Current price to last known book: 271/230 = 1.18
If equities are down 20%, that’s $78 billion from book value.
Current price to ‘adjusted book’ 271/195 = 1.39
Thoughts?
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Agree with that. Likely Buffett has a way to gauge intra period value and acts accordingly.
Still, price to known book is quite low.
“Current price to ‘adjusted book’ 271/195 = 1.39”
yep that is why I often wonder if WEB uses last known book or rough current.
You also have to make other adjustments to replicate the book value as calculated when said books are actually prepared.
Things like
- portfolio decrease
- decrease in deferred tax liability
- cash from earnings this quarter
- reduction in cash balance due to deployment
- decrease in share count due to repurchases
Using some assumptions my guess is that the book value at the end of this quarter if the markets were at today’s level would be about 212 per B. This would be a pb ratio of about 1.27. Still a better than average deal which is all that really matters for investment decision making.
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Here’s a thought, since you ask. The current quote on the equity portfolio doesn’t matter – much – and “adjusted” book value doesn’t matter much in proportion. The quote on the portfolio is far less important than the look-through earnings of the portfolio companies in five or ten years’ time. Ideal would be for all their prices to decrease precipitously and remain low for a long time, so the serial repurchasers among them could reduce the share count at prices actually advantageous to long-term owners. If Berkshire’s price could simultaneously go lower and remain low, repurchases would of Berkshire stock would increase our share of the portfolio companies’ earnings.
Now, I don’t love all the portfolio companies as much as Mr. Buffett does. I wouldn’t be sad to see Ted and Todd some day swap our shares of, say, Coke for something nice reasonably priced and capable of growing more than a few percent a year, assuming they can do that on favorable terms and preferably without paying a boatload of tax. They’re clever kids; maybe they’ll figure it out.
I also wish Mr. B hadn’t dipped so heavily into the cash pile to splurge on HP (yuck) or Chevron (meh) or even Class B shares at 1.35x book. Every dollar we spent there is a dollar minus a few cents in inflation he doesn’t have available to deploy today or tomorrow, with a few really high-quality businesses (including Berkshire itself) now available at reasonable prices.
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“ The quote on the portfolio is far less important than the look-through earnings of the portfolio companies in five or ten years’ time.”
What he said.
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You also have to make other adjustments to replicate the book value as calculated when said books are actually prepared.
Sure. But portfolio decrease is by far the largest component.
Add $5B in earnings, $5B(?) in deferred tax reduction, the others cancel out more or less.
And actually, I think I was off by a bit. I had KHC included.
Taking KHC out I get a reduction in the March 31 portfolio of $88 billion (23%).
Any stocks bought since are also likely to be down.
Using some assumptions my guess is that the book value at the end of this quarter if the markets were at today’s level would be about 212 per B. This would be a pb ratio of about 1.27. Still a better than average deal which is all that really matters for investment decision making.
So that’s a reduction in shareholder’s equity of $40 billion? Care to share your workings?
Sure. But portfolio decrease is by far the largest component…
For a variety of reasons I tend to agree that drops in the market prices of the marketable securities are not meaningful to an assessment of the value of the firm.
Any good metric of value would conclude that a share will be worth more at June 30 than it was at March 31.
Admittedly calculating such a metric is a lot of work, but the conclusion it would give seems pretty clear:
The ongoing earnings are huge and as far as I know there has been no surprising material hit to value at any major division.
Barring any surprises in the next couple of weeks, the biggest loss is likely to be the inflation hit to the real value of the cash and fixed income piles.
The most likely time a drop in book value might matter to you:
If the prices were too high the last time a set of books was prepared, and you put too much faith in those market prices being fair measures of value.
FWIW, when I did my valuation of Berkshire from the Q1 statements I pencilled in Apple’s “conservativized” value at $131 a share (25% lower) and Coke at $50 (19% lower), and Moody’s at $250 (26% lower).
Those three adjustments knocked about $46.5 billion off the market value of the stock portfolio.
Come Jun 30 I’ll increase my share valuations in proportion to my assessment in the progress of earning power of each, if any.
Jim
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I do not understand this statement: Any good metric of value would conclude that a share will be worth more at June 30 than it was at March 31.
Thank you
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I do not understand this statement: Any good metric of value would conclude that a share will be worth more at June 30 than it was at March 31.
Well, I go on to say the reason:
"The ongoing earnings are huge and as far as I know there has been no surprising material hit to value at any major division.
Barring any surprises in the next couple of weeks, the biggest loss is likely to be the inflation hit to the real value of the cash and fixed income piles."
With huge ongoing earnings, both at Berkshire’s operating subsidiaries and within the companies
whose shares we own, most obviously the value rises purely because of the earnings stacking up.
Something with more cash in the bank is worth more than something with less cash in the bank.
Further, as a general trend and taken as a group, the rate of those earnings rise on trend over time as well.
Something with more earning power is worth more than something with less earning power.
As a smaller factor, any shares repurchased below fair value add a very small amount to the value of all remaining shares.
So, unless one concludes that a share is worth less than the average price paid by head office during Q2, there is a slight increase to the value of a share because of that.
There can certainly be losses, even big ones, but they tend to be one-off events.
I don’t happen to know of any in the current quarter, so I assume that the main change to share value is the usual gentle drift upwards mainly for the reasons above.
An example is the permanent hit to the value of Precision Castparts because of the pandemic and the lasting, if not permanent, shrinkage of the business it triggered.
They downsized a lot, and that’s hard to recover from.
(note, the loss is due to the deterioration in the prospects of the business, not because of the accounting treatment of the impairment).
A one time loss in a quarter probably has to be over (say) $10-12bn to cause a share to be worth less after 90 days than it was at the start.
The most important thing to remember is that most of the value of ANY stock lies more than ten years in the future.
There will be some bad stretches before then, and some good stretches.
Any given quarter, good or bad, matters remarkably little in the grand sweep of things.
Even a big recession gets mostly lost in the noise—there’s an endless stream of them,
so it doesn’t matter all that much whether there are two or three of them in the next dozen years.
The vast majority of big companies, in the vast majority of quarters, don’t change in value by more than a few percent.
Almost all big changes in stock prices are changes in valuation multiples, not changes in value.
Jim
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For a variety of reasons I tend to agree that drops in the market prices of the marketable securities are not meaningful to an assessment of the value of the firm.
Any good metric of value would conclude that a share will be worth more at June 30 than it was at March 31.
Admittedly calculating such a metric is a lot of work, but the conclusion it would give seems pretty clear:
The ongoing earnings are huge and as far as I know there has been no surprising material hit to value at any major division.
I agree with this, but it does show the limits of the P/B calculation. Although for the moment we can take refuge in the fact that the Q2 report is not out yet (Q2 not even being over quite yet), pretty soon, book will take a big hit and the P/B ratio will look very different. Meanwhile, in the real world, Apple’s earnings and the earnings of the rest of the equity portfolio are pretty much untouched, along with the relatively steady earnings of the 100% owned utilities and the relatively steady value of the insurance companies.
Although it is a lot more work, another way of calculating value is by calculating look-through earnings, with the important caveat that the volatile insurance earnings need to be averaged out over many years.
Looking at book value, which includes the volatile prices of the huge equity portfolio, has us swinging all over the place trying to see if the shares are a good value for money right now. Looking at peak book value, which Jim has advocated, is a good way of steadying the estimate of what we know to be a pretty steady value. But a sanity check for peak book would be earnings: have they changed materially? If so, does this seem transient, or does it permanently affect value? I think that right now, there is no particular reason to think that earnings of the equity stakes or of the major operating companies have changed in any important way, and using peak book (adjusted if you wish, for companies like Apple and Coca-Cola that seemed a bit overvalued), makes a lot of sense. Adding about $2b in accumulated earnings for every month since the last quarterly report (i.e another $6b now) also makes a lot of sense, although it won’t move the needle much.
If we do that now, we get last quarter’s shareholders’ equity, ($508.1b on p.3 of the Q1 report), plus $6b in interim earnings, so $514.1b, divided by 2.206b B-share equivalents (p. 19, adding 613,960 A-shares times 1500 plus 1,285,371,832 B-shares, as of March 31st 2022), making for $233.01 per B-share equivalent. With yesterday’s closing price of $269.79, that means shares are trading at just under 1.16 times last quarter’s book, adjusted only for $6b in additional accumulated earnings.
If you want to also adjust down the value of the huge Apple stake, taking it from $159.1b on March 31st to the current $123.3b value of those shares, that is $35.8b less, but adjusting for the reduction in the capital gains taxes owed on the unrealized gains, that would be $28.3b less. So Berkshire’s Apple-adjusted book would be $514.1-28.3=$485.8b, and its price to aapl-adjusted peak book would be 1.23, still an excellent price that we would have killed for, a few years ago.
dtb
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So Berkshire’s Apple-adjusted book would be $514.1-28.3=$485.8b, and its price to aapl-adjusted peak book would be 1.23, still an excellent price that we would have killed for, a few years ago.
Yeah, I guess I’m anchored on that last big sale: $174, $172, $160 with last known book $174.28
Those were the days.
I already have an “irrational” amount of Berkshire, and I’m going to wait to see if we retest those 2020 price-to-last-known-book lows.
I’m totally on board with this…