No. of Recommendations: 24
Let’s say that Berkshire’s price-to-book value declines from the present 1.72x to 1.5x. If this occurs, assuming 8% annualized growth in book value, we can expect Berkshire’s Class A stock to trade at ~$995,000 in five years and ~$1,463,000 in ten years. Given the current price of $775,000, shareholders could expect annualized returns of 5.1% over the next five years and 6.6% over the next ten years.
In other words, if we assume that growth in book value per share to 8% and the price-to-book ratio will contract to 1.5x, returns for shareholders holding the stock from current levels will be materially below 8%. Of course, there is no law that says that the price-to-book ratio will be 1.5x in the future or that growth of book value per share will be 8%.
It's extremely clear thinking, I wish more people were that rational. About other stocks too, not just this one.
However, applying the exact same reasoning and assumptions to different time frames, you get
One year return -4.4%
Two year return +1.6%/year
Three year return +3.7%/year
However I prefer to do things in after-inflation dollars, as only spending power matters. Let's say Berkshire manages growth in intrinsic value at inflation + 7%, and a terminal P/B of 1.4 which is still higher than the 15 year average.
One year return inflation -11.6%
Two year return inflation - 2.7%/year
Three year return inflation + 0.4%/year
It's true that investors' situations (tax and timeframe and other) certainly vary, but it is not inconceivable that many entirely rational conservative investors might have opportunities in the next three years which are better for their long term financial health.
Perhaps even their peace of mind, too. Though it isn't a recommendation, I note that the current yields on two- and three- year TIPS are inflation + 1.22%/year and inflation + 1.35%/year.
Trying to "tailcoat" Mr Buffett isn't always the best approach to investing, but he is happy to hold quite a bit of dry powder at the moment hoping for some acceptable opportunity in some reasonable time frame, and so am I : )
Jim
