"Why follow Buffett?" asks Jon Markman on Msnmoney.co.uk. After five years of "underwhelming" performance, Berkshire Hathaway (BRK-A, $89,750) has just reported earnings that excluding an accounting gain were 29% lower in 2005 than in 2004.
The problem is there are no real synergies between the "hodgepodge" of firms that make up Berkshire Hathaway, which cover areas as diverse as insurance, retail, media and construction.
What's more, the insurance part of the business, General Re, has an "out-of-control derivatives book" and has engaged in "corrupt practices and mishandling of catastrophe-insurance policies".
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But hold on a minute, says Jim Jubak, also on Msnmoney.com. The reason for investing in Berkshire Hathaway is precisely because it had such a lacklustre 2004-2005. Part of the reason for that was General Re's (and National Indemnity's) reinsurance units "took a huge hit from the combination of hurricanes Katrina, Rita and Wilma, losing $3.4bn".
But thanks to its low-cost car-insurance business, Geico, Berkshire's insurance business as a whole recorded a small profit for the year. General Re is now also raising prices significantly and it only has 741 out of 23,000 derivatives contracts remaining.
Berkshire has also just bought Pacificorp, putting it "in the forefront of a consolidation of the electric-utility grid", so you'd be mad to sell your shares now. Jubak has a price target on Berkshire Hathaway's B shares (BRK-B, $2,992.8) of $3,440 by September 2006.
There are four other insurance firms that "stand to benefit from increases in premiums for property-and-casualty insurance". Philadelphia Consolidated (PHLY, $33.60) trades on 11.6 times projected earnings (according to Yahoo); HCC Insurance (HCC, $34.36) on 11.9 times 2006 earnings; Cincinnati Financial (CINF, $42.67) on 14 times projected earnings per share and a 3% yield; and WR Berkeley (BER, $57.29) on 11.3 times. All are cheaper than Berkshire on 19.7 times.
Two other companies to follow for their investment prowess, says Markman, are Leucadia National (LUK, $58.34), a "sort of New York version of Berkshire Hathaway", and Brookfield Asset Management (BAM, $55.19). Both have outperformed Berkshire over three and ten years.
