Berkshire Valuation

We've been discussing how information moves selectively in and out of the Berkshire financials/shareholder letter. Here is an example that concerns the critical question of how to value Berkshire. You can draw your own conclusions.

2005

[sorry about the mess that follows but it's how the cut and paste works. the point is simply the nature of the disclosure.] Before we look at our individual businesses, however, let’s review two sets of figures that show where we’ve come from and where we are now. The first set is the amount of investments (including cash and cash-equivalents) we own on a per-share basis. In making this calculation, we exclude investments held in our finance operation because these are largely offset by borrowings: *All figures used in this report apply to Berkshire’s A shares, the successor to the only stock that the company had outstanding before 1996. The B shares have an economic interest equal to 1/30th that of the A. 3Year            Per-Share Investments* 1965 ..................................................................... 1975 ..................................................................... 1985 ..................................................................... 1995 ..................................................................... 2005 ..................................................................... Compound Growth Rate 1965-2005.................... Compound Growth Rate 1995-2005.................... *Net of minority interests $4 159 2,407 21,817 $74,129 28.0% 13.0% In addition to these marketable securities, which with minor exceptions are held in our insurance companies, we own a wide variety of non-insurance businesses. Below, we show the pre-tax earnings (excluding goodwill amortization) of these businesses, again on a per-share basis: Year            Per-Share Earnings* 1965 ..................................................................... 1975 ..................................................................... 1985 ..................................................................... 1995 ..................................................................... 2005  ..................................................................... Compound Growth Rate 1965-2005.................... Compound Growth Rate 1995-2005....................*Pre-tax and net of minority interests $4 4 52 175 $2,441 17.2% 30.2% When growth rates are under discussion, it will pay you to and terminal years have been selected. If either year was aberrational, any calculation of growth will be distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but meaningless, growth rate. In the table above, however, the base year of 1965 was abnormally good; Berkshire earned more money in that year than it did in all but one of the previous ten.

2006

[Same thing -- virtually identical discussion] There are two statistics, however, that are of real importance. The first is the amount of investments (including cash and cash-equivalents) that we own on a per-share basis. Arriving at this figure, we exclude investments held in our finance operation because these are largely offset by borrowings. Here’s the record since present management acquired control of Berkshire: Y ear            Per-Share Investments* 1965 ..................................................................... 1975 ..................................................................... 1985 ..................................................................... 1995 ..................................................................... 2006 ..................................................................... Compound            Growth            Rate            1965-2006 .................... Compound            Growth            Rate            1995-2006 ....................*Net of minority interests $4 159 2,407 21,817 $80,636 27.5% 12.6% In our early years we put most of our retained earnings and insurance float into investments in marketable securities. Because of this emphasis, and because the securities we purchased generally did well, our growth rate in investments was for a long time quite high. Over the years, however, we have focused more and more on the acquisition of operating businesses. Using our funds for these purchases has both slowed our growth in investments and accelerated our gains in pre-tax earnings from non-insurance businesses, the second yardstick we use. Here’s how those earnings have looked: Year Pre-Tax Earnings Per Share* $4 4 52 175 $3,625 17.9% 31.7% *Excluding purchase-accounting adjustments and net of minority interests Last year we had a good increase in non-insurance earnings – 38%. Large gains from here on in, though, will come only if we are able to make major, and sensible, acquisitions.

2007

[Virtually identical discussion] Berkshire has two major areas of value. The first is our investments: stocks, bonds and cash equivalents. At yearend these totaled $141 billion (not counting those in our finance or utility operations, which we assign to our second bucket of value). *All per-share figures used in this report apply to Berkshire’s A shares. Figures for the B shares are 1/30th of those shown for the A. Insurance float – money we temporarily hold in our insurance operations that does not belong to us – funds $59 billion of our investments. This float is “free” as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur. Of course, insurance underwriting is volatile, swinging erratically between profits and losses. Over our entire history, however, we’ve been profitable, and I expect we will average breakeven results or better in the future. If we do that, our investments can be viewed as an unencumbered source of value for Berkshire shareholders. Berkshire’s second component of value is earnings that come from sources other than investments and insurance. These earnings are delivered by our 66 non-insurance companies, itemized on page 76. In our early years, we focused on the investment side. During the past two decades, however, we have put ever more emphasis on the development of earnings from non-insurance businesses.The following tables illustrate this shift. In the first we tabulate per-share investments at 14-year intervals. We exclude those applicable to minority interests. Year 1965 1979 1993 2007 Per-Share Investments $4 577 13,961 90,343 Years 1965-1979 1979-1993 1993-2007 Compounded Annual Gain in Per-Share Investments 42.8% 25.6% 14.3% For the entire 42 years, our compounded annual gain in per-share investments was 27.1%. But the trend has been downward as we increasingly used our available funds to buy operating businesses. Here’s the record on how earnings of our non-insurance businesses have grown, again on a per- share basis and after applicable minority interests. Year 1965 1979 1993 2007 Per Share Pre-Tax Earnings $4 18 212 4,093 Years 1965-1979 1979-1993 1993-2007 Compounded Annual Gain in Per- Share Pre-Tax Earnings 11.1% 19.1% 23.5% For the entire period, the compounded annual gain was 17.8%, with gains accelerating as our focus shifted. (followed by the usual caveat about how this rate of compounding can't be sustained).

2008

[The market tanks and earnings tank. Discussion shrinks.] In 2008, our investments fell from $90,343 per share of Berkshire (after minority interest) to $77,793, a decrease that was caused by a decline in market prices, not by net sales of stocks or bonds. Our second segment of value fell from pre-tax earnings of $4,093 per Berkshire share to $3,921 (again after minority interest). 

 2009

[The discussion is removed.]

I think Berkshire investors could stand to be a bit more detached when it comes to analyzing disclosures like this. I realize that investors can make these calculations on their own, but the point is that Berkshire decided to present them in some years and not another, and that 99% of investors will focus on them only in the years in which they are presented.