Value metrics

FWIW, my valuation comes up with these figures.

I never attempt to get the right multiples, as I’m interested only in the growth rate of the
metric and what the usual ratio of market price to metric is.
So, think of these figures as [some unknown constant] times a reasonable estimate of intrinsic value.

These figures are all inflation adjusted.

2014Q4   **$288063**
2015Q1    292721
2015Q2    298128
2015Q3    300786
2015Q4    **304761**
2016Q1    287421
2016Q2    288676
2016Q3    299216
2016Q4    **312624**
2017Q1    324456
2017Q2    329789
2017Q3    333254
2017Q4    **343624**
2018Q1    347075
2018Q2    361551
2018Q3    382583
2018Q4    **377936**
2019Q1    393950
2019Q2    402792
2019Q3    418911
2019Q4    **435580**
2020Q1    403706
2020Q2    419327
2020Q3    428648
2020Q4    **455364**
2021Q1    475611
2021Q2    507054
2021Q3    520747
2021Q4    **530566**

2 year rate of change of observable value: inflation + 10.4%/year
3 year rate of change of observable value: inflation + 12.0%/year
4 year rate of change of observable value: inflation + 11.5%/year
5 year rate of change of observable value: inflation + 11.2%/year
6 year rate of change of observable value: inflation + 9.7%/year
7 year rate of change of observable value: inflation + 9.1%/year

Oddly, this series is consistent with value rising more quickly, not more slowly, over time.

Note, I apply a substantial haircut to the value of the equity portfolio.
For each period, I have capped the valuation of big positions to a finite multiple of earnings. (chosen to be optimistic but not exuberant)
In effect, I value big positions based on the trajectory of their earnings rather than the trajectory of market prices.
For year end 2021, my haircut was $55.1 bn, or $37300 per share, biggest to date.
78% of the adjustment was for Apple. 13% of it was for Coke and Moody’s.

There is one purely arbitrary patch to the data: the one horrible quarter of earnings 2020-Q2 was “patched” by eyeball to be on trend.
It was clear that the bad earnings wouldn’t last, so I didn’t consider it a good indication of true value.
In the table above, the 2020-Q2 operating earnings were replaced with the average of the 2019-Q2 and 2021-Q2 figures.

Based on the historical ratio of this metric to market price, one might expect one year returns in the range of inflation + 5.1%.
Depending on which model I use, it gives figures ranging from inflation + 2.5% to inflation + 8.1%.
So, if inflation comes in at a mere 3%, that would give a target price end Feb next year end around $519100 (a bit over $346 per B).

The lower forecasts generally look only at market valuation multiples 2008 and later.
The higher figures tend to come from models that also consider earlier data, generally 2003 and later.
Some models use this valuation metric (generally the lower forecasts), and some use book value.
The book value models are more optimistic lately because there is no valuation haircut on big expensive stock positions.

To recap how my value metric is calculated:

  • A multiple of 15 on “steady things”: after tax earnings from rails, utilities, manufacturing/service/retail, and a cyclically adjusted estimate of underwriting profit.
  • Investments per share at market value, less a haircut for overvalued positions.
  • Minus a figure, proportional to the size of the insurance operation, to count the fact that some
    portion of the portfolio will always be earning nothing and is therefore worth nothing to us.
    That’s estimated as 30% of float. (not intended as an estimate of the size of the cash pile–that’s something subtly different)

If you crunch these numbers, you’ll see there is no trend in the “fair” P/B ratio rising or falling.
In other words, the valuation level “P/B 1.5” means about the same thing it did quite a few years ago.
What you might call a reasonably rare but reasonably fair multiple.
Presumably there will be some divergence some day, but not yet.

Jim

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https://twitter.com/rationalwalk/status/1497960498175881217

Rationawalk lays out the growth in BV and Tangible book very nicely. Glad he tracks it. A terrific follow.

Annualized 10 year trailing growth rate = 13%

may it continue…

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Nice metric.

“I never attempt to get the right multiples, as I’m interested only in the growth rate of the
metric and what the usual ratio of market price to metric is.”

I suspect that if you plot (log-log) price versus metric over a sufficiently long period of time (30+ years using BV as the metric), then the trendline becomes a reasonable estimate of IV.

Using BV as the metric (Not that BV is better. We just want some metric upon which IV reasonably depends) we can see the growth rate of the metric and IV back to 1964. Over that period BV and IV growth rates have fallen into three distinct periods, Oct 1964 (fiscal year end) to Dec 1980, Dec 1980 to Dec 1999 (or Jun 1998) and Dec 1999 to Dec 2020 (I haven’t updated to Dec 2021). Here are the growth rates:

…Oct 1964-Dec 1980…Dec 1980-Dec 1999…Dec 1999-Dec 2020
BV…18.6%/yr…28.8%…10.2%
estimated IV…20.3%…31.7%…11.2%
S&p 500 index…1.4%…13.0%…5.3%

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Inflation #'s cited are laughable. Inflation +13-25%/year

Look at Fed Balance sheet

Don’t give me the fake news CPI

"To recap how my value metric is calculated:

  • A multiple of 15 on “steady things”: after tax earnings from rails, utilities, manufacturing/service/retail, and a cyclically adjusted estimate of underwriting profit.
  • Investments per share at market value, less a haircut for overvalued positions.
  • Minus a figure, proportional to the size of the insurance operation, to count the fact that some
    portion of the portfolio will always be earning nothing and is therefore worth nothing to us.
    That’s estimated as 30% of float. (not intended as an estimate of the size of the cash pile–that’s something subtly different)"

One advantage of your metric versus BV is that you can see the growth rates of the individual components of the metric. If you have time, would it be possible to break out the growth rate of the “steady things” (the operating companies) compared to the growth rate of the investments, or of the equity portfolio? My guess is that over longish periods of time the return on investment of the operating companies is roughly the same as the return on the equity portfolio, about 10%-12%/year since Dec 1999, but I haven’t broken out the data. Even a rough guess would appreciated. Thank you.

would it be possible to break out the growth rate of the “steady things” (the operating companies) compared to the growth rate of the investments, or of the equity portfolio?

This table shows my estimate of what fraction of the value of a share is accounted for by operating earnings on the “steady things”.
The remainder, just over half, is made up of investments per share. (less a haircut for exuberantly
valued big positions, and less 30% of float as a proxy for the long term drag of no-return assets)

2013-Q2 46.4%
2013-Q3 46.7%
2013-Q4 44.8%
2014-Q1
2014-Q2 45.2%
2014-Q3 45.7%
2014-Q4 46.1%
2015-Q1 47.5%
2015-Q2 47.5%
2015-Q3 47.5%
2015-Q4 47.0%
2016-Q1 49.8%
2016-Q2 49.3%
2016-Q3 49.4%
2016-Q4 47.0%
2017-Q1 45.4%
2017-Q2 45.4%
2017-Q3 45.0%
2017-Q4 43.7%
2018-Q1 45.8%
2018-Q2 46.8%
2018-Q3 46.7%
2018-Q4 49.8%
2019-Q1 48.3%
2019-Q2 46.8%
2019-Q3 45.3%
2019-Q4 44.2%
2020-Q1 47.1%
2020-Q2 46.6%
2020-Q3 45.8%
2020-Q4 44.2%
2021-Q1 43.8%
2021-Q2 43.1%
2021-Q3 43.2%
2021-Q4 44.0%

No obvious trend at the moment.

If you assign a multiple greater than 15 to after-tax earnings on operating subs, the percentages above will all be higher, but still no obvious up or down trend.

Jim

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<<This table shows my estimate of what fraction of the value of a share is accounted for by operating earnings on the “steady things”.>>

Operating earnings include dividends from security investments, how is that accounted?

<<This table shows my estimate of what fraction of the value of a share is accounted for by operating earnings on the “steady things”.>>

Operating earnings include dividends from security investments, how is that accounted?

I don’t use management’s definition of operating earnings, nor S&P’s definition.
I use the definition further up in the thread, just four specific things.
It excludes everything related to investments.
Three of the four are conveniently presented as after-tax figures at the beginning of each MD&A, the other being the cyclically adjusted underwriting profit.
I estimate that as the average of two estimates: one based on a negative cost of float, one based on a profit margin percentage of premiums earned.

In effect, I break it down into those things valued at asset value (investments per share) and those things valued at earning power value.

Jim

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<<I don’t use management’s definition of operating earnings, nor S&P’s definition.
I use the definition further up in the thread, just four specific things.>>

Thanks!

“This table shows my estimate of what fraction of the value of a share is accounted for by operating earnings…No obvious trend at the moment.”

Thank you. Looks like the operating companies are growing in value at about the same rate as Berkshire in total. Interesting.

Thank you. Looks like the operating companies are growing in value at about the same rate as Berkshire in total. Interesting.

Bear in mind that, although the earnings growth is substantial, it’s not all internally generated growth.
A lot of the growth in operating earnings arises from “bolt on” acquisitions from money funded by the investment side, not the operating earnings side.

There is certainly nothing wrong with this–this is what Berkshire does. And all power to them.
But it’s important to remember lest one try to think of what all the operating subsidiaries are worth.
You can’t just think of that as the growth number of those operations, and compare it to a stand-alone firm with similar growth metrics.

Jim

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“Bear in mind that, although the earnings growth is substantial, it’s not all internally generated growth.”

Thank you for the word of caution, Jim. I was trying to put Berkshire’s IV into three buckets, cash & fixed income, operating companies and equities, and determine the fraction of IV belonging to each bucket and the rate of return of each bucket. I’m getting something like the following for the last five years:

bucket…fraction of IV… 5-year nominal rate of return

cash & fixed income…21%…0.3%/yr (from the corporate bonds)
operating companies…44%…13%/yr
equities…35% (after deferred taxes)…19.6%/yr
sum of buckets…100%…12.4%/yr

BV growth (total, not per share)…12.3%/yr
IV growth (at constant IV/BV)…12.3%/yr

The buckets and their rates of return are approximate, but I think they give me some idea of Berkshire’s parts and the rates of return of the various parts. They also give me some idea of what Berkshire’s rate of IV growth would be over the next five years if the rates of return of the various buckets changed, for example if the equities returned only their current earnings yield.

I welcome comments and corrections.

rrr1234

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cash & fixed income......21%......0.3%/yr (from the corporate bonds)
operating companies......44%......13%/yr
equities......35% (after deferred taxes)......19.6%/yr
sum of buckets......100%.......12.4%/yr

BV growth (total, not per share)......12.3%/yr
IV growth (at constant IV/BV).....12.3%/yr

The buckets and their rates of return are approximate, but I think they give me some idea of Berkshire’s parts and the rates of return of the various parts. They also give me some idea of what Berkshire’s rate of IV growth would be over the next five years if the rates of return of the various buckets changed, for example if the equities returned only their current earnings yield.

I think Jim’s point is that your calculations may show how quickly these 3 buckets have been growing, but it doesn’t show their return, because there are likely to have been transfers from one bucket to another.

If, for instance, Buffett were to get fantastic returns from the bond portfolio, say 8%, and flat returns on stocks, but at the same time sold 10% of the bonds every year to buy stocks, then the bond portfolio might be down 2%, and the stock portfolio up 6%, but this would not be because of their internal rates of return, and the increase in an individual bucket’s value would not measure how well that bucket was performing.

dtb

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“I think Jim’s point is that your calculations may show how quickly these 3 buckets have been growing, but it doesn’t show their return, because there are likely to have been transfers from one bucket to another.”

That is correct, but I have tried to account for transfers between buckets. For example, the return of the equity portfolio is calculated each year using the change in the portfolio balance, minus purchases and plus sales of securities, plus the dividend yield, so cash flows into and out of the equity portfolio are accounted for in calculating the return.

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