Thrifty3000

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds. I haven't found any info on Helios's historical fee earnings yet. Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward. Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax. FAH will benefit from being managed by leading, proven, investors in Africa. what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have UBN and Botswana... If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.” My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed. My guess is he believes the smart money has already bailed. I also think this is a pretty good/brilliant solution to what everyone knows was a serious eff-up. And they probably expect the smart money to recognize the solution’s “brilliance.” At this point the worst case is along the lines of what SharperD has been warning about... that equity investors simply cannot outrun currency devaluation, corruption, and poor business performance in Africa. If so, this deal only prolongs the slow, painful, death. On the other hand, we could be looking at a scenario where a decade from now: - $450 million of existing assets doubles in value to $900 million - Helios contributes $400 million of fees, which is invested and grows to a total value of, say, 600 million - Helios increases their PE assets under management from $3.6 billion to, say, $10 to $12 billion, which will contribute $80 or $100 million of annual fee income to FAH. If you slap an 18 multiple on that and add it to the prior two items you get a fair value over $3 billion, and a 5 to 10 bagger from today’s price. I have a hunch the optimistic scenario is where Prem is leaning, and probably thinks no further explanation is needed. With that said, without more color on expected fees this is highly speculative.

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds. I haven't found any info on Helios's historical fee earnings yet. Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward. Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax. FAH will benefit from being managed by leading, proven, investors in Africa.

Not sure why this wasn't posted in the press section of CIG's website. It's definitely material information (assuming it's true): https://www.businesslive.co.za/bd/companies/industrials/2020-03-09-consolidated-infrastructure-group-restructures-debt/ I'm sure they discussed it during the AGM, but I wasn't looking at FAH back then so I didn't dial in (would love to see a transcript/notes). From what I gather the situation at CIG isn't pretty. Odds of survival were zero without a debt restructure. And, even with the restructure I still think things are grim. (It seems Mr. Market has written off CIG anyway.) CIG has several business lines. Half the revenue comes from large scale project management. The other half comes from diverse businesses that are on solid footing from a profitability standpoint, and a couple have especially exciting growth prospects. The problem is CIG royally SUCKED at project management, for years, and lost insane amounts of money. FAH had no idea how bad things were when they invested. It was clearly WAY out of FAH's circle of competence, because the issues were in plain sight. The good news is FAH appears capable of leading a solid turnaround effort, as long as it's not too little too late. If covid hadn't come along it sounded like CIG had a decent shot of returning to profitability in 2020. Now, who knows? It comes down to whether they can right size the project business, and whether they can continue servicing the debt. I'm rooting for FAH on this one. I think if CIG starts showing signs of life it will be at least a $50 million boost to FAH's valuation, with what should be plenty of opportunity for long term growth. Not holding my breath.

2016: Atlas Mara earned $9 million. 2017: FAH acquired 43% of Atlas Mara for $159 million. Atlas Mara earned $47 million. (Well played FAH.) 2018: Atlas Mara earned $42 million. FAH is looking pretty genius - despite Atlas Mara share price decline. 2019: Atlas Mara makes a strategic decision to focus on holdings with a dominant market position, and to divest several non-strategic banks in its portfolio. To do that it secures commitment from a buyer, and then has to reclassify the assets as held for sale, which requires a very large ($105.5 million) accounting write-down. The write-down flows through the P&L so it has to report a massive 2019 loss - but, Atlas Mara expected to sell the reclassified assets in early 2020. 2020: Covid = deal off. African securities lost more value than they did during the GFC. Atlas Mara is in Africa. Ouch. Atlas Mara has $500 million of equity against $2 billion of liabilities. It can absorb a lot of losses. It's largest asset, UBN (Nigeria), which shared $31 million of it's approximately $54 million of 2019 earnings with Atlas Mara, has been in business for over 100 years! So, it's at least some degree of proof banks can survive long term in Africa. So, what if Atlas Mara goes bust and has to wipe out equity holders? FAH wouldn't walk away empty handed. It would likely recover at least some of its $36 million in Atlas Mara bonds. And, as a modest consolation prize, at the end of the first quarter 2020 FAH extended a $40 million debt facility to Atlas Mara collateralized by Atlas Mara's interest in it's second largest holding, Botswana Bank. Botswana Bank earned $14 million of pre-tax profit last year (ROE of 11.2%, ROA of 1.3%). So, FAH would likely still be in the banking business in Botswana (and also with a completely separate holding, Grobank). Long story short. I'm not faulting FAH for this investment. If you have a mandate to invest in Africa, and you want to be a long term investor in the banking sector, then this looked like a flawlessly timed investment at a great price in 2017. And, I completely agree with the strategy they were pursuing to focus on their strongest assets. I'm sure if Covid is damaging the well-capitalized Atlas Mara, then it is decimating Atlas Mara's competition. Hopefully Atlas Mara can capitalize on the opportunities, gain market share, and in a few years produce look through earnings of $25+ million for FAH. Hopefully FAH will still be selling then for less than $200 million. Haha. Frankly, I'm more concerned about CIG than Atlas Mara, but that's a completely different story. And, all of CIG and Atlas Mara's risks appear to be priced into FAH.

https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2020/Fairfax-Africa-Enters-Into-Automatic-Share-Purchase-Plan-and-Announces-Intention-to-Make-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares/default.aspx Looks like they're going to continue buying up 25% of the daily trading volume. They repurchased 1,476,096 shares on the open market in the last 12 months for an average price of $6.18.

Yeah, I think you're on to something with the recession mental model point... Imagine being Buffett in March. His operations and suppliers in China have already gone dark. The US is just starting to work through a shutdown - averting what was already happening in Italy. He already sees the cash drain on Dairy Queen China, suppliers delaying deliveries, orders being canceled, plummeting rail car loads, a massive drop in daily auto insurance claims, planes not flying, assembly lines halting, and employees being furloughed. His buddy Billy G. advised a vaccine is 18 months away at best, and that the first iterations may not protect the at-risk population (so buckle up for prolonged behavior changes). He's surely talked to his top managers about downside risk scenarios, and about the parental support potentially needed to survive 18, 24, or even 36 months. He's likely urged them to look out for good competitors in financial trouble. In other words he's handicapped Berkshire's risk, so he can more fully focus on opportunity. He knows there's an unprecedented amount of corporate debt sitting one notch above junk. He knows financial markets are gumming up, and companies like AIG are at the mercy of commercial paper. He knows full well the lock down can only subsist about 45 days before businesses globally start dropping like flies. There could soon be opportunities aplenty. He has no idea how the government will respond to this crisis, or how the economy will respond to the government. (The CARES act was introduced to the Senate floor on March 19, at least 9 days after Buffett's last Q1 share repurchase - for $214 per B share.) He does know the Warren Buffett help line is starting to ring... My conclusion: It makes perfect sense for those events to trigger a "recession mental model." Therefore, it makes perfect sense for Buffett to halt repurchases at that time, as the option value of cash was potentially worth FAR more than a moderately discounted share of Berkshire Hathaway. In fact, now that we've talked it out, I'd be scratching my head a bit if he HAD kept buying back shares. So, to that I say well played, Buffett.

The consensus seems to be that the value of the float liability is less than dollar for dollar because maybe it never needs to be paid back. If you invert that, what's the value of a cash asset that earns ~0 and may never be put to productive use? Possibly less than dollar for dollar is appropriate there as well. BRK sentiment is just far too negative right now, which is part of the reason I am buying LEAPS. The option prices say it all, such a low amount of volatility priced in. But we have seen BRK move huge amounts in short periods of time in the past and we will see it again. Not to mention the ridiculously low Price/Book ratio. I agree with this entire post, but especially the part about sentiment. I converted a big chunk of my BRK position from shares to LEAPs on Friday. 2:1 ratio of deep ITM calls to shares. If it continues to drop I'll do more. Biggest reasoning is I think risk of permanent impairment at the current price is very low. Man, I hope you guys are right. I invested a small fortune in March thanks to trade triggers that were based on a pre-covid view of the world. If you take the pre-covid look through earnings of $31 billion, and then add a $5 billion upward adjustment for the cash holdings, you get normal earnings of $36 billion, or $15 per B share (close to the Semper Augustus expectation of normal earnings). If you slap an 18 multiple on it you get a fair value of $270 per B share. If the value doubles over the next 7 to 10 years and you pay today's price of $175 then you'll earn your spot in value investor heaven. Hopefully investing turns out to be that easy. But why did one of the greatest investment minds in history... who knows the salient financial details of thousands of businesses, the interworking of global supply chains, the price history of commodities and their impact on the raw material costs of his dozens of investments (including the price of sugar's impact on the profitability of an 8 ounce serving of coke), whose best friend Bill Gates is also a founder of one of the most valuable companies on the planet and who predicted the enormous global economic pain of a pandemic years before it happened, who together with Gates jointly funds a foundation with its finger on the pulse of the highest probability solutions to covid, who has any world leader and several of the world's greatest risk handicappers - like Ajit Jain - on speed dial... stop buying back shares in March? It wasn't because he's ill-informed.

Awesome question. Pretty sure BRK would have had to pay taxes on the S&P 500 dividends, which would have reduced relative outperformance pretty significantly over the long rung. Whereas with an operating business like GEICO BRK could just throw the advertising spend into hyperdrive and gobble up market share (even a caveman could do it).

I agree. Lumping together cash and investments is a gummed up way of evaluating BRK. I only pointed out the high PE of those two items because another poster mentioned the Rational Walk's grouping of cash and investments when making their point that the rest of BRK is cheap. I personally Love investments with multiple earnings streams, and I feel like I run into the argument that "you get the rest for free" All The Time. In fact, I've been plenty guilty of wanting to use that phrase when evaluating things like Altius, or FFH, or FFH Africa/India, or even something like St. Joe back in the day. IMHO (and talking to myself too) it's probably best if that phrase is deleted from the value investor lexicon. 9 times out of 10, if I keep pushing myself to uncover what the true look through earnings potential of each earnings stream is, I come to find that if you're getting "part of an investment for free" in a highly liquid, highly informed, free market system it's because you're paying too much for the other parts. In the case of Berkshire, we know we're paying too much for Apple, etc. In fact, another COBF thread is currently discussing the merits of shorting Apple if you hold BRK. (Maybe worth exploring if you'd normally sell an equity for a 40% premium to fair value.) For me, the biggest curve balls in recent months are how to think about Covid and the deployment of cash. And, one of the biggest surprises of my investing life is that Buffett was fearful when all others were fearful. I'm sure for very good reason, which only time will tell, but that wasn't supposed to be in his DNA (especially with $100+ billion of cash). I'm confident that if Berkshire deploys cash into equities - including share buybacks - it is with an expectation of high single digit or low double digit returns over time (see Buffett's recent commentary on airline investment justification - there was a double digit return expectation). For that reason I don't think you look at the value of cash as worth less than $1 for each $1 of cash held (despite any inflation-induced decline in near-term purchasing power). Theoretically, $100 billion of cash could be deployed tomorrow at a 10% after tax return. Or, more likely, it could be deployed in chunks over several years (while more cash is piling up). So, you can do what Semper Augustus does and pick the "normalized" long term earnings power you're comfortable with for the $100 billion, and tack it on to your "normal" look through earnings estimate. It's probably not conservative enough to say the $100 billion represents $10 billion of after tax earnings potential, but it's probably perfectly safe to estimate $4 to $6 billion. If look through earnings in 2018 and 2019 were around $31 billion, then after whatever covid impairments you choose to make, you could reasonably add $4 to $6 billion to represent the normal long-term earnings potential of the cash. I already own plenty of BRK, so I'm not currently making an upward earnings adjustment for the cash. But, I have in the past, I probably would now if I had seen at least a few billion deployed in March, and who knows, I could change my mind tomorrow.

My hesitation is that it values cash and equities at 27 times peak-cycle cash/equity earnings of approx $14 billion. A 3.7% peak-cycle earnings yield. how does that value cash and equities at 27x p/e? I dont follow ... fine - apply a 50% discount and its still cheap. I'm just saying this is one of several interesting ways to value BRK Assume cash and equities are worth approx $382 billion. In 2019 the cash and equities had look through earnings of around $14 billion. That's a multiple of 27 and change. At year end 2019 the top 10 equity positions consisted of a credit card company, 5 banks, and an airline. Enough said. I think the value of BRK will ultimately correlate with earnings potential. Putting a multiple on earnings on the cash is a bit strange, no? Top equity position by miles at year end was Apple, which is up 21%. Apple Diluted Earnings Per Share 2018: $11.91 Apple Diluted Earnings Per Share 2019: $11.89 Growth: Negative Apple Share Price: $353.63 Multiple of 2019 Earnings: 29.74 FWIW Morningstar puts Apple's fair value at $240 per share. No matter how you swing it $353 feels a bit sporty.

My hesitation is that it values cash and equities at 27 times peak-cycle cash/equity earnings of approx $14 billion. A 3.7% peak-cycle earnings yield. how does that value cash and equities at 27x p/e? I dont follow ... fine - apply a 50% discount and its still cheap. I'm just saying this is one of several interesting ways to value BRK Assume cash and equities are worth approx $382 billion. In 2019 the cash and equities had look through earnings of around $14 billion. That's a multiple of 27 and change. At year end 2019 the top 10 equity positions consisted of a credit card company, 5 banks, and an airline. Enough said. I think the value of BRK will ultimately correlate with earnings potential.

So, above we have the breakdown of 2019 look through earnings. Now let's take a look at 2018 look through earnings laid out in the same form. But, first try to guess the look through earnings growth rate for the final year of the longest economic expansion in history. Was it 8.5%? 6%? Less than 6%? Drum roll please... Based on 2018 Earnings (In Billions USD except per share info) Non-Insurance Business Earnings: $16.8 Less CapEx Adjustment (Maintenance CapEx less Depreciation): $3 Plus Acquisition-related Amortization: $1.4 TOTAL ADJUSTED NON-INSURANCE BUSINESS EARNINGS: $15.2 ————————————————————————————————— Equities Dividends: $3.8 Estimated Equity Retained Earnings: $8 TOTAL EQUITIES LOOK THROUGH EARNINGS: $11.8 ————————————————————————————————— TOTAL SHARED HOLDINGS EARNINGS (Kraft-Heinz, Berkadia, Flying J): $1.3 EARNINGS FROM TREASURIES & CASH EQUIVS (Assume 1% yield. #lazy): $1.32 INSURANCE COMPANIES (After tax operating profit - I think Buffett ignores this): $1.58 TOTAL LOOK THROUGH EARNINGS: $31 BILLION Average Equivalent B Shares Outstanding (3/31/2020): 2,434,333,367 LOOK THROUGH EARNINGS PER B SHARE: $12.82 So, what was the year over year look through earnings growth rate? A spectacular, breathtaking, hair raising, jaw dropping, 1.2%! Are we going to set a new look through earnings record this year? Spoiler alert... nope. Next year? Maaaaybe, IF we get a vaccine AND if BRK converts $50 to $80 billion of cash/treasuries into something that actually earns money. (WARNING: When I did this analysis after the annual report was published I did it quickly with zero expectation of voluntarily sharing it with hundreds or thousands of people. It's probably flawed (I'd love to know where - preferably without insult). And, don't forget you get what you pay for.)

My hesitation is that it values cash and equities at 27 times peak-cycle cash/equity earnings of approx $14 billion. A 3.7% peak-cycle earnings yield.

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!