The Next 50 Years at Berkshire

[CanadianMunger]

"This cheery prediction comes, however, with an important caution: If an investor’s entry point into

Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares

have occasionally reached – it may well be many years before the investor can realize a profit. In other

words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire

is not exempt from this truth."

 

The above is an excerpt from Buffett's essay "Berkshire - Past, Present and Future" in the 2014 AR.

 

Most of the valuation approaches I have seen peg Berkshire's current IV at 1.65-1.75 book.  So yes, buying at double book value would be a premium to intrinsic value currently. 

 

However, with Berkshire's shift to purchasing operating businesses, the gap between book value has grown over the last decade and is virtually certain to increase over the next few decades (ie. the value of operating co's are never written up).

 

So why would Buffett make the above comment in the future section of his essay?  Its definitely true now, but is it not plausible that a few decades hence, Berkshire's intrinsic value will be double book value?

 

-CM

[Guest longinvestor]

You bring up the most interesting statement in that letter.

 

I believe all he is saying is the price one pays does matter, without exception. It is also a nuanced statement imo, mainly because you don't catch him often saying something about the price to buy BRK at. Like almost never.

 

...at a price, say,approaching double book value; That, say, I believe, acts as a cover for the 50 year narrative. 

 

And there is always the possibility that Buffett turns out to be wrong about all this! I look at it as a vaguely correct statement about the future.

 

That said, I'm sure that "sell BRK at 2x BV" is already widely tattooed in minds and spreadsheets. As a shareholder, I certainly look forward to the day when BRK trades at 2x BV. Hope this happens after what you are suggesting has already happened...op cos true value makes the BV multiple the silly syllabus. It will allow BRK to buy back gobs of stock back. 

[John Hjorth]

CanadianMunger,

 

I totally concur on what longinvestor posted above.

 

With regard to your question:

 

So why would Buffett make the above comment in the future section of his essay?

,

 

you have to read it into the context, written by Mr. Buffett above the actual bullet point in that part of the shareholder letter:

 

... With that warning; I will tell you what I would say to my family today [my emphasis, John] if they asked about Berkshire's future.