khturbo

https://concentratedcompounding.com/brk2/ Here's a follow up looking through all the risks, or in this case, the lack thereof. Hard to find anything that is even close to similarly not risky as Berkshire.

Shalab - the purpose of the article was explicitly to not use industry comps but to value the various pieces based on cash flows. You are correct that in almost every case the values are lower than publicly traded comps. I've mentioned to a couple of others, that's because I discounted things back to 10%. I don't think that's necessarily what they're worth, but it's a function of my own personal opportunity cost. If you would have used a market return of 8% or so the value would be above $250. On that note, in the first couple of paragraphs there's a link to my model. You can open it up and change the assumptions to your liking. One quick note on Geico, that was the value of just the underwriting profit stream. You'd have large value for fixed income investment income and the equity portfolio if it was separate. The value of all that combined would be well over $42bb. Thanks for the thoughts, Kyler

Lots of good thoughts there adjusted earnings. I actually agree with most of them. It's impossible to prove, but I think that if Buffett would have just steadily repurchased stock starting in 2012 instead of making all the investments that they did then per share IV would be higher than it is today. I also think that might be true of a much longer period maybe back to 1998 or so, but it's impossible to prove. Agreed as well that they could have done better in 2009. I would say that in tracking performance I prefer to look through the cycle, not trough to peak (or close to peak at least). It makes perfect sense that Berkshire would outperform through the cycle but might underperform trough to peak, which is roughly what it has done. Since it's perceived as non-cyclical the relative valuation should be higher at the bottom and lower at the top. Another way to say it is that a good chunk of the return of the S&P since the bottom in 2009 is due to valuation expansion. That isn't quite true for BRK. Back to cash deployment that adjusted and swedish point out, I wrote that saying that this assumes all earnings are paid out. I honestly think the biggest risk is that Buffett likes to empire build and keeps a bunch of cash waiting for a deal that never happens, in line with what you guys are saying. I hope I'm wrong and that they'll buy back a ton of stock this year. If they use all fcf to buy back stock they really should hit something like a 10% IRR with lots of certainty. If they just keep a bunch of excess then obviously that would take the IRR down a bit, but hopefully not by more than 1-2% annualized. And to Jurgis, I think that's right. I've had a couple people mention that the valuation is too low. Like I mention earlier, if you discount it at 9% you get ~$235 in value and something higher obviously if you discount at 8%, which is what I'd guess a market return is. I personally think that BRK will continue to trade in the range of where it is to maybe up 10%, which is roughly the ratio of where it has traded relative to perceived intrinsic value over the last maybe 5 years. I don't think the discount will close, but I think it would be hard for the valuation to go lower by 20% and stay there, so I think you lock in through the cycle returns around the rate that IV increases. I appreciate all of the thoughts and feedback by you guys!

Thanks for those inputs SHDL. I generally agree with those thoughts. On the 13% tax rate issue, someone posted a link in the comments that talks about special tax rates for insurers. Looks like they didn't get much relief on the dividends from tax reform, unfortunately.

It's a good point. I've been thinking about that a bit. My clearest answer is that if you were to discount it at 8% or 9%, the value would be much, much higher. Arguably, using a 10% discount rate for Berkshire is too high, especially in a world of 2.5% 10-year yields and a stock market that might make 7-8% through the next cycle. So I think where I say "fair value," I'm actually kind of saying that my opportunity cost is probably around 10%, so for me to be interested I'd need to see a 10% IRR, and low $200s is the price where I see that, using fairly conservative assumptions. I went back and discounted everything back to 9% instead of 10% (admittedly an imperfect exercise) and got a value of ~$235. I think that kind of makes sense. Like you probably shouldn't make 10% on BRK over time given the risk profile. So if you think a fair return is somewhere below 9% then it's probably worth ~$250-260 or so.

Hi all. I just posted a writeup on the valuation at EOY 2018: https://concentratedcompounding.com/brk/ My model is attached in the post. I'd love to get all your thoughts on it!