An Analysis of Berkshire Hathaway

February 26, 2012

This presentation is posted at: www.tilsonfunds.com/BRK.pdf

T2 Partners Management L.P. Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor
The General Motors Building 767 Fifth Avenue, 18th Floor New York, NY 10153
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Disclaimer
THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN TONGUE OWN STOCK IN BERKSHIRE HATHAWAY. THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION. WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED.
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Berkshire Hathaway: A High-Quality, Growing 67-Cent Dollar

History Berkshire Hathaway today does not resemble the company that Buffett bought into during the 1960s Berkshire was a leading New England-based textile company, with investment appeal as a classic Ben Graham-style net-net Buffett took control of Berkshire on May 10, 1965 At that time, Berkshire had a market value of about $18 million and shareholder's equity of about $22 million

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The Berkshire Hathaway Empire Today

Stakes in Public Companies Worth $1.5+ Billion
Company Coca-Cola IBM Wells Fargo American Express Procter & Gamble Kraft Munich RE Wal-Mart U.S. Bancorp ConocoPhillips Johnson & Johnson Sanofi-Aventis POSCO Tesco Shares 200.0 63.9 400.0 151.6 72.4 79.0 20.1 39.0 78.1 29.1 31.4 25.8 3.9 291.6 Price Value ($B) $69.00 $197.76 $30.18 $53.33 $66.71 $37.88 $146.55 $58.79 $28.73 $75.95 $64.46 $71.59 $38,820 $5.01 $13.8 $12.6 $12.1 $8.1 $4.8 $3.0 $2.9 $2.3 $2.2 $2.2 $2.0 $1.9 $1.5 $1.5

Note: Shares as of 12/31/11; Stock prices as of 2/24/12.

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The Basics

Stock price (2/24/12): $120,000 $80.04 for B shares (equivalent to $120,060/A share) Shares outstanding: 1.65 million Market cap: $198 billion Total assets (Q4 11): $393 billion Total equity (Q4 11): $169 billion Book value per share (Q4 11): $99,860 P/B: 1.20x Float (Q4 11): $70.6 billion

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Earnings of Non-Insurance Businesses Have Soared Thanks to Burlington Northern and the Economic Rebound

Earnings before taxes*

2004 970 3 417 161 2,824 4,375

2005 1,221 -334 -1,069 235 3,480 3,533

2006 1,314 523 1,658 340 4,316 8,151

2007 1,113 555 1,427 279 4,758 8,132

2008 916 342 1,222 210 4,896 7,586

2009 649 477 250 84 5,459 6,919

2010 1,117 452 176 268 5,145 7,158

2011 576 144 -714 242 4,725 4,973

Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Burlington Northern Santa Fe Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Other Businesses Total Non-Insur. Oper. Inc. Total Operating Income

584 228 237 2,253 3,302 7,677

822 217 523 2,406 3,968 7,501

1,157 229 1,476 3,297 6,159 14,310

1,006 232 1,774 3,279 6,291 14,423

771 733 276 2,963 2,809 7,552 15,138

653 686 344 1,528 884 4,095 11,014

3,611 689 813 369 1,539 3,092 10,113 17,271

4,741 774 992 370 1,659 3,675 12,211 17,184

* In 2010, Berkshire changed this table from Earnings before income taxes, noncontrolling interests and equity method earnings to Earnings before income taxes. Thus, 2008-2011 reflect the new numbers, and all prior years reflect the old ones.

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Quarterly Earnings of Key Business Units

Earnings before taxes* Insurance Group: GEICO General Re Berkshire Reinsurance Group Berkshire H. Primary Group Investment Income Total Insurance Oper. Inc. Non-Insurance Businesses: Burlington Northern Santa Fe Finance and Financial products Marmon McLane Company MidAmerican/Utilities/Energy Other Businesses Total Non-Insur. Oper. Inc. Total Operating Income 58 513 723 1,536 3,541 72 372 1,015 1,736 3,946 50 481 1,020 1,824 3,793 52 408 957 1,631 3,579 242 277 273 214 241 28 73 516 744 1,602 2,973 254 261 68 329 956 1,868 3,632 163 247 68 526 798 1,802 3,002 113 197 67 1,592 516 2,485 5,736 112 162 143 303 206 926 2,593 115 170 66 402 201 954 2,534 119 194 64 441 350 1,168 3,114 307 160 71 382 271 1,191 2,917 476 111 190 80 395 583 1,835 3,463 974 155 219 109 338 860 2,655 4,865 1,127 148 212 89 416 844 2,836 4,359 1,034 275 192 91 390 805 2,787 4,584 965 156 222 82 451 675 2,551 2,536 1,070 177 273 105 320 976 2,921 4,316 1,236 147 257 124 489 964 3,217 5,950 1,470 294 240 59 399 1,060 3,522 4,382 Q1 07 Q2 07 Q3 07 Q4 07 295 30 553 49 1,078 2,005 325 230 356 63 1,236 2,210 335 157 183 77 1,217 1,969 158 138 335 90 1,227 1,948 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 186 42 29 25 1,089 1,371 298 102 79 81 1,204 1,764 246 54 -166 -8 1,074 1,200 186 144 1,280 112 1,529 3,251 148 -16 177 4 1,354 1,667 111 276 -318 29 1,482 1,580 200 186 141 7 1,412 1,946 190 31 250 44 1,211 1,726 299 -39 52 33 1,283 1,628 329 222 117 48 1,494 2,210 289 201 -237 52 1,218 1,523 200 68 244 135 1,150 1,797 337 -326 -1,343 56 1,261 -15 159 132 -354 54 1,404 1,395 114 148 1,375 58 1,038 2,733 -34 190 -392 74 1,022 860

* In 2010, Berkshire changed this table from Earnings before income taxes, noncontrolling interests and equity method earnings to Earnings before income taxes, but a breakdown of Q1-Q3 numbers in 2008-2010 isnt available, so we use the old numbers for Q1-Q3 of each year, but to get the Q4 numbers in 2008-2010, we subtract from the full-year numbers, which causes slight anomalies in Q4 08, Q4 09 and Q4 10.

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Berkshire Is Becoming Less of an Investment Company and More of an Operating Business

Source: 2010 annual letter.

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After a Two-Year Hiatus, Berkshire Is Buying Stocks Again

20

Cash paid, mostly for Burlington Northern

(the total value of the company at acquisition was $34 billion)

Buying stocks again

15

$B
10 5

0
1997 (5) (10)
Acquisitions Net Stock Purchases

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Buffett is doing a good job investing but the cash is coming in so fast! A high-class problem Markets have a way of presenting big opportunities on short notice Chaos in 2008, junk bonds in 2002 Buffett has reduced average maturity of bond portfolio so he can act quickly
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Buffett Invested Large Amounts of Capital During the Downturn in 2008

Investment/Commitment Mars/Wrigley Auction rate securities Goldman Sachs Constellation Energy stock and preferred Marmon Amount (Bn) $6.5 $6.5 $5.0 $5.7 $4.5 Q2 event; sold much in Q3 Plus $5B to exercise warrants Sold for a $1.1B gain incl. breakup fee The remaining 34.6% not owned by BRK will be purchased from 2011-14 Full year; net of sales Plus $3B to exercise warrants Q2 event; sold much in Q3 Iscar acquisition Plus sharing agreement Comment

General stock purchases Dow/Rohm & Haas General Electric Fed. Home Loan Disc. Notes Tungaloy Swiss Re unit ING reinsurance unit Other businesses purchased TOTAL

$3.3 $3.0 $3.0 $2.4 $1.0 $0.8 $0.4 $3.9 $46.0

Plus $8B to exercise GS & GE warrants

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Note: Does not include capital committed to Berkshires new bond insurance business, Berkshire Assurance

Valuing Berkshire
Over the years we'veattempt[ed] to increase our marketable investments in wonderful businesses, while simultaneously trying to buy similar businesses in their entirety. 1995 Annual Letter In our last two annual reports, we furnished you a table that Charlie and I believe is central to estimating Berkshire's intrinsic value. In the updated version of that table, which follows, we trace our two key components of value. The first column lists our per-share ownership of investments (including cash and equivalents) and the second column shows our per-share earnings from Berkshire's operating businesses before taxes and purchase-accounting adjustments, but after all interest and corporate expenses. The second column excludes all dividends, interest and capital gains that we realized from the investments presented in the first column. 1997 Annual Letter

In effect, the columns show what Berkshire would look like were it split into two parts, with one entity holding our investments and the other operating all of our businesses and bearing all corporate costs. 1997 Annual Letter
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Buffetts Comments on Berkshires Valuation Lead to an Implied Multiplier of Approximately 12

Pre-tax EPS Excluding All Year-End Investments Income From Stock Intrinsic Implied Year Per Share Investments Price Value Multiplier 1996 $28,500 $421 $34,100 $34,100 13 1997 $38,043 $718 $46,000 $46,000 11 1998 $47,647 $474 $70,000 $54,000 13 1999 $47,339 -$458 $56,100 $60,000
1996 Annual Letter: Today's price/value relationship is both much different from what it was a year ago and, as Charlie and I see it, more appropriate. 1997 Annual Letter: Berkshire's intrinsic value grew at nearly the same pace as book value (book +34.1%) 1998 Annual Letter: Though Berkshire's intrinsic value grew very substantially in 1998, the gain fell well short of the 48.3% recorded for book value. (Assume a 1520% increase in intrinsic value.) 1999 Annual Letter: A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value...We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated...Recently, when the A shares fell below $45,000, we considered making repurchases.
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Estimating Berkshires Value: 2001 2011

Pre-tax EPS Excluding All Income From Intrinsic Value Investments1 Per Share -$1,289 $64,000 $1,479 $70,000 $2,912 $97,000 $3,003 $103,000 $3,600 $117,300 $5,200-$5,400 $143,000-$144,400 $5,500-$5,700 $156,300-$158,700 $5,727 $121,728 (8 multiple) $3,571 $126,801 (10 multiple) $7,200 $166,730 (10 multiple) 2 $8,000 $178,366 (10 multiple) Subsequent Year Stock Price Range $59,600-$78,500 $60,600-$84,700 $81,000-$95,700 $78,800-$92,000 $85,700-$114,200 $107,200-$151,650 $84,000-$147,000 $70,050-$108,100 $97,205-$128,730 $98,952-$131,463 ?

Year End 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Investments Per Share $47,460 $52,507 $62,273 $66,967 $74,129 $80,636 $90,343 $75,912 $91,091 $94,730 $98,366

Given compressed multiples at the end of 2008, we used an 8 rather than a 12 multiple. Weve now increased this to a 10 multiple, still below the historical 12 multiple we believe Buffett uses.
1. Unlike Buffett, we include a conservative estimate of normalized earnings from Berkshires insurance businesses: half of the $2 billion of annual profit over the past nine years. 2. Buffett reported $6,990/share in his 2011 annual letter, but we include half of normalized insurance earnings as well as run-rate earnings for Lubrizol.

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Berkshire Is 33% Below Intrinsic Value, Close to a Multi-Decade Low

180,000

Intrinsic value estimate of $178,400 using 10 multiple

170,000 160,000 150,000 140,000

Intrinsic value*

130,000 120,000 110,000 100,000 90,000 80,000 70,000

33% discount to intrinsic value

60,000 50,000 40,000 30,000 20,000

* Investments per share plus 12x pre-tax earnings per share (excluding all income from investments) for the prior year, except for YE 2008 (8 multiple) and YE 2009 onward (10 multiple).

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12-Month Investment Return

Current intrinsic value: $178,400/share Plus 8% growth of intrinsic value of the business Plus cash build over next 12 months: $7,000/share Equals intrinsic value in one year of $200,000 67% above todays price

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Catalysts
Continued earnings growth of operating businesses, especially as $1+ billion of pre-tax earnings from Lubrizol are incorporated New equity investments Additional cash build Meaningful share repurchases Eventually, Berkshire could win back a AAA rating (not likely in the near term) Potential for more meaningful acquisitions and investments If theres a double-dip recession, this becomes more likely

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Berkshires New Share Repurchase Program

On September 26th 2011, Berkshire announced the first formal share repurchase program in Berkshires history, and only the second time Buffett has ever offered to buy back stock Its unusual in three ways:
1. 2. 3. Theres no time limit Theres no dollar cap Buffett set a price: no higher than a 10% premium over the thencurrent book value of the shares. In the opinion of our Board and management, the underlying businesses of Berkshire are worth considerably more than this amount

Book value at the end of Q4 11 was $99,860 ($66.57/B share) Thus, a 10% premium means that Buffett is willing to buy back stock up to $109,846 ($73.23/B share), 8.5% below todays price

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The Share Repurchase Program Has Significantly Improved the Risk-Reward Equation, So We Bought More Stock

It confirms that Buffett shares our belief that Berkshire stock is deeply undervalued
He wouldnt be buying it back at a 10% premium to book value if he thought its intrinsic value was, say, 20% or even 30% above book Our estimate is nearly $180,000/share, 50% above todays levels

Buffett put a floor on the stock: he was clear in numerous interviews after the program was announced that he is eager to buy back a lot of stock and he has plenty of dry powder to do so:
Berkshire has $33.5 billion of cash (excluding railroads, utilities, energy, finance and financial products), plus another $31.2 billion in bonds (nearly all of which are short-term, cash equivalents), which totals $64.7 billion On top of this, the company generated more than $12.3 billion in free cash flow in 2011 in other words, more than $1 billion/month is pouring into Omaha The press release notes that repurchases will not be made if they would reduce Berkshires consolidated cash equivalent holdings below $20 billion, so that leaves $45 billion to deploy (and growing by more than $1 billion/month), equal to 23% of the companys current market cap
Its unlikely, however, that Buffett would repurchase anything close to this amount, as some of the cash and bonds are held at various insurance subsidiaries, plus Buffett likely wants to keep plenty of dry powder to make acquisitions and investments like the recent $5 billion one into Bank of America

In summary, Buffett could easily buy back $10-20 billion of stock and still have plenty of dry powder for other investments
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Berkshire Stock Outperformed the S&P 500 by 83 Percentage Points in the Year After the Only Other Time Buffett Offered to Buy Back Stock
March 11, 2000 March 11, 2001 Up 72%

Berkshire Hathaway

S&P 500

Down 11%

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Risk: Who Will Replace Buffett?

When Buffett is no longer running Berkshire, his job will be split into two parts: one CEO, who has not been named, and a small number of CIOs (Chief Investment Officers)
Two have been named already, Todd Combs and Ted Weschler, who both appear to be excellent investors

Nevertheless, Buffett is irreplaceable and it will be a significant loss when he no longer runs Berkshire for a number of reasons:
There is no investor with Buffetts experience, wisdom and track record, so his successors decisions regarding the purchases of both stocks and entire business might not be as good Most of the 75+ managers of Berkshires operating subsidiaries are wealthy and dont need to work, but nevertheless work extremely hard and almost never leave thanks to Buffetts halo and superb managerial skills. Will this remain the case under his successors? Buffetts reputation is unrivaled so he is offered deals (such as the recent $5 billion investment in BofA) on terms that are not offered to any other investor and might not be offered to his successors Being offered investment opportunities on terms/prices not available to anyone else also applies to buying companies outright. Theres a high degree of prestige in selling ones business to Buffett (above and beyond the advantages of selling to Berkshire). For example, the owners of Iscar could surely have gotten a higher price had they taken the business public or sold it to an LBO firm Buffetts Rolodex is unrivaled, so he gets calls (and can make calls that get returned) that his successors might not

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Arent We Concerned About the Uncertainty of Berkshire After Buffett?

Answer: Not really, for two primary reasons: 1. Buffett isnt going anywhere anytime soon. We think its at least 80% likely that Buffett will be running Berkshire for five more years, and 50% likely hell be doing so for 10 more years
Buffett turned 81 on Aug. 30th, is in excellent health, and loves his job There are no signs that he is slowing down mentally in fact, he appears to be getting better with age A life expectancy calculator (http://calculator.livingto100.com) shows that Buffett is likely to live to age 93 (12 more years) and wed bet on the over

2. The stock is very cheap based on our estimate of intrinsic value (nearly $178,400/A share), which does not include any Buffett premium
We simply take investments/share and add the value of the operating businesses, based on a conservative multiple of their normalized earnings The value of the cash and bonds wont change, and Coke, American Express, Burlington Northern, GEICO, etc. will continue to generate robust earnings even after Buffetts no longer running Berkshire
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Why Doesnt Buffett Identify His Successor Now?

We think it's wise that Buffett hasn't named his successor for two reasons: 1. It would place enormous pressure and expectations on this person, which is unnecessary and counterproductive; 2. It might be demotivating for the candidates who were not chosen; and 3. Who knows what will happen between now and the time that a successor takes over (which could be more than a decade)?
Maybe the current designee falls ill, leaves Berkshire, performs poorly, or makes a terrible mistake (like Sokol did)? Or what if another candidate (perhaps one of the two backup successors today) performs incredibly well, or Berkshire acquires a business with a fantastic CEO, and Buffett and the board decide that another candidate is better? In either case, Buffett and the board will be able to switch their choice without the second-guessing and media circus that would occur if the successor had been named
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The Real Buffett Risk

Buffett is often asked (as are we): What would happen to the company (and stock) if you got hit by a bus (i.e., die suddenly)?
If it happened tomorrow, our best guess is that the stock would fall 10-15% (which would give Berkshire the opportunity to buy back a lot of stock if it was trading below 110% of book value) But this isnt likely. Not to be morbid, but most people dont die suddenly from something like an accident or heart attack, but rather die slowly: their bodies (and sometimes minds) break down gradually A far greater risk to Berkshire shareholders is that Buffett begins to lose it mentally and starts making bad investment decisions, but doesnt recognize it (or refuses to acknowledge it because he loves his work so much) and the board wont take away the keys, perhaps rationalizing that a diminished Buffett is still better than anyone else Buffett is aware of this risk and has instructed Berkshires board members, both publicly and privately, that their most important job is to take away the keys if they see him losing it We trust that both Buffett and the board will act rationally, but also view it as our job to independently observe and evaluate Buffett to make sure were comfortable that hes still at the top of his game. Today, we think hes never been better.
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An Analogy with Apple & Steve Jobs

The most comparable example of a business that, like Berkshire, is closely associated with its legendary founder and CEO is Apple
As Steve Jobss health began to fail, he assumed fewer day-to-day responsibilities, passing them to top lieutenants Jobs resigned as CEO on Aug. 24, 2011 and died exactly six weeks later Apples stock on the first trading days after his retirement and death were announced declined less than 1%, as this chart shows:

First day of trading after Steve Jobs announces retirement

First day of trading after Steve Jobs dies

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Other Risks
A double-dip recession impacts Berkshires earnings materially No catalyst occurs, so the stock sits there and doesnt go up Intrinsic value will likely continue to grow nicely Berkshires stock portfolio declines Losses in the shorter-duration derivatives such as credit-default swaps are larger than expected and/or mark-to-market losses mount among the equity index puts A major super-cat event occurs that costs Berkshire many billions Berkshire is downgraded

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Conclusion
Cheap stock: 67-cent dollar, giving no value to recent investments and immense optionality Extremely safe: huge cash and other assets provide intrinsic value downside protection, while the new share repurchase program provides downside protection on the stock Strong earnings should eventually act as a catalyst

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