No. of Recommendations: 9
"If you're assuming that the price is ultimately a pretty fair representation of value,..."
...
Yes, I am assuming that.
Sorry, I still don't understand your process.
P/B has been falling on trend since the 1990s, not rising. My usual P/B spreadsheet starts in Feb 1996, and the least-squares fit trend line is that the ratio has been falling 2.25 points per year--a whole lot. If you're assuming that market price is ultimately a good-enough proxy for value (not where I would start), it would seem that the conclusion is that intrinsic value as a multiple of book per share is very much lower than it used to be.
e.g.,
First five years of my table: average 1.996
Last five years: average 1.456
Even if you start after the end of the 1990s bubble when things got cheap in 2000, the message is similar:
Five years 2000-2004: average 1.711
Last five years: average 1.456
Or, breaking the data set in half:
1996-2010 average 1.726
2011-2025 average 1.392
True, there has been an upswing lately: the average in the last 18 months at 1.608 is higher than the previously established range. (Average post crunch 2008-2023 inclusive, 1.375).
However 18 months is a pretty short time frame--I would not be in a hurry to call that the new norm. I suspect a lot more of that is generally rising prices in cap weight indexes, and a lot less in terms of calmly rational evaluation of what Berkshire is worth. Except perhaps in the sense of "better value than many other things out there"!
I think it is much more profitable to ignore price and look at a trend in real (after inflation) value per share, using whatever metric you prefer. Book, investments + multiple of earnings, multiple of (earnings + look-through earnings), multiple of multi-year growth in real book, etc. Minus whatever haircuts for debt and cyclical valuation levels you deem suitable. Price is great as one of the two inputs to find out whether something is cheap or expensive at a given time, but it isn't a good enough guide to value.
Jim
