Subject: Re: Berkshire Valuation v Fairfax Financial
Thanks for sharing, EV. Just one comment: You are correct to value the cash, T-Bills and fixed maturity assets at face value, including the $30B in cash held in reserve. These assets are worth the interest stream to be received, plus terminal value, discounted at a discount rate equal to the total annualized return.

Don't forget that float is a liability.
We are generously assuming that the investment assets are worth something because we get to keep the returns on them more or less forever.
If the loan is perpetual and bears no interest rate, we make the very aggressive approximation that we don't really even owe that money.

But never forget that we don't own the investment assets.

If you have $1bn in float liability and $1bn in investment assets, the net asset value is zero. Zero.
We say that the assets are actually worth something to us though, because we get the investment profits on them for an indefinitely long time.
If it's a perpetual interest free loan, we make the first approximation (a quite aggressive one) that it's as if we don't owe anything at all. Whee!

But let's break it down a bit:
That $1bn in investment assets is broken down into (say) on average $750m in "normal" investments and $250m in cash or very short term liquid assets that will forever have an after tax real return of zero. And, don't forget, a true $1bn liability.
You can make a reasonable case that the $750m is worth something despite having an offsetting liability, maybe even as much as face value, because you get to keep the profits and never have to repay the "loan" of float. OK.
But the other $250m? There is an offsetting liability, AND it will forever earn nothing, so I can't see any case for assuming it's worth anything at all to the shareholder.
That part is like a perpetual interest free loan that you can't ever earn anything on. It's useless. The assets and liabilities simply cancel out.

Perpetual cash is worth face value, sure. (using "cash" as shorthand for "some liquid assets forever with no real investment return")
But perpetual cash with an offsetting liability isn't worth squat.

The case that we can ignore the float liability rests on the notion that we get to keep the earnings on the investments.
But there are no earnings on some of those investments, and never will be, so they're not worth anything to us.

Jim