1.2x P/BV entry point

[Guest longinvestor]

Picasso, it's hard for me to understand why Berkshire's businesses deserve to trade 5 multiple points lower than the S&P (you mentioned 13X earnings). If you weight the multiple according to their composition (just using last 6 months), I get to 15.8X (2.2 lower than the S&P) because the railroads have experienced a big re-rating downwards (coal volumes decline, oil, general economy, etc.).

 

"Deserve" is a wrong word. No, it probably does not "deserve". BRK is somewhat cheap while S&P is quite expensive at current multiples. So really the expectation is that S&P might rerate lower rather that BRK would rerate higher. Although some mix is possible.

 

In other words, I'm interested to buy BRK (or similar great/good business) at 13X, but I am not that interested to buy S&P at 18X.

 

well if you want to buy berkshire at 12X and with the investments for 30% discount to current price, and not pay any premium to book for the insurance (ie count the float fully), you'll have to wait for another 18% down. I'm personally not so patient. I think you are articulating that the S&P is absolutely expensive and that Berkshire is relatively cheap to the S&P.

 

I'm inclined to agree with that but something that has 18% downside to a pretty bearish scenario, to me, is absolutely cheap, low risk and compelling.

 

One funny thing is that Picasso mentioned he owns the stock. When I was the guy arguing for less bullish valuations, I also owned the stock...we need more negative thoughts from non-owners!!!

Bear (recession*) : 30% discount to investments ($112B) + Dry Powder ($15B) + 12X Post tax Operating Earnings ($171B) + Insurance Book ($-36B) = $262B  (18% downside, 110% of current book)

 

Yes, we do. Buffett called up Doug Kass to ask questions as a short seller. All Doug could come up with was an  insinuation of nepotism (Howard B as non-Exec chairman); Then he hit them up for $ to fund a short book that he would run. He ran out his clock. Wish someone would ask intelligent questions on the short side.

[Mephistopheles]

Yes, we do. Buffett called up Doug Kass to ask questions as a short seller. All Doug could come up with was an  insinuation of nepotism (Howard B as non-Exec chairman); Then he hit them up for $ to fund a short book that he would run. He ran out his clock. Wish someone would ask intelligent questions on the short side.

 

Don't forget the brilliant question that required out of the box thinking: "Doesn't the fact that you came up with the BAC deal in the bathtub mean that you aren't as informed on your investments as you used to be?"

 

....

 

(Answer: "I've read the 10-k of BAC for the last 50 years")

[thepupil]

i could see a decent bear thesis if it focused on

 

1) an over-earning BNSF (railroads have had a decade plus of increasing utilization and margins)...is there a secular decline in "stuff" that needs to be moved (ie peak car, peak coal, peak crude by rail, etc.)

2) low expected returns at BE (increased regulation, disruption of utility because of at-home solar and the like)

3) insurance mean reversion/skeletons

 

the problem is those are giant big picture worries and really hard to analyze...i know i'm not equipped to do so. But i could see someone making a case along those lines.

[rb]

For me the value of BRK still lies in WB doing great things occasionally and the returns from good businesses/stocks being leveraged by the float.

 

I think this is key.  Just look at the past five years of savvy WEB moves:

 

Getting BAC to give away massive amounts of shareholder returns to Berkshire.  Partnering with 3G to take Heinz private.  Partnering with 3G to fund QSR with very generous terms.  Partnering again with 3G to do a leveraged recap of Kraft.  Swapping assets tax-free with PG and PSX.  And there have been others.  Some of this is probably offset by weakness in large public positions like IBM.

 

Part of me is worried by the current quality of the large value drivers.  Berkshire was built on several decades of growth in GDP per capita where there were very large secular tailwinds behind Coke, Sees Candy, Kraft, Gillette, Heinz, etc.  But now you have a pretty sluggish outlook where some of those businesses true economic costs don't show up on the net income statement.  Or there is massive disruption coming up in some of those businesses.  Coke has spent years attaching their brand to happy moments, but it puts a very large financial burden on other parts of the economy with health care costs.  It just seems to me that it will be a big fight for the next ten or twenty years for those guys.  Maybe someone else is more confident that twenty years from now, Coke will be "guzzled down the throats" of many more consumers.  A big part of Berkshire is built around these not-so-great for taxpayers type businesses.

 

WEB has repeatedly stated that many of these businesses are permanently housed at Berkshire almost no matter what.  I don't think the quality of some of these businesses are as perpetually attractive versus twenty years ago.  So comparing multiples on Berkshire to the past is sort of irrelevant for me. 

 

If WEB passes away in the near future, isn't it realistic to think that you are going to miss out on a lot of the important deals that have occurred due to his presence?  Won't that affect the earnings trajectory?  I don't know what the stock price will be but I bet it's going to get close to 1.2-1.3x book or perhaps lower without WEB.

 

After all, WEB is simply one of a kind.  So far no one is even close to building up a 50-60 year track record like he has.  When he's gone, I need to adjust to the reality of a new Berkshire.  I don't know what kind of Berkshire that is yet, but I probably want to pay closer to book value to compensate for that new uncertainty. 

 

At the current size Berkshire is now very similar to something like Apple.  Float isn't going to compound like it has in the past.  You may have great performance in the future, but the businesses are at a scale that makes it hard to pay beyond 1.3x book or 13x earnings.  It's not even law of large numbers, it's dealing with a cyclical business which Berkshire is today more than ever before.

 

You've also had a very long run of positive insurance combined ratio results.  You always have a point where they have a few bad years.  I'd argue we're much closer now and while they will likely become stronger as a result, you can expect Berkshire stock to become less valuable because we don't know how long that may take.

 

In the end I think some investors are overly enthusiastic about the share price at 1.3-1.4x book.  It's probably priced for high single digit returns on the most probable outcome.  Or maybe a bit more.  As much as I would like to see it, I don't see the easy 15% returns.  And I own a fair amount of the stock.

 

I guess I'm just stating the general market worries about Berkshire, but I happen to think those worries justify a more moderate valuation.  Which is fine because you won't have to worry about selling your stock anytime soon.  It just seems like almost everyone else is happy to disregard the downside of buying in when the master capital allocator is near the end of a storied career and several years of positive insurance tailwind. 

 

The last thing I will note is the behavioral finance behind Berkshire.  We're all so used to Berkshire with WEB that it's hard to give it a proper valuation since it's so easy to assume his presence or Berkshire's performance will always be there.  The thought process of investors when he is gone will change how people value the stock and they will probably want to see results before paying a fully priced valuation. 

 

But who knows, it's time to get back to finding other undervalued securities....

I'm sorry but I don't see why you have a point here. Maybe you could back up your statements with some numbers?

 

Yes WB has been a god when it comes to value creation. Yes in the future he will be no longer with us. And maybe his successor won't be as good at finding/doing deals. Will he or she be a total idiot though? Also keep in mind the subs aren't run by WB they have their own managements. Will they all of a sudden turn stupid?

 

What you're basically saying is that once WB dies everyone at Berkshire will get busy destroying value.

 

You don't need Warren doing deals for BRK to be worth 1.5x-1.6x book so why should it be worth 1.2 book?

 

Now let's say that Mr. Market gets angry at BRK (cause Warren isn't there anymore and life is boring now for him) and knocks it down to 1.2 book. Am I the only one that pictures a Teledyne like situation where Berkshire buys back a ton of stock while still generating organic growth? Personally I wouldn't be unhappy with that.

 

I see here a lot of multiples being thrown around like the BRK will be worth 1.2 book or the op cos are worth 12x post tax. What I don't see is the math how one gets to those numbers. Maybe you guys can share your numbers so we can all see how you get to those multiples.

 

[Jurgis]

i could see a decent bear thesis if it focused on

 

1) an over-earning BNSF (railroads have had a decade plus of increasing utilization and margins)...is there a secular decline in "stuff" that needs to be moved (ie peak car, peak coal, peak crude by rail, etc.)

2) low expected returns at BE (increased regulation, disruption of utility because of at-home solar and the like)

3) insurance mean reversion/skeletons

 

the problem is those are giant big picture worries and really hard to analyze...i know i'm not equipped to do so. But i could see someone making a case along those lines.

 

Your points are good.

You can add:

4) Investments underperforming (KO, IBM, AXP biggest worries, WFC - maybe only if it blows up due to some internal issues)

5) Buffett dies, BRK value drops (internal infighting for money, nobody strongarming subs - make no mistake Warren barges in if sub underperforms horribly, no more sweetheart deals, key personnel leaving or retiring, etc.)

 

Obviously you need a mix of 1-5 to have a bear thesis. Just one of these points is not enough for bear.

 

@rb: no, I am not going to provide numbers for these. ;)

[scorpioncapital]

Regarding Warren's retirement, I suspect it would be more of a notice that within 2 or 5 years he will step back his involvement so it won't be a sudden shock event, more a graceful and well-timed exit - kind of like the Fed rate hike! Some are underestimating the value of quality assets with relatively predictable futures. If Warren decided it was really smart to own poor companies at a cheap price or high tech companies whose future was even less certain, the value of Berkshire wouldn't budge above 1x book, maybe lower. But this is not the case. 1.2x book really does seem a good deal especially as time passes and he keeps making deals while he can.

 

 

 

 

[Guest longinvestor]

Regarding Warren's retirement, I suspect it would be more of a notice that within 2 or 5 years he will step back his involvement so it won't be a sudden shock event, more a graceful and well-timed exit - kind of like the Fed rate hike! Some are underestimating the value of quality assets with relatively predictable futures. If Warren decided it was really smart to own poor companies at a cheap price or high tech companies whose future was even less certain, the value of Berkshire wouldn't budge above 1x book, maybe lower. But this is not the case. 1.2x book really does seem a good deal especially as time passes and he keeps making deals while he can.

 

IMO, that process started some years back; BNI, BHE, T&T are all part of him stepping back. Now, we are even seeing elephant deals consummated by others. One of these days, plan to do a pareto chart of Capital by allocator since 09: Combs, Weschler, Abel, Rose, Jain, Buffett...to me it feels like Buffett is less than 20% and getting smaller still. If you go by press appearance, it may appear otherwise. I like it that the rest of them stay away from the press, at least at the BRK level.

[Guest longinvestor]

A thought occurred to me. WEB went on CNBC saying they're buying or bought 32B of securities recently plus the upcoming PCP deal. Now WSJ is rumoring that the Inbev SAB deal may see an infusion from BRK.

 

Are they going to be lacking dry powder for any buybacks at least in the near term ?

[ourkid8]

I believe they are only allowed to buyback 25% of the daily trading volume per day.  Based on the 3 month average of 4mm B shares trading (as per yahoo), that is really only $133 million dollars per day.  They definitely have enough dry power to buy the maximum shares per day for the next couple of months if it ever reaches 1.2x book. Berkshire is truly a cash cow and right now they have allocated a ton of cash which will benefit shareholders for many years to come...

 

A thought occurred to me. WEB went on CNBC saying they're buying or bought 32B of securities recently plus the upcoming PCP deal. Now WSJ is rumoring that the Inbev SAB deal may see an infusion from BRK.

 

Are they going to be lacking dry powder for any buybacks at least in the near term ?

[rb]

A thought occurred to me. WEB went on CNBC saying they're buying or bought 32B of securities recently plus the upcoming PCP deal. Now WSJ is rumoring that the Inbev SAB deal may see an infusion from BRK.

 

Are they going to be lacking dry powder for any buybacks at least in the near term ?

Maybe, maybe not. Likely not. But even if they do I wouldn't see it as a problem. If they can do a deal that has a higher return than buybacks then I'm glad.

[Guest longinvestor]

A thought occurred to me. WEB went on CNBC saying they're buying or bought 32B of securities recently plus the upcoming PCP deal. Now WSJ is rumoring that the Inbev SAB deal may see an infusion from BRK.

 

Are they going to be lacking dry powder for any buybacks at least in the near term ?

Maybe, maybe not. Likely not. But even if they do I wouldn't see it as a problem. If they can do a deal that has a higher return than buybacks then I'm glad.

I don't see that to be a problem either. They just keep blowing giant holes in the urban myth that their size is an anchor to capital deployment opportunities. It'll be fun to see them move to "more ideas than capital" territory.

[scorpioncapital]

Has anyone noticed that over a 10 year period, Berkshire has outperformed virtually every single one of their major public stock investees? Would this influence your decision to invest in Berkshire vs shadowing his holdings for your long-term portfolio?

[Jurgis]

Has anyone noticed that over a 10 year period, Berkshire has outperformed virtually every single one of their major public stock investees? Would this influence your decision to invest in Berkshire vs shadowing his holdings for your long-term portfolio?

 

There is no longer any point to shadow BRK holdings. Like you said, majority of his alpha comes from BRK internally.

 

You can still buy what BRK invests into, especially T&T purchases, if you believe they are cheap and you believe they will outperform the market.

But shadowing whole BRK portfolio with the goal of replicating BRK makes no sense.

[thefatbaboon]

Has anyone noticed that over a 10 year period, Berkshire has outperformed virtually every single one of their major public stock investees? Would this influence your decision to invest in Berkshire vs shadowing his holdings for your long-term portfolio?

 

i've been ruminating quite a lot on BRK recently, going over the last 20 odd years of reports.  One of the things that struck me was just how incredible the performance of Geico and Jain's Reinsurance have been.  I wrote another post laying out their records.

 

Imo, and obviously with benefit of hindsight, Berkshire performance per share would have been significantly better over the last 20 years if WEB had not made any investments (from 1995 onwards), had not bought any companies (Dexter, GenRE, BNSF etc)  and all growth capital from Insurance had been used within Insurance in Bond and Stock indexes or used to repurchase stock.  It's a guess, but given the incredible sustained growth of the insurance businesses in the high teens, together with a mid single digit return on the Float, and a consistent annual repurchases of 2-3% of the shares, BRK shares would have had a >20% CAGR for the last 20 years under this scenario.  (BRK.A would be approaching $1m today)

 

So, to come back to your observation regarding BRK versus the Investees...BRK has been better than most big companies because it has been riding a tiger of an insurance company. 

 

Before I get attacked for saying that BRK shareholders would be significantly wealthier if WEB had retired 20 years ago I should say that this is 1.) with benefit of hindsight and 2.) assuming one gives little or no value to the diversified situation that exists today.  Personally, I think the diversified business is very valuable, very strong, and a different proposition to a pure insurance venture.  We've given up quite a lot of return acquiring this diversification but I imagine we all sleep better knowing that BRK today would still show overall profitability in a year with a mega mega catastrophe. 

 

Also, I think it best to be clear that personally I think WEB has played a major role in Reinsurance.  Ajit and WEB talk on the phone nearly every day and I have the feeling that building this reinsurance enterprise has been a joint venture between these two incredible business men. 

[original mungerville]

Point 1: KO is borderline irrelevant to BRK, they only have ~10b of equity allocated to it after adjusting for deferred taxes. On a >300b value it is <3% probably. Much more important are BNSF, PCP, etc, which have great outlooks.

 

This is why BRK is so great. The money flows to the best opportunities. Think about the KO position more deeply. You have an asset that started out as ~1.5b and grew to ~15b. As the MV increases, he gets to write more float against the asset and redeploy those funds elsewhere. So while he hasn't sold, allocating more funds elsewhere has lowered the impact on growth. Also, deferred taxes keep increasing, which also leverages the position.

 

Point 2: I think T&T will do fine as deal makers. They already have done ResCap, PCP, PSX asset swap, etc.

 

Point 3: It's tough to say exactly what the returns are going to be going forward but high single digits would be my low end and 15% my high end.

 

That'll do! Especially since "going forward" is in all likelihood 20+ years. " That'd be "quite satisfactory" in Ben Graham's terms.

 

I do think BRK can grow much more than most think on the high end, but 15% will not happen. When is the last time BRK grew by 15% over an extended period (ie not the stock but the business)??

 

 

[Guest longinvestor]

Point 1: KO is borderline irrelevant to BRK, they only have ~10b of equity allocated to it after adjusting for deferred taxes. On a >300b value it is <3% probably. Much more important are BNSF, PCP, etc, which have great outlooks.

 

This is why BRK is so great. The money flows to the best opportunities. Think about the KO position more deeply. You have an asset that started out as ~1.5b and grew to ~15b. As the MV increases, he gets to write more float against the asset and redeploy those funds elsewhere. So while he hasn't sold, allocating more funds elsewhere has lowered the impact on growth. Also, deferred taxes keep increasing, which also leverages the position.

 

Point 2: I think T&T will do fine as deal makers. They already have done ResCap, PCP, PSX asset swap, etc.

 

Point 3: It's tough to say exactly what the returns are going to be going forward but high single digits would be my low end and 15% my high end.

 

That'll do! Especially since "going forward" is in all likelihood 20+ years. " That'd be "quite satisfactory" in Ben Graham's terms.

 

I do think BRK can grow much more than most think on the high end, but 15% will not happen. When is the last time BRK grew by 15% over an extended period (ie not the stock but the business)??

 

The increase in 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 ahares. 21.6% that is.

 

 

I know that the spreadsheets are whirring around to refute the above. In anticipation of the recency arguments that are sure to follow, here is a table of stock price performance (yes, I know, I know, this is sacrilege) for 3- 5- 10- year averages over 3, 5, 10, 20 years etc. 

 

              3-year-avg 5-year-avg 10-year-avg 15-year-avg 20-year-avg 25-year-avg 30-year-avg 40-year-avg

last  50 years 26.13         26.29         27.17         28.90         29.67         29.86           29.77         27.60

last 40 years 26.6                 26.4         27.4           28.9           29.7         29.9                   29.8           27.6

last 30 years 21.8                 22.5         25.8           28.0           29.6         29.9             29.8           27.6

last 20 years 14.9                15.7                 18.3           22.1             26.1         28.4             29.6             27.6

last 10 years 9.7                 8.3                 9.4             13.9             18.3         21.9               25.8             27.4

last 5 years 11.1                 9.1                   8.3           10.0             15.7         18.6             22.5             26.4

last 3 years 17.2                 11.1                   9.7             9.5             14.9         18.1             21.8             26.6

 

 

Numbers don't lie, this points to a marked slowing down that started sometime during the past 10 to 20. And there is somewhat of a climbing out over the past 3 to 5 years.

 

But what actually happened? For roughly 15 of the last 20 years the world went crazy with euphoria and BRK simply sat out of it. Nobody else is remotely capable of feats such as this. Then there was the gloom and BRK went crazy. Just how crazy? ~70% of all earnings retained over the past 50 years has been retained over the past 5 years. The benefit of this craziness has barely begun to be realized. See the 3- and 5-year data. (Sacrilege again!).

 

Perhaps it would be best to return to judging performance over 20-30-40- year periods once again. After all, IV and SP converge over these kinds of time frames. Everything until then is urban myth, at least to me.

[original mungerville]

Right. I said they will not get 15% growth in the business going forward for any extended period of time.

 

You come back with this matrix on the stock price. Even in this matrix of stock price, I see very little evidence of sustainable 15% growth in the stock price over the past 5, 10 or 15 years. So I can't see the point you are trying to make. Are you agreeing with me?

 

Or are you suggesting we should look at the last 20-30-40 years in order to forecast the next 10 years? (This seems to be what you are saying, hopefully not because that makes ZERO sense.)

 

Or is there something more subtle you are getting at?

 

 

 

 

 

[Palantir]

Have members ruled out that BV might decline? I mean BRK is so leveraged and heavily into cyclical, industrial stocks which are getting pounded this year. Eg, NSC is down -30% YTD, and if we assume a similar valuation decline for BNSF, and multiply by 2x for leverage, the "true" BV might be lower than anticipated?

[thepupil]

Have members ruled out that BV might decline? I mean BRK is so leveraged and heavily into cyclical, industrial stocks which are getting pounded this year. Eg, NSC is down -30% YTD, and if we assume a similar valuation decline for BNSF, and multiply by 2x for leverage, the "true" BV might be lower than anticipated?

 

 

BNSF has a book value to Berkshire of $34B. Using a simplistic analysis of the decrease in market value of BNSF (simply saying the "right" multiple has gone from 20X to 14X), then BNSF went from being worth $90B to $56B, from 2.3X GAAP book to 1.6X GAAP Book.

 

It would be incorrect to say NSC is down 30%, Berkshire has 44% equity/ assets, ergo Berkshire's interest in BNSF is worth 60% less.

 

BNSF is simply "worth" a less giant premium to book than before. That premium moves up in down in an unlevered fashion because Berkshire's equity stakes in BNSF and BE are not themselves levered like that.

 

[Guest longinvestor]

Right. I said they will not get 15% growth in the business going forward for any extended period of time.

 

You come back with this matrix on the stock price. Even in this matrix of stock price, I see very little evidence of sustainable 15% growth in the stock price over the past 5, 10 or 15 years. So I can't see the point you are trying to make. Are you agreeing with me?

 

Or are you suggesting we should look at the last 20-30-40 years in order to forecast the next 10 years? (This seems to be what you are saying, hopefully not because that makes ZERO sense.)

 

Or is there something more subtle you are getting at?

 

OK, here's a prior post of mine, coming at it from another angle. Stock price over the fifty years has roughly  followed both earnings growth and bv growth; both ~20%

 

From the 10-K

 

Per-share pre-tax earnings (non-insurance, non-investment)growth rates

1970-1980:20.8%

1980-1990:18.4%

1990-2000: 24.5%

2000-2010: 20.5%

 

2011: 18%

2012: 15.7%

2013: 20.6%

2014: 19%

There is little evidence that earnings growth has materially changed in the past four years from the previous four decades.  Buffett has been singing for many years that their focus going forward is on per share earnings, not on BV growth.

 

I don't see any number below 15%, not in 1-,3-,5- years, or over 5 decades; do you? I put the table of stock prices to show that the 10-20 period is different (world messed up, not BRK, they just went into a shell letting the cash pile up) than the most recent 3-5- and the older 20-30-40 year periods, when the capital was freely deployed. Stock price will follow. I think it is urban myth to project the 10-15 year history into the future. That one makes ZERO sense to me as the opposite does to you.

 

No, I don't agree with you. On the other side, not trying to convince you or anyone else about the future prospects of BRK.

 

 

[thepupil]

Have members ruled out that BV might decline? I mean BRK is so leveraged and heavily into cyclical, industrial stocks which are getting pounded this year. Eg, NSC is down -30% YTD, and if we assume a similar valuation decline for BNSF, and multiply by 2x for leverage, the "true" BV might be lower than anticipated?

 

 

BNSF has a book value to Berkshire of $34B. Using a simplistic analysis of the decrease in market value of BNSF (simply saying the "right" multiple has gone from 20X to 14X), then BNSF went from being worth $90B to $56B, from 2.3X GAAP book to 1.6X GAAP Book.

 

It would be incorrect to say NSC is down 30%, Berkshire has 44% equity/ assets, ergo Berkshire's interest in BNSF is worth 60% less.

 

BNSF is simply "worth" a less giant premium to book than before. That premium moves up in down in an unlevered fashion because Berkshire's equity stakes in BNSF and BE are not themselves levered like that.

 

https://www.bamsec.com/filing/108131615000005?cik=1081316

 

Also BE has gaap book value of $20B, it's worth at least 1.5X that and quite possibly much  more , and utilities are actually one of he beat performing sectors this q. Between the value creation that of occurred with Heinz Kraft transaction, the stability of BE, and the capital deployment of some of that cash that was fallow for so long (PCP plus some equity buys), I don't think Berkshire's adjusted book had declined all too much this year. True, BNSF would certainly be worth less as a public company today than at the beginning of the year, but Berkshire's price is also down a good -15%, so I think price / value has actually improved given the progress elsewhere.

 

Check out all that high quality regulated free cash flow that comes online if BE stands still (which they won't, they'll instead plow that back into more regulated return assets).

[original mungerville]

 

OK, here's a prior post of mine, coming at it from another angle. Stock price over the fifty years has roughly  followed both earnings growth and bv growth; both ~20%

 

From the 10-K

 

Per-share pre-tax earnings (non-insurance, non-investment)growth rates

1970-1980:20.8%

1980-1990:18.4%

1990-2000: 24.5%

2000-2010: 20.5%

 

2011: 18%

2012: 15.7%

2013: 20.6%

2014: 19%

There is little evidence that earnings growth has materially changed in the past four years from the previous four decades.  Buffett has been singing for many years that their focus going forward is on per share earnings, not on BV growth.

 

I don't see any number below 15%, not in 1-,3-,5- years, or over 5 decades; do you? I put the table of stock prices to show that the 10-20 period is different (world messed up, not BRK, they just went into a shell letting the cash pile up) than the most recent 3-5- and the older 20-30-40 year periods, when the capital was freely deployed. Stock price will follow. I think it is urban myth to project the 10-15 year history into the future. That one makes ZERO sense to me as the opposite does to you.

 

No, I don't agree with you. On the other side, not trying to convince you or anyone else about the future prospects of BRK.

 

I agree that intrinsic value growth (approximated by book value growth over time) can be measureed as the combination of the growth of investments per share and earnings per share. As such, it would be helpful for you to stare at not only the numbers above re earnings growth but also investments per share growth and book value growth. This would help our conversation and make clear to you that BRK will not grow intrinsic business value at 15% compounded going forward. Buffett said "focus" on earnings per share growth, not "only look at that" and ignore the other parts of the business which drive intrinsic business value - this is where you are erring.

 

Let's not get hung up on 15% though. If you are saying the next 10-15 years may look better than the last 10-15 years for BRK (especially relative to the S&P) as the driver of intrinsic value is shifting more and more from growth in investments per share to pre-tax earnings growth - and not everyone has figured that out yet - then I completely agree with you. And this is counter-intuitive to a degree because you would not expect this result after the business has become larger.

 

12% on the high end may be doable because of this point I think you are making. Just forget about 15%.

[jay21]

Have members ruled out that BV might decline? I mean BRK is so leveraged and heavily into cyclical, industrial stocks which are getting pounded this year. Eg, NSC is down -30% YTD, and if we assume a similar valuation decline for BNSF, and multiply by 2x for leverage, the "true" BV might be lower than anticipated?

 

How does the MV decline of a wholly owned sub impact BV? Also - highly doubt BNSF equity is financed with 1:1 debt/equity.

[thepupil]

Have members ruled out that BV might decline? I mean BRK is so leveraged and heavily into cyclical, industrial stocks which are getting pounded this year. Eg, NSC is down -30% YTD, and if we assume a similar valuation decline for BNSF, and multiply by 2x for leverage, the "true" BV might be lower than anticipated?

 

How does the MV decline of a wholly owned sub impact BV? Also - highly doubt BNSF equity is financed with 1:1 debt/equity.

 

Jay, see my posts. I think he means "mark to market book value" when he says "true book". MTM book for BNSF has certainly decreased with UNP, NSC, CSX and KSU all down significantly. XLI is also off 12% this year if we use that as a proxy for Marmon, Iscar, and the like. So it's fair to say that MTM book value of wholly owned subs has decreased, in addition to the decline in MTM value of the stock portfolio. BUT the MTM book value of those 2 subs was and is still WELL above GAAP book value.

 

And KHC added a good bit after Q2 to help offset this, as will $23B or so of pre-tax investment income + operating earnings,  plus whatever underwriting profit shakes out to be.

 

and yes, BNSF equity is not levered at all. The company itself is levered, but the equity stake is definitely not!

[vinod1]

 

OK, here's a prior post of mine, coming at it from another angle. Stock price over the fifty years has roughly  followed both earnings growth and bv growth; both ~20%

 

From the 10-K

 

Per-share pre-tax earnings (non-insurance, non-investment)growth rates

1970-1980:20.8%

1980-1990:18.4%

1990-2000: 24.5%

2000-2010: 20.5%

 

2011: 18%

2012: 15.7%

2013: 20.6%

2014: 19%

There is little evidence that earnings growth has materially changed in the past four years from the previous four decades.  Buffett has been singing for many years that their focus going forward is on per share earnings, not on BV growth.

 

I don't see any number below 15%, not in 1-,3-,5- years, or over 5 decades; do you? I put the table of stock prices to show that the 10-20 period is different (world messed up, not BRK, they just went into a shell letting the cash pile up) than the most recent 3-5- and the older 20-30-40 year periods, when the capital was freely deployed. Stock price will follow. I think it is urban myth to project the 10-15 year history into the future. That one makes ZERO sense to me as the opposite does to you.

 

No, I don't agree with you. On the other side, not trying to convince you or anyone else about the future prospects of BRK.

 

I agree that intrinsic value growth (approximated by book value growth over time) can be measureed as the combination of the growth of investments per share and earnings per share. As such, it would be helpful for you to stare at not only the numbers above re earnings growth but also investments per share growth and book value growth. This would help our conversation and make clear to you that BRK will not grow intrinsic business value at 15% compounded going forward. Buffett said "focus" on earnings per share growth, not "only look at that" and ignore the other parts of the business which drive intrinsic business value - this is where you are erring.

 

Let's not get hung up on 15% though. If you are saying the next 10-15 years may look better than the last 10-15 years for BRK (especially relative to the S&P) as the driver of intrinsic value is shifting more and more from growth in investments per share to pre-tax earnings growth - and not everyone has figured that out yet - then I completely agree with you. And this is counter-intuitive to a degree because you would not expect this result after the business has become larger.

 

12% on the high end may be doable because of this point I think you are making. Just forget about 15%.

 

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