Thrifty3000

Yes. He lays everything out in great detail in his annual letters/novellas. He makes several more accounting adjustments than Vinod and I do for things like pension liabilities, etc. He makes assumptions that a large percentage of the cash will be invested at higher rates of return over time (a safe bet), and incorporates the higher projected earning power into “normalized” earnings. Due to his accounting adjustments and assumptions his pre-covid normalized earnings came in about $8 billion higher than my pre-covid estimate. If you assume $100 billion of cash will eventually be invested at an 8% to 10% return, and discount it a bit to account for the wait time to deploy, it accounts for much of the difference between his estimate and mine. I'm a wuss when it comes to optimistic forecasts, so I prefer to assume more cash will pile up at the same rate existing cash will be deployed (see next paragraph). If I recall correctly he also assumes a higher growth rate than I do. I believe his pre-covid estimate gravitated towards 8%. I’m trying to talk myself into using a 7% rate, but I’m not there yet. The cash will be a huge drag. They have to invest $30 billion and growing annually in expensive large cap equities, expensive private companies, or their own fairly priced shares. Remember, BNSF “only” cost $26 billion. I just can’t be optimistic about BRK being able to make a BNSF sized acquisition at a decent price every single year going forward, which is pretty much what it will take to sop up the free cash pouring in (cry me a river). (Buffett says his circle of competence encompasses about 5% of businesses. If you assume he’s comfortable evaluating/purchasing 5% of the businesses in the world, which are at least as big as BNSF, that doesn’t leave many.) I do look forward to Bloomstran’s analysis of covid’s impact on the various segments, if for no other reason than trying to forecast how things like negative interest rates will impact every insurance and banking operation; how less travel will impact airline and auto related businesses, etc, etc, etc - a gargantuan undertaking, and WAY above my pay grade (probably above Bloomstran’s pay grade, and maaaybe above Buffett’s, seeing as he went to DEFCON 1 in March). That’s why I just lop 20% off my pre-covid estimate (#lazy #tooHardPile).

How I derive Berkshire’s Look Through Earnings Based on 2019 Earnings (In Billions USD except per share info) Non-Insurance Business Earnings: $17.7 Less CapEx Adjustment (Maintenance CapEx less Depreciation): $3 Plus Acquisition-related Amortization: $1.3 TOTAL ADJUSTED NON-INSURANCE BUSINESS EARNINGS: $16 ————————————————————————————————— Equities Dividends: $4 Estimated Equity Retained Earnings: $9 TOTAL EQUITIES LOOK THROUGH EARNINGS: $13 ————————————————————————————————— TOTAL SHARED HOLDINGS EARNINGS (Kraft-Heinz, Berkadia, Flying J): $1 EARNINGS FROM TREASURIES & CASH EQUIVS (Assume 1% yield. #lazy): $1.25 INSURANCE COMPANIES (After tax operating profit - I think Buffett ignores this): $.325 TOTAL LOOK THROUGH EARNINGS: $32 BILLION Average Equivalent B Shares Outstanding (3/31/2020): 2,434,333,367 LOOK THROUGH EARNINGS PER B SHARE: $12.97 Post-Covid New World Order 20% Impairment (#reallyLazy): $10.37 per B share

I use Look Through Earnings, which are the earnings that would be available to owners if all free cash flow generated by the operating companies and equity holdings were distributed instead of retained. I assume every dollar retained will lead to at least a dollar of market value over time.

Ok, I totally agree with you there. I feel like that’s where my 6% growth assumption comes into play. I’ve seen growth assumptions from others as high as 8.5%. But, I’m pretty sure Buffett would not have stopped buying back shares in Q1 if he thought long term growth of 8.5% was feasible. I model out for 7 years. So my forecast is over the next 7 years starting from end of March 31. BRK portfolio had slightly higher expected returns from the prices on March 31 and it providing a bit of tailwind from re-rating over 7 years. The 8.5% is not from here to eternity. I did a valuation for YE 2009 and my estimates for 10 year, BV and price. See below. I then reconcile every 5 years to see why it differed. I had not put up the reconciliation on my website. But the main book value growth difference is from (1) tax cut changes (2) portfolio returns. http://vinodp.com/documents/investing/BerkshireHathaway.pdf Vinod Awesome analysis, Vinod. It looks like your valuation and advice were spot on. I liked how you segmented your intrinsic valuation into investment value vs speculative value. I did notice something interesting when I compared the output of your approach to mine. Your approach resulted in a total intrinsic valuation of $110 per B share (in 2009). You advised that investors would earn a 9% to 10% return if they purchased B shares at a price of $84 per share. You advised that aggressive investors should invest at $67 per share. And, you estimated look through earnings of $4.90 per B share. Now, the funny thing is that when I plug $4.90 earnings and 9% growth into my humble little discount-based model it spits out the following: Intrinsic value per B share: $108.88 (Difference from Vinod's model = $1.12 or 1%) Recommended purchase price at 40% discount to Intrinsic Value: $65.33 (Difference from Vinod's model = $1.67 or 2.49%) And, if I had purchased shares in 2009 at $65.33 per share I would have experienced compound growth of approx. 10%. Not too bad. (Side note: Uh Oh! Thrifty3k might be on to something!) It still feels like getting the look through earnings and growth estimates right are the most important factors. Oh yeah, and purchase price. I'll post how I arrive at look through earnings in a bit.

Ok, I totally agree with you there. I feel like that’s where my 6% growth assumption comes into play. I’ve seen growth assumptions from others as high as 8.5%. But, I’m pretty sure Buffett would not have stopped buying back shares in Q1 if he thought long term growth of 8.5% was feasible. I model out for 7 years. So my forecast is over the next 7 years starting from end of March 31. BRK portfolio had slightly higher expected returns from the prices on March 31 and it providing a bit of tailwind from re-rating over 7 years. The 8.5% is not from here to eternity. I did a valuation for YE 2009 and my estimates for 10 year, BV and price. See below. I then reconcile every 5 years to see why it differed. I had not put up the reconciliation on my website. But the main book value growth difference is from (1) tax cut changes (2) portfolio returns. http://vinodp.com/documents/investing/BerkshireHathaway.pdf Vinod Vinod, I sincerely appreciate your generous advice and look forward to reviewing your valuation. Thank you.

Sadly, nobody is offering opinions of Berkshire’s valuation. Further, we seem to be having some sort of a debate over whether the retained earnings of Berkshire’s operating companies and equity investments are valuable and growing. (I’m of the opinion they are both valuable and growing.) And, there seems to be some degree of general disdain over a private investor’s desire to discount those earnings at a rate greater than the rate he estimates those earnings will grow when he is establishing his own desired purchase price.

I feel like I’m in bizarro world. If your hurdle rate is 25% then buy Berkshire at a low enough price to yield 25%. (Spoiler alert, that won’t happen since company buybacks set a floor well above said price.)

^This is why you have no friends. No no, your grandpa doesn’t count. I think you meant confirmation bias, which Munger shorthands as commitment/consistency.

Ok, I totally agree with you there. I feel like that’s where my 6% growth assumption comes into play. I’ve seen growth assumptions from others as high as 8.5%. But, I’m pretty sure Buffett would not have stopped buying back shares in Q1 if he thought long term growth of 8.5% was feasible.

Let’s assume a 10% discount rate... CashCo: Pre-tax PV of year 1 dividend = $45; year 2 = $40.5. Sum = $85.5 InvesCo: Pre-tax PV of year 2 dividend = $81 Am I getting the hang of it? Now, my question for you. How come the retained earnings didn’t generate additional value in year 2?

I actually enjoy conversations on valuation math. I’m always looking to improve my understanding, so I welcome people poking holes in my posts. I just ask that you put forth coherent arguments, which we don’t seem to be getting from Thrifty. As soon as I sober up I'll see if I can clarify. Haha. Geez, I feel like I'm being baited. But, fine, if it makes you trolls happy... Normalized Per-Share Look Through Earnings - Year 0: $10.31 Projected Earnings: Year 1: $10.93 Year 2: $11.58 Year 3: $12.28 Year 4: $13.02 Year 5: $13.80 Present Value of Projected Earnings - Years 1 Through 5 (10% Discount Rate): $46.19 Residual Value: Residual Earnings (Year 5 Earnings x 1.06): $14.62 Capitalization Rate: 6% Capitalized Residual Value: $243.75 Present Value of Capitalized Residual Value (10% Discount Rate): $151.35 Total Present Value of Projected Look Through Earnings: $46.19 + $151.35 = $197.54 And there you have it. $197.54 is the precise intrinsic value of a Berkshire Hathaway B share down to the penny. I can carry it out to more decimals if you like. Haha. Obviously, you can model it out for more than 5 years, play with all the variables, add more inputs and variables, and derive pretty much whatever intrinsic value you want (why Warren Buffett has never wasted time on a DCF model, and why I feel slightly disgusted for wasting my own time). For me, the most important inputs are the normal earnings estimate and growth estimate. Naturally, those are the two numbers I originally shared, and are the two items I wish others would share and intelligently discuss (that goes for all investments on COBF), especially if they aren't just pulled out of the air, and are the result of quality research and personal experience. If you want to add value while attacking my (or anyone's) work, personally I'd prefer you challenge me to defend the effort and assumptions that went into deriving the look through earnings and growth estimates. Another way to be a hero would be to post your own estimates, and subject yourself to a little scrutiny. Bring it on! My posts had nothing to do with what I think Berkshire is worth. I was simply trying to point out that $10 in retained earnings aren’t the same thing as $10 in distributed earnings. You can’t capitalize earnings like you did (and continue to do) unless those earnings are distributed. Would you capitalize the reinvested interest when valuing a zero-coupon bond? If not, then why would you capitalize the retained earnings of Berkshire (Berkshire, which retains all its capital, is effectively a zero-coupon equity)? Aren’t they the same thing? If we can’t agree retained earnings ≠ distributed earnings, then I’m sorry for wasting your time. I was just looking to join a conversation about something I find interesting. All the best If you can’t understand your mom ≠ a girlfriend then I cant help you. Haha Everyone on this forum understands earnings retained by a company aren’t distributed. I’m dying to hear what other brilliant insights you have. I recommend taking your ample free time to read some of Buffett’s annual letters about how to consider retained / look through / owner earnings.

I actually enjoy conversations on valuation math. I’m always looking to improve my understanding, so I welcome people poking holes in my posts. I just ask that you put forth coherent arguments, which we don’t seem to be getting from Thrifty. As soon as I sober up I'll see if I can clarify. Haha. Geez, I feel like I'm being baited. But, fine, if it makes you trolls happy... Normalized Per-Share Look Through Earnings - Year 0: $10.31 Projected Earnings: Year 1: $10.93 Year 2: $11.58 Year 3: $12.28 Year 4: $13.02 Year 5: $13.80 Present Value of Projected Earnings - Years 1 Through 5 (10% Discount Rate): $46.19 Residual Value: Residual Earnings (Year 5 Earnings x 1.06): $14.62 Capitalization Rate: 6% Capitalized Residual Value: $243.75 Present Value of Capitalized Residual Value (10% Discount Rate): $151.35 Total Present Value of Projected Look Through Earnings: $46.19 + $151.35 = $197.54 And there you have it. $197.54 is the precise intrinsic value of a Berkshire Hathaway B share down to the penny. I can carry it out to more decimals if you like. Haha. Obviously, you can model it out for more than 5 years, play with all the variables, add more inputs and variables, and derive pretty much whatever intrinsic value you want (why Warren Buffett has never wasted time on a DCF model, and why I feel slightly disgusted for wasting my own time). For me, the most important inputs are the normal earnings estimate and growth estimate. Naturally, those are the two numbers I originally shared, and are the two items I wish others would share and intelligently discuss (that goes for all investments on COBF), especially if they aren't just pulled out of the air, and are the result of quality research and personal experience. If you want to add value while attacking my (or anyone's) work, personally I'd prefer you challenge me to defend the effort and assumptions that went into deriving the look through earnings and growth estimates. Another way to be a hero would be to post your own estimates, and subject yourself to a little scrutiny. Bring it on!

The $10 of current earnings are not distributable earnings, but retained earnings. In other words, the only way Berkshire can achieve growth rate of 6% in your model is by retaining the earnings. So you should re-work your model to come up with an intrinsic value estimate that incorporates this fact. It is not equal to $10/(10%-6%) = $250 per B share as you seem to be implying. The company earns $10 in year 1. It retains and reinvests that $10 earned in year 1, and as a result, it earns an additional $.60 in year 2, for total year 2 earnings of $10.60. It does the same in year 3. It reinvests the $10.60 it retained in year 2, and earns $11.24. That pattern continues in perpetuity. In 24 years, for example, it will be earning $40 per share according to the model. Why does that need to be reworked? Seems straightforward. Your’re capitalizing retained earnings rather than distributed earnings. The value of $10 in earnings growing by 6% a year depends on how much has to be reinvested to produce the 6% growth. Your economic assumptions ($10 initial earnings, 100% retention, 6% growth) and your valuation assumptions ($10 initial earnings, 0% retention, 6% growth) are not the same thing. Using your 10% discount rate, you get the following present values for Berkshire’s operating earnings (i.e., the value of Berkshire excluding cash and securities): (a) $10 earnings, 100% retention, 6% growth (using your terminal year of 24): ($40.49/.10) / 1.10^24 = $41.11 (b) $10 earnings, 0% retention, 6% growth (in perpetuity): $10 / (.10-.06) = $250 Under your economic assumptions of 100% retention, 6% growth and a 10% discount rate, Berkshire would be destroying value. In fact, each dollar retained would be worth only 60 cents. Here’s another way to look at it: If Berkshire needs to retain 100% of its earnings to grow by 6% a year, they’re earning 6% on equity. Berkshire is levered 2:1 and the liabilities cost zero (roughly). You’re therefore assuming Berkshire will earn just 3% on the asset side. Of course, assets that produce operating earnings only make up half the balance sheet, but you get the idea. +1 It is really dumb for a company to retain 100% of earnings and grow at a lower rate than its discount rate (alternately, the opportunity cost for shareholders). Such a management action destroys shareholder wealth. This is the main reason Buffett said the condition for earnings retention is to be able produce more than $1 of market value for each dollar retained. Seriously? It's not ITS discount rate it's MY discount rate! I think you might be confusing discount rate with cost of capital. PS. -1

The $10 of current earnings are not distributable earnings, but retained earnings. In other words, the only way Berkshire can achieve growth rate of 6% in your model is by retaining the earnings. So you should re-work your model to come up with an intrinsic value estimate that incorporates this fact. It is not equal to $10/(10%-6%) = $250 per B share as you seem to be implying. The company earns $10 in year 1. It retains and reinvests that $10 earned in year 1, and as a result, it earns an additional $.60 in year 2, for total year 2 earnings of $10.60. It does the same in year 3. It reinvests the $10.60 it retained in year 2, and earns $11.24. That pattern continues in perpetuity. In 24 years, for example, it will be earning $40 per share according to the model. Why does that need to be reworked? Seems straightforward. Your’re capitalizing retained earnings rather than distributed earnings. The value of $10 in earnings growing by 6% a year depends on how much has to be reinvested to produce the 6% growth. Your economic assumptions ($10 initial earnings, 100% retention, 6% growth) and your valuation assumptions ($10 initial earnings, 0% retention, 6% growth) are not the same thing. Using your 10% discount rate, you get the following present values for Berkshire’s operating earnings (i.e., the value of Berkshire excluding cash and securities): (a) $10 earnings, 100% retention, 6% growth (using your terminal year of 24): ($40.49/.10) / 1.10^24 = $41.11 (b) $10 earnings, 0% retention, 6% growth (in perpetuity): $10 / (.10-.06) = $250 Under your economic assumptions of 100% retention, 6% growth and a 10% discount rate, Berkshire would be destroying value. In fact, each dollar retained would be worth only 60 cents. Here’s another way to look at it: If Berkshire needs to retain 100% of its earnings to grow by 6% a year, they’re earning 6% on equity. Berkshire is levered 2:1 and the liabilities cost zero (roughly). You’re therefore assuming Berkshire will earn just 3% on the asset side. Of course, assets that produce operating earnings only make up half the balance sheet, but you get the idea. For an investment that doesn’t pay dividends the cash flows consist of a) the initial investment b) the amount received upon exit. The ROI is a function of a) earnings growth b) earnings multiple at entry vs earnings multiple at exit ^that’s Jack Bogle 101 The longer you hold the investment the less of a factor multiple expansion/compression becomes, while the ROI gravitates toward the earnings growth rate (there is a nuanced relationship between ROE and ROI). It’s why paying a fair price for a great business over the long term works out better than paying a great price for a fair business. ^that’s Chuck Munger 101 I said I can quickly estimate the intrinsic value of a long term index-like investment by using a perpetual growth formula in my head. I didn’t say the result is what I would pay for the investment. I did mention I would get excited about buying at prices below $160 per share - or 16 times my estimated look through earnings (my opinion of a fair price for a good business). If I buy and hold for several decades I would expect my ROI to equate to the long term growth rate. In looking ahead over the next 2 to 6 decades I’m not giving Berkshire any benefits of the doubt regarding a future performance anywhere near past performance - even the recent past. The company is gigantic, it has limited investment opportunities of scale, extreme competition for those investment opportunities, and its leadership is in transition. Personally, I’m concerned the company isn’t being handed over to “leaders.” I think it’s being handed off to managers. There’s a big difference. On the positive front you have Ajit and Todd. Ajit is the real deal when it comes to insurance. And, I’m generally excited about the prospects of capital being deployed by Todd Combs, as I get a sense he can learn to be as shrewd as Buffett. I think Ted and Greg, however, are faking it until they don’t make it. No manager will grasp Berkshire or the investment world the way Buffett did in his prime - when it was easier to grow. And, none of the next generation of senior management has shown any ability to communicate like a leader (David Sokol was the closest - but awkwardly arrogant). I suspect they will communicate like operators not wanting to screw up. And, thus begin the journey toward bigness and dumbness. As far as the 2 to 1 leverage goes, Buffett has set an expectation for float to peak, and even decline, though slowly, in the not too distant future. Markets do saturate. I don’t necessarily believe it will decline, I certainly don’t model for it, but declining leverage would create a drag. Estimating earnings growth of 6% and discounting those earnings at 10% is not destroying value. It’s producing an estimate of what I would pay for a 10% return on an earnings stream growing at 6%. Retaining $10 to earn $.60 in perpetuity only destroys value if the multiple others are willing to pay for that $.60 is less than 16.67.

The $10 of current earnings are not distributable earnings, but retained earnings. In other words, the only way Berkshire can achieve growth rate of 6% in your model is by retaining the earnings. So you should re-work your model to come up with an intrinsic value estimate that incorporates this fact. It is not equal to $10/(10%-6%) = $250 per B share as you seem to be implying. The company earns $10 in year 1. It retains and reinvests that $10 earned in year 1, and as a result, it earns an additional $.60 in year 2, for total year 2 earnings of $10.60. It does the same in year 3. It reinvests the $10.60 it retained in year 2, and earns $11.24. That pattern continues in perpetuity. In 24 years, for example, it will be earning $40 per share according to the model. Why does that need to be reworked? Seems straightforward.

Thanks for laying out the assumptions. Without knowing one's estimates of earnings, growth rate of earnings and discount rate, it is difficult to know where there is disagreement if any. In the base case as of Q1, 2020, I have normalized earnings as $12.5 per share, excluding any earnings from float. Growth rate of 8.5%. To me, it looks like any differences in IV estimates for BRK really boil down to 1) The value of float. This is harder to assess as it is dependent on interest rates and investment opportunities. One simple and likely very conservative way is to assume that $60-80 billion would always remain in cash and as long term interest rates may remain low for a long time, essentially are not worth much. So we end up valuing the rest of the float or about $50 billion. Or assume it is going to earn some low rate on the total float and it ends up adding $0.5 to $1 per share. 2) The discount rate. So you have ROE of about 8.5% which is consistent with the growth rate assumption as well with 100% earnings retention. If you pick a discount rate of 7%, you have to have to look through 30 years to make it worth 1.5x book value. The question I have for you is, if you assume a growth rate of 6%, why would it be worth even book value unless your discount rate is less than 6%? Vinod For a handful of index funds or index-like investments (aka Berkshire) that I hope to hold for decades I basically just capitalize growth in perpetuity. I know it's inelegant, but one benefit is I can do it in my head. For Berkshire I do break down the groves in a spreadsheet, and slice and dice assumptions a number of different ways before landing on a look through earnings estimate. (FWIW, when making an investment I assign a lot more significance to my look through earnings yield estimate than to my ability to forecast growth. Hence, Amazon hasn't made it into the 'ol portfolio just yet.) I'm definitely comfortable with a long term BRK growth rate over 5%. The ROE, compensation structures, and capital allocation discipline ingrained in the culture give me that confidence. (As an aside, it also doesn't hurt that: a) Buffett pledged to give away 5% of his BRK holdings annually to the Gates Foundation b) he is genetically hardwired to increase his wealth over the long term (with a margin of safety), so if history's greatest investor feels a minimum 5% long term growth rate for his own company is probably a safe bet, I'm more apt to accept that assumption.) I do have trouble basing a long term growth assumption on a historical 8.5% ROE. They clearly can't reinvest organically at that rate, so it all comes down to acquisition prospects. And, a) because the universe of sizable investment opportunities in Berkshire's circle of competence is now down to maybe a few dozen companies globally b) because Buffett spent his entire life teaching/training an army of extremely well capitalized competitors (aka private equity) to do exactly what he does, while they're incentivized to pay higher prices, I can see scenarios where the elephant gun that used to be unloaded every 2 or 3 years, now gets shelved for 5 to 10 (or more) years at a time; leaving the next generation of management no choice but to accept lower growth while buying back shares or paying dividends. I was comfortable with 7% last year. Now I'm more comfortable with 6%. I really really really hope it turns out to be at least 8.5%. Thanks for the detailed response. Lots of good points. What I am asking is what is your expected long term expected return on BRK? This is what people would call "required return". If I understand it correctly, you seem to be saying you would be happy with 5%. Vinod My current “normalized” look through earnings estimate is $10 per B share. My long term expected growth rate is 6%. I usually use a discount rate of 9% or 10%.

Thanks for laying out the assumptions. Without knowing one's estimates of earnings, growth rate of earnings and discount rate, it is difficult to know where there is disagreement if any. In the base case as of Q1, 2020, I have normalized earnings as $12.5 per share, excluding any earnings from float. Growth rate of 8.5%. To me, it looks like any differences in IV estimates for BRK really boil down to 1) The value of float. This is harder to assess as it is dependent on interest rates and investment opportunities. One simple and likely very conservative way is to assume that $60-80 billion would always remain in cash and as long term interest rates may remain low for a long time, essentially are not worth much. So we end up valuing the rest of the float or about $50 billion. Or assume it is going to earn some low rate on the total float and it ends up adding $0.5 to $1 per share. 2) The discount rate. So you have ROE of about 8.5% which is consistent with the growth rate assumption as well with 100% earnings retention. If you pick a discount rate of 7%, you have to have to look through 30 years to make it worth 1.5x book value. The question I have for you is, if you assume a growth rate of 6%, why would it be worth even book value unless your discount rate is less than 6%? Vinod For a handful of index funds or index-like investments (aka Berkshire) that I hope to hold for decades I basically just capitalize growth in perpetuity. I know it's inelegant, but one benefit is I can do it in my head. For Berkshire I do break down the groves in a spreadsheet, and slice and dice assumptions a number of different ways before landing on a look through earnings estimate. (FWIW, when making an investment I assign a lot more significance to my look through earnings yield estimate than to my ability to forecast growth. Hence, Amazon hasn't made it into the 'ol portfolio just yet.) I'm definitely comfortable with a long term BRK growth rate over 5%. The ROE, compensation structures, and capital allocation discipline ingrained in the culture give me that confidence. (As an aside, it also doesn't hurt that: a) Buffett pledged to give away 5% of his BRK holdings annually to the Gates Foundation b) he is genetically hardwired to increase his wealth over the long term (with a margin of safety), so if history's greatest investor feels a minimum 5% long term growth rate for his own company is probably a safe bet, I'm more apt to accept that assumption.) I do have trouble basing a long term growth assumption on a historical 8.5% ROE. They clearly can't reinvest organically at that rate, so it all comes down to acquisition prospects. And, a) because the universe of sizable investment opportunities in Berkshire's circle of competence is now down to maybe a few dozen companies globally b) because Buffett spent his entire life teaching/training an army of extremely well capitalized competitors (aka private equity) to do exactly what he does, while they're incentivized to pay higher prices, I can see scenarios where the elephant gun that used to be unloaded every 2 or 3 years, now gets shelved for 5 to 10 (or more) years at a time; leaving the next generation of management no choice but to accept lower growth while buying back shares or paying dividends. I was comfortable with 7% last year. Now I'm more comfortable with 6%. I really really really hope it turns out to be at least 8.5%.

At the end of 2019 my model assumed "normal" BRK.B look through earnings of $12 to $16 per share, and a growth rate of 6% to 8% (a base case of $14 per share look through earnings and 7% growth). Since then I've impaired my estimates to incorporate post-covid margin compression for financials, and more modest growth expectations. I now model for look through earnings of $8 to $12 per share, and growth of 5% to 7% (a base case of $10 per share and 6% growth). For me, intrinsic value falls somewhere in the neighborhood of $240 per B share. I'm perfectly comfortable owning the stock at the current price, and would happily buy more below $160 per share.

I would be cautious looking at cash. its certainly possible (they said this yesterday) that some of the businesses need more cash to survive in the next months/years, and that Fairfax will provide it. so, the question comes back again to whether you think those businesses will be profitable one day, thus the extra cash well invested, or whether they will not, and thus Fairfax is just falling into the sink hole phallacy. They have restrictions limiting the amount they can invest in a single opportunity to no more than 25% of the portfolio. And, only 2 holdings are allowed to consume up to 25%. After those 2 the limit is 20% for the rest. I'm not sure whether that's good or bad. In a way it protects investors from overallocation, but it also restricts capacity to bail out troubled investees.

I may be wrong, but I think the value of BNSF and mid-American energy are their historical purchase cost without any upward adjustment to account for all the value created since their purchase.. So an adjustment would be a boost to BRK book value. I think your comment assumes BNSF was being carried out fair market value, in which case a mark to market drop would bring it down. Yeah, I used BNSF as an example because it was the first holding that popped into my mind that BRK had to mark to market during the prior crisis, but had the luxury of not needing to do that for BNSF this time around.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of. Hard to know whether they are being manipulative, but it does argue for squinting a bit when looking at the EPS number (there was BV growth of 14.8% in 2019, right?!). Usually EPS is one of the metrics used to measure how well a company has performed in a particular year, but the paper gains triggered by periodic marks, or the failure to write down assets that are not marked can conceal true economic performance for the year. Usually when FFH triggers paper gains, they are the result of good decisions made 4 or 5 years ago -- these decisions are still to the credit of management, but they are not really indicative of performance in the current year. Maybe Ben Graham was a pretty smart guy when he advocated the use of a E10? SJ I agree with watching look through earnings over time. It would be nice if we could have any sense of what "normalized" non-insurance earnings looks like now, or what non-insurance earnings might look like 10 years from now. I predict non-insurance earnings in 2030 will be somewhere between $0 and $2 billion. How's that for precision?

I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. I’m sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

They were carrying Quess at something like 70 times trailing look through earnings, until they impaired it last quarter to a humble 50 times. I think Bangalore is carried at around 100 times look through earnings. Geez. But, they excused these sky high marks because arms length transactions were done with suckers willing to pay those prices. (I have no doubt Bangalore will eventually be worth it’s carrying value, as more capacity is added and real estate is developed. But, Fairfax was able to fast track years of performance fees thanks to the high marks.)

I 100% get that sense. Their marks to model in India are super aggressive. And, they’re trying to go the same route with Africa. But, you just have to look at the compensation system to see the benefits to them, and why their judgment probably gets clouded. Of course, now they’re in the same boat as Biglari, where it could be years before their next performance fee payout.

I love that the performance fee doesn’t kick in again until book value exceeds $11.69 per share.