Personally, I'd be happy enough if Berkshire continues to trade for less than IV, and I think adjustment will be slow to change away from something like Price/Book Value. I'm thinking that P/BV of 1.2 still seems to be holding up as a pretty good soft floor to valuation and is pretty much the amount one can count on being available to sell at and spend on something that has become cheap. That's why I like BRK.B as a default investment rather than cash - a limited downside that is compounding very much in line with the market that meets my needs while I'm waiting for the fat pitches to come along. Then I can sell some of my Berkshire to buy the high conviction fat pitch. If it's a very high compounder, I should probably hold onto it even when it gets a bit pricey, and otherwise upon revaluation I could trade back into Berkshire when the downside risk there is lower and the upside is broadly similar. Actually, measuring my portfolio against the number of BRK.B shares it represents is a fairly good way of assessing progress compared to the good alternative avilable to me. So is comparison to the SP500TR.
I'm quite a fan of the Look-Through Earnings approach too, as well as Sum-of-the-Parts, possibly making adjustments* for heavily mis-priced portfolio holdings. Two column or two-and-a-half, also seems to be a good variation on this theme.
* at a trailing twelve month P/E ratio close to 17-18, I don't think major adjustment is necessary, though it's a blend. Banks tend to trade at lower P/E ratios, and Apple probably ought to trade at about 18-22 typically.
So far we've had only around 1% of the company bought back, so the excess over BV paid to retire shares hasn't greatly shifted the P/BV ratio that roughly equates to IV.
Now P/BV is crude and IV is certainly not at a fixed multiple of BV. For example, the huge run-up in the portfolio in 2019 Q4 greatly increased BV while IV increased moderately, whereas in 2018 Q4, the opposite was the case. Every 10% gain in portfolio valuation probably adds about 4.5% to BV before considering after tax operating earnings in the period, so the effect of market swings is dampened to a degree.
At slight variance from SwedishCompounder, I'd usually estimate that a typical year sees about a 6%-7% increase in the capital value of Berkshire's portfolio (rather than 8%) while the dividends received make up the rest to match the S&P500 typical total return, but also that few years are actually typical, but we're pretty much on the same page.
I also think that cash is not a drag as it's matched by float - a liability - and gives the opportunity to lever-up significantly when risk-reward balance becomes asymmetrically favourable - i.e. when quality asset prices are unusually low and forward returns are unusually high.
I think a change in the tax treatment of dividends to individual investors might be needed before Berkshire will change its dividend policy any time soon. Buybacks could increase somewhat, but I think they're very keen to keep volume modest to ensure they cannot be seen to be manipulating the stock price, especially as they don't seem to take advantage of 10b-18 Safe Harbor plans.
And Berkshire does not consider its job to be to encourage a stock price that's as high as possible in relation to IV, but one that's reasonably rational and perhaps slightly conservative and that encourages long-term holders who will benefit from the underlying growth in the business (a positive sum game) far more than from intermittent pricing swings (a zero sum game) where either buyer or seller is 'losing out' on the deal. Going into 2019, the price was relatively high, holding up against a declining market. Coming out it was relatively low to moderate. But over 2 years or 3 years, it pretty much performed in line with the market producing results pretty well in line with the business itself.
To me Berkshire is also well positioned to cope with inflation or rising interest rates. These are times when other insurers can lose their pricing discipline and underwrite at a loss, being rescued by bond yields on invested float, and times when other assets, and debt-encumbered companies can start trading fairly cheaply. Initially, a major rise in rates would depress most stock prices to raise earnings yields, though it may help banks. It would also curtail leveraged private equity's ability to obtain high prices for their debt-laden investments. Such a time could be a huge advantage to Berkshire, and one it's well prepared for, but not reliant upon. Whatever the environment I think Berkshire will do well, but perhaps in a low rate environment without a major shock to the system, it shouldn't be expected to do anything spectacular.
And knowing that Berkshire is usually available at a fair to attractive price relative to IV, is also comforting to me, allowing me reasonably frequent opportunities to invest new funds at reasonably attractive prices.
