Post New

Agree that BV has still been a good yardstick for decision making but is it not likely that at some point that will no longer be the case and is it possible that it is happening now? Would it really be surprising if BRK continued its upward trend and before you know it is priced at 2X BV? In fact didn't a top BRK executive, an older guy who has compiled a rather impressive investing record, say that in regards to valuing BRK, BV is not as relevant as it once was?

I'm just amazed that people are talking about selling shares, writing puts, etc. as if it is a "given" that BRK is going to drop in value. Things can and do change. FWIW I think that $500+ for the B's is right around the corner.

“In fact didn't a top BRK executive, an older guy who has compiled a rather impressive investing record, say that in regards to valuing BRK, BV is not as relevant as it once was?”

He did, and he told us how he values Berkshire - the five groves.

Do the exercise as he lays out, but it wont make you happy. You’ll need some pretty heroic earnings multiples to get to $500.

Plus, that same older exec has a huge war chest, but isn’t spending any of it on his own stock. Is that a hint?

What’s driving the current price? Who knows? Mr Market is in his manic phase.

As the company has evolved into principally a collection of operating companies—it should also gradually rise in its valuation relative to Book Value. This is a point Buffett made years earlier.

If this was a collection of stock holdings exclusively it would/should always trade at 1.0x Book value.

If Berkshire privately owned those companies, book value of Berkshire would be several times book value—I.e a similar large multiple the market prices Coke and Amex, etc today. Berkshire has considerably more ownership of private businesses than public stocks. And the public stocks are being further reduced at every turn. It becomes less and less 1985 each quarter. It’s running pretty close to treasuries now.

We’ve discussed this ad nauseum but the comparisons with Berkshire over decades using the P/BV yardstick at a valuation metric are apples to oranges.

Look through Earnings remains my favorite valuation measure. Buffett also recommends this measure. He’s a pretty good source. It cuts through a ton of noise and confusion. It’s simple. But it’s not easy.

I'm just amazed that people are talking about selling shares, writing puts, etc. as if it is a "given" that BRK is going to drop in value. Things can and do change. FWIW I think that $500+ for the B's is right around the corner.

Both can be right. It depends on the time frame.

I can totally imagine the price soaring...for a while. Or not. Who knows?*

But that doesn't change the notion that when valuation levels are higher than usual (for this investment or any other), the forward returns will be lower than usual for a while at some point. Result certain, timing no clue.

In the case of Berkshire, the price might well go up a lot from here for a while, but I can't think of any evidence based reason to *expect* a positive real market return in the next year. Other than "random fluctuations happen all the time". Quick back of the envelope: at the usual growth rate book might be $495000 at the end of the year ($330 per B), and the typical 1.4 times that would be $693000 ($462 per B), which is 4% less than today's price of $719000. So again it's back to time frame: if you care about having a prudently evaluated greater than 50/50 shot at making a profit THIS year, then lightening may make sense, especially if you have a better idea. I think it's fair to say that the odds very slightly favour a higher return from cash, even if it's only 51:49 odds. If your target time frame is longer, ignoring such things can make good sense.

Jim

* One can always try to guess.
The market is certainly exuberant in many ways at the moment, and that tends not to fade very quickly, so the short term might well be up. The "little people" are out in droves...3 of the 4 highest days of retail stock purchases in the last decade were in the last few weeks. Heck, Robinhood even made a profit.

“Look through Earnings remains my favorite valuation measure. Buffett also recommends this measure. He’s a pretty good source. It cuts through a ton of noise and confusion. It’s simple. But it’s not easy.”

Isn’t look-through basically 5-groves but not taking Mr Markets word for it on the publicly traded stocks grove?

Be interested what IV you’re coming up with currently using look-through. How are you valuing the cash? What multiple on fully-owned businesses? What multiples on look-through?

We’ve discussed this ad nauseum but the comparisons with Berkshire over decades using the P/BV yardstick at a valuation metric are apples to oranges.

The theory behind this is certainly sound. But the fact remains that SO FAR, a simple multiple of book still gives almost precisely the same "fair value" levels as very much more sophisticated measures of value. There is, as you note, no theoretical reason that this must be so, and good reasons to believe that the two should diverge over time--they just haven't yet. So far, "about 1.5 times book" has almost exactly the same meaning in terms of valuation level as it has for many many years, at least well within the margin of error that it always had. In fact, depending on the time frame you're looking at, the fair P/B is a hair *lower* than it was some years back.

The amount of value arising from the operating subsidiaries versus investments per share is certainly a big factor, but I haven't found that the fraction has really budged (net) in 20 years.

Jim

<<Be interested what IV you’re coming up with currently using look-through. How are you valuing the cash? What multiple on fully-owned businesses? What multiples on look-through>>

Great question, I calculate Berkshires % ownership of each individual stock and simply add that same % of earnings—what Berkshire owns. Then I use a multiple of 17 which is below market, but slightly above historic averages. The value of cash is the earnings it generates and is already included in Berkshires income statements. You do have to back out the stocks dividend payment to avoid double counting those earnings.Because Berkshire earnings give already give full credit to that-but only that on stocks. That’s the whole point of this exercise—giving credit to the value stocks provide us BEYOND the dividends.

I just treat all the earnings the same. This is very ballpark. And I’m probably not doing this exactly right :) The 5 groves method is excellent. And not claiming look through is better but I like it. I’d rather be highly accurate within a very wide range…than very specific but wrong.

Honestly, I’m on vacation now and haven’t run this exercise for a while—last time I got around 16x but the stock has run considerably higher since then. In any case—on a trailing earnings basis Berkshire is a good deal cheaper than the market. Forward earnings comparison not as compelling but I think those are highly speculative/generous numbers…

As far as Intrinsic Value it really depends what you plug in for your hurdle rate. Buffett says the 10 year Treasury is the risk free hurdle. We’re probably around fair value now. For most of the time I’ve owned Berkshire it’s traded between a 10 to 20% discount. So trading at fair value is attractive relative to the market, yet one of the least attractive for historic Berkshire entry points.

The theory behind this is certainly sound. But the fact remains that SO FAR, a simple multiple of book still gives almost precisely the same "fair value" levels as very much more sophisticated measures of value.

I agree with Jim's observations.

Consider that cash, fixed income, and equity investments (adjusted for deferred taxes) all come in a 1.0 P/B. While wholly owned businesses certainly deserve a higher multiple - sometimes much higher - they are all relatively slow growing. And new acquisitions also come onboard at 1.0 P/B.

So it's going to take a very long time for growth in the old wholly owned businesses to change the P/B ratio upward.

Hence the importance of Jim's final comment.

The amount of value arising from the operating subsidiaries versus investments per share is certainly a big factor, but I haven't found that the fraction has really budged (net) in 20 years.

<<There is, as you note, no theoretical reason that this must be so, and good reasons to believe that the two should diverge over time--they just haven't yet. So far, "about 1.5 times book" has almost exactly the same meaning in terms of valuation level as it has for many many years, at least well within the margin of error that it always had. >>

Here’s part of that elusive “reason” lol… the rise in cash which is now well over $300 Billion. Thats $300 Billion, approaching 1/3 of the company, that should be carried at 1.00 X. Yes, that’s a depressant on the multiples one should apply to overall BV. A higher multiple demands putting a chunk of that 1.0x book cash to work.

<<There is, as you note, no theoretical reason that this must be so, and good reasons to believe that the two should diverge over time--they just haven't yet. So far, "about 1.5 times book" has almost exactly the same meaning in terms of valuation level as it has for many many years, at least well within the margin of error that it always had. >>

Here’s part of that elusive “reason” lol… the rise in cash which is now well over $300 Billion. Thats $300 Billion, approaching 1/3 of the company, that should be carried at 1.00 X. Yes, that’s a depressant on the multiples one should apply to overall BV. A higher multiple demands putting a chunk of that 1.0x book cash to work.



There are always a bunch of different factors pulling fair IV to higher or lower Price-to-book value ratios. You can say a large cash balance deserves 1x but what if half that cash is float valued in book value at *negative* -1x. What if instead of 6 month duration the "cash" was moved to 2 year notes and stopped being called "cash" - would that change anything? You can look at Chubb's price to book with a more conventional bond portfolio. Nobody backs out the fixed income as "cash" for other insurance companies because the duration is slightly longer.

When large acquisitions of operating companies are more recent, closer to 1x makes sense. When large operating companies were acquired many years ago, higher BV multiples make sense.

The value of float changes with underwriting experience, prevailing interest rates, etc. Is it negative 100%? Is it more valuable than equity since it grows over time and we are paid to hold it? We can probably all agree float is worth somewhere between negative 100% (the accounting treatment for this liability in BV) and positive 150% (more valuable than equity). That's a big spread.

Agree that BV has still been a good yardstick for decision making but is it not likely that at some point that will no longer be the case and is it possible that it is happening now?
..........
I'm just amazed that people are talking about selling shares, writing puts, etc. as if it is a "given" that BRK is going to drop in value. Things can and do change.

Of course it's possible that this changes now, that BV is not a good indicator for price anymore, and that BRK won't drop in price from here. But have a look at that relation:

https://drive.google.com/file/d/1CQrM07aVXdn7hXAa7...

Since decades BV is a good indicator for price --- including right now. As long as there are not overwhelming reasons to believe otherwise one should rather expect that to continue than to change.

Here’s part of that elusive “reason” lol… the rise in cash which is now well over $300 Billion. That's $300 Billion, approaching 1/3 of the company, that should be carried at 1.00 X. Yes, that’s a depressant on the multiples one should apply to overall BV. A higher multiple demands putting a chunk of that 1.0x book cash to work.

Indeed. I had a comment to that effect in my post and deleted it to keep it simple.

The cash pile is at the high end of the historical range with respect to the size of the firm, but not outrageous--not notably above the historical range, just at the top again. I think it's a bit of a toss-up whether to say (a) it's more than the usual amount of cash so the "fair" P/B ought to be a little bit lower at the moment, or (b) they'll probably find SOME way to invest it with a decent return without an unreasonable delay, as they always have in the past, so the historically typical modest overall multiple on assets is not a crazy approach.

The best case for (b) is empirical: in the past, had you dropped your estimate of fair value during high cash periods, you would have been misled, missing some very good buying opportunities, as observable value has risen like a juggernaut: dips have been transient, and resumptions have always gone all the way back to the prior trend. Admittedly, the next time around might not be the same and assuming the cash won't get deployed sensibly is the conservative stance. But it does go against history.

Objectively speaking, cash does not deserve a multiple. But one might reasonably say that "temporary" cash might.

Jim

He did, and he told us how he values Berkshire - the five groves. Do the exercise as he lays out, but it wont make you happy. You’ll need some pretty heroic earnings multiples to get to $500. Plus, that same older exec has a huge war chest, but isn’t spending any of it on his own stock. Is that a hint?

Warren is not only not buying back Berkshire stock recently but he was actually selling Berkshire stock to buyback minority interests at BHE in 2024. That says everything one needs to know about the wise old man's view of Berkshire stock valuation these days.

"but he was actually selling Berkshire stock to buyback minority interests at BHE in 2024."

https://rationalwalk.com/berkshire-hathaway-acquir...

Great write up by RW:

Berkshire Hathaway Acquires BHE Minority Interests
Published on October 1, 2024

Berkshire Hathaway Energy (BHE) is now a wholly owned subsidiary of Berkshire Hathaway.

On September 30, 2024, BHE repurchased part of the minority interest held by family members of the late Walter Scott Jr., along with interests owned by “related or affiliated entities.” The remainder of the minority interest was acquired by Berkshire Hathaway in exchange for Berkshire Class B common stock.

Prior to the transaction, Berkshire Hathaway owned a 92% interest in BHE. The transaction has interesting implications regarding the diminished value of BHE after recent wildfire litigation and changes in the regulatory and political landscape. In addition, since Berkshire Hathaway issued shares to pay for part of the transaction, there may be implications regarding Warren Buffett’s view of the valuation of Berkshire shares.

The following is my analysis of the transaction:

The valuation of the BHE common stock is listed as $650 per share in the repurchase agreement.
BHE acquired 4,424,494 shares of BHE common stock at $650 per share, implying a total cost of $2,875,921,100.
BHE acquired the 5% Junior Subordinated Debentures due in 2057 with an aggregate principal amount of $100,000,450. This security was owned by the same minority investors who sold the common stock. I calculate that the cost of acquiring this security was $91,359,744.
BHE paid total consideration of $2,367,280,844 in cash and issued a promissory note for $600,000,000 due and payable in one year and bearing interest equal to the one year treasury rate.
BHE funded the cash portion of the transaction “with cash on hand, including proceeds received from the sale of certain investments.”
In a separate transaction, Berkshire Hathaway acquired 1,601,258 shares of BHE common stock for “an equivalent value in shares of Berkshire Hathaway Inc. Class B common stock.” Berkshire’s Class B shares closed at $460.26 on September 30, 2024. Assuming a valuation of $650 per share of BHE common stock, the transaction value was $1,040,817,700 and was funded with issuance of 2,261,369 Berkshire Hathaway Class B shares.

What’s driving the current price? Who knows? Mr Market is in his manic phase.

And Mr Market is manic for large caps, not Berkshire in particular. Other than a temporary squiggle here or there, Berkshire's return has been the same as the S&P for the last 3 years. Definitely not weighing machine, and it barely even counts as the voting machine.

Jim

Post New

US Policy FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.