If you are a novice investor like I am, the best place to invest your money while you learn how to research stocks is an index fund. When you have spent some time reading books and are itching to try your luck at picking your own stocks, there's no better place to invest your hard-earned money than Berkshire Hathaway (NYSE: BRKb). It is true there could be much better investments out there. But because you are still fresh, there's nothing wrong betting your money on the most successful investor. If you have $5,000 to invest and don't want to miss out on all the fun of picking your own stocks, buy a piece of Berkshire's Class B shares first. You can have fun with the rest.

Of course, owning a Berkshire share is not as easy as you think. There is a minimum requirement — you need to have at least $3,000. The Class B shares are trading at $2,787 a pop whereas the Class A shares are trading at $83,500 a pop. So if you do not have $3,000, sorry you are not good enough for Berkshire. No, I'm just kidding. You can always join your local investment club or form your own investment club so you can pool your friends' and your money together to buy some.

Why Berkshire?
Berkshire is currently trading at a discount. Ever since its inception in 1965, Berkshire's book value per share has grown at 21.9% annually compared to S & P 500 Index's (including dividends) puny 10.4% growth.

Let's head on over to MoneyChimp's supposedly "Buffett Formula" calculator. We'll be conservative when plugging in the values. Because there's not much information on the BRKb symbol, we'll be using the values from the BRKa symbol for this purpose.

Earnings per share (last 12 months): $4,629.37
Earnings are expected to grow at a rate of 20% annually
for the next 5 years
before leveling off to an annual growth rate of 0% thereafter.
How confident are you that these expected future earnings will really materialize? 40%
Best available return that you have 100% confidence in (like a Treasury bond): 5% (Note: this is slightly above the current return, but it's good to be conservative)

Now click on Calculate and the magical intrinsic value of the stock per share appears: $86,274.03. The Class A share is roughly equivalent to 30 times the Class B share. Yes, I know, even in stocks there is discrimination. Anyway, dividing the intrinsic value by 30 yields the ceiling price you should pay for a Class B share: $86,274.03 / 30 = $2,875.80. The Class B share is trading at $2,787 as of this writing. Meaning we can buy at a 3% discount off the estimated intrinsic value.

Now, bear in mind that the "Buffett Formula" calculator already has a built-in margin of safety based on the confidence you entered earlier. Plug in the same values into the DCF calculator that most financial analysts use, you will get an intrinsic value of $91,571.13 per Class A share instead. The price per share obtained through the Buffett formula is roughly 6% lower. The 6% is your margin of safety. Nonetheless, Benjamin Graham has always advised against buying anything without a margin of safety. The more conservative you are, the bigger your margin of safety should be. I guess I'm either far from conservative or too optimistic with Berkshire.

I Thought You Favored Small, Fast Growing Companies
In my How To Pick Stocks article, I mentioned I'm looking for small companies with lots of room to grow. Berkshire with a $128 billion market capitalization is hardly small by any standards. So can Berkshire sustain a 20% growth year over year?

You may be surprised but my answer is a confident yes. Berkshire is a different beast compared to the likes of Wal-Mart or Microsoft. Berkshire is largely comprised of many smaller subsidiaries whose corporate maturity level range from growing to mature. Most of the subsidiaries are at a growing stage. The Pampered Chef, Nebraska Furniture Mart, Borsheim's Jewelry, See's Candies and Wesco Financial are just a few of its fast growing subsidiaries. And Buffett's actively looking to acquire more as we speak. Recently, Berkshire acquired Medical Protective Corp, a medical liabilitiy insurer and Forest River, an RV and mobile homes manufacturer. Berkshire's subsidiaries are also making acquisitions. MidAmerican recently went into agreement with Scottish Power to acquire PacifiCorp for $5.1 billion in cash. Acquistions of this size are exactly what Buffett is looking for. With over $40 billion in cash, Berkshire needs to find some better places to distribute the cash than savings accounts.

As you can see, Berkshire is a giant made of many smaller giants in the making. And because of Buffett's policy not to intervene in the management of the subsidiaries, management is free to grow their businesses with capital funding from Berkshire. This is why I think Berkshire is still growing and can sustain the 20% growth rate.

But Why Now?
With the recent investigations by the SEC into General Re's (a subsidiary of Berkshire) questionable accouting practices, the stock has received more than its share of beatings. From the beginning of the year till now, the stock has fallen 5% compared to the S & P 500 rise of of 1.8%. However, prudent shareholders should be happy to know that the recent second quarter earnings per share rose by 12.8%. Despite this cheerful news, I suspect the stock price will remain at this level for a bit considering the SEC now wants to peek into Berkshire's accounting books. This bit of news is bound to strike fear in emotional shareholders. But then again, most of Berkshire's shareholders are long-term investors and worshippers of the investing God himself. So we never know how the market will react.

As I mentioned in my previous article, don't wait for the price to drop tomorrow. If you've done your research, jump in and let the market work its magic.

Introducing the Naked Portfolio
I'm starting a make-believe portfolio to keep track of my stock picks. I'm calling it the Naked Portfolio because I'm a pervert I'll be sharing with you the steps I take to arrive at buy or sell decisions. In return, I hope you'll point out my mistakes and help me beat mm to his target. :) Of course, the only problem is my holdings are immaterial.

As of this writing, I'm adding a share of Berkshire Class B share to the Naked Portfolio. For the record, this portfolio is created on August 7, 2005 with an initial pulled-from-the-air cash position of $3,000. Why so little make-believe cash? I want to make this portfolio as realistic as possible. The last thing I want is for this portfolio to turn into a multi-billion dollar portfolio with money nobody has except for Bill Gates. So I'm going to keep investments small so that people like me who doesn't have a lot of cash lying around can relate to it. And since cash is not always available, stock purchases can be far and between. I'll assume a $500 per month cash available for investment. As for the Berkshire share purchase let's just agree that I found $3,000 in some bushes behind my house.

I'll be reviewing the holdings in the Naked Portfolio at regular intervals and post its results monthly. I am anxious to learn from you what I can do to improve my investing decision making process. If you will be mirroring this portfolio, know that you are liable for all your losses, not me. I'd love to hear from you if you made a ton of money based on my picks. But don't blame me if you lost a ton of money. :)

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