Subject: Re: Just to be provocative
“I’ve not seen anyone on the Berkshire Hathaway message boards offer an explanation for these distinctly different periods of growth. The simplest explanation is that valuations in 1980 for both the S&P and BRKA got down to very low values, with the trailing P/E on the S&P dropping to 8 and the trailing P/BV of BRKA at 1.0. Then in 1999 the trailing P/E of the S&P got up to a very high level of 33, and the P/B of BRKA got up to 2.1 (Actually the peak P/B occurred in Q2 1998 at 2.8).”

While valuation changes may be the easiest explanation, it’s not the whole story. The growth rates of BV/share were also markedly different during the three periods. From 1965 through 1980 BVPS grew 19%/yr, while from 1981 through 1999 BVPS grew 29%/yr, and from 2000 through 2024 BVPS grew 11%/yr. These differences would also explain the differences in price growth during the three periods. But why did BVPS growth change so abruptly in 1981 and 2000? Part of the answer almost certainly lies in the abrupt change in the S&P valuation multiple growth that occurred in 1981 (changing from declining multiple to expanding multiple) and in 2000 (changing from expanding multiple to declining multiple). It seems that if we’re to forecast BRKA’s price growth over the next 20 years, we need to know what is likely to happen to the S&P price multiples. Thoughts?