vinod1

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

I envy you guys. I was at Busch Gardens today and yet managed to miss the excitement. JPM at $50! I am pissed. Vinod

This is probably a basic question to most of you. Trying to understand everything slows me down a lot in trying to figure how these stuff works. How did he get $6000? Is 10 percent cost of capital the same as the DCF discount rate in this case? Yes. Cost of capital is essentially the same as discount rate or required return. Cost of capital is from the company perspective while discount rate or required return is from investors point of view. Assuming all equity funding, they become one and the same. So $600/0.1 = $6000 Vinod

US Bancorp, M&T Bank, Credit Acceptance Corporation, Wintrust, Glacier Bancorp, JP Morgan - if you are interested in the banking industry these are must reads. Vinod

This would be too difficult to predict as there are going to be lot of 2nd order and 3rd order effects. When we have a true driverless car, it might actually increase car usage very significantly - Segments of populations that cannot drive a car (handicapped, older citizens, cannot get a driver's license, etc) would now be able to use them. - People would be more inclined to use them to drive long distances commuting to work, etc as they can be working in the car - Cars could take some of the market share away from public transport, airlines, etc as it would be more convienent The impact would also depend upon how the regulation would evolve and it might favor one industry over another. VInod

Most of my favorite books on valuation are mentioned above. The books mentioned above cater to different sets of needs and provide different perspectives. Damodaran's investment valuation is most comparable to McKinsey's book, in that they do a deep dive on the minutia of valuation. Except for the part about using beta to estimate required returns, it is useful to know almost all the other facets of valuation covered in these books. You might not actually make LIFO to FIFO adjustments or currency translation adjustments in real world valuation - it is one thing to know how these are impacting the financial statements and consciously ignore them for simplification and not knowing what is going on and if it is a positive or negative or if these effects cancel out over the long term. Even if you end up just using multiples, knowing the underlying assumptions behind them helps you to think more clearly. I found out I had been abusing the DCF method before I read Damodaran's book in depth - one of many many but this is most glaring. I personally liked Damodaran's book much better than McKinsey. Perhaps because I started with Damodaran's book and breezed through McKinsey as they cover very very similar material with a slightly different terminology. I also like Jeffrey Hooke's book and Greenwald a lot. They provide a completely different perpective, Hooke's a high level overview and how to value different types of businesses using industry specific methods. Greenwald comes about from a completely different angle based on moat vs. no moat and reinvestment opportunity. I think reading Damodaran or McKinsey's book and both Hooke's and Greenwald provides a nearly comprehensive valuation toolkit for investors. Vinod

I think Sequoia is probably the best proxy for the quality approach. +1 Sequoia is the best proxy for quality (identified both quantitatively and qualitatively) along with a concentrated portfolio and with a large dose of common sense. Quality without concentration or common sense - Jensen Fund Quality indexing (quantitatively driven) without concentration - GMO Quality Vinod

Hi longinvestor, Does this mean that your estimate of IV for BRK is 2.4x BV? Just curious, I have never been able to justify much above 2x BV even in my most optimistic scenario. Thanks Vinod Thanks! I'm not the numbers type, yet indulged because of boredom that comes with owning BRK. Playing around with assumptions (discount rate, owner earnings etc.), my IV range is between $240,000 and $340,000. The big range supports my vaguely correct posture and I'm comfortable with it. While I may be over optimistic, the market continues to under estimate BRK as the norm. Been buying more. While on the subject, I've seen many calculators / calculations using two columns, using DCF etc. But not much discussed about the "third (more subjective) element" which deals with the efficacy with which retained earnings will be deployed. WEB covers this on page 123-124 of the AR. Your thoughts on this? After all, retained earnings is the story of Berkshire since 2009. Curious as to your take on this. Thanks I think Buffett is happy to deploy capital when he can get a very high probability of 10% returns. His investments - WFC, IBM, Capex at Utilities, his various preferred investments, etc - all indicate he is happy with 10%. He might get a chance on occasion to deploy capital at higher rates but they are going to be only a few such opportunities. Some of the internal reinvestment opportunities are going to be at higher rates and he is going to pay premiums for new businesses that generate high ROIC or ROE. But I think all in all, a 10% return on retained earnings is what we can expect. So that is my estimate for "efficacy with which retained earnings will be deployed". IMO - For the really small subset of very high quality companies like Berkshire, Coke, Walmart, etc. it is more useful to estimate the growth rate of IV rather than focusing on IV itself. This would allow you to estimate what returns you are likely to get over the very long term if you just hold this investment. This way you avoid the most speculative component of valuation - changes in multiples. Vinod If IV is made up of 1. Investments/share + 2. Operating Earnings per share + 3. Incremental return on Retained Earnings Readily Calculable 1) = $140,000 2) = 10x $11,000 = $121,000 Efficacy of RE deployed - estimate of future 3) = NPV of incremental earnings from RE= $81,000 How I get to this: RE for 2012-13-14: $14B, $20B, $20B; If we held RE constant at $20B for the next 20 years (WEB has stated this "as far as the eye can see") and the retained earnings start producing a 10% return 3 years out; 10% Discount rate So 1+2+3 = $342,000; There's my 2.4x BV. Conservative enough? If you ask me, they will retain far more than what I'm assuming, earn better than 10%. Agree with you, they look for a near certain 10% return; The retained earnings is of growing significance just by sheer magnitude. A standout comment by Munger in his commentary, "BRK will do fine without ever making another acquisition" perhaps has this baked in. IMO, the multiple you put on #2 is based on "the efficacy with which retained earnings will be deployed". If you do it this way, in effect you are saying a $1 of operating earnings are worth about 27.4 times. So you are putting a PE multiple of 27.4 $121,000 + $81,000 = $202,000 value for operating businesses. These are earning pre-tax about $11,000. At a 33% tax rate, after tax earnings are $7370. PE multiple = 202,000/7370 = 27.4 You would certainly be able to justify these depending on your assumptions about expected returns, required return, retention and length of the period where expected returns exceed required returns. But to me they would not be conservative. But again, that would just be me and I have a tendency to be very conservative in my estimates. Vinod

10% after leverage. Basically ROE. Since they are likely to keep about $30 billion on average in cash and need to pay taxes on capital gains, leverage basically pays for the drag of these two. So we end up with ROE of about 10% Vinod.

Hi longinvestor, Does this mean that your estimate of IV for BRK is 2.4x BV? Just curious, I have never been able to justify much above 2x BV even in my most optimistic scenario. Thanks Vinod Thanks! I'm not the numbers type, yet indulged because of boredom that comes with owning BRK. Playing around with assumptions (discount rate, owner earnings etc.), my IV range is between $240,000 and $340,000. The big range supports my vaguely correct posture and I'm comfortable with it. While I may be over optimistic, the market continues to under estimate BRK as the norm. Been buying more. While on the subject, I've seen many calculators / calculations using two columns, using DCF etc. But not much discussed about the "third (more subjective) element" which deals with the efficacy with which retained earnings will be deployed. WEB covers this on page 123-124 of the AR. Your thoughts on this? After all, retained earnings is the story of Berkshire since 2009. Curious as to your take on this. Thanks I think Buffett is happy to deploy capital when he can get a very high probability of 10% returns. His investments - WFC, IBM, Capex at Utilities, his various preferred investments, etc - all indicate he is happy with 10%. He might get a chance on occasion to deploy capital at higher rates but they are going to be only a few such opportunities. Some of the internal reinvestment opportunities are going to be at higher rates and he is going to pay premiums for new businesses that generate high ROIC or ROE. But I think all in all, a 10% return on retained earnings is what we can expect. So that is my estimate for "efficacy with which retained earnings will be deployed". IMO - For the really small subset of very high quality companies like Berkshire, Coke, Walmart, etc. it is more useful to estimate the growth rate of IV rather than focusing on IV itself. This would allow you to estimate what returns you are likely to get over the very long term if you just hold this investment. This way you avoid the most speculative component of valuation - changes in multiples. Vinod

Hi longinvestor, Does this mean that your estimate of IV for BRK is 2.4x BV? Just curious, I have never been able to justify much above 2x BV even in my most optimistic scenario. Thanks Vinod Thanks! I'm not the numbers type, yet indulged because of boredom that comes with owning BRK. Playing around with assumptions (discount rate, owner earnings etc.), my IV range is between $240,000 and $340,000. The big range supports my vaguely correct posture and I'm comfortable with it. While I may be over optimistic, the market continues to under estimate BRK as the norm. Been buying more.

Hi longinvestor, Does this mean that your estimate of IV for BRK is 2.4x BV? Just curious, I have never been able to justify much above 2x BV even in my most optimistic scenario. Thanks Vinod

I wouldn’t call it “a very specific view of the future”… That imo is a fact! ;) Instead, how big banks are going to do very fine, if interest rates stay low and asset prices deflate, is more difficult for me to understand… But I admit I don’t follow them closely, and therefore I might be missing something important. Cheers, Gio I was probably not clear. The specific view of the future is the deflation scenario playing out in the next few years. You seem to think that as likely and having that view, I can completely understand why Fairfax would be attractive. As far as big banks are concerned, sure they would not make as much money in a deflation scenario, but they would come our alright. Their capital levels are in the best shape possible, they are furiously reducing expenses, revenues are depressed not just from interest rates but from a lots of other factors, so they have lots of room to do reasonable well come what may. Vinod

Fortunately, we can put together a “portfolio” of investments… And certainly I am not saying FFH is my only investment! But I disagree with your base scenario “because you don’t have any particular view of the world”… Instead, to be invested in big banks you must have a very clear view of how the world is going to be 10 years from now… Because in a deflationary environment big banks will suffer much! I on the contrary own both investments that I think will do well if a muddle through scenario goes on, and an investment in FFH that will do well in case of deflation. In other words, I believe FFH has a place especially in the portfolios of those who claim not to have “any particular view of the world”! ;) Cheers, Gio Gio, I am comfortable enough to hold the big banks under a variety of scenarios. So I really do not have a view on how deflation/inflation plays out in future. I understand portfolio part, but just focusing on Fairfax. I am not saying Fairfax does not make sense for you or someone else who wants part of the portfolio to do well in a deflation scenario sort of like a hedge. All I am saying is, if deflation scenario does not play out, the returns from Fairfax are likely to be unattractive. Since I do not have any particular view of the future, I see no reason to weigh the deflation scenario heavily, as you seem to be doing. You repeatedly point out how Fairfax is going to make billions in a deflation scenario that it gets to deploy when asset prices collapse. That a very specific view of the future. Vinod