Estimates of IV suggests that the 1.2xBV is a 50 cent dollar.

Hi longinvestor,

Does this mean that your estimate of IV for BRK is 2.4x BV? Just curious, I have never been able to justify much above 2x BV even in my most optimistic scenario.

Thanks

Vinod

Thanks!

I'm not the numbers type, yet indulged because of boredom that comes with owning BRK. Playing around with assumptions (discount rate, owner earnings etc.), my IV range is between $240,000 and $340,000. The big range supports my vaguely correct posture and I'm comfortable with it. While I may be over optimistic, the market continues to under estimate BRK as the norm. Been buying more.

While on the subject, I've seen many calculators / calculations using two columns, using DCF etc. But not much discussed about the "third (more subjective) element" which deals with the efficacy with which retained earnings will be deployed. WEB covers this on page 123-124 of the AR.

Your thoughts on this? After all, retained earnings is the story of Berkshire since 2009. Curious as to your take on this.

Thanks

I think Buffett is happy to deploy capital when he can get a very high probability of 10% returns. His investments - WFC, IBM, Capex at Utilities, his various preferred investments, etc - all indicate he is happy with 10%. He might get a chance on occasion to deploy capital at higher rates but they are going to be only a few such opportunities.

Some of the internal reinvestment opportunities are going to be at higher rates and he is going to pay premiums for new businesses that generate high ROIC or ROE.

But I think all in all, a 10% return on retained earnings is what we can expect. So that is my estimate for "efficacy with which retained earnings will be deployed".

IMO - For the really small subset of very high quality companies like Berkshire, Coke, Walmart, etc. it is more useful to estimate the growth rate of IV rather than focusing on IV itself. This would allow you to estimate what returns you are likely to get over the very long term if you just hold this investment. This way you avoid the most speculative component of valuation - changes in multiples.

Vinod

If IV is made up of 1. Investments/share + 2. Operating Earnings per share + 3. Incremental return on Retained Earnings

Readily Calculable

1) = $140,000

2) = 10x $11,000 = $121,000

Efficacy of RE deployed - estimate of future

3) = NPV of incremental earnings from RE= $81,000

How I get to this: RE for 2012-13-14: $14B, $20B, $20B; If we held RE constant at $20B for the next 20 years (WEB has stated this "as far as the eye can see") and the retained earnings start producing a 10% return 3 years out; 10% Discount rate

So 1+2+3 = $342,000; There's my 2.4x BV. Conservative enough? If you ask me, they will retain far more than what I'm assuming, earn better than 10%. Agree with you, they look for a near certain 10% return;

The retained earnings is of growing significance just by sheer magnitude. A standout comment by Munger in his commentary, "BRK will do fine without ever making another acquisition" perhaps has this baked in.