## Wednesday, August 23, 2017

### Warren Buffett's simple Berkshire Hathaway intrinsic value math

Summary: 1,25 price to book is a very reasonable price for Berkshire Hathaway stock. If you buy at that price point, you can expect a future return of roughly 12%. Buy A shares if the price dips under 1,4 PB = \$182,816 x 1,4 = \$255,942

=======

Below is a slightly simplified version of the explanation given by Warren Buffett in his Letter to Shareholders 2012; http://www.berkshirehathaway.com/letters/2012ltr.pdf see page 20.

Moreover, on the plus side, there also is a possibility that the assumptions will be exceeded.  The sell-off method, unlike dividends, lets each shareholder make her own choice between cash receipts and capital build-up. One shareholder can elect to cash out, say, 60% of annual earnings while other shareholders elect 20% or nothing at all.

Let me end this math exercise – and I can hear you cheering as I put away the dentist drill – by using my own case to illustrate how a shareholder’s regular disposals of shares can be accompanied by an increased investment in his or her business. For the last seven years, I have annually given away about 4,25% of my Berkshire shares. Through this process, my original position of 712,497,000 B-equivalent shares (split-adjusted) has decreased to 528,525,623 shares. Clearly, my ownership percentage of the company has significantly decreased. Yet my investment in the business has actually increased: The book value of my current interest in Berkshire considerably exceeds the book value attributable to my holdings of seven years ago. (The actual figures are \$28.2 billion for 2005 and \$40.2 billion for 2012.) In other words, I now have far more money working for me at Berkshire even though my ownership of the company has materially decreased. It’s also true that my share of both Berkshire’s intrinsic business value and the company’s normal earning power is far greater than it was in 2005. Over time, I expect this accretion of value to continue – albeit in a decidedly irregular fashion – even as I now annually give away more than 4,25% of my shares (the increase has occurred because I’ve recently doubled my lifetime pledges to certain foundations).

At Berkshire we will stick with our no dividend, sell off policy as long as we believe our assumptions about the book-value buildup and the market-price premium seem reasonable. If the prospects for either factor change materially for the worse, we will reexamine our actions."

Below is a chart I have used for my own decisions on Berkshire Hathaway, when I wanted to sell around October 2016. I decided to wait and did some selling around January 2017. (The chart is in Euros and is based on only 7 unevenly distributed data sets across the years, but should get the point across.) The current Price / Book at Berkshire Hathaway is: \$180/\$122 = 1,48 which is higher than 1,25. (B shares is A shares divided by 1 500. Buy A shares if the price dips under 1,4 PB = \$182,816 x 1,4 = \$255,942 )

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com