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Berkshire Hathaway Inc. Message Board

  • physamg physamg Oct 20, 2003 9:57 AM Flag

    This stock is cheap.

    On a valuation basis of 1.68 book Brk has been a buy for some time.Now at a PE of 15 or so compared to 30 for the S&P 500,is a bargin on a earnings valuation basis,and you can trust the nunbers.Picked up some more this morning @2565.

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    • Yea, if you look at the 1998 I think AR then you see that he said the stock was fairly price at 38K. If you subract investments per share out and then div by earnings=PE20 after tax. (earings are without investment gains)

      So investments +20earnings(13pretax)

      If investments are 60K a share, and we get 1000 earnings for the 3rd.

      4Q02*3Q03=2842

      2842*20+60000=116840

      Now I would never pay that for it, but it doesnt seen that berkshire is stock price is lagging IV very badly.

      Some problems I see with this way of doing IV is investment income is getting double counted. I also am not valuing the cash investments. I hope they break even to make this test have some meaning.

      SWUSC

      • 1 Reply to swusc
      • I agree with you. Just bought a few more "B" shares today on this pull back. Believe the overall trend is UP.

        However I believe in a more conservative estimate of the high at $85,000.

        FYI:.....Jim Cramer, when asked about BRK as an investment, indicated that he liked BRK as long as Charley Munger was there. That means to me that Charely Munger has more to do with BRK than I thought or that Warren Buffett says.
        Charley is not a young man so watch out to see that he maintains his relationship with Warren.

    • P/B and P/E are pricing valuations, so they are of limited use. What is important is the IV, which can be estimated from the earnings or cash flows if you want to get more complex.

    • <FLAT

      You'd never have survived 1999-2000>

      Dead on - check out message 26225 on 12/16/99.

    • Care to elaborate further on your message #26225?

      http://finance.messages.yahoo.com/bbs?.mm=FN&board=7080974&tid=brka&sid=7080974&
      action=m&mid=26225


      Man, it must suck to have such a post attributed to ones name, can't you email yahoo and have them remove the evidence or something?

      I know I have posts back there I wish I could excise, but sheesh, I think I'll get a rope and make 13 loops if any of them are THAT bad...

    • MSG #26229 is a great reply to FLATFISHER's rant.

    • Hahahahahahaha. Flatfisher's a phony.

    • That old post by Flatfisher reminded me of a good article that shows why Buffett was right and Flat was flat wrong ;-) Earnings Growth: The Two Percent Dilution is by William Bernstein and Robert Arnott and appears in the latest Financial Analysts Journal. Here's a summary:

      The bull market of the 1990s was built largely on a foundation of two immense misconceptions:

      With a technology revolution and a "new paradigm" of low payout ratios and internal reinvestment, earnings will grow faster than ever before. Five percent real growth will be easy to achieve.

      When earnings are not distributed as dividends and not reinvested into stellar growth opportunities, they are distributed back to shareholders in the form of stock buybacks.

      In fact, neither of these widespread beliefs stands up to historical scrutiny. Since 1800, the economy, as measured by real GDP, has grown a thousandfold, averaging about 3.7 percent a year. The long-term uniformity of economic growth is remarkable; it is both a blessing and a curse. To know that real U.S. GDP doubles every 20 years is reassuring. But this growth is also a dire warning to those predicting rapid acceleration of economic growth from the computer and Internet revolutions.

      The relatively uniform increase in GDP implies a similar uniformity in the growth of corporate profits�which does, in fact, occur. Except for the Great Depression, during which overall corporate profits briefly disappeared, nominal aggregate corporate earnings have tracked nominal GDP growth, with corporate earnings staying at 8�10 percent of the GDP growth. The trend growth in corporate profits is identical, to within a remarkable 20 bps, to the trend growth in GDP.

      For 16 countries, with data spanning the 20th century, we compared dividend growth, price growth, and total return with GDP data from the same period. We found that in stable, non-war-torn nations, per share dividend growth was 2.3 percent less than growth in aggregate GDP and 1.1 percent less than growth in per capita GDP. In the war-torn nations, the situation was far worse�per share dividend growth 4.1 percent less than growth in aggregate GDP and 3.3 percent less than growth in per capita GDP.

      Data for the comprehensive CRSP 1�10 Index from 1926 to June 2002 show that, after adjustment for additions to the index, total U.S. market capitalization grew 2.3 percent faster than the price index. Thus, over the past 76 1/2 years, a 2.3 percent net new issuance of shares took place, which is the equivalent of negative buybacks. Although net buybacks occurred in the 1980s, by the 1990s, buyback activity had once again returned to historical norms.

    • Earnings growth was indeed high during the 1990s. But the persistence of this growth is dubious for three reasons:

      The market went from trough earnings in the 1990 recession to peak earnings in the 2000 bubble. Measuring growth from trough to peak is meaningless; extrapolating that growth is even worse.

      Analysts frequently ignored write-offs while increasing their focus on operating earnings. This behavior is acceptable if write-offs are truly "extraordinary items" but not if write-offs become an annual or biannual event, as was commonplace in the 1990s. Furthermore, what are extraordinary items for a single company are entirely ordinary for the economy as a whole.

      The peak earnings of 1999�2000 consisted of three dubious components. The first was an underrecognition of the impact of stock options, which various Wall Street strategists estimated at 10 percent or more of earnings. The second was pension expense (or pension "earnings") based on 9�10 percent return assumptions, which were realistic then but are no longer; this factor pumped up earnings by about 15 percent at the peak and 20�30 percent from recent, depressed levels. The third was Enron-style "earnings management," which various observers have estimated at 5�10 percent of the peak earnings.

      In summary, in a dynamic, free-market economy, considerable capital is consumed funding new ventures. For this reason, per share growth of prices, earnings, and dividends will lag aggregate macroeconomic growth by an amount equal to the net issuance of new shares. In peaceful, stable societies, this gap appears to be about 2 percent a year. In war-torn nations, this gap is considerably larger. Although these nations' economies can recover relatively rapidly, the high degree of recapitalization that is required savages shareholders.

      The markets are probably in the eye of a storm and can expect further turmoil as the rest of the storm passes over. If normalized S&P 500 earnings are $30-$36 per share, if payout ratios on those normalized earnings are at the low end of the historical range (implying lower than normal future earnings growth), if normal earnings growth is really only about 1 percent a year above inflation, if stock buybacks have been little more than an appealing fairy tale, if the credibility of earnings is at an all time low, and if demographics suggest Baby Boomer dis-saving in the next 20 years, then we have a problem.

    • ....here "in the black forests of the south"
      we do not know how to put multiple "recom-points"...I wished we knew today!
      Thank you for an EXCELLENT post!
      Saludos cordiales
      Stephan

    • Hyperlink to William J. Bernstein's article "The Two-Percent Dilution" in the Summer 2002 online edition of "Efficient Frontier".

      http: //www.efficientfrontier.com/ef/702/2percent.htm

      or, if you prefer Adobe Acrobat:

      http: //www.efficientfrontier.com/ef/702.pdf

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