' Given its moderate undervaluation today, I think over the next five years, Berkshire's stock is likely to do perhaps two percentage points (compounded annually) better than the S&P 500. In other words, if the S&P compounds at 5%, I'd expect Berkshire will do 7%.''


This prediction sounds a bit weird, at least to me. If Berkshire increases book value in the vicinity of 10 percent per annum (as it has been doing and is expected to continue doing, at least for the next 10 years, per Mr. Buffett), then the stock return will also be around 10% per annum, unless one expects the P/B multiple to fall. This prediction is independent of the performance of the S&P 500.

It is true that a significant portion of Berkshire's equity is in stocks, which are expected to fall if the S&P 500 falls. However, the S&P 500 is significantly overvalued (regardless of whether one looks at Shiller CAPE or market cap to GDP ratio). Can the same be said about Berkshire's publicly listed holdings (even after accounting for Apple)? If not, the longer term returns from the latter may be a few points higher than those of the S&P 500. In conjunction with the increase in value of the non-publicly listed portfolio, Berkshire may return several points more than the S&P 500 over the next 5 years, assuming both trade at fair value then.

Thoughts welcome.