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Let’s say that Berkshire’s price-to-book value declines from the present 1.72x to 1.5x. If this occurs, assuming 8% annualized growth in book value, we can expect Berkshire’s Class A stock to trade at ~$995,000 in five years and ~$1,463,000 in ten years. Given the current price of $775,000, shareholders could expect annualized returns of 5.1% over the next five years and 6.6% over the next ten years.

In other words, if we assume that growth in book value per share to 8% and the price-to-book ratio will contract to 1.5x, returns for shareholders holding the stock from current levels will be materially below 8%. Of course, there is no law that says that the price-to-book ratio will be 1.5x in the future or that growth of book value per share will be 8%.

https://substack.com/home/post/p-158300421

Excellent post by Rational Walk on BRK valuation using Buffett’s writings and repurchase actions.

We will always be prepared for the thousand-year flood; in fact, if it occurs we will be selling life jackets to the unprepared

That reminds me what one day I will utterly miss: The laughs I am having when reading Warren's Letters to the shareholders. Nothing against Abel, but he won't be able to provide the above. I will then read the old ones from time to time.

Let’s say that Berkshire’s price-to-book value declines from the present 1.72x to 1.5x. If this occurs, assuming 8% annualized growth in book value, we can expect Berkshire’s Class A stock to trade at ~$995,000 in five years and ~$1,463,000 in ten years. Given the current price of $775,000, shareholders could expect annualized returns of 5.1% over the next five years and 6.6% over the next ten years.
In other words, if we assume that growth in book value per share to 8% and the price-to-book ratio will contract to 1.5x, returns for shareholders holding the stock from current levels will be materially below 8%. Of course, there is no law that says that the price-to-book ratio will be 1.5x in the future or that growth of book value per share will be 8%.

It's extremely clear thinking, I wish more people were that rational. About other stocks too, not just this one.

However, applying the exact same reasoning and assumptions to different time frames, you get
One year return -4.4%
Two year return +1.6%/year
Three year return +3.7%/year

However I prefer to do things in after-inflation dollars, as only spending power matters. Let's say Berkshire manages growth in intrinsic value at inflation + 7%, and a terminal P/B of 1.4 which is still higher than the 15 year average.
One year return inflation -11.6%
Two year return inflation - 2.7%/year
Three year return inflation + 0.4%/year


It's true that investors' situations (tax and timeframe and other) certainly vary, but it is not inconceivable that many entirely rational conservative investors might have opportunities in the next three years which are better for their long term financial health.

Perhaps even their peace of mind, too. Though it isn't a recommendation, I note that the current yields on two- and three- year TIPS are inflation + 1.22%/year and inflation + 1.35%/year.

Trying to "tailcoat" Mr Buffett isn't always the best approach to investing, but he is happy to hold quite a bit of dry powder at the moment hoping for some acceptable opportunity in some reasonable time frame, and so am I : )

Jim

Fantastic post Jim. Love it.

" Trying to "tailcoat" Mr Buffett isn't always the best approach to investing, but he is happy to hold quite a bit of dry powder at the moment hoping for some acceptable opportunity in some reasonable time frame, and so am I : )

Jim"

Good morning Jim, as you recall, once upon a time Buffett was loading up on IBM and touting IBM rather than buying brkb, which made a few of us nuts, at that time. Buybacks at small premiums to BV was dilutive to BV, BUT, buybacks at, substantial discounts to IV, is accretive to IV, which always should have been the hurdle. IF I could ask Buffett one question, that would be it, WHY didn't you authorize a buyback at material discounts to IV in the 2006 time period? Amen.

Fantastic post Jim. Love it.

Notice that it does not recommend that those suited to, and good at, long term buy and hold should sell their stock. Sitting on your hands also has much to commend it.
However, let's just say I wasn't a buyer at $518 per B share yesterday.

Jim

It's always been my take/belief that WEB, much like the idea of paying a dividend, has never wanted to repurchase ANY shares and that he only did so when the valuation became so ridiculously low that he would be open to tremendous criticism from shareholders. And then initially his buyback policy was set at a ridiculously low valuation. Only when it became glaringly obvious that hardly any shares would be bought back the buyback price was bumped up 10% (1.1 book value).....and that price was as successful in buying back shares as the first one. So then they changed it again...price subject to WEB and Charlie's discretion. This is where it got interesting and I would argue that the amount of shares repurchased is what in WEB's opinion is the minimum amount needed to fend off criticism from shareholders. Numerous price opportunities and cash were available to "load the boat" with repurchases...didn't happen.

Going forward I think there is a different scenario than what is constantly being mentioned here. What if the price of BRK, with a decent amount of volatility, slowly but surely works its way up to 1.75-2.0 BV and stays in that range? In time the earnings will easily support it. Those waiting for the magical 1.4X BV to reappear may need a black swan event which is always possible. My question is why would anyone expect, especially in light of the recent earnings numbers, the stock to decline? The answer seems to be because that is what the chart is telling me and it's always been that way.

" My question is why would anyone expect, especially in light of the recent earnings numbers, the stock to decline?"

Buffett has held too much cash for over a decade isn't that the proper question for him? He always wanted to paint on a bigger canvas, and he didn't care that he was giving away his life's work via the foundations for years near BV. His mindset bothered me to the tune of many millions over three decades.

Going forward I think there is a different scenario than what is constantly being mentioned here. What if the price of BRK, with a decent amount of volatility, slowly but surely works its way up to 1.75-2.0 BV and stays in that range? In time the earnings will easily support it. Those waiting for the magical 1.4X BV to reappear may need a black swan event which is always possible.


One of the black swan events is just a moderate to major market correction, say 30% off current stock prices, which would very likely bring Berkshire down from a market cap of $1.1t to, say, $800b. With $300b in cash available, he could set up a Dutch auction and buy back close to 40% of shares, solving the problem of the anchor that the cash represents, and returning Berkshire to a $500b market cap where there are more acquisition targets of the appropriate size. Then he could massively increase the repurchases going forward, in an attempt to shrink and not expand the size of the company.

In retrospect, it is a shame he didn't do this 15 years ago, when prices were much lower, and as you say, the repurchases have always been done with some reluctance. This has gone from the intial complete refusal to repurchase ("it would be taking advantage of outgoing shareholders") to a grudging acceptance that it made sense, but only at very low multiples to book (initial 1.1x, then 1.2x, and now more like 1.4-1.5x book. Maybe Buffett will be like Moses, condemned to never enter the land of milk and honey, and it will be his successor who keeps the basic insurance conglomerate model but fixes the size problem.

dtb

My question is why would anyone expect, especially in light of the recent earnings numbers, the stock to decline?


Outside of insurance and a slight turn around in the utility business, are the recent earnings numbers all that impressive? One could say Ops earnings growth less insurance have been mediocre at best since 2016 without the tax breaks in 2018 and a one time covid bump in 2021.

When it comes to the insurance side i don't think it would be prudent to start penciling in extravagant growth to the $9B in net underwriting profits from last year either. Combined net underwriting profits from 2010 to 2022 were $8.9B. The situation at GEICO seems to have improved but how much rosier can it get from here?

I just don't see much of a justification for the current high valuation. I'm content waiting for better prices to increase my BRK exposure from my current all time lows.

Jeff

I’m with you. The MSR division was pretty terrible. BNSF not great, and with a possible slowdown coming probably not going to improve in the ST. Many other examples of weakness, IMHO.

Burlington is imporving though .

BHE too seems to be improving, and should benefit from AI .

Burlington is improving though

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This from Kingsley’s comments,

“BNSF Railway”

“Berkshire’s railroad posted $6.6 billion in pre-tax earnings, a very slight increase over 2023. Unfortunately, after those pesky income taxes, BNSF’s net profitability actually dropped 1.1% year over year.

BNSF achieved a 6.5% boost in volume — fueled by a 16.2% increase in consumer products and 7.4% in agricultural products. Coal, meanwhile, sank 17.9%. BNSF moved more freight in 2024, but average revenue per car fell 6.6%.

The operating ratio of 68.0% was a slight improvement over 2023, but still lags far behind competitor Union Pacific’s 59.9%.”

ciao

Nothing against Abel, but he won't be able to provide the above.

Maybe he will! It'll be in his own style, but he might mature into someone who can garner chuckles from the readers every now and then.

One of the black swan events is just a moderate to major market correction, say 30% off current stock prices, which would very likely bring Berkshire down from a market cap of $1.1t to, say, $800b. With $300b in cash available, he could set up a Dutch auction and buy back close to 40% of shares, solving the problem of the anchor that the cash represents, and returning Berkshire to a $500b market cap where there are more acquisition targets of the appropriate size. Then he could massively increase the repurchases going forward, in an attempt to shrink and not expand the size of the company.

A few comments here:
1. A 30% downdraft isn't really a "black swan", it's a semi-regular occurrence that happens every decade or two (6 times already since the 50s).
2. If Berkshire drops by 30%, would you think that "everything else" drops by less, the same, or more than Berkshire dropped?
3. I don't think a dutch auction would work for 40% of the shares, heck it probably wouldn't even work for 5% of the shares. That's because many people (more than most other stocks) hold tight to their Berkshire shares and rarely if ever even consider selling them. For most large holders, the shares only ever get sold when they die, and even then, they are often donated and then slowly sold off to fund various good works.
4. Look above at item 2. Most of us believe that Berkshire is of higher quality than the vast majority of other companies. So it stands to reason that if Berkshire drops a lot, the others will drop even more. And when that happens, maybe it would be smarter to purchase other company's stock at a greater discount than purchasing Berkshire at a lower discount.

A response to the buyback questions several of us have had over the decades, which some of you might find helpful. This from an old poster who no longer wishes to post here but has added tremendous value over the decades so to further this discussion, with my response.


"
Alex Morris has a section on Buffett’s comments on repurchases in his book, “Buffett and Munger Unscripted” which has categorized excerpts from the annual meetings. The section on repurchases of Berkshire stock is on pages 107-112 and many times he touches on the idea that he doesn’t want shareholders selling back to the company unless they have all the information he’d want if he was in their shoes, or words to that effect. But I don’t see anything that categorically said that he would be taking advantage of the seller at any price. Perhaps he said it and Alex didn’t include it but the book is quite thorough in general. It does confirm his extreme reluctance to do repurchases especially prior to 2011 when the (ridiculously low) limit of 1.1x BV was first introduced. I wish he had been more aggressive. At around the same time I believe he was buying IBM! But hindsight is 20/20."

OK, the point is every fully reporting public company has met the requirement to keep the public informed. The company's lawyers keep insiders informed with respect to when insiders can sell, if they wish, without a 10b5, and when the company can buy back stock, IF, an authorized buy back is in place. During the time period of 2000-to 2010ish Buffett had no interest in reducing the issued and outstanding. He didn't even buy back stock used to complete the railroad acquisition. At the very least brk should have had the, right of first refusal on all Gates Foundation sales, and disclosed it in the Buffett donation letter of June 2006. Very odd indeed, and a HUGE unforced error.

Let it go, bud. He didn't want to shrink his canvas back then.
I was surprised he did so much in 2020 & 2021, over $51billion combined.
It's no surprise he isn't buying right now. We shouldn't want him to.

“ Let it go, bud. He didn't want to shrink his canvas back then.“ The larger point is Buffett is not the greatest investor ever. He should be labeled as the most unselfish CEO of all times, a much more impressive title. He could have taken 1 percent of the company annually via options and that still would have been a bargain, he didn’t. That was the gift from Uncle Warren, he worked for us for free. 💕☮️

He could have taken 1 percent of the company annually via options

Heck, he could have invented the hedge fund 60 years ago and taken 2 and 20 over the years. He's be worth north of $500B by now.

That was the gift from Uncle Warren, he worked for us for free.

Yep, exactly.

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