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In his 1986 annual letter to shareholders, Mr. Buffett defined "owner earnings".
The context for this was his acquisition of Scott Fetzer. He thought Scott Fetzer
was worth more than reported GAAP earnings and wanted to explain why. He said
these owner earnings represented:

(a) reported earnings plus (b) depreciation, depletion, amortization, and certain
other non-cash charges less (c) the average annual amount of capitalized expenditures
for plant and equipment, etc. that the business requires to fully maintain its long-term
competitive position and its unit volume. (If the business requires additional working
capital to maintain its competitive position and unit volume, the increment also should
be included in (c).

It's clear from the discussion in the 1986 letter that he and Charlie use some form of
owner earnings to value businesses for either part or full purchase. Do they value
Berkshire the same way?

I asked my friend ChatGPT if Mr. Buffett had ever publicly calculated owner earnings
for Berkshire. ChatGPT said yes, he did so in the 2020 annual letter, $51.9 billion.
Not for the first time, ChatGPT was hallucinating.

Out of curiosity, I calculated owner earnings for Berkshire myself. I stayed simple
and conservative by subtracting full capital expenditures from cash from operations.
I compared owner earnings per share to regular old earnings per share and book value
per share for the last 20 years:

https://public.flourish.studio/visualisation/13334...

Here's the same thing indexed to 100:

https://public.flourish.studio/visualisation/13333...

I'd be interested to hear how you'd:

1) Calculate owner earnings for Berkshire
2) Normalize those earnings
3) Determine a growth rate for those earnings

Ears

I'd use book value per share (BVPS). BVPS captures all earnings, including both realized and unrealized capital gains. While it's true that stock repurchases distort IV/BV slightly, this distortion is small quantitatively. Book value by IFRS rather than GAAP would be somewhat better because IFRS carries properties at market value rather than cost less depreciation, but this distortion is also relatively small. One unknown when calculating IV growth using BVPS is how fast IV/BV is increasing, but the increase in IV/BV tends to be quite slow. BV growth is also less volatile than earnings growth simply because of the large denominator. Just my two cents.

I calculated owner earnings for Berkshire myself. I stayed simple and conservative by subtracting full capital expenditures from cash from operations.

Did you use operating earnings instead of net earnings? Did Mr. Buffett mean the latter?

Also, Chris Bloomstran has been making the case that Berkshire spends significantly more on its operating businesses than what it claims as depreciation (not necessarily on each individual business but in aggregate) so as to widen the moat of the businesses and increase the earnings power going forward. A couple of years ago, he estimated that Berkshire spent about $5 billion more on its operations than Capex.

If so, will subtracting full capital gains from earnings capture that part?

Also, I'm not sure if that amount qualifies as "required to maintain its competitive position and unit volume" (which would be subtracted from net earnings, according to Mr. Buffett) or investment to pursue growth (which would be added to net earnings). Bloomstran argues that it is the latter.

Bloomstran does compute Berkshire's normalized net earning power, though it looks like you are focusing only on the operating side of the business, whereas he calculates it for Berkshire as a whole (including the stock portfolio using dividends and look-through earnings).

For year end 2022, he calculated that to be $53.9 billion for Berkshire See p.99 of his latest annual report.

The growth rate of the earnings is interesting and I'm curious to know if anyone has any estimates of that.

Ears, I meant to italicize only your quote (first two sentences) but, for some reason, the whole post ended up becoming italicized. Apologies!

Did you use operating earnings instead of net earnings?

Net Earnings. Mr. Buffett divulged his recipe for owner earnings a year or so before the cash
flow statement became mandatory. I had the luxury (curse?) of using Berkshire's cash flow
statements going back 20 years. To keep it simple, I started with cash from operations which
is derived starting with net earnings.

Also, Chris Bloomstran...

He values Berkshire in a number of ways. My simple strawman resembles one of them. He starts
with cash from operations like I did. Then he subtracts maintenance capex rather than all capex
like I did. After that, resemblance fades. He adds adjustments -- the major one being the
retained earnings of the stock portfolio -- to get what he calls Economic Earnings.

Here's a comparison of my strawman to his method for 2021:

                                           me                    him
                                       ----------            ------------

Cash from Operations                     39,421                 39,421
Capex                                   -13,276 all capex       -9,500 just maint capex
                                         ------                 ------
Owner Earnings                           26,145                 29,921

Stock portfolio retained earnings                               11,800
Other adjustments                                                5,179
                                                                ------
Bloomstran's Economic Earnings                                  46,900

An advantage to both is removing the noise of the stock portfolio.

Ears

No content, just seeing if I can turn off italics for the thread.



Well, is it off?

Weill just putting in a < / i > (without spaces) didn't work. Let see if turing it on then off works.

Italics turned on

Italics turned off

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Berkshire Hathaway FAQ

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