Subject: Re: Berkshire Valuation v Fairfax Financial
IIRC, both Jim and Bloomstran take $50 billion off the cash pile (30% of float value) to account for the amount that will always be held in reserve.

Just a clarification of my own thinking. A small geeky difference, but important to my way of thinking. The amount I take off the investments per share due to float, 30% as you mention, is not an estimate of the average cash balance as some might suppose.

My thinking is this:
Any good long term portfolio, with a prudently varying and opportune mix of securities and cash at any given time, will be expected to have a certain long term return. Its true intrinsic value is a function of that return. I would generally estimate the value of this portfolio at its market value. (plus or minus a cyclical adjustment at valuation extremes, perhaps, but let's ignore that). Let's say intrinsic value = P1 = market value.

A portfolio of the same size which has to allocate a certain amount of assets to very short term liquidity because it is backing insurance liabilities will suffer by comparison in terms of its long run returns. If the long run returns are lower than the returns in the unconstrained portfolio above, the intrinsic value of the portfolio is lower. So I estimate that it is worth less than its face value. Call it P1 - K.

The 30% of float is just the arithmetic I use to estimate of K, being the amount to reduce the value estimate of the total investments because long run returns will be lower than long run returns from an unconstrained portfolio. K is not the amount of investments per share expected to be held in cash, but the reduction in intrinsic value of the total portfolio because of the liquidity constraints on portfolio allocation.

Obviously different people might estimate K in different ways, but I think it's useful to think in terms of the reduction in the value of the portfolio to Berkshire rather than obsessing about the size of the cash pile. What we call "cash" is just the shortest duration end of the fixed income part of the portfolio, which in turn is just a varying subset of the total portfolio of liquid assets. There is no bright dividing line between cash and non-cash. I think it's best thought of as a single large broad mixed portfolio, with slightly lower returns than would normally be the case because of a liquidity floor, hence a lower intrinsic value.

Jim