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What do fellow Shrewds expect BRK returns to be over the next 5 years? I will start with my guess:

I expect the intrinsic value growth to be around 9% per year. But given that its current price is at the high end (or perhaps even slightly above) IV, I expect a compression in its price/ book or price/IV which will subtract 3% per annum over the next 5 years. So, I expect an annual return of about 6%. And if I am wrong, I take the under on that. I assume somewhat "normal" economic conditions (no huge recessions like the GFC, only a mild one).

I expect the value per share to grow at around inflation + 7%. If we get lucky, inflation plus 8% at the upper end, but I certainly don't count on that. That's what we have seen since forever, but it's hard to manage at this scale.

That's value. What about price?
Lacking any better reasoning, I imagine the valuation levels will be similar to the levels typical in the last 15 years, so I expect some one-time multiple compression, so (very roughly) two of the next 5-10 years will be flat. (even rounder numbers to explain that, valuation level 16% above usual would imply two years of flat price with 8% value growth and ending at the "usual" valuation). Note, I don't have any real idea of *which* two years will be net flat.

If you look out a decade, two years of inflation+8% and two years of nothing works out to an annualized return for ten years of about inflation+ 6.4%. Which, being roughly Siegel's constant, is pretty much my definition of fair value.

Berkshire is more expensive than usual, but then it's usually somewhat underpriced, so the two seem to cancel out at the moment.

Jim

"What do fellow Shrewds expect BRK returns to be over the next 5 years?"

I think that your estimate of IV growth is about right, about 9%-10% per year, nominal (Unfortunately not 16% as in 2024). I also agree that there will be some multiple contraction, maybe from today's P/B of 1.72 to 1.55, which looks to be Buffett's highest repurchase price. This multiple contraction would knock 2%/yr off the total return. So I would go with a total return of about 8%/yr, nominal.

However, I think that there is a high probability of a major correction in the broad US market (I've been saying this for years, so make of it what you will.) The trailing twelve month P/E of the S&P 500 today is about 28, versus a fair value of 17 or 18, so a 35% correction is not unlikely. If the broad market falls 35%, then BRK.B will fall with it, maybe by 25%. A 25% fall in one year of the coming five years, with 10% gains in the other four years, would bring Berkshire's 5-year annualized return down to 2%, in spite of the IV growth. Berkshire would need some years with high price gains to make up for its undeserved correction. Over 10-15 years this would be likely, but over five, not so much.

Just FWIW.

A 25% fall in one year of the coming five years, with 10% gains in the other four years, would bring Berkshire's 5-year annualized return down to 2%, in spite of the IV growth.

That is definitely a possible scenario. There were many long stretches in the past where BRK stock went nowhere.

Dow Jones Industrial Average
December 31, 1964 874.12
December 31, 1981 875.00

There is a very interesting chart on page 36 of Bloomstran's annual letter, detailing the average cost of holding "dry powder" cash, waiting for a better opportunity. If held three years, an 18%-25% drop in the stock market is needed to break even. At ten years it is up to 48-61%. The 18-25% scenario seems fairly likely these days, and it could come in less than three years. For me, sitting on large gains, with not unlimited years ahead, his words of warning actually were reassuring.

https://static.fmgsuite.com/media/documents/209f84...

Dow Jones Industrial Average
December 31, 1964 874.12
December 31, 1981 875.00

Definitely one of the worst stretches (maybe only starting 1928 is worse). Were any dividends distributed over those 15 years? You know, to calculate true real return.

I quite enjoyed Bloomstran’s annual letter. And as a baby boomer, I particularly enjoyed his clever references to one of the great albums of the era, Who’s Next😎

Dow Jones Industrial Average
December 31, 1964 874.12
December 31, 1981 875.00

GTR1 can backtest the S&P500 over that period. On a price-only basis {!S5} returned a CAGR of 2.18%; on a total return basis {!S5T}, 6.34%. For what it's worth, equal-weight total return {!S5TE} was 9.89%.

Baltassar

Definitely one of the worst stretches (maybe only starting 1928 is worse). Were any dividends distributed over those 15 years? You know, to calculate true real return.

Don't forget inflation

December 31, 1964 to December 31, 1981


Real total return, S&P 500 -0.38%/year

And just for comparison,
Real total return, S&P 500 Equal Weight, +3.43%/year

Jim

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