No. of Recommendations: 45
About 3 months ago, I posted about using trend book value for valuing Berkshire. (
https://www.shrewdm.com/MB?pid=192596782) I've updated my graphs using year-end book value.
Berkshire's book value seems to become noisier than it was in the past. Mungofitch has proposed using peak BV to reduce the noise which seems to provide some improvement over actual BV. But it looks like BV is noisy on both the high and low sides, so I propose using trend BV as an even better metric.
I used reported BV from 2000Q1 through 2022Q4, took the log of those values, fit a linear trend line through them, then calculated E(X) to undo the logs. This showed BV increasing by 10.58% per year over the time period.
Here is an image showing that information graphically:
https://ibb.co/sWcwh3g The X-axis ranges from [1=2000Q1 to 92=2022Q4]
The Y-axis is the natural log of Book Value
Extrapolating those values gives the following quarterly projected BVs for the next 10 years. It assumes inflation in the future matches the last 23 years. It won't of course, but you can apply an adjustment based on how much above/below 2.457% inflation turns out to be.
Year . . . . Q1 . . . . . Q2 . . . . . Q3 . . . . . Q4
2023 - $335,929 $344,485 $353,258 $362,254
2024 - $371,480 $380,941 $390,643 $400,592
2025 - $410,794 $421,256 $431,984 $442,986
2026 - $454,268 $465,837 $477,701 $489,867
2027 - $502,343 $515,136 $528,256 $541,709
2028 - $555,505 $569,653 $584,161 $599,038
2029 - $614,294 $629,939 $645,982 $662,434
2030 - $679,305 $696,605 $714,346 $732,539
2031 - $751,195 $770,326 $789,945 $810,063
2032 - $830,693 $851,849 $873,544 $895,791
As a nod to Manlobbi, the IV10 value for the increase in trend BV is 2.7345. IV10 would increase to the extent you could buy at a cheaper Price-BV ratio than you expect in the future. As a guide to how much of an effect the differential has, if you bought at 1.10 PBV and projected selling at 1.35 PBV in 10 years, the IV10 would be a rocking 4.06.
A better method would be to first make an adjustment for inflation before going through the steps described above. Doing this gives the result of book value rising at 8.28% plus inflation. This method doesn't allow you to extrapolate forward until you know or predict future inflation.
In summary, the various book values for EOY 2022 were:
Actual reported BV . . . . . $323,637
Peak BV . . . . . $345,569 (in 2022 Q1)
Trend BV with no inflation adjustment . . . . . $327,586, increasing 10.58% per year
Trend inflation-adjusted BV . . . . . $345,880, increasing at 8.28% plus inflation per year
CHANGES IN THE PRICE / TREND BOOK VALUE RATIO
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Unlike actual book value which is only reported quarterly, trend BV can be calculated on a daily basis. I used this to calculate P/BV over the 23-year period. The image of the result is here:
https://ibb.co/rZwPXLnA couple of interesting takeaways from this graph. P/BV is not constant but seems to wander above or below a central value for a few years at a time. It's useful to have a reference if you're thinking about mimicking Jim Mungofitch's technique of loading up/leveraging at low P/BV and lightening up when P/BV is high. Another takeaway is P/BV changed substantially after the great recession. Prior to that time, it seemed to vary about a constant mean of roughly 1.65. It dropped precipitously during the great recession and seems to vary around a mean that is slowly rising over time. It's unclear how long the slow rise will continue and what its new level will be.
