Post New

What will the return of Berkshire Hathaway and the S&P 500 be over the next 20 years? The easy answer is to say, “I don’t know.” You can’t go wrong. After all, the burden of proof is on the person who claims to know. Nevertheless, just to be provocative, I will put forth a guess. I’ll go with about 4%, nominal, for the S&P and 7% for the BRKA.

Here's some background. Since 1965 both the S&P and BRKA have undergone three, distinct periods of growth. You can see these three periods strikingly simply by plotting (semi-log) the S&P 500 index and BRKA stock price over the period 1965 through 2024. Here are the returns during those periods:

Period…………… S&P 500 index………. BRKA stock price
1965-1980……….. 3%........................ 19%
1981-1999………. 13%........................ 27%
2000-2024…..…… 6%........................ 10% (least squares)

I’ve not seen anyone on the Berkshire Hathaway message boards offer an explanation for these distinctly different periods of growth. The simplest explanation is that valuations in 1980 for both the S&P and BRKA were very low values, with the trailing P/E on the S&P dropping to 8 and the trailing P/BV of BRKA at 1.0. Then in 1999 the trailing P/E of the S&P got up to a very high level of 33, and the P/B of BRKA got up to 2.1 (Actually the peak P/B occurred in Q2 1998 at 2.8).

My deliberately provocative forecast is based on the notion that valuations are again at an inflection point, similar to 1981 and 2000, and are now rolling over from their 2024 highs, and that they will fall to below average valuations over the next 20 years (Note that valuations do not revert to the mean. They cycle about the mean, which is different. You can see this dramatically in Shiller’s CAPE versus time charts, https://shillerdata.com.) Let’s estimate that the P/E on the S&P 500 will fall from its 2024 high of 29 to a low of 15 (versus a fair value of about 17) over the next 20 years, and the P/B of BRKA will fall from its 2024 high of 1.7 to 1.4 (versus a fair value of about 1.5). Assuming 8% nominal returns before valuation changes for both the S&P index and BRKA, those valuation changes bring the nominal return of the S&P to 4% and the nominal return for BRKA to 7%.

I realize that similar arguments could have been made several times in the last five or six years, and indeed were made by John Bogle, Jeremy Grantham, Hohn Hussman and myself, but we have to ask ourselves what forecast is most probable relative to 2000-2024, (1) the same returns, (2) higher returns or (3) lower returns. I’m arguing lower returns.

“I’ve not seen anyone on the Berkshire Hathaway message boards offer an explanation for these distinctly different periods of growth. The simplest explanation is that valuations in 1980 for both the S&P and BRKA got down to very low values, with the trailing P/E on the S&P dropping to 8 and the trailing P/BV of BRKA at 1.0. Then in 1999 the trailing P/E of the S&P got up to a very high level of 33, and the P/B of BRKA got up to 2.1 (Actually the peak P/B occurred in Q2 1998 at 2.8).”

While valuation changes may be the easiest explanation, it’s not the whole story. The growth rates of BV/share were also markedly different during the three periods. From 1965 through 1980 BVPS grew 19%/yr, while from 1981 through 1999 BVPS grew 29%/yr, and from 2000 through 2024 BVPS grew 11%/yr. These differences would also explain the differences in price growth during the three periods. But why did BVPS growth change so abruptly in 1981 and 2000? Part of the answer almost certainly lies in the abrupt change in the S&P valuation multiple growth that occurred in 1981 (changing from declining multiple to expanding multiple) and in 2000 (changing from expanding multiple to declining multiple). It seems that if we’re to forecast BRKA’s price growth over the next 20 years, we need to know what is likely to happen to the S&P price multiples. Thoughts?

It seems that if we’re to forecast BRKA’s price growth over the next 20 years, we need to know what is likely to happen to the S&P price multiples. Thoughts?

Secular bull markets can start only from low valuation levels. US equity market multiples are currently a whole lot more like 2000 than they are like 1982.
It would seem to me that if multiples start high, then a medium-to-long term trend of lowish price increases is rather more likely than a trend of highish price increases.

Jim

“Since 1965 both the S&P and BRKA have undergone three, distinct periods of growth.”

I need to correct this statement. The S&P 500 index and BRKA saw four, distinct periods of growth from 1965-2024. In late 2011 the P/E on the S&P bottomed at 13, down from 33 in late 1999, but, as everyone knows (even me when I’m not sleeping), the P/E then rose to 29 in late 2024. The annualized return of the index from Dec 1999 through Dec 2011 was 0.7%, and from Dec 2011 through Dec 2024 was 15%. Wake up, rrr13245.

Meanwhile the annualized return of BRKA from Dec 1999 through Dec 2011 was 6%, and from Dec 2011 through Dec 2024 was 15%.

When we split 2000-2024 into two periods, we get the following growth rates from 1965 through 2024:

Period…………… S&P 500 index………. BRKA stock price
1965-1980……….. 3%........................ 19%
1981-1999………. 13%........................ 27%
2000-2011…..…….1%......................... 6%
2012-2024………. 15%…………………….................15%

Please forgive my error. This correction does not change my intentionally provocative forecast for the next 20 years, which remains 4%/yr growth for the S&P 500 and 7%/yr growth for BRKA. Valuations, especially on the S&P 500 index, are predicted to fall.

"Secular bull markets can start only from low valuation levels. US equity market multiples are currently a whole lot more like 2000 than they are like 1982. It would seem to me that if multiples start high, then a medium-to-long term trend of lowish price increases is rather more likely than a trend of highish price increases."

Agreed. And how, if at all, will a medium-to-long term trend of lowish price increases for the S&P 500 affect Berkshire's BVPS growth and stock price? The data since 1965 look to me like BRKA's price growth and BVPS growth (BVPS growth is not shown in the table, but it is very similar to the stock price growth.) will qualitatively track the S&P 500's growth, although at a higher growth rate. (In my forecast I used the same growth rate, 8%, for both the S&P and BRKA, before changes in the S&P's P/E and Berkshire's P/B.)

What is a good source for the S&P 500 PE ratio analysis? I have not stumbled across anything particularly useful. I would like to have a succinct report that tells me the following information with sources:

The trailing 12 months P/E ratio for the S&P 500. (I have seen 25x and 27x quoted.)

The trailing 12 months for the S&P 500 segmented by things like magnificent seven, industries etc.

And the same numbers for the next 12 months, including key assumptions around profit margins and GDP growth.

I think I have read that the forward PE is as low as 18 or 20. This seems to be at odds with: the recession risks, higher taxes risks, reversion to mean profit margins and all the other problems.

Maybe the investment banks have this type of information for their clients only. I am almost completely in the dark about market valuations but suspect they are high and that fits with the individual companies I have looked at.

In the media reports and discussions about what the stock market might do, valuation discussions seem to take a back seat, which doesn’t make sense to me.

I remember 20 odd years ago paying 20 times earnings for Wrigley, when the market PE was probably around 14 or something and it seemed like a very high price. You could buy great companies at 12X and some smaller good companies at 6X.

My sense is that it’s going to be extremely difficult to make money in equities from current levels, generally. Now a days 14x is considered cheap, 20x normal and 30x okay, with some great and established companies selling for 40x and more.

I also agree that the Ben Graham central idea, was to suggest a framework for protecting your principal. That margin of safety doesn’t have to be paying working capital but can be a moat combined with an attractive valuation. We do not have attractive valuations and that means safety of principal is on shaky ground, particularly in the context of the near term headwinds.

I imagine investing used to be something only people and organisations that had excess capital had to think about. They wanted a safe place to park that money and a satisfactory return. In the last few decades, investing itself has become a way to get rich. On the one hand there is a lot of cash on the sidelines and plenty of innovation happening. But on the other hand it all looks unattractive to me with plenty of potholes ahead and some potential sinkholes!

Period…………… S&P 500 index………. BRKA stock price
1965-1980……….. 3%........................ 19%
1981-1999………. 13%........................ 27%
2000-2011…..…….1%......................... 6%
2012-2024………. 15%…………………….................15%


How would you graph these results against the inflation rate, as well as the US dollar index of each period?

I suspect that, if you project your estimates of these two varients, it miight provide more clarity to a reasonable answwer to your question.

Jeff

What is a good source for the S&P 500 PE ratio analysis?

The current P/E of the market isn't actually a usefully good predictor of anything. During recessions, for example, you tend to see high multiples because earnings are temporarily depressed. But if you're thinking it's going to be a sensibly low multiple indicative of a good time to buy, you'll be disappointed.

The best yardstick is cyclically adjusted earnings, expressed as an earnings yield rather than as a P/E ratio. The reason for the distinction is that you can do math with earnings yields, like averaging them over time, but you can't do that with P/E ratios. There aren't many good sources for this, but Smithers & Co keeps a page here https://smithers.co.uk/q_faqs/us-cape-and-q-chart/
They keep trying to do math on P/E ratios, thinking it's a problem of geometric means, but perhaps one day they'll learn.

If you really don't want cyclical adjustment---
Forwards earnings estimates are always too optimistic, but they do admittedly have the advantage that they don't include any one-off effects, since nobody includes one-off things that haven't happened yet in their estimates. The Factset weekly Earnings Insight report is an excellent source. Google "Factset S&P 500 earnings" and the top result is usually their PDF.

Jim

PS
From the "teach a man to fish" department--
In case anyone is interested, here is a brief history of the smoothing that I use. It's like the E10 used in CAPE with two slight changes: (a) somewhat smoother and (b) scaled so that on average it's close to what earnings would be on any given date if that date were neither unusually good nor unusually bad. This is entirely backwards looking: the figure for each date uses only data available up to that date.

Have a look at the history. I believe the last column below gives you a reasonably good idea of current broad market valuation levels. You can compare it to the average figure in (say) the last 5 years, up to average figure in the last 35 years, with the table below. You can say with some modest confidence that prices are currently 48% higher than they were at the lowest quarter of the credit crunch at end March 2009 (the cheapest quarter in t his series), and the market was 31% more expensive than this at the end of March 2000 at the end of the tech bubble (the most expensive line in this series). The market was cheaper than this 86% of the time in the last 35 years.

The S&P figures are all off by a hair because I do this weekly and just resampled it to be quarterly to make a reasonably sized post. The "Real price" and "Trend earnings" columns are with today's CPI of 319.80. Knowing that, you could scale the numbers appropriately for any future date. The other columns, notably the trend earnings yield, won't need revision.

The health warning: the trend earnings are perhaps an overestimate, so there is a case to be made that the market is currently more expensive than these figures imply. Net profit margins have been (compared to history) extremely high for some years now, long enough that the trend earnings line itself has bent upwards. Mathematically, this can not continue forever. The recent rate of earnings growth will definitely at least slow back to the rate of sales growth at some point (if margins stay very high but stop rising), or perhaps lower for a while if net margins fall back somewhat in the direction of old normal levels.

The last date is this week just ended, so it isn't part of the quarterly spacing.

   Quarter        S&P       Real       Real      Trend
    Ending      Index      Index    Trend E    E Yield
1989-12-31     353.40     895.20      56.00     6.255%
1990-03-31     339.94     845.73      56.07     6.629%
1990-06-30     358.02     881.81      56.04     6.355%
1990-09-30     306.05     738.11      55.94     7.579%
1990-12-31     328.72     784.95      55.83     7.112%
1991-03-31     375.22     889.07      55.70     6.264%
1991-06-30     371.16     873.28      55.60     6.367%
1991-09-30     385.90     900.34      55.48     6.162%
1991-12-31     406.46     942.60      55.30     5.866%
1992-03-31     403.50     927.37      55.05     5.936%
1992-06-30     403.45     921.30      54.77     5.945%
1992-09-30     414.35     941.10      54.54     5.795%
1992-12-31     435.71     981.71      54.34     5.535%
1993-03-31     447.78    1001.16      54.22     5.416%
1993-06-30     447.60     993.01      54.15     5.453%
1993-09-30     457.63    1011.78      54.09     5.346%
1993-12-31     466.45    1023.33      54.02     5.279%
1994-03-31     445.77     971.93      54.00     5.556%
1994-06-30     442.80     959.82      53.99     5.625%
1994-09-30     462.71     993.48      54.03     5.438%
1994-12-31     459.27     981.51      54.13     5.515%
1995-03-31     500.71    1061.35      54.31     5.117%
1995-06-30     544.75    1145.25      54.57     4.765%
1995-09-30     584.41    1222.56      54.93     4.493%
1995-12-31     615.93    1282.17      55.36     4.317%
1996-03-31     645.50    1332.03      55.78     4.187%
1996-06-30     670.63    1370.12      56.17     4.099%
1996-09-30     686.19    1395.38      56.57     4.054%
1996-12-31     756.79    1526.83      57.05     3.736%
1997-03-31     773.88    1552.20      57.70     3.717%
1997-06-30     887.30    1771.64      58.49     3.302%
1997-09-30     945.22    1880.59      59.36     3.157%
1997-12-31     936.46    1854.29      60.24     3.249%
1998-03-31    1095.44    2164.81      61.13     2.824%
1998-06-30    1133.20    2227.28      61.98     2.783%
1998-09-30    1044.75    2045.66      62.81     3.071%
1998-12-31    1229.23    2397.41      63.68     2.656%
1999-03-31    1282.80    2493.96      64.40     2.582%
1999-06-30    1315.31    2530.94      65.15     2.574%
1999-09-30    1277.36    2446.62      65.89     2.693%
1999-12-31    1469.25    2792.35      66.77     2.391%
2000-03-31    1498.58    2822.73      67.65     2.397%
2000-06-30    1454.60    2713.68      68.59     2.527%
2000-09-30    1436.51    2657.85      69.53     2.616%
2000-12-31    1320.28    2425.88      70.44     2.904%
2001-03-31    1160.33    2113.38      71.29     3.373%
2001-06-30    1224.38    2205.63      72.00     3.264%
2001-09-30    1040.94    1874.16      72.57     3.872%
2001-12-31    1161.02    2093.29      73.00     3.487%
2002-03-31    1147.39    2065.63      73.29     3.548%
2002-06-30     989.82    1760.42      73.58     4.180%
2002-09-30     827.37    1466.83      73.92     5.039%
2002-12-31     875.40    1544.71      74.31     4.811%
2003-03-31     863.50    1511.30      74.70     4.943%
2003-06-30     976.22    1699.98      74.95     4.409%
2003-09-30     996.85    1728.70      75.15     4.347%
2003-12-31    1095.89    1897.79      75.42     3.974%
2004-03-31    1108.06    1905.28      75.80     3.978%
2004-06-30    1134.43    1921.86      76.36     3.973%
2004-09-30    1110.11    1873.73      77.00     4.109%
2004-12-31    1211.92    2030.71      77.71     3.827%
2005-03-31    1171.42    1958.77      78.38     4.001%
2005-06-30    1191.57    1959.29      79.13     4.039%
2005-09-30    1228.81    1996.74      80.06     4.009%
2005-12-31    1248.29    2016.99      81.15     4.023%
2006-03-31    1294.87    2083.42      82.36     3.953%
2006-06-30    1270.20    2008.09      83.65     4.166%
2006-09-30    1335.85    2097.68      84.99     4.052%
2006-12-31    1418.30    2249.37      86.37     3.840%
2007-03-31    1420.86    2233.01      87.84     3.934%
2007-06-30    1503.35    2318.18      89.27     3.851%
2007-09-30    1526.75    2345.89      90.73     3.867%
2007-12-31    1478.49    2253.76      92.12     4.087%
2008-03-31    1315.22    1985.96      93.32     4.699%
2008-06-30    1278.38    1888.82      94.19     4.987%
2008-09-30    1213.27    1768.48      94.84     5.363%
2008-12-31     872.80    1305.71      95.31     7.300%
2009-03-31     815.94    1231.77      95.54     7.757%
2009-06-30     918.90    1373.90      94.94     6.911%
2009-09-30    1044.38    1549.31      93.97     6.065%
2009-12-31    1115.10    1648.52      92.85     5.632%
2010-03-31    1166.59    1720.57      92.36     5.368%
2010-06-30    1076.76    1579.06      92.38     5.850%
2010-09-30    1148.67    1683.83      92.51     5.494%
2010-12-31    1257.64    1837.58      92.78     5.049%
2011-03-31    1313.80    1901.83      93.11     4.896%
2011-06-30    1268.45    1798.39      93.61     5.205%
2011-09-30    1131.42    1598.20      94.26     5.898%
2011-12-31    1257.60    1778.25      95.06     5.346%
2012-03-31    1408.47    1976.64      96.01     4.857%
2012-06-30    1362.16    1895.11      97.07     5.122%
2012-09-30    1440.67    2001.16      98.16     4.905%
2012-12-31    1402.43    1946.45      99.21     5.097%
2013-03-31    1569.19    2165.60     100.17     4.625%
2013-06-30    1606.28    2206.30     101.08     4.581%
2013-09-30    1691.75    2314.22     101.95     4.406%
2013-12-31    1841.40    2524.73     102.97     4.079%
2014-03-31    1857.62    2531.77     104.42     4.124%
2014-06-30    1960.96    2639.43     105.99     4.015%
2014-09-30    1982.85    2663.78     107.55     4.037%
2014-12-31    2088.77    2824.88     109.21     3.866%
2015-03-31    2061.02    2812.09     110.99     3.947%
2015-06-30    2101.61    2828.22     112.65     3.983%
2015-09-30    1931.34    2592.83     114.17     4.403%
2015-12-31    2043.94    2754.27     115.58     4.196%
2016-03-31    2035.94    2745.54     116.54     4.245%
2016-06-30    2037.41    2715.24     117.34     4.322%
2016-09-30    2168.27    2878.57     118.11     4.103%
2016-12-31    2238.83    2964.92     118.76     4.005%
2017-03-31    2362.72    3103.94     119.34     3.845%
2017-06-30    2423.41    3166.90     119.92     3.787%
2017-09-30    2519.36    3279.88     120.46     3.673%
2017-12-31    2673.61    3466.64     121.02     3.491%
2018-03-31    2640.87    3394.14     121.65     3.584%
2018-06-30    2718.37    3457.95     122.41     3.540%
2018-09-30    2913.98    3695.28     123.31     3.337%
2018-12-31    2485.74    3151.38     124.47     3.950%
2019-03-31    2834.40    3587.27     125.82     3.507%
2019-06-30    2941.76    3676.72     127.44     3.466%
2019-09-30    2961.79    3690.67     129.09     3.498%
2019-12-31    3240.02    4028.49     131.02     3.252%
2020-03-31    2541.47    3145.97     132.94     4.226%
2020-06-30    3009.05    3750.19     134.98     3.599%
2020-09-30    3298.46    4061.07     136.69     3.366%
2020-12-31    3756.07    4615.88     138.47     3.000%
2021-03-31    3974.54    4832.92     140.11     2.899%
2021-06-30    4280.70    5085.32     141.88     2.790%
2021-09-30    4455.48    5207.83     144.21     2.769%
2021-12-31    4766.18    5483.81     147.07     2.682%
2022-03-31    4543.06    5120.79     149.45     2.919%
2022-06-30    3911.74    4279.76     151.92     3.550%
2022-09-30    3585.62    3871.70     154.17     3.982%
2022-12-31    3839.50    4098.37     155.79     3.801%
2023-03-31    4109.31    4368.29     157.32     3.601%
2023-06-30    4450.38    4680.14     158.66     3.390%
2023-09-30    4288.05    4466.40     160.16     3.586%
2023-12-31    4769.83    4967.89     161.97     3.260%
2024-03-31    5254.35    5414.69     163.96     3.028%
2024-06-30    5460.48    5596.32     165.97     2.966%
2024-09-30    5738.17    5829.31     168.09     2.884%
2024-12-31    5970.84    6051.70     170.19     2.812%
2025-03-31    5580.94    5602.23     172.30     3.075%
2025-04-25    5525.21    5525.21     172.98     3.131%

I think the key observations about Berkshire's future performance can be boiled down to something simple: the era of meaningful outperformance is probably, finally, over. Within rounding error.

The top level reasoning goes like this:

Berkshire's operating companies are fine firms, but there are lots of fine firms out there. There is no reason to think that as a collection they will rise in value measurably faster than a random set of plausibly good US firms. Maybe a little bit at the margin if, and to the extent that, they are slightly better than average firms, but nothing material. As a collection they don't have noteworthy returns on incrementally invested capital.

The other side is investments: the portfolio, and the changes to the portfolio. To within rounding error, the rules of investing large portfolios is: if your name is Warren Buffett you can beat the market materially over time, and if it isn't you can't. He will be leaving the office for the last time in the not distant future, so that era is essentially over. The portfolio will be market tracking in future.

Taking the two sides together, one can observe that the trend in value growth per share has been basically constant for the last 27 years, but the sensible expectation is that it's now over. A kink is coming.

As others noted recently, the Apple trade was the greatest single trade in the history of investing, and even with that included in the recent results, Berkshire was merely able to keep up the trend for a few more years. It was a miracle, but we basically can't see any more miracles. There just can't BE a miracle that big again, and nothing short of a move that was both bigger and just as successful could allow Berkshire's value growth to maintain its pace up till now.

Berkshire still has a few advantages, but they are not big in percentage terms. The quality of the insurance arm is one, and the float it offers. And the mere fact of a tradition of rational capital allocation is another...no "sterilizing" stock grants with buybacks of shares while they're wildly overpriced, or ego driven overpriced acquisitions. And of course a very low risk because of the fortress like balance sheet, a tradition I don't foresee changing. But I don't think one can reasonably expect those to offer an advantage of more than 0.5% to 1.0% per year relative to a diversified dartboard portfolio of US equities.

I guess that leaves one last question - if performance were 0.5% to 1.0% better than a broad swath of US equities, what should one expect from a broad swath of US equities? In short, what is the reasonable expectation of the future for US businesses and equities starting from the current valuation and business environments. Much poorer than an average year in the past, possibly for a very long time. We have seen a golden age, but the sun is getting low on the horizon.

Jim

Here's one source:

material/sp-500-eps-est.xlsx

Here's another source:

Click on ie_data (xls)

If you calculate and plot the forward, 10-year return on the same chart as CAPE, you get a saw-tooth curve like the CAPE plot, but inverted, with forward returns low when CAPE is high. Earnings have grown more-or less smoothly since 1945, but P/Es and returns have moved up and down dramatically in a saw tooth pattern. Sort of a 30-ish year K-wave?

I'm just kidding about the K-wave, but Shiller's CAPE plot does look like a long, saw-tooth cycle.

I once segmented historical P/E data and the corresponding forward returns into long periods of rising P/E and falling P/E, and then plotted forward return versus P/E. The result was two, 2nd order, curves, one for periods of rising P/E that was curved downward, and one for periods of falling P/E that was curved upward. The two curves met at the extremes of P/E with the highest forward returns at the lowest P/E and the lowest forward returns at the highest P/E. The curves diverged at the median P/E, forming sort of a tilted football. I think this is why linear fits of return versus P/E are fat in the middle. But I digress.

"Much poorer than an average year in the past, possibly for a very long time."

I guess I'm not the only pessimist on the message board, and your opinion is, justifiably, much more highly valued (pun intended) than mine.

It does seem to me that although Berkshire's value growth will be not unlike that of the S&P 500, Berkshire's return over the next 10 years or so will be higher. That is simply because Berkshire stock is currently not as overpriced as the S&P 500. Berkshire's P/B is maybe 12% or so above fair value, while the S&P's P/E is more like 45% above fair value.

Jim, you state the in my view two main points supporting one who a)currently holds Berkshire AND b)don´t want to withdraw from the US to keep on holding Berkshire:

1.)There is no reason to think that as a collection they will rise in value measurably faster than a random set of plausibly good US firms.

Holding Berkshire is easier than trying to trying to identify good US firms oneself --- and done by better ones (than me).

2.) And of course a very low risk because of the fortress like balance sheet, a tradition I don't foresee changing

And this (I just would add "Berkshire culture" to "tradition") together with 1 makes the case to keep holding even stronger.

To within rounding error, the rules of investing large portfolios is: if your name is Warren Buffett you can beat the market materially over time, and if it isn't you can't. He will be leaving the office for the last time in the not distant future, so that era is essentially over. The portfolio will be market tracking in future.

I think there were 4 or 5 people (Buffett, Miller, Simons, etc) who were able to beat the market materially over the long-term. It is quite possible that someday there will be a fifth such person.

" I think there were 4 or 5 people (Buffett, Miller, Simons, etc) who were able to beat the market materially over the long-term. It is quite possible that someday there will be a fifth such person."

Ron Baron and Steve Cohen have great records, which makes you wonder WHY Buffett didn't take his own advice years ago and just buy spy?

I actually submitted this as a question this year for the annual meeting.
The S & P offers the ability for Berkshire to move in and out of markets at extreme size and speed.
This seems like a far more efficient way to mobilize Berkshire's cash than waiting for the occasional deal that may offer slightly better returns.
If the market as a whole is trading at an atttractive level, of course.

Outstanding post Jim.
Thank you sincerely.

I guess I'm not the only pessimist on the message board, and your opinion is, justifiably, much more highly valued (pun intended) than mine.
Just a reminder that high valuation levels tend not to last : )


Berkshire's P/B is maybe 12% or so above fair value, while the S&P's P/E is more like 45% above fair value.

I agree with the general conclusion, but I warn folks to doubt the notion that the S&P 500's average valuation level in any given period is a good guide to its fair value or average future level. (it seems to work better for Berkshire). For a simple reason: Even if you pick a 30 year stretch, you get wildly different numbers for the "normal" level of US equities depending on the date range. I have almost no idea what the average valuation level will be for US equities in the next 20 years.

You can still try to estimate what sort of forward return seems plausible, and decide whether or not that is sufficient for you. That's because we know what current profits are, and how much we're paying for them. In very round numbers, you might expect a forward real total return equal to the sum of (1) the dividend yield on purchase date (1.41%), plus (2) the rate of growth in the market value of the equities. Over time the latter is going to be the growth of real value, which tracks real growth of profits, which tracks real growth of sales, which can be approximated with real US GDP growth (2.2%/year since the mid 1990s).
Plus the one time adjustment wildcards (3a): the annualized impact of the one time change in valuation multiples during your holding period, and (3b) given recent extremes, any one-time impact from a change in the "normal" level of net profit margins.

The margin question is hard to predict, but you can look at this chart and eyeball what level you think would be "normal" in future, and how that differs from the latest figure, which gives you the size of the one-time change to expect. https://fred.stlouisfed.org/graph/?g=cSh
There is a big correlation between US corporate net profit margins and federal government deficits, for pretty good macroeconomic reasons. So if you have an opinion on the trajectory of future deficits, you can feed that into your expectation of how much net margin mean reversion to expect.

Jim

Holding Berkshire is easier than trying to trying to identify good US firms oneself --- and done by better ones (than me).

Indeed.
I laid out a fairly stark case for concluding that Berkshire's future rate of growth in value per share will no longer be higher than the average (or not meaningfully so), so one should no longer expect it to be.

But there are still several good reasons which one could list for having Berkshire as a core investment.


On the short term lighter side: Berkshire is more likely than most firms to get a nice one time boost for any capital deployed in the next bear market, whenever that may be.
On the short term darker side: a lot of BNSF's business is moving stuff that was made in other countries. Arrivals at the port of Los Angeles are down ~30% for the moment.

Jim

“ On the short term lighter side: Berkshire is more likely than most firms to get a nice one time boost for any capital deployed in the next bear market, whenever that may be.
On the short term darker side: a lot of BNSF's business is moving stuff that was made in other countries. Arrivals at the port of Los Angeles are down ~30% for the moment.

Jim“ Good morning, based on the major investments made the past ten years, why should we be optimistic that stock picking, or takeover deals, will beat an index? Other than the huge Apple win, what do you see to justify that confidence? Thank you.

A headline that caught my eye this morning:

“ A Spectacularly Underappreciated 15 Years”
https://ritholtz.com/2025/04/an-amazing-15-years/

The last few years I’ve had a nagging feeling that my investment success was pretty obviously too good to be true. I was an unsophisticated car salesman who started buying Berkshire in 1998 (like I said, unsophisticated), and continued buying as long as our small car dealership was profitable. I got a little bit more intelligent later on and only bought when the P/B ratio was in my favor. The GFC killed the car business in 2009 so I stopped buying Berkshire and retired at the early age of 45 with what I thought was just enough to live on. I got nervous in 2011 and started up a small used car business, and ran that and saved a bit more money over the next 5 years, and retired again with a better (but still not super large) portfolio size.

Fast forward to the past few years, and I’ve ended up in the top 1% of NW in the US according to stats I read. I knew in my mind this was ridiculous, and probably too good to last, so we never spent much money like most “rich” people. I hate to say it, but it looks like the chorus from this old Merle Haggard song might be coming true:

Are we rolling down hill
Like a snowball headed for hell?
With no kind of chance for the Flag or the Liberty bell
Wish a Ford and a Chevy
Could still last ten years, like they should
Is the best of the free life behind us now?
Are the good times really over for good?

based on the major investments made the past ten years, why should we be optimistic that stock picking, or takeover deals, will beat an index? Other than the huge Apple win, what do you see to justify that confidence?

Well, I just laid out my reasoning specifically for why we should NOT be optimistic on that front. I imagine you saw it. https://www.shrewdm.com/MB?pid=697552250

Separately, evaluating Mr Buffett's recent stock portfolio performance without counting the Apple position is a bit like evaluating an ocean without considering the water, isn't it?

As for the future of the portfolio of investments:
I do think we can expect a moderate one-time lift from capital deployed in the next bear market, whenever that may be. A bit of the old sell-high-buy-low is good for the pocketbook. The picks don't have to be particularly market beating; merely avoiding big losers works well, and that is Berkshire's traditional super power. One of my favourite sayings is "you make most of your money in bear markets, you just don't realize it at the time". The word "realize" has two meanings, of course.

Jim

To within rounding error, the rules of investing large portfolios is: if your name is Warren Buffett you can beat the market materially over time, and if it isn't you can't.
...
I think there were 4 or 5 people (Buffett, Miller, Simons, etc) who were able to beat the market materially over the long-term. It is quite possible that someday there will be a fifth such person.

Read my comment with emphasis on "large". I'm pretty sure nobody else has beat the market past random chance with a 12 digit portfolio to manage. Heck, at that scale it gets hard to diverge by any material amount. You have to hold large positions from among the largest things.

It's certainly possible, even likely, that someone else will manage the feat some day. But as a rule of thumb, it makes no sense to think that the next portfolio manager at Berkshire will be that person. If they manage a 1%/year advantage over time after corporate-level tax that will be truly astounding. Book value might manage that because of the modest implicit leverage within Berkshire.

Jim

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