thefatbaboon

I learnt a few things from a number of experiences - some active, some passive - about investing in commodity businesses: 1. Be very very skeptical of yours and anyone else's ability to ascribe advantage. "Low cost", "know-how", "management", "oligopolistic". Without exaggeration I have found that more than 9 out of 10 times these so called "competitive advantages" never existed. I have a very simple test for this nowadays. True competitve advantage is when there is a track record of operating very profitably and successfully throughout cycles. If there is no evidence of this then there may be some kind of "advantage" but it is immensely different to the purest forms of advantage. For example, a gravel pit that is the only gravel pit near a specific town is advantaged because it massive cost to market advantage compared to competition. Unfortunately though if gravel is priced high due to high demand and you purchase the pit on that basis but then a year later the town goes into decline and no roads or new builds are going to get built for 15 years. Notwithstanding the proximity to market this pit can be an appalling investment. 2. The sell decision is usually more important than the buy because holding through the crash that can see the elimination of multiple rounds of equity and can go on for longer than a decade is fatal. It is almost impossible to recover from the economics of that - so it is better to have never bought than misjudge the sell. In that sense it is really a different animal to "investing" because the investment is a mere prologue to the main act: the sale.

hmmmm I don't think there is a "tipping point", these are very different businesses.

Does anyone have these? Would be very interested to read. Thanks

My point wasn't really to nit pick if PCP closes before or after New Years Day...nor predict exactly the final tally of Q3/4 new purchases and sales...just think it's interesting in a general sense how easily a $32bn acquisition gets swallowed.

At end Q2 Berkshire had $67bn of consolidated cash - 5bn for Kraft -22bn for PCP (he's said $10bn of the $32bn will be debt financed) +8bn-10bn for 6 months operating cash build Assuming no insurance catastrophes and no net investment in stocks/bonds consolidated cash should be back around $50bn by the end of the year.

From Charlie's letter, "And, in the early decades of the Buffett era, common stocks within Berkshire's insurance subsidiaries greatly outperformed the index, exactly as Buffett expected. And, later, when both the large size of Berkshire's stockholdings and income tax considerations caused the index-beating part of returns to fade to insignificance (perhaps not forever), other and better advantage came. Ajit Jain created out of nothing an immense reinsurance business that produced both a huge "float" and a large underwriting gain. And all of GEICO came into Berkshire, followed by a quadrupling of GEICO's market share. And the rest of Berkshire's insurance operations hugely improved, largely by dint of reputational advantage, underwriting discipline, finding and staying within good niches, and recruiting and holding outstanding people. ... Berkshire's marvelous outcome in insurance was not a natural result. Ordinarily a casualty insurance business is a producer of mediocre results, even when very well managed. And such results are of little use. Berkshire's better outcome was so astoundingly large that I believe Buffett would now fail to recreate it if he returned to a small base while retaining his smarts and regaining his youth." "

Me too. But I suspect that when the 10Q confirms that they bought $32 B in securities as reported, plus the PCP deal early 2016, they could be down to the $20B cash cushion. That's not happened in a while. I'd love for the media to fixate next on them not having enough cash! No talk of buy backs, elephant deals for a while, ha! Are you saying that they have spent $32bn as well as the PCP commitment? If so, on what are you basing it?

i've been ruminating quite a lot on BRK recently, going over the last 20 odd years of reports. One of the things that struck me was just how incredible the performance of Geico and Jain's Reinsurance have been. I wrote another post laying out their records. Imo, and obviously with benefit of hindsight, Berkshire performance per share would have been significantly better over the last 20 years if WEB had not made any investments (from 1995 onwards), had not bought any companies (Dexter, GenRE, BNSF etc) and all growth capital from Insurance had been used within Insurance in Bond and Stock indexes or used to repurchase stock. It's a guess, but given the incredible sustained growth of the insurance businesses in the high teens, together with a mid single digit return on the Float, and a consistent annual repurchases of 2-3% of the shares, BRK shares would have had a >20% CAGR for the last 20 years under this scenario. (BRK.A would be approaching $1m today) So, to come back to your observation regarding BRK versus the Investees...BRK has been better than most big companies because it has been riding a tiger of an insurance company. Before I get attacked for saying that BRK shareholders would be significantly wealthier if WEB had retired 20 years ago I should say that this is 1.) with benefit of hindsight and 2.) assuming one gives little or no value to the diversified situation that exists today. Personally, I think the diversified business is very valuable, very strong, and a different proposition to a pure insurance venture. We've given up quite a lot of return acquiring this diversification but I imagine we all sleep better knowing that BRK today would still show overall profitability in a year with a mega mega catastrophe. Also, I think it best to be clear that personally I think WEB has played a major role in Reinsurance. Ajit and WEB talk on the phone nearly every day and I have the feeling that building this reinsurance enterprise has been a joint venture between these two incredible business men.

Was going through the letters and whilst I knew this already it really hit me hard: That over the last 16 years Mr. Ajit Jain has increased Berkshire Reinsurance's Float 10 fold, from $4.3bn to $42.4bn. And has made a cumulative underwriting profit of more than $6bn in the process. For comparison, over the same period Geico increased Float from $3.4bn to $13.6bn. And made a cumulative underwriting profit of more than $10bn in the process. Jain has been paid about 2% per annum to accept a loan growing at a c.17% cagr. Geico has been paid about 7% per annum to accept a loan growing at a c.9% cagr. Looking at the data strung out like this over the last 16 years has rather blown my mind.

Anyone know if BRK still has this investment? If not how did it end and with what result? Thanks!

I think you can see from my ranting posts on the topic that I think the Book Value anchors valuation! So, 1. Book value heuristic 2. Warren is old. Charlie is old. Jain isn't exactly young. No matter if you and I are ok with BRK after WEB, many people aren't. And while I'm not that concerned I am a bit. Also old people tend to go wrong slowly and he may remain in control while his skills decline. The idea of a conglomerate working well beyond the death of the founding generation requires a leap of faith. 3. I think there is a supply demand issue. Berkshire was a core holding, often comprising an unusual percentage of net worth, for a number of very rich who are now old or dying. Heirs and charities are likely to diversify. And charities anyway have to sell down min 5% p a for their tax status. On the other hand I don't imagine there are loads of new guys with a few hundred million or a billion or two who are calling up their bankers and saying put 90% of the portfolio into BRK.

long, It might cause a run up but I think that it's only when you design your buyback the way Warren has. If the buyback was just there in the background at a floating level with no fixed level then i don't think it has the same effect. Imagine none of this hullabaloo about 1.1 or 1.2bv being "well below intrinsic value". Intrinsic value isn't so static. One has to do something: build cash, buy out owners or add more business/investments. There seems no logical reason to pin oneself into a corner about only buying at x multiple of book. Just lots of questions by BRK's allocator in chief: Shall I buy IBM or BRK or build cash? Shall I buy NV or BRK or build cash? Shall I buy PCP or BRK or build cash? Repurchasing at 2.5 times book would have been better than buying Dexter Shoe. And I would guess with some of the recent buys (IBM, NV, Alta, PCP (Not Heinz!)) we will find that the money would have been better spent on repurchases at say an average of 1.35 bv where it's been over the last 4 years. Warren made a nonsensical morality play out of the buyback for no discernible reason. He says he doesn't want to take advantage of a seller. Except that a well executed buyback would achieve completely the opposite: his bid would HELP any seller get a better price. And so long as he is not over paying, and thus damaging continuing partners, a share repo helps the seller get a better sale and the non seller get a better intrinsic value. I found his arguments in this area quite bizarre and I think it also damages his investees who he wants to encourage to repurchase their stock. I mean what does it imply about IBM?? Hi IBM, I will write long paragraph in my AR about how great your repurchase is, and every year I will mention how great it is that KO, AXP et al increase my look through percentage of their earnings via repurchase BUT I will also write at length how I don't want to take advantage of my lovely partners by repurchasing BRK shares. Apart from the fact that he is simply wrong I find it quite rude to his long term investees!

Dear Simian, I would call you baboon but I think that would be rude. It's hard with your handle. I agree with your idea of splitting off insurance from the operating subs and valuing them separately. Though even in insurance geico should probably split off and valued differently still. What I do not agree with is your discounts on cash and FI. A discount may be appropriate for the 20 billion that will not be deployed but nor for the rest. To apply a discount you must assume that the funds will be deployed in a manner that destroys value. This is not the case of Berkshire. They're not some tech company keeping idle cash stashed offshore. Nor are they the kind of company that does "strategic acquisitions" at lofty premiums. Actually I could argue that $1 of cash in the hands of Berkshire is worth more than $1. Because I believe in conservativism I will not do that. But I would find it very hard to make the case that $1 in the hands on Berkshire is worth 70 cents and much harder still to make the case that it's worth 50 cents. You might be right. That 50% too much. My thinking was $20bn on hand as said by Buffett, which knowing him will almost certainly be a bit more, and $5bn floating around the subs as part of working capital. I also assumed that there would be some minimum amount of investment grade FI that he'd keep around. It's an estimate to be sure but I wouldn't be surprised if there's never less than $40bn unproductive cash/FI. Maybe I should just subtract $40bn instead of doing the 50% thing.

Mathematically it is not possible for them to buy 20% of the share float in quick time. About 500 shares trade daily, it would take 660 trading days. For this reason, they need "single large transactions". Buffett's letter talks about that one day, 10 to 20 years from now when they may be unable to deploy capital intelligently. I believe that this frames the context for buybacks. Between their monumental patience, the near certainty of market folly, the right choice will be made. I bet there is no hand wringing going on at Omaha. That is for message boards! I never know when people are joking. I probably have to assume it's not possible to be on here for all those hundreds of posts and not know that BRK also has b shares that trade. Apologies in advance if i'm being thick and you're just being funny. 20% of BRK is approx 500m B shares. About 4m B shares and 300 A shares trade daily. Approx 4.5m B equivalents. 240 trading days p a. So 1.08bn shares a year. The first IBM share bought Q1 2011. We are now (PCP) Q3 2015. So 4 and half years. So approx 4.9bn shares have traded over the period. So in order to get 500m Berkshire would have been in the market buying 10% vol.

I disagreed with your version of the last 15 years as implying that the investments per share have been used up to support earnings. I don't think that is right even in absolute terms when taken in aggregate for the period. And I think whether you agree with that or not the undeniable point so far (and for me the critical point for the method i used to value BRK) is that the Investments per share have grown at a comparable rate to the S&P during a period when OP earnings grew at a 20% cagr. So even if they did subsidize they did so without bringing results below the S&P. Pretty sure that's just fact. And it's important to me because as you point out I just valued the investments per share at market. And made a separate valuation for Op earnings. If you were correct that would of course be wrong - one would have to penalize one to subsidize the other. You may well become right in the (very near) future. Indeed, I think you raise a very valid concern to be looked at come the end of the decade. Did the current underperformance of the investments and reallocations for PC, Duracell continue. But so far I don't think there is the evidence - even including the BNSF period. That being said we're focusing on a strange distinction. At some point most of the current equity Investments may well end up consolidated. Apologies if i came across aggressive or grumpy. Really no offense intended - it's just the way I write. And my frustration is in many ways at myself. I've been obsessed with BRK and WB for 20 years now. And for many many years I have, I think, approached the business wrong. All this book value stuff is very tricky for the simple reason that a good, predictable free cash flowing asset that's funded by a good, cheap/free , source of growing leverage does not lend itself well to capitalization. It's almost impossible to not be too conservative. And this confusion is just further compounded by the various accounting conventions. I think BV anchoring costs shareholders in other ways too. For example, Berkshire should continuously compare share repurchases to acquisitions of investments and businesses. IBM, PCP, NV, Altalink...I don't know the future but I would wager that repurchasing BRK at prevailing prices even though they were over 1.1 or 1.2BV would have been a meaningfully better risk-adjusted use of capital. They could have repurchased 20% of the outstanding shares, and thus increased intrinsic value per share by 25%. Instead if one follows this BV heuristic the repurchases made over book value reduce BVPS so they damage WB's amazing record - even if they are IV accretive! I pray we get rid of the book value column. It should swap places with "intrinsic value today and tomorrow". Bring that to the front and send BV to the back of the report.

Well at one point Berkshire had big investments in the railroads before fully taking BNSF over. So that is another example of perverse effects of cross over because his BNSF shares became an Op co and he sold his non-BNSF railroad shares to partially fund. Also he sold some JNJ to fund if memory serves...but the JNJ had only been bought a year or two before so it was the disinvestment of a recent investment. And you're right there was share issuance but that has been taken into account because I was using investments per share numbers. I hope you don't think that I expect 20% of the future OR that subsidizing might not happen in the future. Maybe PCP and and Duracell/PG in 2015 will be the beginning of a subsidizing trend. I just think that so far the historical record is incredible and that there really is no evidence of this earnings growth having been artificial or built on the back of a partial liquidation. What you say regarding the insurance is something that has confused me too. So far we have 12 years of underwriting profits cumulating to 24 billion. Float hasn't been a liability, it has been a monumental asset. And yet we all sit there like lemmings subtracting it from book and then making our little adjustments. It's retarded. And yet as you say we all live in fear that one day we'll wake up to horrendous losses, although Buffett, who know better than we, says that a monumental catastrophe event will be very manageable: Berkshire would likely be "significantly profitable in a 250bn catastrophe year". Well I'm not sure exactly what "significantly" means but I'm guessing that it would probably not be enough to eat away more than half of the cumulative underwriting profits booked so far. So even after such an event the historical record would show that not only was the float a growing free source of money but that it had still made money although not quite as much. We also keep subtracting out DTL, even though hardly anything of significance has ever been booked in this area and Buffett has said that his big holdings are to be held forever. But we subtract it out and then make our little adjustments. It's retarded. Maybe we can say it has an inhibiting cost - perhaps Warren would have sold KO in '98 if he weren't horrified at the capital gains that would have come due. Thats a cost. But no reasonable person would put it anywhere close to the number we subtract from assets to get equity book. There may however be unannounced examples where the disincentive of taxes encouraged Buffett to hold a position which he was tempted to sell and it subsequently did better than expected. In that case DTL would have been an asset. In the valuation I did a few pages ago I took out DTL and Float. I wanted to apply a little Occams razor. Let's not fool around with book and then make lots of little adjustments. I also used an 18 PE on the Op co's NI. But obviously as you well know if they grow at 20% merely on retained earnings and incremental debt they are worth more than that. If the future resembles the recent past (last 15 years) I look at Berkshire and see a perfectly reasonable way to arrive at an equity valuation that sits quite comfortably around $500bn. But I feel like a nut when I write that. So instead I used the numbers I did earlier in the conversation: say his stocks etc are worth market (even though he is the greatest stock picker ever), his cash is worth 50% (because I don't buy equity to get cash/FI returns and he has stated a desire to hold in excess of 20 fallow cash), and that his incredible portfolio of regulated and advantaged businesses are worth a tiny bit more than the historical market multiple at a time that interest rates have never been lower. And that gets me to $430bn. These are all very reasonable and conservative assumptions in my view the only scandalous thing being that I have ignored Float and DT liabilities.

It's funny, but taking a closer look at your example year I actually find it remarkable because of how much the op co is able to fund on it's own. And you can't reasonably subtract total capex from a number that has had D&A already subtracted. Thats nuts. They did 19.5bn of capex, bolt-on and the NV utility buy. And the op co's made about $18bn after adding back the depreciation and amortization. Assuming that the $4bn of capex that was in excess of D&A (i.e. the growth capex) and the 3bn of bolt-ons were or could be 25% debt funded then 2013 was a year the Op Co funded itself entirely to the tune of $20bn. (Note we haven't even made any account of the underwriting profits which have been $24bn over the last 12 years and are not required to be accounted for within Investments per share!) I don't want to go back and forward arguing over this. One year here, one year there. I'm sure in 2015 with the PCP buy and the PG/Duracell swap funds WILL be diverted from Investments to Op Co. But it doesn't change the big picture that both are thriving. That up until very recently investments per share were trouncing the market at the same time as op co earnings were speeding along at a 20% cagr. And that the recent lag in Investments per share is adequately explained by mediocre performance of the major equities and a lot of cash and FI. We're four years into the decade...let's see in 6 years. That said the distinction is rather irrelevant. What happened if AXP or KO end up whole owned? They fall out of "Investments per share" and into "Op Co". Or look at Heinz that is in Op Co whilst USG is in Investments. It's all arbitrary. The one thing thats fairly clear though is that you're wrong and that so far there's been no meaningful bleeding, subsidizing or artificial affordability of capex/bolt-on. And please don't interpret this as me saying that BRK will grow op earnings at 20% going forward or that a subsidizing trend may not happen in the future. I'm arguing with you about the historical record.

I think you're pretty much totally wrong. And taking one year and using wonky accounting doesnt show much of anything. Why do you use a post D&A number for earnings and then imagine subtracting capex? At least add back the non cash depreciation charges - they runs at about $7bn a year! Then you make no allowance for debt finance - surely we should imagine that the purchase of a Nevada utility can be partially funded with debt? Perhaps even after these adjustments there is a small transfer across, but that is one year! I've given you a decade long track record of investments PER SHARE increasing faster than the market, and a fairly obvious account of the recent underperfomance being explainable by the large underperforming positions and carrying zero return cash. I'm not saying that they don't give each other a hand. But the evidence is that depending on the year they take turns and the overall record is that each is flourishing remarkably and neither is sapping the other. You may well be right that BRK will not grow op earnings in the future at historical rates but you should look for other reasons than because investments per share cannot subsidize op co indefinitely.

pupil, So what if the absolute return of 6.6% is low? It was far ahead of the market. And you're contention was that the portfolio was bled to fund BNSF, BE etc. The fact that over the last 14 years investments per share grew faster than the market (while generally being made up of quite a few underperforming stocks!) is clear evidence of the portfolio not being used in the way you imagine. What significant positions have been bled in this way? Not a single large, long term stock holding was liquidated or swapped. WaPo was swapped predominantly for BRK stock and was anyway tiny. Phillips was a recent-ish buy, small and the acquired flow business was anyway not even contributing to growth in the period! The first meaningful swap of a long term position is PG - and it hasn't even happened yet. Honestly I have no idea what you're talking about. The fairly obvious reason for investments per share lagging a bit over the four years of this bull market is that his biggest equity positions are in aggregate only up 45% for the period versus 60% for the market and he's held a bunch of cash. Not very mysterious. I think you are totally off in what you are suggesting.

Can't stop chuckling! I really do object to this book value stuff! It's a useful shortcut and it's been promoted by Buffett and I've spent years and years using it myself but still, I find it is precisely this entrenched usage that is leading to BRK being persistently undervalued (especially the insurance operation). What do you guys think of the following simple valuation for the ultra longterm equity investor: 1. The stock portfolio (plus Heinz, Bac, converts, preferreds etc) is worth what it's worth. The cash and IG fixed income is worth 50% of gaap but in any case the discount to be a minimum of $25bn. 2. Total operating income has the interest, dividends, gains derived from the above assets removed. All of the remainder (including an averaged number for the insurance underwriting gains) is then capitalized at a rate that makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. 1 + 2 are then added together and are the total equity value for shareholders. (No subtractions of DTL or Float.) *Note on Float. If float grows over time then the above undervalues the company. And If float declines Buffett wrote in this year's report that it would do so very gradually and probably not any more than 3% per annum. hello my obese simian friend, 1. agree to disagree on incremental debt usage being a separate or quantifiable source of intrinsic value to berkshire. I agree it will and has helped grow IV, but I'm not willing to attempt to try to value that or consider it a separate component of growth in value. To your point, BNSF increased debt by $7.1B over 2012-2014, whereas UNP increased it by only $2.5B. BNSF now has ~$20B, while UNP has ~$13B. So either UNP is underlevered, or you are correct in that the Berkshire structure may allow for incrementally more leverage at the subs where the vast majority of the debt is located. 2. I'd like to say that much of talk about the astounding historical growth in operating earnings does not point out that Berkshire has used big chunks of the securities portfolio in order to grow these operating earnings (way back in the day issued shares for utility company, issued shares for BNSF, turned PG into Duracell, turned WaPo into earnings assets, PSX into Lubrizol add-on, etc.). The growth in investments / share has lagged the market returns because of Berkshire's conversion to more of an operating company. Berkshire has been very good at monetizing the increase in value of the holdings and converting them into wholly owned operating earnings. also the securities portfolio historically ahs been MUCH larger than the operating businesses, so using the securities portfolio earnings to subsidize the growth of the operating earnings had a particularly large effect. This will not be as powerful in the future as it has been in the past. I'll be willing to wager anyone that growth in operating earnings per share is less than 14% over the next ten years, up to 20 shares of Berkshire (b shares that is) as the stakes. To be clear i am referring to the $17.5B of pretax earnings from non-insurance non-investment biz (BNSF, Berkshire Energy, manufacturing and service etc.). You'll get PCP as a head start. 14% growth would imply pre-tax operating earnings of $65B. It is not completely impossible, but would be quite extraordinary. If those talking about growth of the past being the norm for the future want to truly bet on it, I'm willing to take the other side. I'm not sure the numbers support your contention about the Investments bleeding to support the earnings. Of course PG/Duracell hasn't happened yet. Between 2000 and 2010 Investments per share grew at a CAGR of 6.6%. I haven't got the number in front of me now but I'm pretty sure thats triple the dividend reinvested returns of the S&P 500. From 2010 till 2014 Investments grew 50% while the S&P500 grew approx 60%. Yes, so far behind in this decade but not by much. Not enough to come to your conclusion. I won't wager on an absolute growth rate. I would be willing to work out a wager using a spread to an interest rate. If interest rates (and what that implies about GDP) are as pathetic as they are now for the next decade then any sustained double digit growth rate will be mightily impressive. If long term rate head back to mid single digits then I definitely think Berkshire op companies can grow at the 14% you mention. For consideration, something like a +10% spread to the ten year?

Using numbers for 2014: 1. Stock 115.5, Heinz Stock 15 (estimate), Other Prefs etc 22, HY FI 2.3 = 155 Cash 63, IG FI 24 = 87 = @50% discount = 44 Total: 199 2. EBIT excluding underwriting and anything deriving from above: 17.5 Average underwriting gain of last 12 years: 2 Total 19.5 I think it is reasonable to have a PE of 18 for a company that has a multi decade record of 20% growth and at a time when interest rates are so low. That equates to an EBIT multiple of around 12 times. So the capitalized EBIT: 19.5 * 12 = 234 TOTAL of 1 + 2 = 433 Approx $175 per B share It's approx 5% less if you believe Float runs off at the max -3% that Buffett mentions in AR2014. It's approx 10% less if you believe Float runs off as above and there insurance underwriting goes to break-even. It happens to be about 1.8 times YE 2014 book but I don't see the point in relating it to net book with all the convoluted accounting that makes book what it is (DTL, Float, Goodwill etc etc)

Can't stop chuckling! I really do object to this book value stuff! It's a useful shortcut and it's been promoted by Buffett and I've spent years and years using it myself but still, I find it is precisely this entrenched usage that is leading to BRK being persistently undervalued (especially the insurance operation). What do you guys think of the following simple valuation for the ultra longterm equity investor: 1. The stock portfolio (plus Heinz, Bac, converts, preferreds etc) is worth what it's worth. The cash and IG fixed income is worth 50% of gaap but in any case the discount to be a minimum of $25bn. 2. Total operating income has the interest, dividends, gains derived from the above assets removed. All of the remainder (including an averaged number for the insurance underwriting gains) is then capitalized at a rate that makes sense to the investor keeping in mind that with full retention of earnings BRK has historically grown these earnings at a CAGR of 20%, about double the long term returns of the market. 1 + 2 are then added together and are the total equity value for shareholders. (No subtractions of DTL or Float.) *Note on Float. If float grows over time then the above undervalues the company. And If float declines Buffett wrote in this year's report that it would do so very gradually and probably not any more than 3% per annum.

Pupil, On the debt, first I should have been clear that for me this is the most questionable and smallest of my points about liabilities; DTL and Float are more obviously compelling, and they manifestly do not exist if the future resembles the past. That said, I have developed a view on debt that growing incremental debt capacity has positive value for equity where one has the very high conviction in the following three points: a talented capital allocator in charge, a predictable business, and a growing business. If any one of the three are lacking debt becomes a liability. There are very few companies that I've been willing to ascribe this value to because there are very few where I'm confident in the three characteristic pertaining long term and the costs of getting this wrong are massive because one swings from debt being an asset to debt being a liability, a double whammy effect. It's therefore possible that ceteris paribus I might be willing to value BNSF higher than UNP or Discovery higher than Time Warner or Davita higher than Fresenius on the basis that I can make a predictions regarding the present value of incremental debt capacity (there may of course be other reasons as well). That being said I would never argue too much with someone who did not agree on this point. Re the things you mentioned just now that are negatives ytd...one could add also Geico that has had two bad quarters and has probably got two more ahead till the new pricing takes effect across most policies.

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?

welcome to the club :) Congratulations! (it's an easy stock to own, a real armchair ride)