Valuehalla Posted February 27, 2017 Posted February 27, 2017 Hi Cigarbutt, I agree with most what you write. Maybe there is a misunderstanding. The BV is for me just one lighttower among others on the investmentocean. If the MV is below the BV (or maybe below BV + adjusted 20% or maybe + adjusted from year to year plus a little % more) we just buy in this case 1$ for less than 1 $. If the MV is above BV + adjustment, my next or better additional lighttower is the IV, referring to future earningpower. Every investment decision is also always your personal subjective decision: You have to compare it with YOUR individual other opportunities. Also imo you shall understand and like the businessmodel and management, as a fundamental.
Valuehalla Posted February 28, 2017 Posted February 28, 2017 Cigarbutt, let me add something concerning the subject "first half" and "second half": In "first half" we do not need an adjustment on BV to find a minimum line, but it is useful for the "second half": we need it, but its maybe a method like someone use a kitchenknife to amputate a blind gut, instead of a surgeon who does it in a delicate way. So the adjustment of 20 % is just a point of orientation. I think the more BRK grows in the way it has done in the second half, the 20 % shall be increased a little bit year by year. In consequence of this (BV+20%) see page 6 of the letter: "The authorization given me does not mean that we will “prop” our stock’s price at the 120% ratio. If that level is reached, we will instead attempt to blend a desire to make meaningful purchases at a value-creating price with a related goal of not over-influencing the market" BV+ 20 % is a soft initial-point, let me call it lighttower 8) Its light is the bargain-flashlight of BRK. The more closer MV comes to our lighttower, the more you can be sure to buy BRK is a good decision. But take as an advise from longtime holder, whatever the MV is...over the time : BRK was, BRK is and BRK will be a good investment.
Cigarbutt Posted February 28, 2017 Posted February 28, 2017 Valuehalla, This may rapidly turn into a circulation discussion. I respect your position. Amen to your last line. If everybody had invested in BRK in 1965, all would be at least a 100x richer ?! One of Mr. Buffett's messages is that a small difference over time can make a big difference. I like snowballs too. Are you aware of the rice bet and chessboard story? If interested, here is a link: http://www.singularitysymposium.com/exponential-growth.html The recurrent compounding that you refer to (gradually increasing difference between BV and IV) is much less than 100% per year. But small differences do matter. With a 2.8% (20.8-19.0) difference of MKT performance vs BV, over 52 years, BRK achieved a return differential of 1,088,276% (1,972,595-884,319)! So, compounding with no end in sight makes me uncomfortable especially without a defined rational basis. I tend to think that trees don't grow to the sky. I hope I did not insult you with my exaggerated example. We're all going after the truth, aren't we?
Guest longinvestor Posted March 1, 2017 Posted March 1, 2017 So I get around $290k/share for BRKA and $192/share for BRKB, which means BRK is still trading at ~13% discount to IV. I just apply a 10x multiple on the operating businesses, though each group probably deserves a slightly different multiple. Operating Earnings Underwriting: $2.1b BHE: $2.7b BNSF: $5.7b MSR: $8.4b Financial Product: $2b Total Operating Earnings: $21b @10x multiple = $210b Cash & Investments Cash: $86.3b Investments: $120.4b Fixed Income: $23.8b Preferred/Warrants/KHC: $32.6b Total Investments: $263.3b $210b + $263b = $473b current Mkt cap = $420b Discount to IV = 13% Rationale behind using a10x earnings multiple? Earnings since 1999 have doubled 5 times.
LC Posted March 1, 2017 Posted March 1, 2017 So I get around $290k/share for BRKA and $192/share for BRKB, which means BRK is still trading at ~13% discount to IV. I just apply a 10x multiple on the operating businesses, though each group probably deserves a slightly different multiple. Operating Earnings Underwriting: $2.1b BHE: $2.7b BNSF: $5.7b MSR: $8.4b Financial Product: $2b Total Operating Earnings: $21b @10x multiple = $210b Cash & Investments Cash: $86.3b Investments: $120.4b Fixed Income: $23.8b Preferred/Warrants/KHC: $32.6b Total Investments: $263.3b $210b + $263b = $473b current Mkt cap = $420b Discount to IV = 13% Rationale behind using a10x earnings multiple? Earnings since 1999 have doubled 5 times. Does it matter? You're looking at a 13% discount to IV when using a 10x multiple. You can go thru and plop a market (~20x) multiple on the wholly-owneds and justify an even larger discount ;D I put the following multiples on each business line: underwrite - 10x energy - 20x railroad - 20x financial - 10x manuf/service/retail - 15x You wind up with a 30% discount to IV
Guest longinvestor Posted March 1, 2017 Posted March 1, 2017 So I get around $290k/share for BRKA and $192/share for BRKB, which means BRK is still trading at ~13% discount to IV. I just apply a 10x multiple on the operating businesses, though each group probably deserves a slightly different multiple. Operating Earnings Underwriting: $2.1b BHE: $2.7b BNSF: $5.7b MSR: $8.4b Financial Product: $2b Total Operating Earnings: $21b @10x multiple = $210b Cash & Investments Cash: $86.3b Investments: $120.4b Fixed Income: $23.8b Preferred/Warrants/KHC: $32.6b Total Investments: $263.3b $210b + $263b = $473b current Mkt cap = $420b Discount to IV = 13% Rationale behind using a10x earnings multiple? Earnings since 1999 have doubled 5 times. Does it matter? You're looking at a 13% discount to IV when using a 10x multiple. You can go thru and plop a market (~20x) multiple on the wholly-owneds and justify an even larger discount ;D I put the following multiples on each business line: underwrite - 10x energy - 20x railroad - 20x financial - 10x manuf/service/retail - 15x You wind up with a 30% discount to IV ;D Yeah, who cares if the discount is 18% or 30% or 50%! What's amazing to me is that Mr. Market has been in catch up mode for many years in properly pricing BRK. We are used to thinking that dislocations in pricing happens in the dark corners of the market, where information is less than fully efficient, not with a company with a CEO whose every muscle twitch is a headline! Intrinsic value is indeed hard to calculate, let it remain so till I retire, ha! By then, AI / tech will be so awesome that everyone's hand held device will flash Berkshire's IV every second. I will be sumgly selling my stock knowing we have now finally entered the era of market efficiency.
Valuehalla Posted March 1, 2017 Posted March 1, 2017 I am not ok with the system to multiply the earnings and than add the cash etc. The cash and also investments are needed to run the company. So these are not 2 independent subjects, which can be simple added. As I remind WEB by himself mentioned anyhow that minimum 20 (?) B cash is necessary: also it is reflected in the share buyback policy, there is a minimum amount of cash-holding quoted to do repurchases if MV is falling short of BV + 20 %.
John Hjorth Posted March 1, 2017 Posted March 1, 2017 I am not ok with the system to multiply the earnings and than add the cash etc. The cash and also investments is needed to run the company. So these are not 2 independent subjects, which can be simple added. Why not, Valuehalla? The income [net] from holding the insurance float at about USD 100 B at the moment is included in the insurance results multiplied with a P/E, thereby putting a net present value on holding the insurance float. The listed investments are primarily held by the insurance subsidiaries, financed by float, so the listed investments and the insurance operation are two separate sides of the same operation. Furthermore, this two column calculation of IV does not include a discount on deferred taxes booked in the balance sheet as a liability of approx. USD 78 B. That is calculated as if it had to be paid 1st Januar 2017, however nobody knows when or if it will ever come due.
Dynamic Posted March 1, 2017 Posted March 1, 2017 Valuehalla, I'd say that maybe $20bn of cash is required to run the company in the sense of seeing BRK through any megacatastrophe insurance losses. As for the rest of the cash and investments I can't see much of the rest of the cash held as being necessary to the operating companies who are generally generating a lot of cash and sending it to Omaha for whatever rational investments can be made with it and can continue to do so without additional funds. They can also request funds from Omaha if a truly worthy investment becomes available to them and they can persuade HQ that the returns will be sufficient. BNSF and the Utilities are probably the main exceptions, retaining earnings and also levering up on non-recourse debt and accumulating deferred taxes to invest in assets for which they should obtain a modest but stable return on invested capital. The pile of cash over and above $20bn has some optionality as ammunition for new investments in stock, acquiring companies, or bolt-on acquisitions within subsidiaries, all of which should pass a hurdle rate of return before the trigger is pulled, so I think it can be expected to return perhaps 10% annualized or more on average over the next decade, maybe a little less due to cash drag and the delay between such suitably value-enhancing investments, or maybe a little more if there's a financial panic and great opportunities abound. I think it's worth considering at least a second valuation approach as a sanity check to your preferred method of valuation, and there are three that are typically employed for Berkshire. You might choose to think that the market is a bit toppy and is overvaluing BRK's equity holdings. If so, you can do a look-through earnings approach and value these investments en masse at whatever you feel is an acceptable P/E ratio or E/P earnings yield, or even independently value them with as much detail as you deem prudent (perhaps only value the top 5 holdings carefully then apply a simple P/E ratio to the rest). When I've done this and applied a low-ball valuation earnings yield of 8.5% (P/E = 11.8) to both the operating company's earnings (with dividends stripped away) and the total look-through earnings of the portfolio, my low-ball valuation has usually come in remarkably close to the 1.2x Book Value soft floor valuation - usually less than a percent or two higher. This was quite a surprise to me, and might only be coincidence. The current market value of the investments has seemed fairly fully priced for the last many months, yet the implied current market value of the operating company of BRK has seemed to be close to my low-ball valuation for a while so that the overall market price of BRK.B has been moderate - not overvalued but not really cheap.
Guest longinvestor Posted March 1, 2017 Posted March 1, 2017 So I get around $290k/share for BRKA and $192/share for BRKB, which means BRK is still trading at ~13% discount to IV. I just apply a 10x multiple on the operating businesses, though each group probably deserves a slightly different multiple. Operating Earnings Underwriting: $2.1b BHE: $2.7b BNSF: $5.7b MSR: $8.4b Financial Product: $2b Total Operating Earnings: $21b @10x multiple = $210b Cash & Investments Cash: $86.3b Investments: $120.4b Fixed Income: $23.8b Preferred/Warrants/KHC: $32.6b Total Investments: $263.3b $210b + $263b = $473b current Mkt cap = $420b Discount to IV = 13% Rationale behind using a10x earnings multiple? Earnings since 1999 have doubled 5 times. Does it matter? You're looking at a 13% discount to IV when using a 10x multiple. You can go thru and plop a market (~20x) multiple on the wholly-owneds and justify an even larger discount ;D I put the following multiples on each business line: underwrite - 10x energy - 20x railroad - 20x financial - 10x manuf/service/retail - 15x You wind up with a 30% discount to IV There's another reason to be correct versus (unnecessarily/ wrongly) conservative. I am reading Fisher's Common stocks / Uncommon profits and he mentions this incidence of an investor who likes a stock and places an order for $16 when the stock is trading for $25; that order never fills and he watches it go to $400 or something like that. Those who have bought Berkshire for much lower prices, like around the 1.2x bv have this kind of anchoring going on. There have been so many posts on Cobf with folks waiting for that day to come; again. It is better to be realistic when you are dealing with exceptional businesses. In all cases, make up your own mind. (Fisher). Crowd thinking is terrible, our own star-studded Cobf not excluded.
Guest longinvestor Posted March 1, 2017 Posted March 1, 2017 Couldn't resist posting this, but we are talking about MV and IV converging over the very long term, no? That's today, folks!
LC Posted March 1, 2017 Posted March 1, 2017 Couldn't resist posting this, but we are talking about MV and IV converging over the very long term, no? That's today, folks! Not fully! Market cap is 465B as of today. If you accept the multiples I posted, it's worth ~600B!
John Hjorth Posted March 1, 2017 Posted March 1, 2017 Couldn't resist posting this, but we are talking about MV and IV converging over the very long term, no? That's today, folks! It hasen't - to my best recollection - been discussed, from this particular angle, since the release of the annual letter and the 2016 annual report and all the talk about fees: It's the "badly hidden agenda" of Mr. Buffett and Mr. Munger: "Why are you paying all those fees?! - Just send us your money! - by buying BRK stock - We'll manage them - almost - for free."
Guest longinvestor Posted March 1, 2017 Posted March 1, 2017 Couldn't resist posting this, but we are talking about MV and IV converging over the very long term, no? That's today, folks! It hasen't - to my best recollection - been discussed, from this particular angle, since the release of the annual letter and the 2016 annual report and all the talk about fees: It's the "badly hidden agenda" of Mr. Buffett and Mr. Munger: "Why are you paying all those fees?! - Just send us your money! - by buying BRK stock - We'll manage them - almost - for free." Actually, right after Buffett went on the rampage over fees at last year's meeting at Omaha, even as the crowd broke into a long applause, Munger chimed in with "well, the folks here today have figured out something better than the index. They bought Berkshire". Buffett means the same, Munger says it.
Guest longinvestor Posted March 2, 2017 Posted March 2, 2017 Something came to mind about BV versus IV. We've been discussing how to calculate IV, all the different methods, the assumptions etc.etc. The key question is how Buffett and more importantly his BOD or successor /s would calculate it as close to the real IV as possible? Turns out that Buffett clearly lays this out in their 50th letter and the reason for including the MV in the performance table. See below. A simple fact staring at us is that the net % gain in BV over 50 years multiplied by 1.2x is almost exactly half of the net MV gain% over the same period. We know Buffett a) dislikes the thought of buying his stock back over other purchases but, b) should the market offer BRK at a 50 cent dollar, he may be better off taking it because he (more his successor) is not finding those often any more. The beauty of this way of estimating it is obvious, it is all based on historical numbers. Even an idiot like me can readily calculate it on the back of an envelope, the preferred method in Omaha. He points out that the MV gain over 50 or 52 or 60 years is the IV gain! No assumptions needed about future cash flows, discount rate etc. Of course, some sense of business culture / practice continuity into the future is assumed. Just my 2 cents! 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.
Valuehalla Posted March 2, 2017 Posted March 2, 2017 So the consequences of the quote is: The more and longer BRK is "shifting in a major way to owning and operating large businesses" the adjustment on the BV has to increase. Since the possibility of a share-repurchase was announced, the adjustment is declared with BV + 20 %. Imo it shall already be more nowadays....
LC Posted March 2, 2017 Posted March 2, 2017 Quite frankly, a market multiple on earnings will get you 90% of the way there. You want to know what BNSF is worth at market? Take Union-Pacific's earnings multiple and apply it. That is what it is "worth". Same for the energy division, and on and on. That will at least mark you to market. Now, if you STILL think it is undervalued vs the market, well you are in luck because now you have a further discount at your fingertips. Heck, you can say that the stocks which berkshire hold are also undervalued. So their ~250B portfolio has an intrinsic value of $300B.
Guest longinvestor Posted March 2, 2017 Posted March 2, 2017 Quite frankly, a market multiple on earnings will get you 90% of the way there. You want to know what BNSF is worth at market? Take Union-Pacific's earnings multiple and apply it. That is what it is "worth". Same for the energy division, and on and on. That will at least mark you to market. Now, if you STILL think it is undervalued vs the market, well you are in luck because now you have a further discount at your fingertips. Heck, you can say that the stocks which berkshire hold are also undervalued. So their ~250B portfolio has an intrinsic value of $300B. Arguably, BNSF and for that matter many subsidiaries are worth more than their major competitors because of things like access to cheaper and unlimited capital via 100% earnings retention, lower taxes, lower costs, less time for reporting to wall street and so on. There used to be a hefty premium for Buffett's stock picking ability but now effectively there's a sizeable discount on the unique conglomerate form A premium is warranted, which explains the net BV% lag since about 1999. Buffett recognizes this by the willingness to buy back shares. All I'm saying is that BV multiples is becoming the silly syllabus at 50%of real IV
Valuehalla Posted March 2, 2017 Posted March 2, 2017 Total BV 31.12.2016 = 283,001 B Add to adjust KHC till 31.12.2016 13,1 B for fairvalue (see letter page 19) Add further till today (Jan+Feb+1March): Add for Investment gains app 8,14 B (incl. Appel accumulation before 30th Jan) Add for adjustment KHC + BAC 4,25 B Add for Operative Jan+Feb app 3,0 B TOTAL BV today app 311,5 B = +10 % since 31.12.2016 This means BV per B share on 1. March 2017 = app 126,30 $ (KHC adjusted) 177,28 $ (B closing price yesterday) is 40 % over (KHC adjusted) BV and this seems cheap to me. ATTENTION: deffered taxes are not embedded. Also unknown subjects from 1th Jan till today. Imo it is not possible to calculate an exact figure; so all is just approximatly...
Guest longinvestor Posted March 4, 2017 Posted March 4, 2017 The discounted owner earnings approach to estimating intrinsic business value! http://seekingalpha.com/article/3071196-berkshire-hathaway-a-discounted-owner-earnings-analysis-of-value?page=2 The author's conclusion of stock price growth of 14% over five years on a basis of $143 is conservatively OK. In fact it has largely played out in the two years since the writing. He uses a 9% discount rate and 70-75% of net earnings. This is from 2015 and author has a disclosure of being a forever-holder-of-BRK ;) Gurufocus has upto date historical OE numbers http://www.gurufocus.com/term/Owner_Earnings/BRK.A/Owner-Earnings-per-Share-TTM/Berkshire-Hathaway-Inc
SlowAppreciation Posted March 4, 2017 Posted March 4, 2017 So I get around $290k/share for BRKA and $192/share for BRKB, which means BRK is still trading at ~13% discount to IV. I just apply a 10x multiple on the operating businesses, though each group probably deserves a slightly different multiple. Operating Earnings Underwriting: $2.1b BHE: $2.7b BNSF: $5.7b MSR: $8.4b Financial Product: $2b Total Operating Earnings: $21b @10x multiple = $210b Cash & Investments Cash: $86.3b Investments: $120.4b Fixed Income: $23.8b Preferred/Warrants/KHC: $32.6b Total Investments: $263.3b $210b + $263b = $473b current Mkt cap = $420b Discount to IV = 13% Rationale behind using a10x earnings multiple? Earnings since 1999 have doubled 5 times. It should certainly be higher. But I just always use really low multiples/growth projections for any business. So if it's still trading at a discount based on the low end, I'm way more confident in it being a buy. BRK looks like a buy to me.
Guest longinvestor Posted March 4, 2017 Posted March 4, 2017 He is telegraphing that the stock buyback could happen during the next big market correction. Market circumstances The longer it takes for the next big market swoon, the bigger the discount to IV. That's a happy thought. 1-foot-hurdles indeed. To recap Berkshire’s own repurchase policy: I am authorized to buy large amounts of Berkshire shares at 120% or less of book value because our Board has concluded that purchases at that level clearly bring an instant and material benefit to continuing shareholders. By our estimate, a 120%-of-book price is a significant discount to Berkshire’s intrinsic value, a spread that is appropriate because calculations of intrinsic value can’t be precise. The authorization given me does not mean that we will “prop” our stock’s price at the 120% ratio. If that level is reached, we will instead attempt to blend a desire to make meaningful purchases at a value-creating price with a related goal of not over-influencing the market. To date, repurchasing our shares has proved hard to do. That may well be because we have been clear in describing our repurchase policy and thereby have signaled our view that Berkshire’s intrinsic value is significantly higher than 120% of book value. If so, that’s fine. Charlie and I prefer to see Berkshire shares sell in a fairly narrow range around intrinsic value, neither wishing them to sell at an unwarranted high price – it’s no fun having owners who are disappointed with their purchases – nor one too low. Furthermore, our buying out “partners” at a discount is not a particularly gratifying way of making money. Still, market circumstances could create a situation in which repurchases would benefit both continuing and exiting shareholders. If so, we will be ready to act.
Guest longinvestor Posted March 5, 2017 Posted March 5, 2017 http://www.semperaugustus.com/2016-sai-letter--sympathy-for-the-dog-old-challenging-dogma-death-of-the-profit-margin-and-a-brief-berkshire-reduxpdf
Valuehalla Posted March 6, 2017 Posted March 6, 2017 According to Semperaugustus valuation and the BRK letter, the situation is like this: On 31.12.2016, per B share: BV (not KHC adjusted) 114,74 $ IV app 209,00 $ Marketprice 162,98 $ GAP app 28 % upside potential to reach IV 1.3.2017, my estimation, per B share: BV (not KHC adjusted) 118,80 $ (incl. est. InVestGains, BAC, APPL accumulation, minus defferred tax, plus operative IV app 216,00 $ Marketrpice 177,28 $ GAP app 22 % upside potential to reach IV
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