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Berkshire Hathaway Inc. Message Board

  • scorpion3600 scorpion3600 Feb 16, 2004 1:26 AM Flag

    Can brkb return 15%/year at 3k/share?

    Ok, I just want an opionion. Do you think BRKb can return 15% increase in share price if purchased at 3k/share for the next 5 to 10 years? This is a market cap of 280 billion in 5 years? Reasonable or stretching it? What is a more likely scenario?

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    • � Do you think BRKb can return 15% increase in share price if purchased at 3k/share for the next 5 to 10 years? �

      The keyword in the above sentence is CAN, as opposed to WILL.

      Just an opinion?

      * 5 to 10 years? ... Yes.
      * 20 years or more? ... No.

      Why?

      Think of Berkshire as a fish in a pond. A very special fish. Because of a genetic mutation, it grows in volume by 12% per year, each and every year, until it dies. Unfortunately for the fish, the pond only grows in volume by 3% per year. Let's say, that when the fish's volume is 5% of the pond's volume it exhausts the pond's ability to sustain it and it dies. Let's say that the fish now has a volume equal to 1% of the pond's volume. How many years does the fish have left to live (for Berkshire, to grow)?

      0.05 = 0.01 * ( 1.12 / 1.03 ) ^ n

      n = ln ( 0.05 / 0.01 ) / ln ( 1.12 / 1.03 )

      n ~ 20 years {19.213 years, if you're checking your math} .

      Now, I don't believe Berkshire will "die" in twenty years but its' real growth will probably be closer to real growth in GDP than it is today and Berkshire will finally be forced to ... � drum roll please � .... pay a dividend!

      Some really quick and dirty numbers {feel free to clean these up}:

      Mkt Cap(BRK) = 1.54e6 shares * 92e3 $/share = 1.4e11 = 0.14e12

      Mkt Cap(S&P500) = 10.463e12 {Barra, 1/31/2004}

      Mkt Cap(US stock market) ~ Mkt Cap(S&P500) / 0.75 = 14e12

      Mkt Cap(BRK) / Mkt Cap(US stock mkt) ~ 0.01 ~ 1%

      Real growth in GDP ~ 3% per year.

      Real growth in Mkt Cap(US stock mkt) ~ real growth in GDP.

      Don't like the answer? Redefine the pond. What is the WORLD total market capitalization?

      Messages with similar themes:

      192603 ... real growth in GDP, actually a rant on annualizing periods less than a year.
      205032 ... Infinite growth in a finite world.
      205119 ... Does real growth in sales require real growth in headcount?

      Reminder, this was just an opinion.

      • 2 Replies to jad1148
      • Just a theory, and it ain't gunna happen, but:

        Berkshire could act like a ratchet and pawl on the stock market and the economy. It could continue to garnish itself with 3%+XX% gains year in and year out until it consumes every industry in the land. How? The market continuously makes pricing errors, by exploiting those errors when they happen, Berkshire could buy dollars for 50 cents ad infinitum (well, until the entire supply of "dollars" is gone, at which point, 3% is the terminal growth rate). Such a scenario would take 100 or more years, and require, near the end, multiple periods when everybody agrees wholeheartedly that stocks and industry are doomed. (It would have to be gnashing of teeth times.) We could do nearly 6% right up to the end, and as we approach the end, we could redefine the terminal growth rate ourselves, via exploitation of foreign markets or economic machinations. (We would essentially BE the government of the land.)

        It could happen, but it is almost an impossibility, unless there were some moat associated with Berkshire, something like it being such a kind and generous employer that employees of other companies force the sale of their own companies to Berkshire, or Berkshire owns some paradigm-breaking mechanism (like free energy, etc) that forces all others to be woefully disadvantaged. Yes, it could happen, the likelyhood of Hitler popping up somewhere and taking over the world is equally likely, but hey, it could happen.

        But, dude, I sure wish I were a man back in those days of 10 women to 1 man in Paraguay. Maybe that could happen too, someday. Either way, either scenario, we are talking fantasy. ;-)

      • "pay a dividend"

        Inevitable, but that doesn't necessarily mean a decline in total return, at least not for some time. Rather, ROIs, and growth, will be enhanced, at some point, with dividend, or even asset, distribution(s). Especially if dividends and capital gains are taxed at the same rate for individuals. Actually, there are several options available. BRK has probably already thought of a few we likely won't.

 
BRK-A
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