Please don't assume anything undeclared about anyone's background, or if you do then keep it to yourself.
- Manlobbi
Halls of Shrewd'm / US Policy
No. of Recommendations: 7
Someone asked about calculating intrinsic value and I meant to reply. Can’t remember which thread it was in now.
Mr. Buffett laid out his thinking on the subject quite succinctly in the 2018 letter. Greg Abel basically reiterated the same method when talking about buybacks at the meeting last week.
https://www.berkshirehathaway.com/letters/2018ltr....Mr. Buffett: “I believe Berkshire’s intrinsic value can be approximated by summing the values of our four asset-laden groves and then subtracting an appropriate amount for taxes eventually payable on the sale of marketable securities.”
It’s surprising to me that many avid Berkshire watchers don’t do it. You do have to dig for the numbers a bit. You have to make a stab at an earnings multiple for the wholly owned companies*. And it does often spit out numbers that aren’t pleasing to those who listen to Bloomstran, Tilson, and the other perma-bulls. Like now, for instance.
I often riff on Mica 6:8 in my head:
He has shown you, O mortal, how to estimate IV
And what does Mr. Buffett require of you?
To sum the values of our four asset-laden groves and then subtract an appropriate amount for taxes eventually payable on the sale of marketable securities.
* or you can solve for X and see what multiple the market is assigning to the subs, and see if that is good value or not.
No. of Recommendations: 5
Another quote from the 2018 letter and a few numbers:
Re: using different earnings multiples for the various wholly-owned businesses - not necessary:
Investors who evaluate Berkshire sometimes obsess on the details of our many and diverse businesses– our economic “trees,” so to speak. Analysis of that type can be mind-numbing, given that we own a vast array of specimens, ranging from twigs to redwoods. A few of our trees are diseased and unlikely to be around a decade from now. Many others, though, are destined to grow in size and beauty.
Fortunately, it’s not necessary to evaluate each tree individually to make a rough estimate of Berkshire’s intrinsic business value. That’s because our forest contains five “groves” of major importance, each of which can be appraised, with reasonable accuracy, in its entirety.
2026Q1 numbers per B share:
Grove 1 - Subs
15.7 PE ratio to get to the current share price
$171
Grove 2 equities less taxes
$114
Grove 3 partially owned
$9
Grove 4 cash & fixed
$181
Grove 5 Insurance businesses
Provide the float to partially pay for the other groves
Total $476
Notes:
1. The cash and fixed income grove is now the largest of the 5 groves.
2. The market is pricing the wholly owned subs at 15.7x earnings. That doesn't seem very cheap to me.
No. of Recommendations: 2
"The market is pricing the wholly owned subs at 15.7x earnings. That doesn't seem very cheap to me."
The S&P trades at 26x - expensive of course
No. of Recommendations: 2
" "The market is pricing the wholly owned subs at 15.7x earnings. That doesn't seem very cheap to me."
The S&P trades at 26x - expensive of course"
Which makes my case that brk offers safer risk adjusted returns with the same 1 % yield, for conservative investors. Thank you.
No. of Recommendations: 2
"The market is pricing the wholly owned subs at 15.7x earnings. That doesn't seem very cheap to me."
The S&P trades at 26x - expensive of courseWorse than that according to:
https://www.multpl.com/s-p-500-pe-ratioCurrent trailing PE 31.8
S&P500 5-year earnings growth rate about 10%
Berkshire 5-year book value growth rate about 7%
Berkshire seems like a far better value, but then it almost always does.
No. of Recommendations: 4
No. of Recommendations: 24
Berkshire's operating earnings have compounded at 17.3% since 2018;
Huh?
Railroad net earnings up 0.69%/year in those seven years.
Utilities net earnings up 6.15%/year
Manufacturing/service/retail/non-controlled up 6.15/year
Sum of the above divisions up 4.87%/year
Underwriting had a good year, up 24.5%/year since 2018, but it's so volatile that it shouldn't be included in any rate-of-growth calculation that uses a single baseline date.
If I replace actual underwriting earnings with a cyclically adjusted figure which was up 5.86%/year, the sum of the 3 items above plus net underwriting profit was up 4.94%/year in full year 2025 compared to full year 2018. Before inflation adjustment.
Those figures use FY 2025 instead of the four quarters to Q1 as the endpoint, but it doesn't change the observation that the statement above is spectacularly silly.
In fact, I figure that the extremely weak rate of growth of operating earnings is the major weakness at Berkshire these days, and the major reason not to be too keen on buybacks as a way to deploy capital. Though there are reasons for the weakness, some of which are arguably transient, the message from the top level numbers is that it would constitute spending money to buy more and more of a set of ho-hum businesses.
Jim
No. of Recommendations: 2
Berkshire's operating earnings have compounded at 17.3% since 2018
I get 7.2% nominal NOT including underwriting earnings.
Underwriting earnings went like this the last 10 years ($bn):
1.370
0.000
1.566
0.325
0.657
0.728
-0.090
5.428
9.020
7.258
Those last three years have been great.
I think if Mr. Buffett thought they'd be material long-term he would have included them in his IV estimate.
No. of Recommendations: 4
<<I get 7.2% nominal NOT including underwriting earnings.>>
That includes 2018, btw, my bad.
Since 2018, that is starting at 2019, I get 4.4% CAGR nominal NOT including underwriting earnings.
More in line with Jim's numbers (thanks, Jim).
No. of Recommendations: 6
Since 2018
Jim:
Railroad net earnings up 0.69%/year in those seven years.
Utilities net earnings up 6.15%/year
Manufacturing/service/retail/non-controlled up 6.15/year
Sum of the above divisions up 4.87%/year
...
In fact, I figure that the extremely weak rate of growth of operating earnings is the major weakness at Berkshire these days, and the major reason not to be too keen on buybacks as a way to deploy capital. Though there are reasons for the weakness, some of which are arguably transient, the message from the top level numbers is that it would constitute spending money to buy more and more of a set of ho-hum businesses.
From the 2018 letter:
Mr. Buffett: Before moving on, I want to give you some good news– really good news– that is not reflected in our financial statements. It concerns the management changes we made in early 2018, when Ajit Jain was put in charge of all insurance activities and Greg Abel was given authority over all other operations. These moves were overdue. Berkshire is now far better managed than when I alone was supervising operations. Ajit and Greg have rare talents, and Berkshire blood flows through their veins
Greg Abel was given authority over all non-insurance operations in early 2018.
What's that Buffett saying about good management and poor businesses?
