Berkshire’s investment managers have purchased a couple of such stocks, and paid the price. Two examples:
Well, I guess one could say that the fat lady hasn’t sung yet. Things may change. The positions haven’t been closed.
But you’re right, it’s certainly a big risk in the short term at a minimum.
I think we are expected to assume that, being money managers at Berkshire, they probably weren’t trading based on a prediction of a short term price movement.
Rather, that they felt they could look far enough into the future with enough certainty to conclude that in a few years the business would be worth more than what they paid.
And not just a little: enough more that the elapsed time won’t have made it a bad rate of return.
To put it in my terms, I think that they thought that the price paid was less than 10 times the highly likely profits 5-10 years out.
I can’t imagine how they arrived at that conclusion, but that’s the sort of calculus I think they probably used.
Maybe a different number of years, but I am relatively sure they were not planning on being able to sell at a nosebleed multiple of then-current earning power.
Jim