At the annual meeting in 2017 a young man in the audience asked Warren what he thought Berkshire’s IV growth rate would be over the next ten years, and Warren replied, “about 10%.” As of the end of last year, 4.75 years later, Berkshire’s IV/share, or at least BV/share, had grown 14.7%/year. Without the Apple purchase, which has added about $117B to BV (including dividends and shares sold), BV/share growth would have been about 8.7%/yr. (Please check my arithmetic.) Anyway, my question is this: At what rate will Berkshire’s IV grow over the next 10 years, and at what rate will Berkshire’s various parts grow IV?
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Great questions. Thank you for asking.
By any chance, do you have a link to the conversation you mentioned between the young man and Mr. Buffett?
I scanned the video and meeting notes, but I didn’t see the question. Carol Loomis asked the same question (It had been submitted to her), and Warren answered about 10%, depending on interest rates.
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Thank you for checking and for the additional information.
Well if we need to get to the “about 10%” that Warren gave, we should expect about 5.85%/year for the next 4 1/4 years. But I suspect if Warren is asked, he will once again reply “about 10%”. I don’t know if you intended to allude to it or not, but one of the great things about Berkshire is Warren can redistribute profits to parts of Berkshire that can make better use of them. For example, they’ve been unable to use See’s Candy’s profits to profitably grow See’s Candy: it remains mostly a west coast and seasonal online product. On the other hand, profits in most utility companies need to flow first to shareholders as dividends before the balance can be spent improving services. BHE doesn’t need to pay any dividends, or send money back to corporate if it has profitable projects to spend them on instead. I think the balance of these things keeps Berkshire earning around 10% even if some industries aren’t doing so well.
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I’m fairly certain that Buffett did not predict future IV growth. There was a question about what Buffett thought the past 10 years IV growth was and Buffett hedged the answer saying “probably 10%”.
I thought the question was quite astute and stumped Buffett a bit. He doesn’t like to give out any numbers on IV
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Below is the discussion on intrinsic value from the transcript on CNBC (bolding mine): https://buffett.cnbc.com/video/2017/05/06/morning-session—…. As you’ll see, Buffett estimated that Berkshire had compounded IV growth at about 10 percent over the past 10 years. In terms of future expectations, he provided lots of caveats about interest rates. Ultimately, he said his “best guess would be in the 10 percent range, but that assumes somewhat higher interest rates — not dramatically higher — but somewhat higher interest rates in the next 10 or 20 years than we’ve experienced in the last seven years.”
- Intrinsic value projections depend on interest rates
WARREN BUFFETT: OK, Carol?
CAROL LOOMIS: This question is from Franz Tramberger (PH) of Austria. And it concerns intrinsic value, which is neither — Warren may rather — he may amend this, my definition here, but — which is neither a company’s accounting value nor its stock market value, but is rather its estimated real value.
So the question is, “At what rate has Berkshire compounded intrinsic value over the last 10 years? And at what rate, including your explanation for it please, do you think intrinsic value can be compounded over the next 10 years?”
WARREN BUFFETT: Yeah. Intrinsic value, you know, can only be calculated — or gains — you know, in retrospect.
But the intrinsic value pure definition would be the cash to be generated between now and Judgment Day, discounted at an interest rate that seems appropriate at the time. And that’s varied enormously over a 30 or 40-year period.
If you pick out 10 years, and you’re back to May of 2007, you know, we had some unpleasant things coming up. But we’ve — I would say that we’ve probably compounded it at about 10 percent.
And I think that’s going to be tough to achieve, in fact almost impossible to achieve, if we continued in this interest rate environment.
That’s the number one — if you asked me to give the answer to the question, if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth. I would not ask you about who was going to be president.
I would — a million things — I would ask you what the interest rate is going to be over the next 20 years on average, the 10-year or whatever you wanted to do.
And if you assume our present interest rate structure is likely to be the average over 10 or 20 years, then I would say it’d be very difficult to get to 10 percent.
On the other hand, if I were to pick with a whole range of probabilities on interest rates, I would say that that rate might be — it might be somewhat aspirational. And it might well — it might be doable.
And if you would say, “Well, we can’t continue these interest rates for a long time,” I would ask you to look at Japan, you know, where 25 years ago, we couldn’t see how their interest rates could be sustained. And we’re still looking at the same thing.
So I do not think it’s easy to predict the course of interest rates at all. And unfortunately, predicting that is embedded in giving a good answer to you.
I would say the chances of getting a terrible result in Berkshire are probably as low as about anything you can find. Chance of getting a sensational result are also about as low as anything you can find. So if I — I would — I —
My best guess would be in the 10 percent range, but that assumes somewhat higher interest rates — not dramatically higher — but somewhat higher interest rates in the next 10 or 20 years than we’ve experienced in the last seven years.
Charlie?
CHARLIE MUNGER: Well, there’s no question about the fact that the future, with our present size is, in terms of percentages of rates of return, is going to be less glorious than our past. And we keep saying that. And now we’re proving it. (Laughter)
WARREN BUFFETT: Do you want to end on that note, Charlie? Or would you care to — (Laughter)
CHARLIE MUNGER: Well, I do think Warren’s right about one thing. I think we have a collection of businesses that on average has better investment values than, say, the S&P average. So I don’t think you shareholders have a terrible problem.
WARREN BUFFETT: And I would say we probably — well, I’m certain — we have — we do have more of a shareholder orientation than the S&P 500 as a whole. I mean, for — you know, the —
This company has a culture where decisions are made for — as an owner, as a private owner would make them. And frankly, that’s a luxury we have that many companies don’t have. I mean, they’re under pressures today, sometimes, to do things.
One of the questions I ask the CEO of every public company that I meet is, “What would you be doing differently if you owned it all yourself?” And the answer, you know, is usually this, that, and a couple of other things.
If you would ask us, the answer is, you know, we’re doing exactly what we would do if we owned them all — all the stock ourselves. And I think that’s a small plus over time.
Anything further, Charlie? (Applause)
CHARLIE MUNGER: I think we have one other advantage. A lot of other people are trying to be brilliant. And we’re just trying to stay rational. And — (laughter and applause) — it’s a big advantage. Trying to be brilliant is dangerous, particularly when you’re gambling.
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brk-b price in May 1 2007 is 72.5, 15 years apart today’s price is 344.33, that’s annual growth of 10.94%, matching IV growth very well.
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<<<<brk-b price in May 1 2007 is 72.5, 15 years apart today’s price is 344.33, that’s annual growth of 10.94%, matching IV growth very well.>>>>
I have no quarrel with the 10.94% or it could well be 13.94%.
That said, I’d argue that this particular period, 2007-now is not enough of a duration to make the correlation between market price and IV. The singularities of the GFC, the Pandemic as well as this unprecedented decade of fiscal intervention all within this period have made this 15 year period of Berkshire’s history different from other 15 year periods. I know that comparisons are tough. But arguably 2007-2030 could be a meaningful and better time frame to try to correlate IV and MV.
Buffett, sort of agrees with this position of mine. The pedal to the floor stock buybacks, $50 Billion and counting makes this case. Using the Gaussian curve on market values, especially for predicting MV don’t cut it for me. There are many things in life that don’t fit the Normal curve but the world doesn’t know any better. Taleb has written books on urban mythology based on naive, yet wrong arithmetic; across all walks of life.
Berkshire long term shareholders have been enjoying this but it’s in our best interest if the misunderstanding of Berkshire’s true IV/growth continue for as long as possible. And keep Berkshire priced below IV sufficiently until the share count drops to, say, below 1 Million A-share equivalent. I welcome it, so will the guy (Abel?) who will eventually replace Buffett.
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I doubt that IV will grow 10%/yr over the next decade. Berkshire’s stock portfolio represents about 44% of IV ($350B in stocks vs about $750B IV as of Dec 31), and the S&P 500 index is priced to return about 4.5%. At least that’s the trailing 12 months (ttm) earnings yield ($4400 price and $198 ttm earnings).
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