No. of Recommendations: 5
Thanks for another walk down memory lane.I figured that's what you were referring to with your comment in the other thread:
"Seriously bud, I have little interest in what Buffett said in 1999, 1979, or 1809 comprende?"Your quote from the Owner's Manual:
"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."In the 2009 AR he added this:
I should have written the “five-year rolling basis” sentence differently, an error I didn’t realize until I received a question
about this subject at the 2009 annual meeting.
When the stock market has declined sharply over a five-year stretch, our market-price premium to book value has sometimes
shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short as early as 1971-75,
well before I wrote this principle in 1983.
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.Berkshire has failed this test most years in the last 13. Ravi has written about it:
https://newsletter.rationalwalk.com/p/berkshire-ha...According to Ravi they failed 2013-2017 and 2020-2022.
Since book value gains lagged the S&P500 in 2023, 2024, and likely 2025, it's probable the test was failed in these years also.
Two thoughts: Buffett de-emphasized book value as a performance measure in 2018, and they did return some earnings to shareholders via buybacks (nearly $80 billion).
