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  • What Is Berkshire Hathaway Really Worth? A Comprehensive Look [View article]
    Chris,

    Thank you for your comments. I agree with a great deal of what you said.

    To address a couple issues:

    1. As for why I did not include an assumption of additional growth to the float: I did this because I am making a long case based on valuation. Thus I sought to be very conservative lest I provide critics with reason to dispute my argument or assumptions. I did mention in the article:

    "Although we do not incorporate this into our valuation, we believe it would be fair to ascribe at least an average market return assumption of 6% per annum to the portfolio. This is despite our expectation that Berkshire's portfolio will continue to deliver alpha."

    2. I undertook my analysis as of the end of 2013. If we examine the pro forma March 25 2014 numbers -based on net income generated (and retained) from Jan to March 2014- we can assume that BRK has added several billion of book value during this period.

    So yes; it would not be inappropriate to add another few billion in profits-earned-but-not...

    However, for the same reason I mentioned in #1, I did not want to provide anyone with cause to suggest that I was making too many assumptions.

    Thanks again for your comments.
    Mar 30 07:40 PM | 1 Like Like |Link to Comment
  • What Is Berkshire Hathaway Really Worth? A Comprehensive Look [View article]
    Great points, Rational Walk. I will try to incorporate that further level of detail into subsequent analyses.
    Mar 28 09:43 AM | 1 Like Like |Link to Comment
  • What Is Berkshire Hathaway Really Worth? A Comprehensive Look [View article]
    NYTEX Energy,

    I wish I had a better response for your question, but unfortunately Buffett's eventual departure is somewhat concerning. Personally, I don't believe it will result in the disaster scenario that some envision:

    Here are a few thoughts, in no particular order:

    (1) It is my belief that Buffett has instilled some of his modus operandi, ethics, and strategy into the management and governance model of the company. I believe it will succeed him and that the company will be run effectively after his departure.

    Will it be quite as good at making those great investments at just the right time? Probably not. But that does not mean that highly paid, competent, effective CEOs of the various divisions within BRK will be running for the exits. After all, this is not what we tend to see in well-run, ordinary standalone businesses.

    (2) Buffett has already begun a succession plan and divided up some of the responsibilities.

    (3) The broader strategy of the company should be the purview of the Board of Directors. I can only hope they do nearly as good a job as Warren Buffett has done.

    (4) The company doesn't stop earning money just because Warren is gone one day - it still possesses a robust portfolio of enduring, cash generating assets. it is only growth which may be harder to achieve at the same pace.

    If the "Impending Buffett Departure" idea is the cause of the existing discount, then the market has certainly set the bar low for Warren's successor (or committee of successors). If they do even half as good a job as Warren, then there could be some upside down the line. But that's probably pretty distant.

    I acknowledge that this is not a perfect answer, but it's all I have on this. I suppose they could let me take a shot at running the company...
    Mar 27 09:49 PM | 3 Likes Like |Link to Comment
  • What Is Berkshire Hathaway Really Worth? A Comprehensive Look [View article]
    David @ Imperial Beach

    I regret that my process is not able to satisfy you. It's convoluted, admittedly, but it is that way because Berkshire is a large, complex, multifaceted entity.

    It would be unfair to examine only one valuation measure when the components are so varied.
    Mar 27 07:32 PM | 4 Likes Like |Link to Comment
  • Don't Judge Berkshire Hathaway By Its Book Value Cover [View article]
    I'm reluctant to comment on an article such as this at all.

    However, to thenoffya's particular characterization of BRK's P/B, I expect he's precisely right.

    The public market assets within BRK ought to be awarded a market value -within BRK- of 1.0x book at all times. Maybe a slight premium/discount, just as some funds trade at or around their NAV.

    Therefore, the remaining assets within BRK implicitly trade at a somewhat higher premium to Book Value than the stock as a whole.
    Mar 12 04:26 PM | Likes Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    By Google Finance's calculation methodology, the Beta is 0.47
    By Yahoo Finance's calculation methodology, the Beta is 0.29

    Although we could conduct an R^2 regression analysis, I see no need.

    Moreover, the volatility is likely exacerbated by the market valuations of the public equities portfolio. It would be laborious to quantify this although it could indeed be done.
    Mar 10 02:18 PM | Likes Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    Trinta,

    Thanks for your comments. Yes; Buffet's returns are grounded in increases in increases in book value, which many would argue is more 'real' than market valuations.

    One thing to note is that BRK does have a peripheral gain from the S&P's increase due its public market holdings:

    These public market holdings also complicate BRK's P/Book multiple, because these securities should never trade for more than book, given that they're market to market:

    If Buffet holds Coca Cola (which itself trades at ~5x book), the book value of BRK's Coca Cola securities shouldn't trade for more than 1x book on BRK's balance sheet). Holding Coca Cola securities at book value already means you're holding them at 5x the underlying company's book value.

    So in that regard, only BRK's private portfolio justifies a material premium to book value, although I would argue that it should be substantial.
    Mar 9 06:21 PM | 1 Like Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    In fact, BRK discloses its EBT by division (Just exclude investment income/loss).

    Moreover, I see no reason to exclude BNSF and Insurance simply because it would support your argument; they are both extremely large, significant components of non-public BRK's portfolio.

    BRK's EBT from operations is double digit billions for each of the last 7 years, excluding investment gains/losses; it jumps up after purchasing BNSF.
    -Investment gain/loss goes from +5.3 billion in 2007 to -5.7 billion in 2008 due to the public portfolio.
    -That's an $11 billion Y-o-Y delta.
    Mar 6 08:10 AM | 1 Like Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    anotheremptysuit:

    Well, my whole article is an opinion.

    I believe it was fairly well understood by most that my comments regarding the superiority of BRK's private portfolio was (1) an opinion, and (2) a general assessment (or I would have named the particular holding I was discussing about).

    "Are you saying DG & See's are better businesses than Walmart?"
    "Are you saying the real-estate offices are better businesses than Davita?"

    I think it's pretty clear to most people that I did not mean to imply that *every single* private holding is better than *all* of the public holdings.
    Mar 5 07:58 PM | Likes Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    I believe your suggestion has merit.

    While I stopped short of advising this in my article, I do agree personally.

    However, note that on paper, Berkshire's BVPS would decline if it bought back stock as long as it is trading above 1.0x book value.

    This is because you reduce the company's book value by $1.20 of (i.e. cash declines by $1.20) to buy back $1.00 of book value.

    But book value alone undervalues BRK, so such a transaction would still make sense even though it would be dilutive on paper.
    Mar 5 06:51 PM | Likes Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    I agree with Ted:

    Some insurance companies run an actuarial loss and rely on the float to generate investment income. Berkshire does not; it operates with an actuarial profit.
    Mar 5 06:40 PM | Likes Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    It is not mentioned directly, but it certainly is mentioned by implication.

    Profitable underwriting -a fundamentally profitable insurance business- is one of BRK's chief value drivers.

    The fact that it is an actuarially profitable business is a benefit independent of BRK's investment prowess which has allowed the float to be invested efficiently as well.
    Mar 5 04:37 PM | Likes Like |Link to Comment
  • Berkshire Hathaway's Performance Vs. The S&P Is An Artifact [View article]
    Kospi,

    You evidently feel exactly the same as I do regarding this.

    The S&P's increase has been due in large part to multiple expansion more than profit growth.

    Berkshire actually earned money and retained it.

    The only way in which Berkshire's book value increased in 2013 in a fashion that is *not* necessarily durable/sustainable is via the appreciation in its public equity portfolio.
    Mar 5 11:46 AM | Likes Like |Link to Comment
  • Is The NASDAQ Really Overvalued? [View article]
    jprizutto:

    My list of mature and expensive stocks is by no means arbitrary although it is admittedly not comprehensive.

    For the mature companies, I wanted to select some of the larger companies by net income which traded at reasonable multiples and had been around for a long time (Mondelez isn't really new because it was spun out of Kraft).

    So yes, of course there is a selection bias; but my point was to show that the index was not overvalued uniformly, even though many companies probably are.

    As for Google, I explained in a comment above why I excluded it:
    "I excluded [Google] deliberately. Google has a relatively high P/E ratio, true, but not an unreasonable one. It also possesses a demonstrated track record of growing earnings relatively consistently and in novel ways."

    The 9 mature companies are large enough that the whole index excluding them trades at an appreciably higher multiple.

    For the expensive cohort, I chose a selection of large-cap companies which trade at very high multiples. There are smaller companies which trade at even more extreme multiples, but removing them from the list would not have altered the aggregate-excluding-th... significantly.

    In retrospect, I should have included some like Salesforce.com in this cohort.

    As for going deeper, and why I selected 9 expensive and 9 matures: I wanted it to look presentable and clear, and it began to look more cluttered and busy with more. Many readers often find it daunting to be inundated with hundreds of examples onscreen.

    In my backup Excel work, I've played with much larger cohorts, and they're quite instructive.

    The cohort excluding the top 50 and bottom 50 is quite a bit more pronounced, especially if you sort by P/E and also use a weighted number (the larger market cap expensive companies make more of a difference than the small ones even though their valuations may not be as extreme).
    Mar 3 06:24 PM | Likes Like |Link to Comment
  • Is The NASDAQ Really Overvalued? [View article]
    Mikeurl: I agree with your characterization: you can't fund your retirement with 'eyeballs', or 'users', or 'interactions'. Fiat currencies are the relevant metric for most individuals.

    To be clear: I'm not averse to employing industry-specific KPIs as they pertain to the fundamental drivers of a particular business; they are important. However, it's also essential to understand how these (1) translate into earnings or (2) how they may *eventually* translate into earnings.

    It's when there is a significant stretch required to determine how to bridge the gap from 'users' to 'profit' that I begin to question the value of the metric.

    For example, if each incremental user had a higher direct cost than revenue (i.e. a negative gross margin), it's hard to see how adding users is somehow beneficial.

    I afford a certain degree of leniency for businesses with a significant SG&A infrastructure (which presents a fixed cost), but where there is a high gross margin; at least it's clear to me how achieving a certain revenue threshold will make these businesses profitable via the increased contribution.

    As for the NASDAQ, it's clear that the mature businesses are better 'value'.

    Some of the more ambitious growth stocks may one day justify their existing valuations, but most of them probably won't...
    Mar 2 11:37 AM | Likes Like |Link to Comment
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