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Berkshire Hathaway Inc. Message Board

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  • baltbear Oct 23, 2012 7:48 PM Flag

    Downside to 79 ?

    "the market" has nothing to do with book value--except when rats' droppings multiples are used to prove whatever somebody already wants to think.
    "No" insurance claims during period x says nothing about potential for claims.
    Any claim for "book" that is a multiple of the net receipts of a sheriff's auction is likewise fairly bogus.

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    • But Balt, the market price of BRK's bond and stock portfolios do effect BRK's book value. Book Value is equal to Assets minus Liabilities. If the market value of some of the assets shrink with no commensurate contraction in the liabilities, then the BRK's book value will collapse as well.

      An analogy. Do you know why a crippled submarine sinks until it hits the ocean's floor? It is because the damaged submarine's density (mass per volume) at any particular depth is always greater than the density of the water it displaces. As the submarine sinks its mass never changes, but external water pressure increases with depth and that pressure continually crushes the hull, reducing its volume, which in turn continually increases the submarine's density, so that at any interim depth it is no longer buoyant. A cascading catastrophic failure. If the markets do undergo a contraction then I would suspect that BRK's stock price would follow a similar path.

      • 3 Replies to jad1148
      • Jad, book value is not equal to assets minus liabilities - that is liquidation value. Book value is an accounting term. Buffett's fixation with book value is that it INTENTIONALLY understates true market value and hence offers a conservative DIRECTIONAL view of Berkshire's net worth as compared to the S&P 500 (note that WEB never offers a BV/BV comparison between Bekrshire and the S&P 500 even though each of the companies in the S&P 500 have easily discernable book values). For a company like Berkshire that increasingly is a function of the value of its operating businesses, book value is a largely meaningless metric. Wouldn't you rather value a business based on its earnings and the market value of its assets, rather than based on the price that was originally paid for the business? Of course the most extreme example is that of Sees Candies, but as time passes, most of BRK's operating companies should rise in value, so why look at book value?

      • And in a declining market and a declining economy, the insurance liabilities often grow, not shrink As an example, when unemployment compensation begins to run out, the old back problem flairs up and becomes a workers compensation claim. Also, businesses mysteriously burn to the ground with greater frequency.

        Don't argue with the old balty -- when he treads into where he knows nothing, you get the kind of answers he just offered you, then he calls you a republitard.

      • baltbear Oct 24, 2012 5:56 PM Flag

        All true enough. However, that "bond and stock port" is its own submarine in its own ocean. The assumption that it is otherwise is the error.
        Example, Let's say WB has x.y% of the o/s of ticker abcd. The stats available to price setters remove these shares from the "free trading float". As soon as they are added, the submarine--mkt clearing price--goes down. It keeps going down until it hits the demand floor. You can see all stock boards filled with submariners attempting to man the pumps--one of the actual reasons such efforts are called pumps.
        That is, "book" is the actual market clearing price of assets minus the cost of getting rid of liabilities. That's the real mark for "neutral buoyancy."
        " Do you know why a crippled submarine sinks until it hits the ocean's floor?" Because it can no longer pretend to be a live fish, and so starts to act like a dead one. Fish generally die as a result of factors in the ocean, not in their natures as fish. Therefore studying a fish's health w/o regard to the ocean leads to error.

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