No. of Recommendations: 13
Did you sell simply so you can buy back later at a cheaper price, or do you think there has been some real damage to the Berkshire “brand” due to the weakness at BNSF and especially at BHE? Are you forecasting a weaker operating earnings trend far into the future?
Purely valuation based. The price seemed high enough that odds favoured raising cash for a while. If you make a lot of assumptions (value grows at around the same rate as in recent years, valuation multiples stay around the last 10-15 average, etc), then the forward returns in the next year are more likely to be negative than positive. Same old, same old.
But sure, new information will roll in over time. Some of that information may affect my estimate of value, which in turn affects my estimate of the price-to-value ratio, which in turn would affect how much and at what price I buy back in.
As for this report--I have been talking about the disappointing operating earnings for several quarters now, and now we have comments suggesting that it might be a lasting issue rather than a purely temporary blip. On the other hand, I have always assumed that Berkshire's value generation rate would slow over time, so maybe this is it. In fact I think it already has slowed somewhat in a broad sense, but it was "hidden" by the unrepeatable good result from the Apple position.
My long term forecast for value goes something like this:
Assume Berkshire is capable of generating value at a rate of X%/year faster than the broad US market, in year 1. I'm speaking of value, not price.
I assume that each year, the magic sauce "X" will drop by 6% from the previous year's figure. e.g., if they could beat the market's value generation rate by 5% one typical year, then I'd expect them to beat it by only 4.70% the second year, 4.42% the third year, 4.42% the fourth year. Asymptotically approaching a rate of value generation no better than the average company. I came up with this formula in 2006, and I keep not seeing the slowdown yet. But it will come.
FWIW, based on the current price of $402.86 per B, my sundry models for one year forward returns have a median value of inflation - 7.3%. The range is inflation-13.3% to inflation + 1.1%. The models are based on various value metrics, and varying amounts of historical data.
Jim
