vinod1

A thriller very much in the tradition of "Barbarians at the Gate". It is about insider trading at the hedge fund of Raj Rajaratnam. It provides background info on what goes on behind the scenes at hedge funds and board room maneuvering. Also adds a bit more color on Buffett's investment in Goldman Sachs. Vinod

Premium or discount is related to the value add that is generated at the conglomerate level. How many conglomerates suck out all the cash flow from the subs and allocate them to the highest risk adjusted returns? Berkshire additionally gets low cost leverage from float - a value add due to its structure. Compare it to other conglomerates. It is not great salesmanship or popularity that gets Berkshire its premium to book value. Vinod

To me long term the more likely risk is management succession at subs. All these companies that have sold themselves to Berkshire, have owners who have personal loyalty to Buffett. They are willing to work for probably lower salaries than they could get outside just because they love doing what they are doing and basking in Buffett's praises. As these owners die off or retire, the next generation might have less personal attachment to Buffett's successor. That is when problems could start coming up with "Management bordering on negligence". Vinod

Simple answer is the people investing in Berkshire. Shareholders of Berkshire are people who believe in Warren Buffett and value investing and so they want to invest at a discount. They also want to buy Berkshire at a discount. Would any of you pay full Intrinsic Value for Berkshire? I know I wouldn't. I bought Berkshire when I thought it was at a large discount. As long as the investors it attracts are Buffett style value investors Berkshire Hathaway will almost always trade at a discount to intrinsic value. I am not so sure about that. As recently as 2007, BRK is traded at nearly 2x BV. With S&P 500 then at 1500, it was a tough call for someone choosing between Index and BRK. Now with S&P around 2000, BRK at 1.3x BV was very attractive compared to S&P 500. It is at least to me seems to be an easy call. For close friends for whom I help out with their portfolios, I have had them realllocate 10 to 15% of portfolios from market index to BRK. I was agonizing over that decision in 2007. Presumably there are just as many investors interested in BRK now as in 2007. Hence, my skepticism about your explanation. Vinod

I agree. Where we differ is in magnitude. I think the growth in IV/BV is somewhat slightly less than 1% per year while you think it is much higher than that. Vinod shalab, Thanks for the kind words. You seem to have studied this quite in depth as well. I might be giving a false impression about the precision of my estimates. I did two snapshot valuations one for year end 2009 and one for year end 2014, trying to keep everything the same (which is difficult in the best of circumstances). My central estimate of IV came out to be 1.55 BV in 2009 and 1.6 BV in 2014. So the IV growth seems to be outpacing BV growth by about 0.6% annually. I do not put too much faith in this number myself, but is done more to get a very rough idea of the rate of the increase. I would not be too surprised if this growth is say 1% but much more than that seems unlikely. I agree Berkshire is very attractive at the current price. I keep wondering why it is not above $150 already. Vinod

longinvestor, As I mentioned above to shalab I do think IV/BV multiple is increasing each year. Buffett is pretty much also confirming that. So I think the buybacks would also be done at higher levels in future. But at the current time, he also outlined very clearly what he thinks are reasonable prices and what are on expensive side. Vinod

I agree. Where we differ is in magnitude. I think the growth in IV/BV is somewhat slightly less than 1% per year while you think it is much higher than that. Vinod

After 22 pages of discussing the fact that BV is / has become a poor proxy of BRK's IV, why would I do that? Because of the nature of BRK today...they keep adding value to the coffers regularly which in turn contributes to earnings which is increasingly retained and adds to IV but BV never gets revised upwards. The whole reason why BRK is misunderstood today. Why WEB has started measuring stock price in the table for the very first time. It is clearly explained on the very first page of the Annual report. My bet is self-explanatory. It is based on stock price which over time converges with IV. I want to go back to the year 2010 for a very specific reason. There is a whole new BRK developing since then, the world is late to catch on. "Berkshire has not gotten that worse". That is my bet, and it is in stock price growth. I disagree with your interpretation of Buffett's comments in the annual report. The context for that discussion is Berkshire's failure to meet his 5 year test. That Berkshire as measured by book value would beat S&P 500 total return over a 5 year period as defense for retaining all the earnings. He was saying book value as in "IV being roughly equal to book value" was a good measure early on but that now IV is much higher than book value. He never said that IV is unrelated to book value. In fact, he lays out when he thinks Berkshire is attractive and when it is overvalued entirely as a multiple of book value later on in the annual report. So all he is saying is we need to use a multiple of book value now and not just 1x book value. I do not disagree that IV and MV would converge over the long term. But Berkshire is undervalued now and over 5 or 10 year period changes in valuation would add or detract to returns just due to end points. Growth in IV I believe would be much closer to growth in IV. I do believe that IV is growing at a slightly faster rate than BV but that difference is less than 1% annually. So book value growth remains a convienent and reasonable method to estimate growth in IV. As I said before, I root for you to be right for my portfolio sake. Vinod BNSF was of the best investments that Buffett made in recent years and it was an opportunity that came about from the 2008 bear market. I do not think you can extrapolate such results onto all other investments. Energy is a good example. Vinod

After 22 pages of discussing the fact that BV is / has become a poor proxy of BRK's IV, why would I do that? Because of the nature of BRK today...they keep adding value to the coffers regularly which in turn contributes to earnings which is increasingly retained and adds to IV but BV never gets revised upwards. The whole reason why BRK is misunderstood today. Why WEB has started measuring stock price in the table for the very first time. It is clearly explained on the very first page of the Annual report. My bet is self-explanatory. It is based on stock price which over time converges with IV. I want to go back to the year 2010 for a very specific reason. There is a whole new BRK developing since then, the world is late to catch on. "Berkshire has not gotten that worse". That is my bet, and it is in stock price growth. I disagree with your interpretation of Buffett's comments in the annual report. The context for that discussion is Berkshire's failure to meet his 5 year test. That Berkshire as measured by book value would beat S&P 500 total return over a 5 year period as defense for retaining all the earnings. He was saying book value as in "IV being roughly equal to book value" was a good measure early on but that now IV is much higher than book value. He never said that IV is unrelated to book value. In fact, he lays out when he thinks Berkshire is attractive and when it is overvalued entirely as a multiple of book value later on in the annual report. So all he is saying is we need to use a multiple of book value now and not just 1x book value. I do not disagree that IV and MV would converge over the long term. But Berkshire is undervalued now and over 5 or 10 year period changes in valuation would add or detract to returns just due to end points. Growth in IV I believe would be much closer to growth in IV. I do believe that IV is growing at a slightly faster rate than BV but that difference is less than 1% annually. So book value growth remains a convienent and reasonable method to estimate growth in IV. As I said before, I root for you to be right for my portfolio sake. Vinod

longinvestor, If you start with year end 2014 and use book value for measuring performance to say either year end 2019 or 2024, I am on. Vinod

A few thoughts 1. As long as the businesses with "temporary problems" have a strong moat and I have conviction in the moat, I find it easy to hold and even add on to the business as price drops. The key really is that moat is real. IMO there are only about a couple of dozen businesses with moats - all others are more riding industry tailwinds or operationally outstanding (which is not a moat). If you have several dozens of businesses then probably your definition of moat might not be stringent enough to give confidence. So I would really be hoping the prices for these businesses to be going down more and more. I would give in general any business 3 years for the "temporary problem" to be fixed. If problem continues it is likely that its moat is impaired in some way. 2. As far a limiting problem businesses to a certain % of portfolio, I think it is better to avoid setting such guidelines top down. I used to do that but it never really worked in practice as I always violated the guidelines since opportunities in the market do not fit nicely with our top down preferences. Some times there is an abundance of cheap high quality businesses, sometimes there is an abundance of 'temporary problem" businesses within your circle of competence. So it makes sense to go where opportunities are. Three years ago I was entirely (2x or more notional portfolio exposure) to problem businesses (financials) because they are dead cheap. Now I have moved in a major way to high quality companies. So instead of a "problem business" at 0.6x IV, I would rather own 0.8x IV high quality business. But when I own mostly problem companies, I would have a higher percentage of cash to balance tail risks and/or have some hedges in place. Vinod

I agree that intrinsic value growth (approximated by book value growth over time) can be measureed as the combination of the growth of investments per share and earnings per share. As such, it would be helpful for you to stare at not only the numbers above re earnings growth but also investments per share growth and book value growth. This would help our conversation and make clear to you that BRK will not grow intrinsic business value at 15% compounded going forward. Buffett said "focus" on earnings per share growth, not "only look at that" and ignore the other parts of the business which drive intrinsic business value - this is where you are erring. Let's not get hung up on 15% though. If you are saying the next 10-15 years may look better than the last 10-15 years for BRK (especially relative to the S&P) as the driver of intrinsic value is shifting more and more from growth in investments per share to pre-tax earnings growth - and not everyone has figured that out yet - then I completely agree with you. And this is counter-intuitive to a degree because you would not expect this result after the business has become larger. 12% on the high end may be doable because of this point I think you are making. Just forget about 15%. +1

Vinod, I think you hit the nail squarely on the head. Their explanation fit very nicely with my estimate of Berkshires IV. But this was the most clear estimate of Berkshire's IV yet from Buffett and Munger. I was shocked to see it spelled out so clearly when they've been playing can and mouse games for years regarding the IV. Just to share another insight. It was an off the cuff response from Buffett at an annual meeting a few years ago. There were questions about the value of the smaller BRK subs. Buffett came out and said that they're worth about 14x pre-tax earnings. I was shocked to hear such a direct answer about their value - it was late in the meeting so maybe he was tires. Then I went home and dove deep and found that it's true. I think these days maybe they're trying to obfuscate the valuation of the smaller subs by combining them with insurance. rb, Can you share any insight into what subs Buffett is talking about? This is the first time I am hearing about this, so any additional info you can share around this would be great. Vinod Vinod, Sorry to get back to you so many pages later in this post but real life intervened. I went back to my notes and that comment was at the 2012 meeting and he was referring to the small subs so ex BNS, BHE, Finance, Insurance, Lubrizol, etc. Basically he was saying the "Other" divisions were worth 14x pre tax. rb, Thanks for the info. Vinod

You need to estimate what the likely growth rate of book value would be giving the equity hedges and portfolio positioning if we just muddle through with low economic growth, weak stock markets and low bond yields for a long time. In such a scenario, Fairfax would be growing book value at an unattractive rate. If you believe in major deflation or an economic catastrophe, it look very attractive. Otherwise, not so much. Vinod

I looked at official Japanese data as well and it also does not indicate the amount of deflation that Fairfax was referencing in their AR. Fairfax used World Bank or some other global org data (I cannot recollect) which showed a much higher deflation amount than official Japanese figures. Do not know why. Vinod

+1 I was thinking of the same. The heated argument seems to be (a) we make a lot of money (b) we make a heck of lot of money. Not to distract anything from the quality of the discussion but it is funny. Vinod

I would suggest that CONeal is absolutely correct here! I was asked to speak to some engineers at Google, and I said that I don't deserve to speak at Google until I've done something noteworthy. I've seen other managers write books about how to be like Buffett, yet their funds or businesses flounder or fail. I've seen a manager I praised highly fall mightily in terms of ethics and respecting shareholders. Shareholders will see us announce many new things over the next 5 months, next 5 years and as long as I can run the company. You are just at the very tip of the beginning...the 1st batter, of the 1st inning of a 9 inning game. Let's get through the first few innings before you think I deserve any sort of section for Premier. I'll do my best to get one though! ;D Cheers and thanks for your support! Parsad, You are such a level headed and honest guy that I have the utmost confidence in your success. Wishing you the very best in your efforts. Charlie Munger I think talks about deserved success and I cannot think of a better person who qualifies. Vinod

Vinod, I think you hit the nail squarely on the head. Their explanation fit very nicely with my estimate of Berkshires IV. But this was the most clear estimate of Berkshire's IV yet from Buffett and Munger. I was shocked to see it spelled out so clearly when they've been playing can and mouse games for years regarding the IV. Just to share another insight. It was an off the cuff response from Buffett at an annual meeting a few years ago. There were questions about the value of the smaller BRK subs. Buffett came out and said that they're worth about 14x pre-tax earnings. I was shocked to hear such a direct answer about their value - it was late in the meeting so maybe he was tires. Then I went home and dove deep and found that it's true. I think these days maybe they're trying to obfuscate the valuation of the smaller subs by combining them with insurance. rb, Can you share any insight into what subs Buffett is talking about? This is the first time I am hearing about this, so any additional info you can share around this would be great. Vinod

Good point. I did not think of it because I am not used to thinking of Berkshire in this way. I try to value Berkshire segment by segment by segment as well as other methods. I use P/B more as a short cut from the values derived from each of these. So if segment by segment method comes to a value of $160 per share, then as a short cut I would use 1.6 P/B as fair value. This way I need go through the detailed calculations every quarter or year. Then after a couple of years, I refresh my estimates and again convert it into a P/B ratio. This is more for ease of use. I did a detailed write up 5 years back that pretty much remains the model that I use for subsequent years. http://vinodp.com/documents/investing/BerkshireHathaway.pdf I have updated one for this year but it is not in a publishable state. #2, and #3 I'll take them together. Yes the goodwill that BRK carries for the acquisitions shouldn't result in a large P/B attached to them. Especially in the near term. Now I'm going to get into a bit of murky conceptual valuation stuff so bear with me a bit. The way I see it is that with certain big acquisitions: Mid-American, BNSF, and PCP Buffett actually acquired growth platforms. Companies which have a large opportunity set of projects that carry high rates of return by virtue of their economics or industry they are in. The kind of rates of return which are scarce outside of these companies. So instead of Buffett having to look for a stock to buy that will return 12% with the flip of a switch he can dump capital into MidAmerican and get 12%. This way he can reinvest the rivers of cash flowing into Omaha at high rates of return. To see this change in strategy you can look at BRK investments up to the 2000s. They were mostly asset light companies that spit out a lot of cash. Coca Cola, P&G, Gillette, American Express. After 2000s you see asset heavy companies that can suck up a lot of cash: MidAmerican and BNSF. I think PCP will turn out to be some sort of roll-up like NOV was. Now my question is. Since these growth platforms are acquired to reinvest Berkshire's cash at high rates of return for years into the future, and Berkshire is sure to make lots of cash in the future, when is the a lot of value actually created? When the cash is deployed or when the growth platform is acquired? I'd love to hear your thoughts on this, especially since I may be getting a bit aggressive with mine. Thanks. Agree completely. This is exactly the way I view this too. Buffett has made sure that his successors have the option of deploying huge amounts of capital at good to great rates of return. So one less problem for them and importantly growth with low risk. I struggle too with this as the value of a truly exception business is going to be pretty high. It depends on how far you want to look into the future. 10 years? 30 years? I am inclined to look at 10 years, knowing fully well that IV is going to be higher that my estimate. This way I would not be so conservative as to miss out on the opportunity but also give myself some margin of safety. Vinod vinod and rb, I wanted to continue with the discussion on IV to BV and strains/changes//tendency etc. Your discussion is very interesting and I think it possibly gets at the heart of an interesting matter: that this anchor onto BV has become a coil that keeps tightening, providing persistent buying opportunities, with the likelihood of a rerating upwards at some point in the future. Maybe I can throw a couple of questions into the pot for consideration vis a vis the liabilities that get subtracted from equity book: LIABILITIES. BV is calculated after subtracting debt, deferred taxes and float liabilities. Sometimes modelers value the insurance business and add something back for its incredible track record of underwriting profits. Sometimes modelers add back some of the deferred taxes liabilities. No one discounts debt. What if much of this is too pessimistic? Float: IF, and obviously it is an if, the insurance business performs in the future like it has in the past then the float has zero liability. ZERO. Indeed, if the underwriting result is net cash flow positive, the insurance business has a net positive present value in addition to the float having no liability. Debt: Debt that is tax deductible and costs 2, 3 or 4 percent does not have the same time/value characteristics as Berkshire's assets. For example, imagine i set up a little company into which I put $1m equity and I borrow $1m long term at 3% and I use the money ($2m) to buy a power plant that makes $200,000 annually. The equity book value is $1m, $2m of assets minus $1m of debt. But is that a fair reflection? My equity of $1m is making a 17% return. If the debt is sustainable and both the debt and equity are very long term one can make the argument that far from the $1m of debt being equal to the $1m of equity, that, in fact the equity is worth more than 5 times as much as the debt (17%/3%). And that is static debt, the discrepancy is more pronounced where one can add to a growing debt. No modeler that I have ever seen ascribes any value to BRK's operating businesses ability to carry debt, or add incremental debt to maintain a debt ratio. Good growing stable businesses can create FCF out of thin air because they create opportunities to add debt capital to simply maintain leverage ratios. Malone is a genius at this. But the same applies to quite a number of Berkshire businesses although Buffett is far less aggressive than someone like Malone. All the book value estimators I have seem always subtract 100% of the outstanding debt and no one I have ever read has ascribed a positive present value to a predictable grower's ability to constantly add incremental debt. Deferred taxes: Nearly everyone subtracts some of the deferred taxes. Most of the portfolio is in WFC, KHC, BAC, KO, IBM, AXP which I doubt are ever sold. So what exactly is the liability? Eventually these businesses will end up 100% owned and in the meantime the dividend is paid without any of the dividend going as interest to the "deferred taxes funding" (there is dividend tax of circa 15% but that is in line with what you or I would pay owning these companies directly). IF, and obviously it is an if, the positions are not sold then there is no deferred tax liability and owning these businesses through BRK is the same as owning them direct. Now obviously there were some "ifs" in there...but all the "ifs" are the "actuals" of the last twenty years. Perhaps we should see BRK as stack of solid return assets funded by a blend of liabilities that, if the future resembles the past, don't exist? It would be better to come up with an IV estimate based on look through earnings and expected growth in IV. This way you incorporate all the relevant factors, growth in float, growth in investments, growth in subsidiary earnings, etc. Then you can derive what P/B would match with IV. Otherwise it is difficult to quantify exactly what P/B would be fair value. Or, you can take Buffett comments in this year's AR. If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth. Purchases of Berkshire that investors make at a price modestly above the level at which the company would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s directors will only authorize repurchases at a price they believe to be well below intrinsic value. He is practically giving you his valuation. At 1.2 P/B it is unambiguously cheap. At P/B of 2.0 it is expensive. If you estimate "well below intrinsic value" to be 25%, then IV is around 1.6 P/B. Very hard to improve on this. Vinod

Good point. I did not think of it because I am not used to thinking of Berkshire in this way. I try to value Berkshire segment by segment by segment as well as other methods. I use P/B more as a short cut from the values derived from each of these. So if segment by segment method comes to a value of $160 per share, then as a short cut I would use 1.6 P/B as fair value. This way I need go through the detailed calculations every quarter or year. Then after a couple of years, I refresh my estimates and again convert it into a P/B ratio. This is more for ease of use. I did a detailed write up 5 years back that pretty much remains the model that I use for subsequent years. http://vinodp.com/documents/investing/BerkshireHathaway.pdf I have updated one for this year but it is not in a publishable state. #2, and #3 I'll take them together. Yes the goodwill that BRK carries for the acquisitions shouldn't result in a large P/B attached to them. Especially in the near term. Now I'm going to get into a bit of murky conceptual valuation stuff so bear with me a bit. The way I see it is that with certain big acquisitions: Mid-American, BNSF, and PCP Buffett actually acquired growth platforms. Companies which have a large opportunity set of projects that carry high rates of return by virtue of their economics or industry they are in. The kind of rates of return which are scarce outside of these companies. So instead of Buffett having to look for a stock to buy that will return 12% with the flip of a switch he can dump capital into MidAmerican and get 12%. This way he can reinvest the rivers of cash flowing into Omaha at high rates of return. To see this change in strategy you can look at BRK investments up to the 2000s. They were mostly asset light companies that spit out a lot of cash. Coca Cola, P&G, Gillette, American Express. After 2000s you see asset heavy companies that can suck up a lot of cash: MidAmerican and BNSF. I think PCP will turn out to be some sort of roll-up like NOV was. Now my question is. Since these growth platforms are acquired to reinvest Berkshire's cash at high rates of return for years into the future, and Berkshire is sure to make lots of cash in the future, when is the a lot of value actually created? When the cash is deployed or when the growth platform is acquired? I'd love to hear your thoughts on this, especially since I may be getting a bit aggressive with mine. Thanks. Agree completely. This is exactly the way I view this too. Buffett has made sure that his successors have the option of deploying huge amounts of capital at good to great rates of return. So one less problem for them and importantly growth with low risk. I struggle too with this as the value of a truly exception business is going to be pretty high. It depends on how far you want to look into the future. 10 years? 30 years? I am inclined to look at 10 years, knowing fully well that IV is going to be higher that my estimate. This way I would not be so conservative as to miss out on the opportunity but also give myself some margin of safety. Vinod

Well the spread between IV and BV will widen. I don't know if it's right to think that it will be tougher to think of BV vs. IV. My view is that at some point maybe not too far away it will become wrong to think of BRK in terms of IV.* I'm a bit encouraged by the use of debt in the PCP acquisition. Maybe they're starting to use the balance sheet a bit. We'll see if that turns out to be true. I am usually too abbreviated on the internet. Obviously the link between IV and BV will be easy to think about b/c people have their estimate of IV and BV is a known number and they can compare the two. I was more thinking of the change in each. Will a 5% increase in BV be roughly equal to a 5% increase in IV etc.? It won't be a useful heuristic. *You mean BV where the asterisk is above? Obviously it is nice to have a neat multiplier on BV to get to IV and that worked nicely in the past. What I'm getting at when I'm saying that the relationship between IV and BV is breaking down is the company has changed to much from the past. In the past it was mostly a financial company and a lot of the assets would be marked to market so BV would be tracking IV. That relationship is breaking down because so many of the assets aren't marked. This gets to your thoughts about relative changes in BV and IV. For example if the investment portfolio goes up by $1 then IV goes up by $1. In this case IV will grow by less in % terms rather than BV. However if BV of BNSF or PCP goes up by $1 then IV may go up by $4. Looking at it in a different way, if earnings go up by 10% in a year at BNSF we can infer that BNSF's IV went up 10%. That's a lot of value created and added to Berkshire's IV but very little of that would show up in the BV. So I don't think that even changes in BV and IV are correlated that much anymore. Great points and I largely agree. A few minor quibbles: As operating companies make a larger proportion of Berkshire compared to investments, the IV as measured by P/B multiple should creep up. But I think the P/B creep is very slow. If Berkshire fair value was say 1.5 P/B five years ago, it is probably 1.55 P/B now. So I think to a first approximation P/B is a pretty decent measure of estimating BRK's IV. There are many different factors that are influencing P/B multiple 1. When Berkshire makes say investments in the stock market, those are worth pretty close to book value. They are worth a bit more than book value due to the strong possibility of beating the market, but again they face taxes on dividends which reduces some of the premium. If Berkshire consisted of nothing but $120 billion worth of stocks, then I do not think fair value would be anywhere as high as 1.5x Book value. 2. When Berkshire purchases operating companies, it typically pays a premium to the underlying companies book value and the total price paid becomes the new book value on Berkshire balance sheet. Sure they are worth more under Berkshire's umbrella but in aggregate, fair value for these would be closer to say 1.2x price paid or something around that. PCP on which I think Berkshire got a particularly good deal is probably worth 1.3x at the high end to what Buffett paid for that company. But this is unusually attractive deal (much to my irritation as a PCP shareholder). 3. When Berkshire deploys capital internally say in BNSF or Energy or in any of its subs, that is where a larger premium of say something like P/B of 2 would be justified. So reinvested earnings are worth 2x book or maybe even higher. This is the part I disagree a bit with your comments. When BNSF increases its earnings by 10%, it is associated with a corresponding increase in equity or book value of BNSF. Othewise you are assuming that BNSF would have continuously increasing ROE - no growth in book value as earnings increase. While ROE might increase a bit, most of Berkshire's recent subs are likely to have a stable ROE, thus they would need growth in book value to increase earnings. #1 and #2 pull P/B multiple down while #3 increases the multiple. So overall, if you do a point in time IV estimate and translate it into a P/B multiple, it is remarkably stable - although increasing by a very small amount each year. There are a few other minor factors as well but for brevity let us ignore them. Vinod

I used book value growth as a rough proxy for IV growth which incorporates both book value and earnings power growth. So I am really focusing on IV growth. For my own estimates, I tried to model growth of various components that drive IV - float, investments, reinvestment rates, etc. I get a range of 9% to 10% and if I really stretch I can get to 11%. But beyond that I just cannot see how IV growth can be much higher. As I said above, I was wrong before in underestimating growth rate and would be really happy to be wrong again! Vinod

Over the last 5 years (2009 YE to 2014 YE), Berkshire did not achieve low teens growth, arguably with strong tailwinds (equity market recovery from crisis lows, benefiting from opportunities created by the crisis, etc) over the last 5 years. Assuming the balance sheet is managed in the same fashion as before, neither more conservatively nor more aggressively, what factors would drive higher returns than the past 5 five years? BRK is my largest allocation, but not seeing the growth you guys are expecting. Vinod

Agree with thepupil regarding growth. Growth in book value anywhere near teens is unlikely. I did a detailed write up on BRK in early 2010 and did an update and postmortem on where my estimates have deviated from actual results. None of the growth factors have changed all that much over the past 5 years, except that equity portfolio is more likely to have lower returns going forward than in the past years. Here is the section: Over the last 5 years (from 2009 YE to 2014 YE), Berkshire has compounded shareholders equity from $131 billion to $240 billion, at a compound annual rate of 12.9%. I had estimated in early 2010 that shareholders equity is likely to compound at about 9.6% to $207 billion. Shareholders equity increased by $33 billion more than my estimate. What happened? I underestimated growth in two segments 1. Equity Investment Returns: Berkshire had an equity portfolio of $57 billion at 2009 YE. I estimated a price return (excluding dividends) of 6% on equity portfolio. Actual S&P 500 price return (excluding dividends) over the same period is 13.0%. If Berkshire equity portfolio matched S&P 500 returns, equity portfolio would be $105 billion at end of 2014, compared to my estimate of $76 billion. This accounted for $29 billion of the underestimate. 2. BNSF Earnings: I estimated earnings over the last 5 years of about $10 billion. BNSF reported earnings of $16 billion over this period. This accounted for $6 billion of the underestimate. My estimates for underwriting profits, investment income, annual gains from investments (equities, bonds, preferred stocks, etc.), and financial products earnings are close to actual results. Utilities and Manufacturing, Service & Retail came in above my estimates but not significantly. If equity returns instead averaged 7% over the last 5 years, book value would have compounded at 10.4% annually instead of 12.9%. Going forward I think it is more likely that growth rate would be between 9% to 10%. Vinod

Very few got JPM at $50. My Fido order filled at $58 I think. You are right. It looks like the $50 price is a one off. Vinod