No. of Recommendations: 20
Jim, is it possible that Berkshire's valuation in the next decade will be higher than that in the last decade because of differences in earnings attributed to the cash level (assuming that interest rates in the next decade are higher than in the last decade)?
For instance, at an interest rate of 5%, $130 billion earns $6.5 billion, which is not an insignificant amount. In the last decade, the cash position was not yielding anything close to this amount.
In terms of valuation levels, sure, anything is possible. It might be higher. It might also be lower.
For that matter, I have no particular explanation for why valuation levels seem to have made a one-time permanent step downwards around late 2017.
The rate of growth of value (beyond inflation) remains pretty much a straight line since 1998, so it's not that.
Interest rates were pretty darned low before that, and pretty darned low after that.
And the long term index puts have expired : )
(at a substantial net final underwriting profit plus float benefit, it should be noted)
As for the interest income at Berkshire, I'm not as optimistic as some others.
Sure, we are now earning interest. Yay!
But the return on short term fixed income after taxes and inflation is actually lower, not higher, than it was before inflation and interest rates took off.
Depending somewhat on your outlook for inflation.
The recent upturn in interest rates and inflation makes things worse, not better, for Berkshire.
Keep your eye on real interest rates, with a duration in the range that Berkshire is holding. No great joy visible.
In fact, I think this is a small part of the reason that Mr Buffett has allocated a huge tranche of cash to (say) the sogo shosha and OXY. The pain of holding cash is a bit higher than it was.
Patience waiting for an elephant is a great virtue, but the amount of patience that makes sense is inversely proportional to the real after-tax cost of waiting.
But even then...taxes actually matter.
Recall that taxes are assessed on nominal returns, not real returns. 6% interest with 4% inflation is a much lower net real return than 2% interest and 0% inflation, even though they are both notionally real interest rates of 2%.
The 21% "normal" US corporate tax on the first one is 1.26%, and on the second one 0.42%, so the real after-tax return on the second one is 0.84%/year higher.
Jim
