787
584
3,065

1,921
822
3,445

Total Operating Income

7,440

6,978

3,297
1,157
6,159

1,774
232
436
3,279
1,006
6,727

2,963
276
733
3,014
771
7,757

1,528
344
686
1,028
653
4,239

3,611
1,539
369
813
3,092
689
10,113

14,313

14,859

15,343

11,158

17,271

* In 2010, Berkshire changed this table from "Earnings before income taxes, noncontrolling interests and equity method earnings" to "Earnings before income taxes".
** Non-insurance businesses were recategorized in 2014, so figures prior to 2012 are not comparable.

-8-

Quarterly Earnings of Key Business Units

Earnings before taxes*

Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15

Insurance Group:

YOY
change

GEICO

148

111

200

190

299

329

289

200

337

159

114

-34

124

155

435

-34

266

336

307

218

353

393

264

149

160

53

-87%

General Re

-16

276

186

31

-39

222

201

68

-326

132

148

190

81

138

154

-18

95

24

63

101

80

116

126

-45

-47

107

-8%

Berkshire Reinsurance Group

177

-318

141

250

52

117

-237

244 -1,343

-354

1,375

-392

-191

613

-102

-16

974

391

-206

135

**183

-9

443

-11

459

-411

n/a

29

44

33

48

52

135

56

54

58

74

71

51

121

43

54

75

99

157

99

137

143

247

175

203

48%

1,354
1,667

1,482
1,580

1,412
1,946

1,211
1,726

1,283

1,494

1,218

1,150

1,261

1,404

1,038

1,022

1,052

1,393

976

1,033

996

1,535

1,078

1,104

946

1,498

950

963

1,087

1,334

-11%

1,628

2,210

1,523

1,797

-15

1,395

2,733

860

1,137

2,350

1,584

1,008

2,385

2,361

1,341

1,715

1,661

2,135

1,926

1,303

1,834

1,286

-40%

Berkshire H. Primary Group

Investment Income
Total Insurance Oper. Inc.

**
Non-Insurance Businesses:**
Burlington Northern Santa Fe

974

1,127

1,034

965

1,070

1,236

1,470

1,115

1,280

1,508

1,474

1,289

1,397

1,556

1,686

1,169

1,472

1,654

1,874

1,672

1,536

4%

338

416

390

451

320

489

399

483

324

542

295

553

435

586

232

619

578

1,051

463

596

649

12%

71

80

109

89

91

82

105

124

59

102

73

130

98

132

114

126

114

115

126

120

74

131

147

17%

160
271

190

219

212

192

222

273

257

240

269

307

293

268

948

1,151

1,202

904

1,068

1,369

1,337

1,037

1,205

1,393

2%

583

860

844

805

675

976

964

1,060

1,069

1,330

1,210

982

282

400

317

470

287

453

355

451

384

498

10%

444

550

30%

4,432

4,773

8%

6,059

-8%

McLane Company

143

66

64

Manufacturing

162
206

170
201

194
350

112
112

115
115

119
119

307
307

111

155

148

275

156

177

147

294

163

189

175

321

296

355

403

510

372

422

453

592

1,835

2,655

2,836

2,787

2,551

2,921

3,217

3,522

3,201

3,503

3,858

3,438

3,500

3,852

4,190

3,916

3,630

4,420

4,970

4,491

1,779

1,695

2,065

2,033

3,463

4,865

4,359

4,584

2,536

4,316

5,950

4,382

4,338

5,853

5,442

4,446

5,885

6,213

5,531

5,631

5,291

6,555

6,896

5,794

6,266

Finance and financial products

Total Non-Insur. Oper. Inc.
Total Operating Income

441

395

303

Service & Retailing

402

476

Berkshire Hathaway Energy

382

* In 2010, Berkshire changed this table from "Earnings before income taxes, noncontrolling interests and equity method earnings" to "Earnings before income taxes", but a breakdown
of Q1-Q3 numbers in 2008-2010 isn't available, so we use the old numbers for Q1-Q3 of each year, but to get the Q4 numbers in 2008-2010, we subtract from the full-year numbers,
which causes slight anomalies.
** Non-insurance businesses were recategorized in 2014, so figures prior to 2012 are not comparable.

-9-

Berkshire Is Becoming Less of an Investment

Company and More of an Operating Business

Source: 2010 annual letter.

-10-

Buffett Continues to Put Berkshire's Cash to Work

at a Healthy Clip
Heinz ($12.3B)

Burlington Northern
(total value of the company at
acquisition was $34B)

20

BofA
($5B)

15

$B

ISCAR & PacifiCorp

PCP
($32B)
& Kraft
($5.3B)

Lubrizol

10

0
1997

1998

1999

2000

2001 2002

2003

2004

2005

2006 2007

2008 2009

2010

2011

2012

2013 2014 H1 '15

(5)
Acquisitions

Net Stock Purchases

Buffett is doing a good job investing the latest examples being Precision
Castparts and Kraft but the cash is coming in so fast (a high-class problem)!
Berkshire will generate free cash flow equal to the $32 billion paid for PCP
in ~20 months
Markets have a way of presenting big opportunities on short notice
Junk bonds in 2002, chaos in 2008
Buffett has reduced the average maturity of Berkshires bond portfolio so
he can act quickly

-11-

Buffett Invested Large Amounts of

Capital During the Downturn in 2008
Investment/Commitment

Amount (Bn)

Comment

Mars/Wrigley

$6.5

Auction rate securities

$6.5

Q2 event; sold much in Q3

Goldman Sachs

$5.0

Plus $5B to exercise warrants

Constellation Energy stock

and preferred

$5.7

Sold for a $1.1B gain incl.

breakup fee

Marmon

$4.5

The remaining 34.6% not

owned by BRK was
purchased from 2011-14

General stock purchases

$3.3

Full year; net of sales

Dow/Rohm & Haas

$3.0

General Electric

$3.0

Plus $3B to exercise warrants

Fed. Home Loan Disc. Notes

$2.4

Q2 event; sold much in Q3

Tungaloy

$1.0

Iscar acquisition

Swiss Re unit

$0.8

Plus sharing agreement

ING reinsurance unit

$0.4

Other businesses purchased

$3.9

TOTAL

$46.0

Plus $8B to exercise GS &

GE warrants

Note: Does not include capital committed to Berkshire's bond insurance business, Berkshire Assurance

-12-

Valuing Berkshire
"Over the years we'veattempt[ed] to increase our marketable investments in
wonderful businesses, while simultaneously trying to buy similar businesses in their
entirety." 1995 Annual Letter
"In our last two annual reports, we furnished you a table that Charlie and I believe is
central to estimating Berkshire's intrinsic value. In the updated version of that table,
which follows, we trace our two key components of value. The first column lists our
per-share ownership of investments (including cash and equivalents) and the second
column shows our per-share earnings from Berkshire's operating businesses before
taxes and purchase-accounting adjustments, but after all interest and corporate
expenses. The second column excludes all dividends, interest and capital gains that
we realized from the investments presented in the first column." 1997 Annual Letter

"In effect, the columns show what Berkshire would look like were it split into two parts,
with one entity holding our investments and the other operating all of our businesses and
bearing all corporate costs." 1997 Annual Letter
-13-

Berkshires Financials Dont Currently Reflect

Nearly $10,000/A Share of Value in Kraft Heinz
Analysis courtesy of Glenn Tongue, Deerhaven Capital

On June 7, 2013, Berkshire invested $8 billion in preferred stock and $4.25

billion in equity in the buyout of Heinz, alongside 3G.
This investment is carried on Berkshire's balance sheet in the line item
Investments in The Kraft Heinz Company" and is accounted for using equity
accounting. Reflecting some amortization, it is carried on Berkshires balance
sheet as of June 30th at $11.45B, which materially understates the value of the
investment.
On July 6, 2015 (after the end of Q2), Heinz merged with Kraft. In connection
with this transaction, Berkshire invested an additional $5.26B in the new
company.
As a result, Berkshire now owns $8B of preferred stock and 325 million shares
of the new Kraft Heinz (trading at $78.46 per share). The aggregate value of
this preferred ($8B) and common ($25.5B) stock held by Berkshire is $33.5B.
From this, one must subtract the cost: $8B (preferred stock) + 4.25B (first
equity investment) + 5.26B (second equity investment), for a total of $17.5B.
Thus, Berkshires profit is $16 billion, or $9,756/A share, which is not reflected
on the balance sheet and must be added to the calculation of intrinsic value.
Note: I havent subtracted taxes on this gain because I think this will prove to be a permanent holding.

-14-

Buffett's Comments on Berkshire's Valuation Lead

to an Implied Historical Multiplier of ~12x
Pre-tax EPS
Excluding All Year-End
Investments Income From
Stock
Intrinsic Implied
Year Per Share
Investments
Price
Value Multiplier
1996 $28,500
$421
$34,100 $34,100
13
1997 $38,043
$718
$46,000 $46,000
11
1998 $47,647
$474
$70,000 $54,000
13
1999 $47,339
-$458
$56,100 $60,000

1996 Annual Letter: "Today's price/value relationship is both much different from what
it was a year ago and, as Charlie and I see it, more appropriate."
1997 Annual Letter: "Berkshire's intrinsic value grew at nearly the same pace as book
value" (book +34.1%)
1998 Annual Letter: "Though Berkshire's intrinsic value grew very substantially in
1998, the gain fell well short of the 48.3% recorded for book value." (Assume a 1520% increase in intrinsic value.)
1999 Annual Letter: "A repurchase of, say, 2% of a company's shares at a 25%
discount from per-share intrinsic value...We will not repurchase shares unless we
believe Berkshire stock is selling well below intrinsic value, conservatively
calculated...Recently, when the A shares fell below $45,000, we considered making
repurchases."
-15-

Estimating Berkshire's Value: 2001 Q2 '2015

Year End
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Q2 '15

Pre-tax EPS
Excluding All
Investments Income From
Per Share
Investments1
$47,460
-$1,289
$52,507
$1,479
$62,273
$2,912
$66,967
$3,003
$74,129
$3,600
$80,636
$5,300
$90,343
$5,600
$75,912
$5,727
$91,091
$3,571
$94,730
$7,200
$98,366
$8,000
$113,786
$8,700
$129,253
$9,716
$140,123
$11,447
3
(Assume 4% increase)

Unrecognized
Gain in
Kraft Heinz

$9,756

Intrinsic Value
Per Share2
$64,000
$70,255
$97,217
$103,003
$117,329
$144,236
$157,543
$121,728
$119,659
$152,330
$178,366
$200,786
$226,413
$254,593
~$275,000

Subsequent
Year Stock
Price Range
$59,600-$78,500
$60,600-$84,700
$81,000-$95,700
$78,800-$92,000
$85,700-$114,200
$107,200-$151,650
$84,000-$147,000
$70,050-$108,100
$97,205-$128,730
$98,952-$131,463
$114,500-$134,060
$139,610-$178,275
$163,038-$229,374
?
?

1. Unlike Buffett, we include a conservative estimate of normalized earnings from Berkshire's insurance businesses: half of the $2 billion of average
annual profit over the past 12 years, equal to $600/share.
2. Historically we believe Buffett used a 12 multiple, but given compressed multiples during the downturn, we used an 8 in 2008-2010 and 10 since then.
3. Estimate of +4% based on Berkshire's 2.4% increase in book value and 14% increase in operating income of non-insurance businesses in H1 '15.

-16-

Though Berkshire's Stock Is Near Its All-Time

High, It's Still 22% Below Its Intrinsic Value

$275,000

Intrinsic value*

* Investments per share plus unrecognized gain in Kraft Heinz plus 12x pre-tax earnings per share (excluding all income from investments, but
including $600/share of insurance earnings) through 2007, then an 8x multiple from 2008-2010, and a 10x multiple thereafter.

-17-

12-Month Investment Return

Current intrinsic value: $275,000/share

Plus 8% annual growth of intrinsic value of the business
Plus $8,000/share cash build over next 12 months
Equals intrinsic value in one year of $305,000
42% above today's price

-18-

Catalysts

Continued earnings growth of operating businesses

Recognition of gain in Kraft Heinz
Likelihood of meaningful acquisitions
New stock investments
Additional cash build
Share repurchases (if the stock drops to 1.2x book or below; its
currently at 1.44x)

-19-

Berkshire's Share Repurchase Program

On September 26, 2011, Berkshire announced the first formal share
repurchase program in Berkshire's history, and only the second time
Buffett has ever offered to buy back stock
It's unusual in three ways:
1.
2.
3.

There's no time limit

There's no dollar cap
Buffett set a price: "no higher than a 10% premium over the thencurrent book value of the shares. In the opinion of our Board and
management, the underlying businesses of Berkshire are worth
considerably more than this amount"

On December 12, 2012, Berkshire increased the limit to 1.2x book

and announced that it had repurchased $1.2 billion in one transaction
Book value per share at the end of Q2 '15 was $149,735
Thus, a 20% premium means that Buffett is willing to buy back stock
up to $179,682, 17% below the current price
-20-

The Share Repurchase Program Has Significantly Improved

the Risk-Reward Equation, So We Added to Our Position

It confirms that Buffett shares our belief that Berkshire stock is undervalued

He wouldn't be buying it back at a 20% premium to book value if he thought its intrinsic value
was, say, 30% above book
Our estimate is $275,000/share or 1.84x adjusted book value

Buffett put a floor on the stock: he was clear in numerous interviews after the program
was announced that he is eager to buy back a lot of stock and he has plenty of dry
powder to do so:

Berkshire has $60.4 billion of cash (excluding railroads, utilities, energy, finance and financial
products), plus another $27.2 billion in bonds (nearly all of which are short-term, cash
equivalents), which totals $87.6 billion (will soon be reduced by $37B for Kraft and PCP)
On top of this, the company generated $18.2 billion in free cash flow in the past 12 months
in other words, $1.5 billion is pouring into Omaha every month
The Sept. 2011 press release noted that "repurchases will not be made if they would reduce
Berkshire's consolidated cash equivalent holdings below $20 billion," so that leaves $68
billion to deploy (and growing by $1.5 billion/month), equal to 19% of the company's current
market cap

It's unlikely, however, that Buffett would repurchase anything close to this amount, as some of the
cash and bonds are held at various insurance subsidiaries, plus Buffett likely wants to keep plenty of
dry powder to make acquisitions and investments

In summary, even with the upcoming payments of ~$37B for Kraft and PCP, Buffett could
easily buy back $20 billion of stock and still have plenty of dry powder for other investments
-21-

Risk: Who Will Replace Buffett?

When Buffett is no longer running Berkshire, his job will be split into two parts: one
CEO, who has not been named, and a small number of CIOs (Chief Investment
Officers)

A CEO successor (and two backups) have been identified, but not publicly named
Two CIOs have been named already, Todd Combs and Ted Weschler, both of whom are
excellent investors

Nevertheless, Buffett is irreplaceable and it will be a significant loss when he no

longer runs Berkshire for a number of reasons:

There is no investor with Buffett's experience, wisdom and track record, so his successors'
decisions regarding the purchases of both stocks and entire business might not be as good
Most of the 80+ managers of Berkshire's operating subsidiaries are wealthy and don't need
to work, but nevertheless work extremely hard and almost never leave thanks to Buffett's
"halo" and superb managerial skills. Will this remain the case under his successors?
Buffett's relationships and reputation are unrivaled so he is sometimes offered deals and
terms that are not offered to any other investor and might not be offered to his successors
Being offered investment opportunities (especially on terms/prices not available to anyone
else) also applies to buying companies outright. There's a high degree of prestige in selling
one's business to Buffett (above and beyond the advantages of selling to Berkshire). For
example, the owners of Iscar could surely have gotten a higher price had they taken the
business public or sold it to an LBO firm

-22-

Aren't We Concerned About the

Uncertainty of Berkshire After Buffett?
Answer: Not really, for two primary reasons:
1. Buffett isn't going anywhere anytime soon. We think it's at least
80% likely that Buffett will be running Berkshire for five more
years, and perhaps 50% likely he'll be doing so for 10 more years

Buffett turns 85 on Aug. 30th, 2015, is in excellent health, and loves his job
There are no signs that he is slowing down mentally in fact, he appears to be
getting better with age
A life expectancy calculator (http://calculator.livingto100.com) shows that
Buffett is likely to live to age 93 and we'd bet on the over

2. The stock is undervalued based on our estimate of intrinsic value,

which does not include any Buffett premium

We simply take investments/share and add the value of the operating

businesses, based on a conservative multiple of their normalized earnings
The value of the cash and bonds won't change, and Wells Fargo, Kraft Heinz,
Coke, American Express, Burlington Northern, GEICO, etc. will continue to
generate robust earnings even after Buffett is no longer running Berkshire
-23-

Why Doesn't Buffett Identify

His Successor Now?
We agree with Buffett's decision not to name his successor for three
reasons:
1. It would place enormous pressure and expectations on this
person, which is unnecessary and counterproductive;
2. It might be demotivating for the candidates who were not chosen;
and
3. Who knows what will happen between now and the time that a
successor takes over (which could be more than a decade)?

Maybe the current designee falls ill, leaves Berkshire, performs

poorly, or makes a terrible mistake (remember David Sokol?)
Or what if another candidate (perhaps one of the two backup
successors today) performs incredibly well, or Berkshire acquires a
business with a fantastic CEO, and Buffett and the board decide that
another candidate is better?
By not naming Buffetts successor now, Buffett and the board will be
able to switch their choice without the second-guessing and media
circus that would occur if the successor had been named
-24-

The Real Buffett Risk

Buffett is often asked (as are we): "What would happen to the
company (and stock) if you got hit by a bus (i.e., die suddenly)?"
If it happened tomorrow, our best guess is that the stock would fall 15% (which
might give Berkshire the opportunity to buy back a lot of stock)
But this isn't likely. Not to be morbid, but most people don't die suddenly from
something like an accident or heart attack, but rather die slowly: their bodies
(and sometimes minds) break down gradually
A far greater risk to Berkshire shareholders is that Buffett begins to lose it
mentally and starts making bad investment decisions, but doesn't recognize it
(or refuses to acknowledge it because he loves his work so much) and the
board won't "take away the keys", perhaps rationalizing that a diminished Buffett
is still better than anyone else
Buffett is aware of this risk and has instructed Berkshire's board members, both
publicly and privately, that their most important job is to "take away the keys" if
they see him losing it
We trust that both Buffett and the board will act rationally, but also view it as our
job to independently observe and evaluate Buffett to make sure we're
comfortable that he's still at the top of his game. Today, we think he's never
been better
-25-

An Analogy with Apple & Steve Jobs

The most comparable example of a business that, like Berkshire,
is closely associated with its legendary founder and CEO is Apple
As Steve Jobs's health began to fail, he assumed fewer day-to-day
responsibilities, passing them to top lieutenants
Jobs resigned as CEO on Aug. 24, 2011 and died exactly six weeks later
Apple's stock on the first trading days after his retirement and death were
announced declined less than 1%, as this chart shows:

First day of
trading after
Steve Jobs
announces
retirement

First day of
trading after
Steve Jobs dies

-26-

Other Risks
A recession impacts Berkshire's earnings materially
No catalysts occur, so the stock sits there and doesn't go up
Intrinsic value will likely continue to grow nicely

Berkshire's stock portfolio declines

Losses in the shorter-duration derivatives such as credit-default
swaps are larger than expected and/or mark-to-market losses
mount among the equity index puts
A major super-cat event occurs that costs Berkshire many billions

-27-

Conclusion: Berkshire Has Everything I Look for in a

Stock: It's Safe, Cheap and Growing at a Healthy Rate

Extremely safe: Berkshire's huge hoard of liquid assets, the

quality and diversity of its businesses, the fact that much of its
earnings (primarily insurance and utilities) aren't tied to the
economic cycle, and the conservative way in which it's managed
all protect Berkshire's intrinsic value, while the share repurchase
program provides downside protection to the stock
Cheap stock: trading 22% below intrinsic value, without giving
any credit to immense optionality, with 42% upside over the next
year
Intrinsic value is growing at roughly 8-10% annually

-28-