The reference to ‘look-through’ earnings is interesting. I had emailed the journalist back in September, about his previous article including valuation comparisons (on a PE basis) with the S&P 500 but not mentioning: all earnings from the portfolio. I had included a link to a post here on Shrewd’m discussing looking through- earnings…seems to have taken it on board, stating that “the look-through PE ratio is appreciably lower than 23”.

Good to see Barron’s getting smarter from reading Manlobbi’s creation.

Email below:

“I enjoyed your article on Berkshire. I particularly liked that you looked at valuation compared to the S&P 500.

I have been a Berkshire shareholder for more than two decades and have followed the company very closely. I am also a chartered accountant and enjoy crunching the numbers on Berkshire. I recently posted on Berkshire’s Q2 results. Extract below and link to full post.

One important fact not included in your analysis is the concept of ‘owner earnings’. Buffett has discussed this many times in the past. Berkshire’s reported earnings, although prepared in accordance with US GAAP, under report earnings from it’s equity portfolio. Berkshire includes dividends from its equity investments but of course these businesses only pay out an element of their earnings in dividends. Since Berkshire’s equity portfolio is so large, the under reporting of earnings is material. When all ‘owner earnings’ are accounted for, Berkshire’s PE ratio is substantially lower than the S&P 500.

One final point. Berkshire’s has returned broadly the same as the S&P 500 in recent years. In a bull market returns have been handicapped be having such a large amount of excess cash, currently defined by Buffett as cash in excess of $30 billion. Cash Buffett can’t find a rational home for. And of course this is due to the shrinking of the investment landscape, against the now huge size of Berkshire.

EVBigMacMeal writes on Berkshire Valuation v Fairfax Financial

When Berkshire reports earnings, most if not all media outlets, reference GAAP earnings, which is understandable. However, Buffett is correct, when he says such numbers are almost meaningless for a conglomerate like Berkshire. He is referring to both investment gains & losses and undistributed earnings from equity investments.

Not that rational Berkshire shareholders are complaining. After all, a little bit of under valuation (not currently the case) would be helpful, given the growing lack of capital allocation opportunities. It would enable Berkshire to buy back it’s own shares below intrinsic value.

Appreciate the article and your interest in Berkshire. It’s an interesting company. If you ever wanted to include a line on owner earnings, hedge fund manager, Chris Bloomstran, is a reliable source. See his annual letters published prior to Berkshire annual report each year.”