Berkshire Hathaway: Buffett's Attraction

Steven Roge thinks he's found the best steward of capital at a bargain price. The ace's name: Warren Buffett. That's right, Roge, a fee-only investment adviser who also manages the open-end Roge Partners Fund, sees irresistible value in the shares of Berkshire Hathaway, Buffett's Omaha, Neb.-based holding company.

Let's walk through Roge's reasoning. Since 1965, Berkshire returned 21.5% per annum after taxes, compared with just 10.3% per year pre-tax for the Standard Poor's 500-stock index. Last year, the nation's largest mutual fund, American Growth, raked in $1 billion in management fees from American fundholders. Buffett manages more assets than American Growth, yet Roge argues that a Berkshire shareholder essentially gets the services of one of the greatest money managers ever for no fee and a holding company with microscopic overhead.

Several current elements attract Roge. By purchasing Iscar, a privately held Israeli machinery company, Buffett is signaling his interest in buying foreign, privately owned companies. Buffett's impeccable reputation is such that Roge predicts he'll receive a flood of offers from private companies abroad that want to sell out to him. "Foreign owners know Buffett won't churn and burn your company or sacrifice capital spending the way an American private equity or buyout firm might," he says. By joining Berkshire Hathaway, which maintains a golden AAA credit rating, a private company can dramatically reduce its cost of capital.

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Roge also likes the rising yield on Berkshire's $40 billion cash hoard. He calculates that each percentage point increase in interest rates pumps up Berkshire's profits by $625 million.

And then there are Berkshire's huge insurance and re-insurance businesses. These even turned a profit in 2005, the year of Hurricane Katrina and the worst year of catastrophes on record for the U.S. insurance business. The industry jacked up rates, so if 2006 is just a normal year, Berkshire's insurance business will gain a windfall.

Roge figures that Berkshire Hathaway A shares (symbol BRK.A), which trade at $91,750, are worth at least $125,000, implying upside potential of at least 36%. Or you can invest in the Berkshire B shares (BRK.B), which represent 1/30th of an A share and fetch $3,048.

--Andrew Tanzer