Subject: Re: Thinking of BV multiple for BRK as a function of i


Start of year 1, with $100 BV. Let's say earnings are $7 by end of year 1 and BV now is $107. Why should it be worth more than 1x BV in this case?

In the absence of buybacks/dividends, BV growth should be same as ROE. If we assume BV growth as equal to S&P 500 total return and our discount rate also equals S&P 500 return, does it not make the case that it would be worth only 1x BV?



For investments that are internal i.e not publicly traded, the book value is the accounting entry made when the asset was acquired originally and never adjusted upwards as the years go by. So the collection of businesses Berkshire owns that keep improving their intrinsic value over time, yet their increase in Book value does not reflect this increase at all. The incremental earnings do show up - let's say as cash - but that does not reflect the improvement in the intrinsic value which is a projection of the future cash producing characteristics of the business, This would explain why for the wholly owned businesses, you would expect the book and intrinsic value to start diverging. A business on the books at $100 that produces $7 in cash but which created a way of producing a higher rate of earnings growth in 5 years by reinvesting this amount back in the business has increased its IV but but not its BV. For Berkshire's collection of businesses the assumption is that on average the reinvestment characteristics compare favourably to those available to the S&P as a group.

Market values for the equity portfolio are constantly adjusted to produce this estimate of future value. As the proportion of the Berkshire asset base has shifted more towards wholly owned businesses vs public equities, this divergence would expect to increase over time.

I'm not sure that addressed the question you were raising though !