Honestly didn’t think I would be buying again this soon after lightening, but at 312 per B-share vs. 230.31 BVPS, we are back at 1.35x last known BVPS. Warren may restart repurchases tomorrow or the next day - they usually refrain for at least the first day after a report.
With 2.2063 Billion B-share equivalents, Berkshire is being valued at a $688 Billion market cap
I bought a little in my IRA after lightening up at 350. Seems like pretty easy money to me.
Brk dropped to 0.9 / 1 x book after the GFC and in 2020 during the pandemic 1.35/1.4 is the 5 year average, I wxpect worse to come.
Brk dropped to 0.9 / 1 x book after the GFC and in 2020 during the pandemic 1.35/1.4 is the 5 year average, I wxpect worse to come.
Why?
I always buy in stages now when Berkshire drops, because I missed out on some buying opportunities many years ago trying to wait on the “big drop”.
Sure my overall return is a little lower buying on the way down than it would be if I timed the bottom, but timing the bottom is super hard and stressful for me.
Inflation, interest rate rises, war, pandemic, near record valuation levels vs GDP.
https://www.currentmarketvaluation.com/models/buffett-indica…
“ Inflation, interest rate rises, war, pandemic, near record valuation levels vs GDP.”
Apparently, Buffett is much more bullish, buying 50b of stocks. To see the reasons, perhaps think about the Rabit/Duck carton he showed to us: anything has two sides, depending on your perception.
Didn’t Charlie say the purchases were a better option than treasury bills given the current environment? Not a table pounding buy recommendation.
Certainly not “like an oversexed man in a harem” Buffett 1974.
I nibbled today as well today @318 and also thought the 50B in purchases in Q1 was wise, will add real value, and shows WEB is still very active and will not hesitate to allocate in a huge way quickly if it makes good sense. Not to mention the buybacks. Hope Mr. Market serves us even better entries.
I like to look at the Y charts price to book for brk b. The 5 year low is 0.92, high 1.59 average 1.35 price to book.
Assuming book of 228
0.92 would be 209
1.35 would be 307
1.59 would be 362.
So we’re sitting a bit above the 5 year average atm.
Jim,If taking an initial position at this time which would be the best type of investment now?
1 buy the stock
2 buy in the money long term leap calls
3 sell out of money long term leap puts
Thaks in advaance.
I like to look at the Y charts price to book for brk b. The 5 year low is 0.92, high 1.59 average 1.35 price to book.
Assuming book of 228
0.92 would be 209
1.35 would be 307
1.59 would be 362.
So we’re sitting a bit above the 5 year average atm.
0.92PBV was when Covid hit and everything cratered ~40%.
WEB has been investing since last two years deploying billions which will go to work instead of rotting.
BRK is a better value at 1.35PBV than it was at 0.92PBV.
I’d probably buy the stock.
Or at least mostly stock.
If it gets really cheap then the near term return prospects will be high–
You can then (optionally) succumb to the temptation of a bit of leverage.
Sell some of the stock, use the money to buy some low strike calls.
It’s a good way to pass the time when the rest of the market is panicking.
Historically a cycle like this would have worked well:
In recent years 1.35 has been a whole lot more common than 1.55.
So maybe the two cutoff figures should be 1.30 and 1.50???
Jim
With buybacks in full swing, either P/BV multiple has to go up or it becomes less relevant.
“ With buybacks in full swing, either P/BV multiple has to go up or it becomes less relevant.”
It becomes a more and more conservative measure of the firm’s value. So, if you were comfortable buying at, say, 1.3 X book per share before, you should really really be very comfortable buying at 1.3 X book per share now (and as buybacks continue).
The other way to approach it is to adjust for the buybacks in the book value. So, if prior to the last quarter, the buyback amount was $51 billion, one could add that amount to the current book value and recalculate the P/B ratio and use the old yardsticks. Personally, I would also adjust for the overvalued stocks such as AAPL.
Thoughts on this approach are welcome (especially Jim’s). Thanks.
The other way to approach it is to adjust for the buybacks in the book value. So, if prior to the
last quarter, the buyback amount was $51 billion, one could add that amount to the current book
value and recalculate the P/B ratio and use the old yardsticks. Personally, I would also adjust for
the overvalued stocks such as AAPL.
Thoughts on this approach are welcome…
Don’t add back the amount spent on buybacks.
Add only the amount by which the amount spent exceeded the book value of the shares purchased.
If you spend a billion on shares at P/B 1.4, that doesn’t “artificially depress” book value by a billion.
It only pushes it down by $285m because $714m worth of assets were acquired as the $1bn in cash went out the door.
But either way it’s not a worry, and probably won’t be for years.
There are lots of things that affect the fair P/B ratio, and they are mostly small.
Buybacks do affect it, but for the change to be meaningful it has to be a meaningful fraction of shares purchased AND at a meaningful multiple of book per share.
That will take a lot of years.
Other things matter more—has there been a big acquisition lately, public or private?
Is cash a materially larger than normal fraction of the company’s value?
Are some of the big stock holdings overvalued?
Those tend to push the fair P/B multiple down.
Has there been a lot of capex within operating subs lately? Have most big operating units been owned for a long time?
Are some of the big stock holdings really cheap?
Is a big successful operating unit increasing sales and profits without needing much new capital?
Those tend to push the fair P/B multiple up.
My valuation figures suggest that there is no trend change in the “fair” P/B in the last decade or more.
Any change is way down in the rounding error. If anything, my figures show that the fair P/B is just a hair lower than it was.
Eventually it will matter.
But for now, the traditional meaning of P/B 1.40 is the same as it ever was, and has no more nor less precision as a value yardstick than it ever had.
Jim
Personally, I would also adjust for the overvalued stocks such as AAPL.
So what’s your valuation of AAPL?
Thank you very much, Jim. I agree that several factors influence relationship between book value and intrinsic value. The ones you listed are great! However, when Berkshire buys back its own stock, it is akin to buying stock in a different business (say, company X) with the same characteristics as Berkshire.
With the stock buyback, cash is debited from the balance sheet but there is no corresponding credit on the assets side (because I’m assuming Berkshire destroys the stock purchased).
However, when Berkshire purchases stock in a different business (X), there is both a debit (corresponding to the cash spent to purchase the stock) and a credit (the current value of the shares of firm X purchased).
That is why it seems appropriate to add back the entire amount spent on buybacks. It looks like you disagree with this approach, but it’s still not clear to me why.
When Berkshire purchases its own stock, at that point intrinsic value of the firm goes up by the difference in intrinsic value right before the purchase and the cash outlay (regardless of book value). However, that is only at the time of the purchase. After that point, the value added by the buybacks is determined by the performance of the firm (again, the logic is akin to Berkshire buying a different firm with the same characteristics as Berkshire).
Please let me know if I am missing something. Thank you again!
“So what’s your valuation of AAPL?”
fdoubleol, I have not done the exercise recently, and tend to rely on Jim’s figures.
With the stock buyback, cash is debited from the balance sheet but there is no corresponding
credit on the assets side (because I’m assuming Berkshire destroys the stock purchased).
However, when Berkshire purchases stock in a different business (X), there is both a debit
(corresponding to the cash spent to purchase the stock) and a credit (the current value of the shares of firm X purchased).
That is why it seems appropriate to add back the entire amount spent on buybacks. It looks like you
disagree with this approach, but it’s still not clear to me why.
The reason is that, for accounting purchases, repurchased shares are “unbundled”.
They are, in effect, replaced with the book assets underpinning them once you look at the per-share result.
So it is not at all like buying share in another company.
If Berkshire buys $100 worth of shares in another company, $100 cash leaves the building and a mark-to-market stock position of $100 is opened.
No change to book value till the share price changes.
The result at the whole company level is (proportionately) the same as the result at the per-share level: no change to book till the price of the shares purchased changes.
But if Berkshire buys $100 worth of Berkshire stock at (say) P/B of 1.5, then from an accounting point of view, when converted to a per-share view, the proportionate result is:
Why is that?
When shares are repurchased, each share loses its proportional ownership in the money spent,
but gets a greater interest in all the continuing assets that are NOT the cash used for the buyback.
The ratio between the two changes is the P/B ratio at which the buyback was done.
A company can do an unlimited number of buybacks at book value per share and not change the level or meaning of book per share at all.
That’s called “Loews” : )
(a company famous for extremely large aggregate buybacks over very long time frames…but often trading very close to book per share.
Share count has halved since around 2007 due to massive buybacks.
But book value per share is up by a factor of 2.5, not lower, because buybacks done at/near book value didn’t erode the bookkeeping assets per share.)
Jim