No. of Recommendations: 10
Way back when there was such a thing, the Owner's Manual once said:
We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.
We continue to pass the test, but the challenges of doing so have grown more difficult. If we reach the point that we can't create extra value by retaining earnings, we will pay them out and let our shareholders deploy the funds.
It got revised in 2009:
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1? If these tests are met, retaining earnings has made sense.
And in 2018 we were told "..the annual change in Berkshire's book value ... is a metric that has lost the relevance it once had."
A method for calculating intrinsic value was presented (5-groves).
Question: has the revised test has been met lately using book value? How about using intrinsic value?
By my reckoning, for the past three rolling 5-year periods, Berkshire has lost to SPY on book value gain, market price gain and 5-groves intrinsic value gain.
Large share repurchases (when it made sense) in the last three years too.
