Investors can drive stocks up beyond the value of assets

— -- A: Yes, it is. To explain, imagine what would happen if there was an auction for a fishbowl brimming with $100 bills.

Assuming no bidder was permitted to study the fishbowl closely and count the money, you can imagine what would ensue. Some bidders would be too conservative and offer to buy the bowl for less than the amount of money it contained. Others would bid too much. If many bidders were feeling aggressive, the price tag could rise above the value of the money it contained.

Consider this analogy when thinking about how it's possible for shares of a holding company, like Berkshire Hathaway, to become over- or under-valued relative to its assets. Remember that the stock price isn't determined by accountants. It's determined by investors who buy and sell the stock based on what they think those assets are worth.

And in the case of Berkshire stock, the risk of overvaluation becomes even more likely since investors aren't just bidding on the company's assets, but its visionary leader, Warren Buffett. Investors would clearly be willing to pay dearly for a fishbowl containing $100,000 in $100 bills, if, as part of the deal, Warren Buffett agreed to manage the money.

This isn't unique to Berkshire Hathaway. Closed-end mutual funds see this phenomenon as well, as the price of the funds are determined by investors buying and selling. Usually, closed-end funds wind up trading for less than the value of their assets, as investors figure management will make poor decision and lose money.

Buffett, himself, comments routinely on how Berkshire stock may be overvalued.

But I'm not saying Berkshire's stock is overvalued, as you can read here. I'm just pointing out that sometimes you have to be like Buffett, and pay close attention to valuation, even when looking to buy his stock. Some investors assume that just because Buffett invests at low prices on behalf of Berkshire, that the price of Berkshire will be a bargain as a result. That's not necessarily the case.