1.2x P/BV entry point

[Guest longinvestor]

longinvestor,

 

If you start with year end 2014 and use book value for measuring performance to say either year end 2019 or 2024, I am on.

 

Vinod

 

After 22 pages of discussing the fact that BV is / has become a poor proxy of BRK's IV, why would I do that? Because of the nature of BRK today...they keep adding value to the coffers regularly which in turn contributes to earnings which is increasingly retained and adds to IV  but BV never gets revised upwards.  The whole reason why BRK is misunderstood today. Why WEB has started measuring stock price in the table for the very first time. It is clearly explained on the very first page of the Annual report.

 

My bet is self-explanatory. It is based on stock price which over time converges with IV. I want to go back to the year 2010 for a very specific reason. There is a whole new BRK developing since then, the world is late to catch on.

 

"Berkshire has not gotten that worse".  That is my bet, and it is in stock price growth.

 

I disagree with your interpretation of Buffett's comments in the annual report.

 

The context for that discussion is Berkshire's failure to meet his 5 year test. That Berkshire as measured by book value would beat S&P 500 total return over a 5 year period as defense for retaining all the earnings.

 

He was saying book value as in "IV being roughly equal to book value" was a good measure early on but that now IV is much higher than book value.

 

He never said that IV is unrelated to book value. In fact, he lays out when he thinks Berkshire is attractive and when it is overvalued entirely as a multiple of book value later on in the annual report.

 

So all he is saying is we need to use a multiple of book value now and not just 1x book value.

 

I do not disagree that IV and MV would converge over the long term. But Berkshire is undervalued now and over 5 or 10 year period changes in valuation would add or detract to returns just due to end points.

 

Growth in IV I believe would be much closer to growth in IV. I do believe that IV is growing at a slightly faster rate than BV but that difference is less than 1% annually. So book value growth remains a convienent and reasonable method to estimate growth in IV.

 

As I said before, I root for you to be right for my portfolio sake.

 

Vinod

 

Neither do I agree with your interpretation, that somehow the 2009-2014 period's BV under performance relative to the S&P OR that he needed to justify retaining earnings were the reasons for the addition of the MV column in the performance table. Those are part of the urban myth that BRK has gotten too big, WEB too old etc. The stated reasons are noted in red below. I tend to take WEB's words just as he says it.

 

With regards to the x times BV buying suggestions, below is the text of the letter again. WEB has not locked in the 1.2x  buy and 2.0x  don't buy signal for all time to come. The caveats noted in red below leave room for revisions later. There are several analyses suggesting that at 1.2BV, it is a 50 cent IV dollar. I did not remotely suggest that IV and BV stopped having a relationship. Let me offer that as IV diverges away from BV enough that 1.2xBV is, say, a 25 cent dollar, I'd stop using the term BV multiple anymore. It will be an order of magnitude difference. Like IV=twice BV, thrice BV....By then, the wisdom of using MV would be plainly obvious to everyone. And BV would be relegated to the silly syllabus. ? is not IF but WHEN.

 

With regards to BRK being undervalued, of course that is included in my bet involving MV. I've no idea as to what the MV growth will end up in 2019 but I'm reasonably sure that I'll walk away with a big win, especially with the opposite bet maxed out at 12%. 

 

 

 

During our tenure, we have consistently compared the yearly performance of the S&P 500 to the change in

Berkshire’s per-share book value. We’ve done that because book value has been a crude, but useful, tracking device

for the number that really counts: intrinsic business value.

In our early decades, the relationship between book value and intrinsic value was much closer than it is

now. That was true because Berkshire’s assets were then largely securities whose values were continuously restated

to reflect their current market prices. In Wall Street parlance, most of the assets involved in the calculation of book

value were “marked to market.”

Today, our emphasis has shifted in a major way to owning and operating large businesses. Many of these

are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how

much the value of these companies has increased. Consequently, the gap between Berkshire’s intrinsic value and its

book value has materially widened.

With that in mind, we have added a new set of data – the historical record of Berkshire’s stock price – to

the performance table on the facing page. Market prices, let me stress, have their limitations in the short term.

Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time,

however, stock prices and intrinsic value almost invariably converge. Charlie Munger, Berkshire Vice Chairman

and my partner, and I believe that has been true at Berkshire: In our view, the increase in Berkshire’s per-share

intrinsic value over the past 50 years is roughly equal to the 1,826,163% gain in market price of the company’s

shares.

 

 

: If an investor’s entry point into

Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares

have occasionally reached – it may well be many years before the investor can realize a profit. In other

words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire

is not exempt from this truth.

Purchases of Berkshire that investors make at a price modestly above the level at which the company

would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s

directors will only authorize repurchases at a price they believe to be well below intrinsic value. (

[vinod1]

Yes - I think energy is generally tied to book value somewhere in the 1.6 - 1.9 times book. Insurance is another that is typically tied to a multiple of book - Gieco is probably an exception here.

 

There are several others that aren't tied as much - examples:

 

Lubrizol

Van Tuyl

Iskar

Marmon(?)

Fruit of the Loom

Brooks shoes

Sees candies

Retail(?)

PCP when it gets done

 

So I think the assertion of IV deviating to the higher side of book over time is correct.

BNSF was of the best investments that Buffett made in recent years and it was an opportunity that came about from the 2008 bear market. I do not think you can extrapolate such results onto all other investments. Energy is a good example.

Vinod

 

I agree. Where we differ is in magnitude. I think the growth in IV/BV is somewhat slightly less than 1% per year while you think it is much higher than that.

 

Vinod

[vinod1]

longinvestor,

 

As I mentioned above to shalab I do think IV/BV multiple is increasing each year. Buffett is pretty much also confirming that. So I think the buybacks would also be done at higher levels in future.

 

But at the current time, he also outlined very clearly what he thinks are reasonable prices and what are on expensive side.

 

Vinod

[Guest longinvestor]

longinvestor,

 

As I mentioned above to shalab I do think IV/BV multiple is increasing each year. Buffett is pretty much also confirming that. So I think the buybacks would also be done at higher levels in future.

 

But at the current time, he also outlined very clearly what he thinks are reasonable prices and what are on expensive side.

 

Vinod

Vinod,

Peace. We're all on the same wavelength and have the same $$ goal. May BRK blow through all urban myths, may betting against them fail utterly.

 

Now just wait for actuals. Screw all projections

[Guest longinvestor]

While we're at it, Mr. Market getting BRK so wrong is the mother of all value investing opportunities! Just go to the most frequented names in the investments page on CoBF. SHLD, ZINC. BBRY...makes me scratch the head. But it always seems to work that way, the stuff in plain sight doesn't get seen. Cigar butts will always be in vogue.

[scorpioncapital]

I was just watching an old interview with Buffett and Becky where he talks about how he asked Steve Jobs if his company has more cash than he can use and if he thinks Apple was undervalued and that he never did do a buyback. Then Becky asked him why he doesn't do a buyback for Berkshire. The answer was a highly qualified IF there is more cash than HE can use. In other words, it all hinges on ideas to invest. Look at IBM which he praises. They bought back 100 billion of shares over a decade because even at 10% return dividend included there was no opportunity they judged possible to earn 15%+ returns. To some degree, no buybacks are confidence in his belief in his ability to earn a market beating return. If he honestly assesses this is not possible, then 1.2x = hurdle rate for belief in his ability to reinvest at market beating returns. Reverse engineer that number and you know what he's thinking.

 

During the greatest crisis of our time, Berkshire BV dropped only 10%. The 1.2x limit was not in effect and Berkshire was below this and many deals were made. Arguably, Berkshire IV was still way above BV even in 2008. A few years later the buyback 1.2x level went into effect. Why would he do this? I can think of 3 reasons:

 

One - setting up an automated buyback threshold that would transcend his retirement which he feels is getting closer

 

Two - after the 2008 crisis, he feels that 1.2x BV is extremely cheap relative to his ability to earn a market beating return and in this environment and for years to come, this is a price level that should not naturally occur, so he will buy back aggressively.

 

Three - at this level it is a normal form of diversification where Berkshire stock would have equal footing with any other deal, but are not mutually exclusive.

 

2 and 3 are opposing reasons but given his attitudes to buyback I'd be more inclined to go with 2 as the default preference until he retires is to make deals.

 

[Guest longinvestor]

I was just watching an old interview with Buffett and Becky where he talks about how he asked Steve Jobs if his company has more cash than he can use and if he thinks Apple was undervalued and that he never did do a buyback. Then Becky asked him why he doesn't do a buyback for Berkshire. The answer was a highly qualified IF there is more cash than HE can use. In other words, it all hinges on ideas to invest. Look at IBM which he praises. They bought back 100 billion of shares over a decade because even at 10% return dividend included there was no opportunity they judged possible to earn 15%+ returns. To some degree, no buybacks are confidence in his belief in his ability to earn a market beating return. If he honestly assesses this is not possible, then 1.2x = hurdle rate for belief in his ability to reinvest at market beating returns. Reverse engineer that number and you know what he's thinking.

 

During the greatest crisis of our time, Berkshire BV dropped only 10%. The 1.2x limit was not in effect and Berkshire was below this and many deals were made. Arguably, Berkshire IV was still way above BV even in 2008. A few years later the buyback 1.2x level went into effect. Why would he do this? I can think of 3 reasons:

 

One - setting up an automated buyback threshold that would transcend his retirement which he feels is getting closer

 

Two - after the 2008 crisis, he feels that 1.2x BV is extremely cheap relative to his ability to earn a market beating return and in this environment and for years to come, this is a price level that should not naturally occur, so he will buy back aggressively.

 

Three - at this level it is a normal form of diversification where Berkshire stock would have equal footing with any other deal, but are not mutually exclusive.

 

2 and 3 are opposing reasons but given his attitudes to buyback I'd be more inclined to go with 2 as the default preference until he retires is to make deals.

+1+2+3

In a tacit sense, returning capital is a giant white flag he probably loathes.

 

IMO, he has been transitioning out of his CEO role for a while. This is best captured by the now repeated capital allocation priorities, whereby he is increasingly out of the driver's seat.

 

.(1)..constantly improving the basic earning power of our many subsidiaries;(2)furtherincreasingtheirearnings throughbolt-onacquisitions;(3)benefitingfromthegrowthofourinvestees;(4)repurchasingBerkshireshares whentheyareavailableatameaningfuldiscountfromintrinsicvalue;and(5)makinganoccasionallarge acquisition.Wewillalsotrytomaximizeresultsfor you byrarely,ifever,issuingBerkshireshares.

[shalab]

Vinod - I am a fan of your posts and analysis. I know you have studied BRK in depth, so keen to know the reasoning behind the gap not being more than 1%. The long term difference and the shorter term difference between the two are very interesting.

 

 

For fun, I ran the numbers on book value growth and market value growth. The numbers are interesting:

 

Case 1:

For the full 50 year period. The market value growth has exceeded book value growth by 1.79% per annum.

 

Case 2:

 

First decade of Berkshire:

 

Book value growth outpaced market value growth by 2.1% per annum.

 

Case 3:

Second decade at Berkshire. Market value triumphed book value by a whopping 8.4% per annum.

 

Case 4:

Market value beat book value by 5.8% per annum.

 

Case 5:

 

Book value beat market value by 2.6% per annum in fouth decade.

 

Case 6:

 

Book value beat market value by a slight 0.2% per annum in the fifth decade.

 

Case 7:

 

In the last two decades, book value growth has beat market value growth by 1.36% per year. An anomaly is the last five years where market value has beaten book value by 5.7% per year.

 

Case 8:

The next decade - looking at the closing prices of Berkshire shares and correlation to book value, the future looks definitely positive for the berkshire investor. If the widening of the gap from book value to market value is recognized by the market, things should get even better.

 

Yes - I think energy is generally tied to book value somewhere in the 1.6 - 1.9 times book. Insurance is another that is typically tied to a multiple of book - Gieco is probably an exception here.

 

There are several others that aren't tied as much - examples:

 

Lubrizol

Van Tuyl

Iskar

Marmon(?)

Fruit of the Loom

Brooks shoes

Sees candies

Retail(?)

PCP when it gets done

 

So I think the assertion of IV deviating to the higher side of book over time is correct.

BNSF was of the best investments that Buffett made in recent years and it was an opportunity that came about from the 2008 bear market. I do not think you can extrapolate such results onto all other investments. Energy is a good example.

Vinod

 

I agree. Where we differ is in magnitude. I think the growth in IV/BV is somewhat slightly less than 1% per year while you think it is much higher than that.

 

Vinod

[scorpioncapital]

In 1999, Berkshire stock halved to 45,000 per share and the stock was at the same level as in 1984 - 15 years earlier. It had gone back for a time to a price level that wiped out all outperformance to S&P and also absolute performance.

In 2008, it halved again, but was still double 1999 price and 1984 price.

Another 15 years later to today, it has returned 9% per year from that 'low'.

Imagine if you had bought in 1984 or 2007. Even from the low you are getting an ok 9% per year.

And this is Berkshire - a supposed fortress! Markets are really volatile. Margin will kill you, you can't even add to positions. And valuation can be quite unforgiving if you get it wrong - but not as disastrous as margin if you hold for retirement.

 

 

 

[vinod1]

Vinod - I am a fan of your posts and analysis. I know you have studied BRK in depth, so keen to know the reasoning behind the gap not being more than 1%. The long term difference and the shorter term difference between the two are very interesting.

 

 

For fun, I ran the numbers on book value growth and market value growth. The numbers are interesting:

 

Case 1:

For the full 50 year period. The market value growth has exceeded book value growth by 1.79% per annum.

 

Case 2:

 

First decade of Berkshire:

 

Book value growth outpaced market value growth by 2.1% per annum.

 

Case 3:

Second decade at Berkshire. Market value triumphed book value by a whopping 8.4% per annum.

 

Case 4:

Market value beat book value by 5.8% per annum.

 

Case 5:

 

Book value beat market value by 2.6% per annum in fouth decade.

 

Case 6:

 

Book value beat market value by a slight 0.2% per annum in the fifth decade.

 

Case 7:

 

In the last two decades, book value growth has beat market value growth by 1.36% per year. An anomaly is the last five years where market value has beaten book value by 5.7% per year.

 

Case 8:

The next decade - looking at the closing prices of Berkshire shares and correlation to book value, the future looks definitely positive for the berkshire investor. If the widening of the gap from book value to market value is recognized by the market, things should get even better.

 

Yes - I think energy is generally tied to book value somewhere in the 1.6 - 1.9 times book. Insurance is another that is typically tied to a multiple of book - Gieco is probably an exception here.

 

There are several others that aren't tied as much - examples:

 

Lubrizol

Van Tuyl

Iskar

Marmon(?)

Fruit of the Loom

Brooks shoes

Sees candies

Retail(?)

PCP when it gets done

 

So I think the assertion of IV deviating to the higher side of book over time is correct.

BNSF was of the best investments that Buffett made in recent years and it was an opportunity that came about from the 2008 bear market. I do not think you can extrapolate such results onto all other investments. Energy is a good example.

Vinod

 

I agree. Where we differ is in magnitude. I think the growth in IV/BV is somewhat slightly less than 1% per year while you think it is much higher than that.

 

Vinod

 

shalab,

 

Thanks for the kind words. You seem to have studied this quite in depth as well.

 

I might be giving a false impression about the precision of my estimates. I did two snapshot valuations one for year end 2009 and one for year end 2014, trying to keep everything the same (which is difficult in the best of circumstances). My central estimate of IV came out to be 1.55 BV in 2009 and 1.6 BV in 2014.

 

So the IV growth seems to be outpacing BV growth by about 0.6% annually. I do not put too much faith in this number myself, but is done more to get a very rough idea of the rate of the increase. I would not be too surprised if this growth is say 1% but much more than that seems unlikely.

 

I agree Berkshire is very attractive at the current price. I keep wondering why it is not above $150 already.

 

Vinod

[Munger_Disciple]

I agree with Vinod. My own analysis of IV/BV ratio over the past 10 years shows that the ratio is remarkably steady over time. Here is my attempt at an explanation for this phenomenon. At a high level, Berkshire owns two types of businesses: (1) ones that can only grow earnings with additional capital, for example BNSF and utilities, (2) those that can grow earnings without much capital being added, ex: KraftHeinz, See's, Businesswire, etc. The first type of business commands a constant IV/BV ratio over time, say 1.6-1.8 range, given the rates of return allowed in these businesses. The second type commands increasing IV/BV ratio over time (consider See's example). However, increasingly larger and larger portion of Berkshire BV is being allocated to the first type of business to a point where these dominate at the present time and will continue to dominate over the next 10 years or more. Also any new acquisitions mostly command a IV/BV ratio closer to 1 at the time of acquisition given that Berkshire typically pays a large premium.

 

Due to all these factors, I believe that IV/BV will at best grow at a very low rate (under 1% per year) over time. It would not surprise me if IV/BV does not grow at all over the next 5-10 years.

[adesigar]

 

I agree Berkshire is very attractive at the current price. I keep wondering why it is not above $150 already.

 

Vinod

 

Simple answer is the people investing in Berkshire. Shareholders of Berkshire are people who believe in Warren Buffett and value investing and so they want to invest at a discount. They also want to buy Berkshire at a discount. Would any of you pay full Intrinsic Value for Berkshire? I know I wouldn't. I bought Berkshire when I thought it was at a large discount. As long as the investors it attracts are Buffett style value investors Berkshire Hathaway will almost always trade at a discount to intrinsic value.

[benhacker]

Scorpion,

 

In 1999, Berkshire stock halved to 45,000 per share and the stock was at the same level as in 1984 - 15 years earlier. It had gone back for a time to a price level that wiped out all outperformance to S&P and also absolute performance.

In 2008, it halved again, but was still double 1999 price and 1984 price.

Another 15 years later to today, it has returned 9% per year from that 'low'.

Imagine if you had bought in 1984 or 2007. Even from the low you are getting an ok 9% per year.

And this is Berkshire - a supposed fortress! Markets are really volatile. Margin will kill you, you can't even add to positions. And valuation can be quite unforgiving if you get it wrong - but not as disastrous as margin if you hold for retirement.

 

In 1984, BRK was around $2,000 / share. $45k was first hit in late 1997... so being at 1999 was 2-3 years of draw down, not 15.

[jay21]

I agree with Vinod. My own analysis of IV/BV ratio over the past 10 years shows that the ratio is remarkably steady over time. Here is my attempt at an explanation for this phenomenon. At a high level, Berkshire owns two types of businesses: (1) ones that can only grow earnings with additional capital, for example BNSF and utilities, (2) those that can grow earnings without much capital being added, ex: KraftHeinz, See's, Businesswire, etc. The first type of business commands a constant IV/BV ratio over time, say 1.6-1.8 range, given the rates of return allowed in these businesses. The second type commands increasing IV/BV ratio over time (consider See's example). However, increasingly larger and larger portion of Berkshire BV is being allocated to the first type of business to a point where these dominate at the present time and will continue to dominate over the next 10 years or more. Also any new acquisitions mostly command a IV/BV ratio closer to 1 at the time of acquisition given that Berkshire typically pays a large premium.

 

Due to all these factors, I believe that IV/BV will at best grow at a very low rate (under 1% per year) over time. It would not surprise me if IV/BV does not grow at all over the next 5-10 years.

 

It depends on what happens. If BRK only buys shares with retain earnings, the IV/BV will start to greatly increase. Obviously this is a low probability.

 

It also depends on how acquisitive BRK is. Bigger and more recent acquisitions make IV/BV ratio converge to 1 as buys will be at ~IV.

 

It's hard to predict. I think the best way is to still go business by business starting with the biggest and come up with a value for each.

[rb]

While we're at it, Mr. Market getting BRK so wrong is the mother of all value investing opportunities! Just go to the most frequented names in the investments page on CoBF. SHLD, ZINC. BBRY...makes me scratch the head. But it always seems to work that way, the stuff in plain sight doesn't get seen. Cigar butts will always be in vogue.

I wonder the same thing. Why bother with crappy complicated companies when the market is offering such a nice pitch with BRK. I guess some people are just masochistic.

[Munger_Disciple]

Buybacks increase the IV/BV ratio and as jay21 points out the probability of a large scale buyback is very small. Moreover Berkshire will only buyback stock if it is the most attractive option available (compared to internally reinvesting earnings/buying other businesses). If buyback is the best option available to Berkshire over an extended period of time (5 or more years), it will be a signal that the days of internal growth for Berkshire are over (not great news for shareholders).

 

 

 

[Munger_Disciple]

I am very optimistic about the prospects for Berkshire going forward. I think it is great that they have the ability (thru' BNSF and Energy) to automatically reinvest earnings at a decent, almost guaranteed rate of return.

[Guest longinvestor]

I am very optimistic about the prospects for Berkshire going forward. I think it is great that they have the ability (thru' BNSF and Energy) to automatically reinvest earnings at a decent, almost guaranteed rate of return.

+1

The sun needs to keep shining, the wind blowing and Americans keep keep using energy. guzzling gas, consuming cheap goods from Asia. They'll do alright.

[scorpioncapital]

Scorpion,

 

In 1999, Berkshire stock halved to 45,000 per share and the stock was at the same level as in 1984 - 15 years earlier. It had gone back for a time to a price level that wiped out all outperformance to S&P and also absolute performance.

In 2008, it halved again, but was still double 1999 price and 1984 price.

Another 15 years later to today, it has returned 9% per year from that 'low'.

Imagine if you had bought in 1984 or 2007. Even from the low you are getting an ok 9% per year.

And this is Berkshire - a supposed fortress! Markets are really volatile. Margin will kill you, you can't even add to positions. And valuation can be quite unforgiving if you get it wrong - but not as disastrous as margin if you hold for retirement.

 

In 1984, BRK was around $2,000 / share. $45k was first hit in late 1997... so being at 1999 was 2-3 years of draw down, not 15.

 

Wow thanks. Can you believe I read this in a published hardcover book about Warren Buffett? Perhaps I shouldn't list the title :)

[rb]

Wow thanks. Can you believe I read this in a published hardcover book about Warren Buffett? Perhaps I shouldn't list the title :)

 

Perhaps you should, so people here can avoid wasting time reading anything by the author.

[scorpioncapital]

Wow thanks. Can you believe I read this in a published hardcover book about Warren Buffett? Perhaps I shouldn't list the title :)

 

Perhaps you should, so people here can avoid wasting time reading anything by the author.

 

Perhaps I am misinterpreting the quote or likely it's talking about two separate events S&P outperformance vs absolute share price?

 

"Between June 1998 and March 2000, Berkshire Hathaway's stock price halved in value. In the process, it unwound all of its outperformance versus the S&P500 since 1984 and did much to dim the aura that had come to surround Buffett. He was forced to make a confession to his shareholders: "We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well...My "one subject" is capital allocation, and my grade for 1999 wmost assuredly is a D."" - The Real Warren Buffett.

[rb]

Wow thanks. Can you believe I read this in a published hardcover book about Warren Buffett? Perhaps I shouldn't list the title :)

 

Perhaps you should, so people here can avoid wasting time reading anything by the author.

 

Perhaps I am misinterpreting the quote or likely it's talking about two separate events S&P outperformance vs absolute share price?

 

"Between June 1998 and March 2000, Berkshire Hathaway's stock price halved in value. In the process, it unwound all of its outperformance versus the S&P500 since 1984 and did much to dim the aura that had come to surround Buffett. He was forced to make a confession to his shareholders: "We had the worst absolute performance of my tenure and, compared to the S&P, the worst relative performance as well...My "one subject" is capital allocation, and my grade for 1999 wmost assuredly is a D."" - The Real Warren Buffett.

You're misinterpreting the quote. It says that after the decline it matched the S&P for the 84-00 period. The S&P went up a lot between 84 and 2000. 800% plus dividends or 14% plus dividends per year. If I get that performance over 16 years :) I won't really care if I outperformed or underperformed. But that's just me.

[vinod1]

 

I agree Berkshire is very attractive at the current price. I keep wondering why it is not above $150 already.

 

Vinod

 

Simple answer is the people investing in Berkshire. Shareholders of Berkshire are people who believe in Warren Buffett and value investing and so they want to invest at a discount. They also want to buy Berkshire at a discount. Would any of you pay full Intrinsic Value for Berkshire? I know I wouldn't. I bought Berkshire when I thought it was at a large discount. As long as the investors it attracts are Buffett style value investors Berkshire Hathaway will almost always trade at a discount to intrinsic value.

 

I am not so sure about that. As recently as 2007, BRK is traded at nearly 2x BV. With S&P 500 then at 1500, it was a tough call for someone choosing between Index and BRK.

 

Now with S&P around 2000, BRK at 1.3x BV was very attractive compared to S&P 500. It is at least to me seems to be an easy call.

 

For close friends for whom I help out with their portfolios, I have had them realllocate 10 to 15% of portfolios from market index to BRK. I was agonizing over that decision in 2007.

 

Presumably there are just as many investors interested in BRK now as in 2007. Hence, my skepticism about your explanation.

 

Vinod

[Guest longinvestor]

 

I agree Berkshire is very attractive at the current price. I keep wondering why it is not above $150 already.

 

Vinod

 

Simple answer is the people investing in Berkshire. Shareholders of Berkshire are people who believe in Warren Buffett and value investing and so they want to invest at a discount. They also want to buy Berkshire at a discount. Would any of you pay full Intrinsic Value for Berkshire? I know I wouldn't. I bought Berkshire when I thought it was at a large discount. As long as the investors it attracts are Buffett style value investors Berkshire Hathaway will almost always trade at a discount to intrinsic value.

 

I am not so sure about that. As recently as 2007, BRK is traded at nearly 2x BV. With S&P 500 then at 1500, it was a tough call for someone choosing between Index and BRK.

 

Now with S&P around 2000, BRK at 1.3x BV was very attractive compared to S&P 500. It is at least to me seems to be an easy call.

 

For close friends for whom I help out with their portfolios, I have had them realllocate 10 to 15% of portfolios from market index to BRK. I was agonizing over that decision in 2007.

 

Presumably there are just as many investors interested in BRK now as in 2007. Hence, my skepticism about your explanation.

 

Vinod

And there are those BRK investors from a long while back who "bought at a different price" for whom this is all noise. The only thing likely in their mind is why it's not all in BRK? That is, if they're not there already.

[jay21]

Why are you looking back to 2010? (A low point? - helps your case?)

 

Book value per share has grown by around 10% for the 15 years from 2000 to 2014. (Probably peak to peak in the stock market and probably similar highs for the business cycle - not that the Fed lets us have any of those anymore but that's a different issue). So now you expect that to increase by 50% to 15% compounded over say the next 10 years? On what basis?

 

Thought about it a little more and 15% is too high because of their cash drag. I think all of their assets might do 15% but if they have 10% in cash then the return is 10%*0% + 90%*15% = 13.5%

 

12% to 13% is probably a reasonable high point with a low probability they do above this but they would need a healthy amount of financial engineering/leverage to do it either from acquiring with debt or levered PE investments or warrants.