Why Doug Kass Finally Bit The Bullet And Bought Berkshire Hathaway

Doug Kass just tweeted that he purchased shares of Warren Buffett’s Berkshire Hathaway last week:

He links to this page, which appears to offer a complete history and overview of the company.

Kass had been an outspoken critic of $BRK since November of last year, citing trepidation over the company’s size, succession issues, and doubts about the company’s bond buyback. At the time, he concluded that he “[saw] better opportunities elsewhere.” (Read his full commentary on The Street.)

Kass’s recent change of heart may be influenced by a running debate with value investor Whitney Tilson, who recently published a massive presentation praising Berkshire Hathaway as an undervalued stock.

In that presentation, Tilson touted BRKB as a cheap stock with massive cash assets and highly valuable subsidiaries. He also scoffed at concerns about Buffett’s age, saying that Buffett has properly prepared his staff in case he were to die suddenly or begin to lose his mental capacity.

According to gurufocus.com, Kass responded critically to Tilson’s bullish outlook on the stock. He questioned why investors should pay full value for the stock given Buffett’s growing distance from investment decisions, portfolio size, the price of comparable funds, and Tilson’s valuation.

Tilson rebutted Kass’s criticisms by reiterating his confidence in Buffett’s health, rejecting arguments about how most similar funds trade on a haircut, and defending his valuation of Berkshire stock. Finally he went a step further, asserting that Berkshire Hathaway is a good investment even if Kass was right:

The last point I’d make is that even if one agrees with Doug, Berkshire is STILL super-cheap. If we haircut investments/share by 8%, that’s an $8,000 haircut to our estimate of $178,000, and then if we use 8 rather than 10 for the multiple on pre-tax operating earnings, that’s a $16,000 haircut, so $178,000-$24,000=$154,000 vs. today’s price of $118,895 – it’s STILL at 77-cent dollar (vs. the 67-cent dollar we think it is) AND it’s super safe and growing at a healthy clip…

As it turns out, Kass continues to contest Tilson’s valuation, writing in a memo last week that he sees the intrinsic value of $BRK.A shares valued at $150,500.

But an insider trade was the straw that broke the camel’s back:

As it happens, Wedgewood Partners’ Sir David Rolfe passed on to me an e-mail that piqued my interest in which he wrote that while “Berkshire wont repurchase shares above 1.1x book value, but that rule doesn’t apply to Berkshire’s directors.” He then highlighted that insider Ron Olson has recently purchased stock

That tipped me over the edge and I went back to the Berkshire drawing board.

In November, Kass wrote that the company effectively put a floor on its share price by deciding to buy back shares at $107,000—7.8% below its current share price. At the time he argued that this didn’t give the stock enough upside.

However, the fact that Berkshire’s own directors are still buying stock at current prices suggests that they might be willing to create a new, higher floor on the share price. After six months of doubting, Kass is now back on the Berkshire Hathaway train.

NOW READ: Whitney Tilson’s Latest Huge Bullish Presentation On Berkshire Hathaway >

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