SEEKING ALPHA: Can You Calculate Berkshire's Beta?

November 21, 2008 | about stocks: BRK.A / BRK.B

Like many others, I've followed the recent stock price movements of Berkshire Hathaway (BRK.A) with amazement. What's surprised me the most is the magnitude of Berkshire's decline relative to that of the market as a whole. This could represent a correction--Berkshire was overvalued relative to the market and is less so now.

Or it could mean that the market now believes that Berkshire has a much higher beta than it used to. That is, for a given decline in the market, Berkshire can now be expected to decline even more.

Which begs the question--can you calculate Berkshire's beta? I don't mean historical beta, which you can calculate with regression analysis. I mean its "real-time" beta based on the current components of its portfolio, including operating businesses, securities holdings, cash and fixed income investments, and derivative positions.

For a given percentage decline in the equity value of Corporate America:

1) The value of Berkshire's still-large cash hoard does not decrease at all. To the extent it's in treasuries it may even increase.

2) The value of Berkshire's operating subsidiaries probably declines as well. By how much, it's hard to say. I would argue that Berkshire's businesses are, in aggregate, better businesses than Corporate America as a whole, and their equity is less levered. On the other hand, the operating businesses may be overweighted towards higher beta sectors like construction.

3) The value of Berkshire's public equities portfolio declines, and because it's weighted towards financials like American Express (AXP), Wells Fargo (WFC), Goldman (GS), and GE (GE), probably has a higher beta than the market as a whole.

4) The value of Berkshire's derivative book declines. By how much I'm not sure, as my option math is not up to par. According to the news stories I'm reading, this is the biggest factor in Berkshire's recent declines.

What's the net result?

Disclosure: Long Berkshire Hathaway

Related Links

Political Animal - New Zealand Politics
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Shareinvestorforum.com - Discuss this topic further


From Amazon


The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
Buy new: $21.00 / Used from: $16.99
Usually ships in 24 hours

	The Warren Buffett Way, Second Edition by Robert G. Hagstrom Buy new: $10.17 / Used from: $6.92 Usually ships in 24 hours
	The Tao of Warren Buffett: Warren Buffett's Words of Wisdom: Quotations and Interpretations to Help Guide You to Billionaire Wealth and Enlightened Business Management by Mary Buffett Buy new: $15.61 / Used from: $5.95 Usually ships in 24 hours
	The Four Filters Invention of Warren Buffett and Charlie Munger by Bud Labitan Buy new: $29.65 / Used from: $32.38 Usually ships in 24 hours
	Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor by Janet Lowe Buy new: $13.57 / Used from: $7.95 Usually ships in 24 hours