It has been an interesting ride so far this year–high prices, low prices, all kinds of prices in between.
I have a model which attempts to predict the rate of return from Berkshire’s stock in the next three years based on valuation levels, and the recent rate of change of value.
Unsurprisingly, the stock gets a slightly better market multiple when values have been rising strongly lately.
Technically it’s a model to predict the average real market price 1-5 years later, but that’s pretty much the same as a three year prediction.
As the price-to-value ratio changes, the prediction changes.
When the price was pretty full 2022-03-28, the prediction was that the next three years would get you inflation + 5.41%.
When the price was cheap 2022-06-23, the prediction was that the next three years would get you inflation + 11.06%.
With the recent partial rebound, the current prediction is three years of inflation + 9.08%/year.
That works out to an expected price “around” three years from now of $587,055…measured in today’s dollars.
The model isn’t to bad, if all you want is a prudently sensible expectation rather than actual true predictions.
For a spot check:
Three years ago it predicted a price now of $395,397 measured in August 2019 dollars.
That equates to a price now of $457,055 in today’s dollars.
The actual price is $452,697, so the prediction was too high by just under 1%.
It’s not usually that good : )
Another time it was pretty good:
Its highest ever prediction was at the market bottom in 2009.
It predicted three years of inflation + 17.22%/year.
The actual result was inflation + 19.8%/year.
Give the chaos at t he time, I’d count that a big win.
During the pandemic bear the three year forecast peaked at inflation + 15.49%/year.
We still have to wait a while to see how well it did.
So far we have 2.4 years at inflation + 22.4%/year.
None of this should be taken too seriously, as it includes two big assumptions which are far from sure things:
- That future valuation multiples will roughly resemble past ones, and
- That future growth in value will be roughly similar to past rates
Still, if you want a guess, it’s probably better than reading Reddit.
Jim