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- Manlobbi
Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 31
A long time ago, the dark ages around 2006, I created a spreadsheet to estimate the future trajectory of Berkshire's share value and price. It's a stochastic/ensemble model, so it can calculate the range of likely outcomes as well as the average among them, or estimate the chances of any particular outcome. It assumed that true trend value would rise at a gradually falling rate, and that price would be sort of a bell curve distribution above and below that value trend, and that there would be multi-year stretches of over- or under-valuation.
I stumbled across the version that has had no updates since book value and price at end 2008, 17 years ago. (FWIW, the estimate of on-trend rate of nominal value growth per share for 2026 was 9.18%)
Unfortunately this was before I switched everything to predict returns above (and therefore separate from) inflation, so it's in nominal price terms, and it wasn't really saying what the real gain might be. Still.
Anyway, its average forecast for market price at end 2025 was about $614,600. The actual number was $754,800. Too high by 22.8%, or nominal 1.2%/year faster than expected. Still, given the length of time, I'd consider that prediction pretty respectable. The model estimated that a price of at least $754,800 had a 14% chance of occurring. The actual market price when the forecast was made was $94,750 per share.
Any excuses I can make for the error? Well, P/B was higher than the 20 year average at end 2025. If it had been at the average, the error would have been only 0.6%/year. Also, a part of the model that wasn't really used (some columns related to SWR) had inflation of 2%/year pencilled in. Since we had an inflation spike, at a stretch one could make the excuse that the estimate was too low partly because of that : )
Not a perfect forecast by any means, but close enough that it added some value for planning purposes. I kind of feel sorry for people who invest in those things that provide no idea of how much money they'll make!
Jim
No. of Recommendations: 19
Thanks, Jim. A lot of my retirement was built with your BRK work as an anchor. It it has been genuinely appreciated, and a far more successful guide than I anyone could reasonably hope for.
Do you have a forecast to share for 17 years forward?
No. of Recommendations: 6
Having it be conservative is nice, but a lot of things have happened since 2006. That’s before the acquisition of BNSF and the split in the B shared that added BRK to the S&P500 and to the options market
Probably best to make the return indexed to inflation so you don’t have that error.
Do you guys remember the Intrinsivaluator? It was a flash-based valuation tool. I used it on 2010 and for a few years following to get an idea of how aggressive of a valuation the stock price actually follows.
No. of Recommendations: 16
Do you guys remember the Intrinsivaluator? It was a flash-based valuation tool...
That's the input to this model : )
Indeed, that's why it's all nominal prices, not inflation adjusted, as I built it originally straight from his figures.
Way back when, I used the average of the scenarios for each year to get an idea of the nominal rise in value. That set the initial assumed nominal growth rate, 11.711%/year at end 2008, and a starting notional value of $135731 at that date.
Each year's on-trend value-per-share growth rate after that is based on the assumption that growth rate is made up of two parts: (1) "average US stock in an average year" which I assumed to be 8% nominal (could be thought of as Siegel's constant 6.5% + 1.5% inflation, or 6+2), plus (2) a premium for management being smart. The premium for each year was assumed to be 6.187% less than it was the prior year (can't exactly remember why the strange decimals), so the rate of increase of nominal value per year asymptotically approaches 8%. The reasoning is that any monkey with a dartboard could manage inflation+6.5%, being an estimate of the average total return from the average US stock in the average year, so there is no reason to expect Berkshire's rate of value growth per share to fall lower than that. The idea of 6.5% was approximated in the old model as nominal 8%.
That gives a series of "on trend" value figures. Then I add noise to that for variation in value growth per year, a random number in the range =-7.5% to +7.5% to get notional value at that year end. Then a sort of bell curve of valuation multiple on that, usually ranging from 50% undervalued to 30% overvalued, and with a bit of persistence so trends arising from the random numbers can last more than a year.
Converting the whole model to inflation adjusted figures is possible, but then it is a brand new model, and has no history of out-of-sample validity. So one might as well start with a blank sheet of paper and build a new after-inflation model from scratch. I've done that too, but the result so far has always been the same: on trend growth best fit of inflation + 8%/year since 1998 and, as yet, no slowdown in that trend. I've been waiting for the visible slowdown for a long time. We all know it's coming, but it's amazing that it has held off this long.
However, if we posit that the on-trend growth rate is still inflation+8% at the moment but slowdown starts now, at the slowdown rate in the original model, the *after inflation* on-trend growth rates per share would look like this:
2025 Inflation + 8.00%
2026 7.91%
2027 7.82%
2028 7.74%
2029 7.66%
2030 7.59%
2031 7.52%
2032 7.46%
2033 7.40%
2034 7.34%
2035 7.29%
2036 7.24%
2037 7.20%
2038 7.15%
2039 7.11%
2040 7.08%
2041 7.04%
2042 7.01%
2043 6.98%
2044 6.95%
2045 6.92%
Jim
No. of Recommendations: 42
I kind of feel sorry for people who invest in those things that provide no idea of how much money they'll make!
Jim, I want to publicly thank you for sharing your thoughts and investment approach over the years. About 15 years ago I started reading your posts and it had a dramatic change on my investing mind set - which to put it bluntly has had a dramatic impact. Also want to say that I am now "paying it forward" to the next generation.
thank you.
tecmo
...
No. of Recommendations: 2
That's the input to this model : )
Nice! What I did with the tool was map each of the standard measures of aggressive to conservative valuation against time, and then I graphed them with the stock price. What I was trying to do was figure out what valuation measure might have predictive power.
What I found was the top and bottom valuation measures were a good guide rail on the stock trading range. But it also provided a good basis to later use in establishing option trades.
