Buffett Too Rich for Buffett Is Sign Bargains Are Gone

Buffett Too Rich for Buffett Is Sign Bargains Are Gone

Warren Buffett gave a nice, simple explanation for why Berkshire Hathaway Inc. (BRK/A) didn’t buy back any of its own shares in 2013: The stock just wasn’t cheap enough.

Buffett told shareholders in his annual letter that in order to trigger repurchases, the stock would have to trade for 120 percent of book value or less. (A company’s book value refers to its assets minus liabilities, and not the size of the contract Michael Lewis could fetch for writing about it.) Berkshire is trading at 138 percent of book, or a price-to-book ratio of 1.38. The multiple hasn’t dipped below 1.2 since 2012.

Of course, price-to-book valuations don’t come one-size-fits-all. Ratios far above 1.2 for indexes of consumer and technology companies, even in bear markets, show investors are OK with putting premiums on their brand names, patents and other assets that don’t change hands often. And Buffett himself hunts elephants trading far above 1.2 times book, as the takeovers of H.J. Heinz Co. and Burlington Northern Santa Fe LLC show.

Still, with the Standard & Poor’s 500 Index knocking on the door of another record, the 1.2 multiple does offer a fun limbo stick to send the market under as you wait for today’s closing bell signalling it’s safe to wear white again. (Picture Warren and Charlie Munger in resort wear holding the ends of the limbo stick to participate fully in this exercise.)

Limbo Kings

Though bankers aren’t known for dance skills, in this case they are the Limbo Kings. The KBW Bank Index hasn’t traded above 1.2 times book since around the time of Lehman Brothers Holdings Inc.’s meltdown in 2008, as the world learned how fast bank assets can morph into “troubled assets” and likely won’t forget anytime soon. It’s at 1.09 now, compared with a peak of 3.29 in 1996 and 3.19 near the end of the bull market in 2000. In 2007, it collapsed from 1.99 in February to 1.27 by the end of the year.

There aren’t a lot of other dancers on the floor today coming in under 1.2. About 91 percent of the S&P 500 is trading above the ratio, including 11 companies with negative book values. On March 9, 2009, the best day for bargain hunters of this century, maybe any century, almost half were below.

At the peak of the previous bull market in 2007, about 90 percent of the S&P 500 had a price-to-book above 1.2. Among those below the limbo stick then, note why some of them were there: they were falling on their butts. Just look at Countrywide Financial Corp. (price/book of 0.77) and Ambac Financial Group Inc. (1.2). Now, like then, probably all bargains ain’t bargains.

In the Nasdaq 100 Index, today there are two stocks below 1.2 times book: Liberty Media Corp. and Vodafone Group Plc., the same number as the 2007 peak. At the bottom in 2009, you had a choice of 19. The entire Nasdaq Composite’s ratio is currently 3.7, still well below the Internet bubble peak of 8.9.

Even after a 14 percent drop from a February record, you won’t find any members of the Nasdaq Biotech Index below 1.2. But maybe someone’s working on a pill for that.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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