BV and IV

June 30th BV/share was down 9.1% versus March 31st. Estimated IV/share was also down 9.1% to $466K/share, or 1.48x BV, plus or minus about 7%.

IV was estimated by what I call the weighing machine method, which takes the trendline of price versus BV (log-log) over 40+ years as not just the trendline price that the market is willing to pay for a unit of BV, but also assumes that the trendline price is a reasonable estimate of IV. “In the long term the market is a weighing machine.” The fit of price versus BV over long periods of time is extremely good. The weighing machine model is just one of several IV models that I like to use, but so far it is the only model that I have used to estimate IV as of June 30th. However the weighing machine model usually fits well with other models. FWIW.

4 Likes

The 9% declines in BV/share and in estimated IV/share resulted from a decline in the market value of Berkshire’s equity portfolio. The equity portfolio, valued at market and after deduction of deferred taxes, represents about 54% of Berkshire’s BV. The question is what the fair value of the equity portfolio is, as opposed to the market value. The market value of the equity portfolio fluctuates dramatically over time, from about 10x earnings of the holdings to about 20x earnings. This, I think, is one advantage of using Berkshire’s trendline price versus BV over many years.

FWIW, I estimate the weighted average earnings yield of Berkshire’s equity portfolio equates to a P/E of 14.36

Earnings might be somewhat elevated cyclically–or not–but that certainly doesn’t suggest a frothy overall situation.

Jim

11 Likes

“FWIW, I estimate the weighted average earnings yield of Berkshire’s equity portfolio equates to a P/E of 14.36”

Thanks. That’s a lower aggregate P/E than I would have guessed. It makes the ratio of fair value/market value much more reasonable than that of the S&P 500, where the aggregate P/E is 20.

1 Like

FWIW, I estimate the weighted average earnings yield of Berkshire’s equity portfolio equates to a P/E of 14.36

Thanks. That’s a lower aggregate P/E than I would have guessed. It makes the ratio of fair
value/market value much more reasonable than that of the S&P 500, where the aggregate P/E is 20.

Though your figure may be correct, it wouldn’t be the apples-and-apples number.
Using the same method I used for Berkshire’s portfolio, the average earnings yield in the S&P 500 equates to a P/E of 15.89.
Simple average as in RSP, not weighted average as in SPY.

That doesn’t make the 14.26 figure at Berkshire any scarier, but it’s a smaller gap than you might think.

The earnings figures I used are (with some exceptions) the “Current EPS” figures from Value Line.
They use two quarters of actual earnings excluding extraordinary items, plus two quarters of forecasts.
It’s intended to get a handle on what’s happening right now, without introducing too much in the way of hand-waving optimistic forecasts.
For stocks without an estimate for “Current EPS”, or undisclosed holdings, I use the simple average earnings yield among S&P 500 stocks as a proxy.
The main exception is that I do an eyeball EPS figure for Apple as a cyclical adjustment. I used $6.30 this quarter, higher than VL’s figure.
Consensus for next year is around $6.40 to $6.55 depending on the source, meaning forward P/E between 25 and 26 right now.

Jim

5 Likes