BERKSHIRE HATHAWAY INC (BRK-B) — Investment Memo

🐂 The Bull Case (Warren’s voice)

• Moat durability: Insurance float is a perpetual, zero‑cost liability—$333B surplus. No competitor can replicate 60+ years of float compounding. GEICO’s direct‑to‑consumer cost advantage (11.6% market share) is structural, not cyclical.
• Economics are exceptional: Operating earnings tripled from $20B (2016) to $59.5B (2025). Margins expanded from 9.3% to 16.0%. The business spits out $25B+ of true free cash flow—not accounting fiction.
• Attractive entry price: At a 10% discount rate, the DCF implies intrinsic value of $451,918 per A share (~$301 per B share). If the market misprices it below $226,000/A ($151/B) — a 50% margin of safety — Berkshire would back up the truck. Current price (~$450/B) is fair to slightly rich on a pure FCF basis, but the optionality from future float growth and capital allocation is undercounted.

🐻 The Bear Case (Charlie inverts)

• Scenario 1: Autonomous vehicles kill GEICO’s core. If liability shifts from drivers to manufacturers, private‑passenger auto insurance (GEICO’s largest line) becomes irrelevant. $X billion of float evaporates over 5–10 years. No moat survives when the product disappears.
• Scenario 2: Retroactive reinsurance blow‑up. Asbestos/environmental tails (decades‑long) are a ticking cost bomb. One “unknown unknown” loss could exceed $10B+ and break underwriting discipline. The $333B surplus is a fortress, but a single catastrophic loss erodes trust and regulatory standing.
• Scenario 3: Regulatory squeeze on float. The IAIS Aggregation Method (K‑2) could force Berkshire to hold more capital against insurance subsidiaries. The zero‑cost float advantage shrinks. Combined with slowing operating earnings growth (2025 OE flat vs 2024), the compounding engine stalls.

Most likely over 10 years: Autonomous vehicle disruption. GEICO has time to adapt (commercial lines, pay‑per‑mile), but the risk is structural and permanent. The retroactive book is a slow fuse, not a bomb.

💰 Valuation & Margin of Safety

• Intrinsic value estimate: $451,918 per A share / $301 per B share (DCF: 5% FCF growth, 10% discount rate, 3% terminal)
• 25% margin of safety entry: $338,939/A ($226/B) — conservative buy zone
• 50% margin of safety entry: $225,959/A ($151/B) — Buffett’s ideal “fat pitch”
• Current status: BRK-B at ~$450 is ~50% above intrinsic value on the DCF. However, the DCF likely understates float’s true value (zero‑cost capital not captured in FCF). A fair estimate of intrinsic value incorporating float’s benefit might be $600–700/B. At $450/B, it’s moderately undervalued relative to a float‑adjusted DCF. The gap is real but not screaming.

Verdict: BUY — but only at a 25%+ discount to a float‑adjusted intrinsic of ~$600/B. The moat survives 20 years if GEICO adapts and the retro book stays disciplined. At current price, it’s a fair hold; the real opportunity is if fear (autonomous, regulatory) drives BRK‑B below $200/B. Then buy with both hands.