Any of the books by John Train. I was first introduced in depth to Buffett and Berkshire in a book by John Train called "The
Money Masters", published in 1980. I know there was a subsequent trade paperback edition. It has chapters on Buffett, Paul Cabot,
Philip Fisher, Benjamin Graham, Stanley Kroll, T. Rowe Price, John Templeton, Larry Tisch and Robert Wilson, so there is a lot of
good stuff in addition to Buffett. He interviewed Buffett for the book, which is something I don't think the authors of the newer
books have been able to do. The interview has been outdated in one stark way. He mentions that "Buffett, a genial, ruddy, muscular
man with a wide, humorous mouth and an inquistive expression behind his oversized hornrimmed spectacles, put his feet on the
desk, poured himself a Pepsi-Cola, and, in the somewhat toneless manner characteristic of midwesterners, cheerfully began to
babble about what was on his mind." The awful truth is out and documented. Buffett was once a Pepsi drinker. Two sentences stood
out to me then. This was in 1980 remember. "In the past you could buy a collection of Buffett's favorite holdings at a discount
from their market value-getting the rest of the company free-through Berkshire. (In the future I'd think this discount would
disappear.)" The idea of the vanishing discount hooked me. The chapter on Buffett is 40 pages long and still worth reading.
Train also wrote what is as far as I know, the first book on Buffett, "The Midas Touch". This was in 1987.
There is one outstanding book first published in 1852, "Extraordinary Popular Delusions and the Madness of Crowds" by
Charles Mackay. The first three chapters, The Mississippi Scheme, The South-Sea Bubble and The Tulipomania ( yes there is an O in
Tulipomania ) are of interest to investors. They fill the first 97 pages in my copy. The other 600 pages are devoted to alchymists,
witches, crusades, fortune-telling etc. and are of less interest and much tougher going. This book should be easy to find.
From your research,Mike,do you consider that Buffett did sell all BRK silver (20% of past year world production)?
The fact is that silver prices are down now,where those almost were a year ago...Buffett had to sell those before they fell.And this had to be at the time he announced in Februaray that he bought it in July,97. H.
Thanks for answering my previous question.
Do you have any idea by how much Buffett upwardly adjusts the T-bond rate when using it as the discount rate in the dividend growth model formula?
According to "The Warren Buffett Way," Buffett uses the dividend growth model, PV = C/(r-g), but uses "owner earnings (net income + depreciation&amortization - capital expenditures)" as C in the formula and the 30-year T-bond rate as r, ADJUSTED UPWARD if it is cyclically low.
The T-bond rate is around 5.7% today, which I think is cyclically low. But by how much do you need to adjust it upwards? I'm thinking taking an average of the last 15-30 years and then adding the difference between today's rate (5.7%) and the 15- or 30-year average rate would be a good premium to add, but I'm not exactly sure.
I'd e-mail you if I could, but I'll refrain from posting further
here. Any other Q's or clarifications can be
e-mailed to me at my address at the bottom of the article ;-)
I do realize now anyone can show up here and impersonate me
(for whatever reason I can't imagine). All previous posts are by me. Any further posts are not :)
"It is interesting that Mike's
valuation estimate was 69k, about the same as that seperately calculated by the Motley Fools. I wonder what Buffett's
calculation comes out to?"
With all due respect, mine is correct -g-. Actually, I haven't
read the Fools' piece. They're a thoughtful bunch. Thanks for
pointing me that way.
While I used beta (an efficient market construct) to inject some rigor into the valuation, the endpoint is simply, "What discount
rate do I use?" I don't truly believe in beta for long-term
holders of stocks. But I do believe that if you pick the correct
discount rate, then you can figure the PV of future cash flows.
If this PV is higher than the stock price, then the stock
is undervalued. Buffett has said this many times in his letters
As it turns out, the Capital Asset Pricing Model gives a discount
rate for Berkshire that is near the historic rate of return for
stocks over the last 100 years. This is reasonable, so I used
it, despite my disdain for beta.
It would not be reasonable to use just the T-bond rate. Even
Buffett adds a premium to the T-bond rate when it is low
to come up with a valuation. He has commented that otherwise
the valuation gets too large and unrealistic.
I thought it was a well though-out piece, with the title not exactly matching the article. It is interesting that Mike's valuation estimate was 69k, about the same as that seperately calculated by the Motley Fools. I wonder what Buffett's calculation comes out to?
Just a thought after reading the chairman's letter regarding the Dairy Queen deal and his disappointment that so many DQ shareholders took stock as opposed to cash. Is it possible that Buffett bought back BRK up to his estimate of its intrinsic value? I don't recall if Berkshire has done this before or not. Several entries in the letter made me think of this (rough quotes):
"Berkshire stock has rarely been overvalued"
"We are not pleased with our prospects for committing incoming funds"
"When I've issued stock, I've cost you money"
There was quite a run-up in the months following the completion of the acquisition, with the stock now leveled off around 67 - 68. Coincidence, or does everyone have it intrinsicly valued at this level? I flunked out of technical analysis school, so if this part of some reverse head and shoulders, let me know.
This reflects entirely on me and has nothing to say about you, but if someone lined up against a wall and demanded on the
threat of death that I explain what you just said, my widow would be selecting coffins tomorrow. Just the thought of "Beta" makes
my head hurt. And I am a reasonably bright guy. I am not able to program my VCR, but I am getting pretty handy with the CD
player. My main concern on reading your valuation of Berkshire is that my complete lack of understanding of your equity valuation
methods indicates that I should probably quit this game, sell all my securities and invest all the proceeds in life insurance.
I have owned this stock since 1981 and am a big fan of Buffett et al., but on the best of days, $69,000 pre share valuation seems pretty high to me. Again, my fault, not yours.
All I really know how to do is look at a company, its management, its prospects, its earnings, its everything, and run all
that through some rather simple models I keep in my head and determine what an appropriate pe ratio would be. Quite honestly,
your models leave me breathless. To me, $1,000 worth of Coke stock is worth $1,000. To me, regardless of whether I understand the
concept of beta, the correct net present value of the cash flow of a group of assets that would cost me ( or my widow ) $38,043 to
purchase on the market tomorrow morning is simply $38,043.