Berkshire Hathaway: Some More Thoughts

So in the last post, I did a simple two-column valuation of BRK and surmised that it was a high-quality 75c dollar, that was growing steadily.

Let us first look at the share price (B-shares) from 1980. I use a logarithmic scale for price since I find it easier to see growth rates more easily.

price

It doesn’t take too long to realize that the graph can be split roughly into two growth regimes: a fast growth (1980-1998), and a slower growth (1999-2015) period.

In the fast growth period, the BV compounded at over 28%. The IV and share price compounded at 25% and over 35%, respectively. We can plot the IV, and 120% the BV (Buffett’s threshold for buyback) along with the price action.

linear

From the chart above, one can see that the price in 1998 (end of the high growth period) had meaningfully overshot the intrinsic value.

In the slower growth period (1999-2015), BV and price have compounded roughly in tandem, 9% and 7.3%, respectively. The price has dipped below the 1.2BV threshold on more than one occasion. The growth in intrinsic value in this period has far outstripped the growth in either price or BV; IV has compounded at a brisk 12.5%/year rate, notwithstanding two major stock market corrections.

It can be argued, based on the chart above, that BRK has been continuously undervalued since the Great Recession. At $143/share, it is still a safe and attractive security.

The IV presumably will grow at a rate faster the the S&P as a whole (say 10%). Buying it at 25% discount (75c dollar) to IV means that one should expect to make 12-14% annualized over a 5-10 year time-frame, as the discount to IV closes. Any weakness in the share price is probably an opportunity to add.

If the share price swoons with the market, it is doubly attractive, since BRK has a solid balance sheet that will allow it to survive pretty much anything. Furthermore, it has a record of emerging out of crises even stronger.

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