The longer your compound capital, the less you need luck and the more you need Shrewdness.
- Manlobbi
Halls of Shrewd'm / US Policy
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I'm sure this is buried in the archives of the old board somewhere, but...
Could someone explain to me if peak book is a superior measure of value for Berkshire and if so why. I seem to recall various posts from Jim on this but can't recall the details.
Thank you and happy holidays.
No. of Recommendations: 18
Could someone explain to me if peak book is a superior measure of value for Berkshire and if so why. I seem to recall various posts from Jim on this but can't recall the details.
The book value, as far as a useful took for investor, should ideally be independent to the quotation such that the price/book would fluctuate almost in linear proportion to the change in the quote. With GAAP accounting especially, though, the book value is greatly effected by the changing quotes. In particular the book is marked down with sudden severe declines in the constituent quotes, with Chicago-paradigm-efficiency! Of course, the book (true value) isn't really going down, but that is how we like to read it in the US.
So how do we stabilise the book value? Taking the last peak book value isn't a bad first stab - why? Because it has the useful feature in that - for the sake of measuring relative changes in the price/book ratio from quarter to quarter, we reach our goal above, with the book forced to be stable (for a while). The book value is staying fixed in this case, and our quote changes are fully recognised through to the changing price/book ratio, so we get to see the real change in the relative attractiveness of Berkshire as an investment. Call this goal 1.
But definitely one should not make the mistake that the absolute value of the book was any more valid when it was last at its peak, compared to what it is today. Call this goal 2.
Generally instead we want to normalise the book for normal market conditions, so it would be better to compare the book value to the average 2-year book value, or better still, look at the current on-trend book value by drawing an approximate line continuing from the last few years until today (averaging through the quarter to quarter squiggles). That gets close to 1, and very close to 2.
- Manlobbi
PS: It feels so good to type into this text-box. Others on forums/boards/twitter-like-boses elsewhere don't know what they're missing.
No. of Recommendations: 9
I believe it was as much an empirical / practical point as anything else.
With BRK, if you are using P/B as a measure of overvaluation or undervaluation, peak book has served as a better indicator of when BRK has been undervalued. The reason is because because the fluctuations in book value down have typically been transient. Given the way BRK made their capital allocation decisions, which tends to be conservative and protective of downside, the usual history is that BRK returns to peak book and surpasses it within a reasonably short period of time. So P/Peak book serves as a better indicator of moments of undervaluation that may make good opportunities for investment.
Some of the people who have questioned this typically tend to take a purist view that P/B in real time is the true measure of value and so why wouldn't you use that? I don't think Jim has ever tried to argue that this purist view might be right in theory, but for BRK in particular, with its large diversified based and conservative capital investment approach, its not a very practical signal of undervaluation. Rather, you would probably be better off using P/Peak Book unless you think something has fundamentally and dramatically changed in the prospects of the major components that make up book value.
Hope that helps and hope that is accurate, Jim.
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What is the price to peak book atm?
No. of Recommendations: 4
1.32 I believe
No. of Recommendations: 33
Could someone explain to me if peak book is a superior measure of value for Berkshire and if so why. I seem to recall various posts from Jim on this but can't recall the details.
'superior' is a pretty loaded word.
I find it more useful.
Two reasons.
First, a dip in book is almost certainly not a dip in the actual value of a share.
Price squiggles on the listed securities are generally transient. True value per share rises over time, it's only the proxy metrics that dip sometimes.
Besides, lower market prices tend to make improved periods for allocating capital.
For example, I think there is essentially no chance that a share of Berkshire is worth less than it was six months ago.
The other reason is that, empirically, the price-to-peak-book number has been a better predictor of average forward returns than price-to-current-book has.
Presumably because of reason #1.
In fact, buying whenever book per share has fallen a lot would probably not that bad a rule!
That's one I haven't tried.
Jim
No. of Recommendations: 1
Thank you all...very helpful.
