The Easy Guide to Berkshire Hathaway's Expected Returns

Berkshire Hathaway (NYSE: BRK-B  ) can be hard to value. It's a conglomeration of 55 separate wholly owned subsidiaries and dozens of stock, bond, and derivative investments. The guy steering the ship -- Warren Buffett -- happens to be as mortal as he is talented, making his value tough to calculate.

But here's what we know. Berkshire's future returns will equal its growth in book value per share -- plus or minus the change in its valuation multiple. That's just the mathematical certainty of it.

Berkshire's A-shares currently trade at $177,225 per share (B-shares trade for 1/1,500th that amount). I put together a matrix with different assumptions of book value growth and price-to-book value levels to show where shares may be 10 years from now. Choose your own adventure:

My best guess is that Berkshire will compound book value at around 7% annually, and command a price-to-book value of between 1.2 and 1.5 going forward. That would roughly double share prices over the next decade. 

There's nothing fancy about this table, but these matrices help me keep my expectations in check. For a more detailed analysis on Berkshire, check out the Motley Fool's premium report on the company, written by Inside Value advisor Joe Magyer. Just click here

 


Read/Post Comments (11) | Recommend This Article (36)

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  • Report this Comment On July 22, 2013, at 11:48 AM, eksummers620 wrote:

    How did you arrive at your "best guess"?

  • Report this Comment On July 22, 2013, at 3:54 PM, shaun1776 wrote:

    Your best guess, if it is an estimate of value and not price, is probably too low, particularly the price-to-book (P/B). 1.2 is currently the buyback threshold so it's clearly well below fair value. It's more likely that P/B will expand given the increasing full ownership of operating companies. I'd estimate fair value P/B in 10 years at 1.8. Stock price will almost certainly visit $500,000 sometime within 10 years as price can exceed value just as it can trail value.

  • Report this Comment On July 23, 2013, at 3:08 AM, AnsgarJohn wrote:

    Didn't Buffett write in his last letter that 12% book value growth would be reasonable as well as price to book of 1,25? (In the part about whether or not to pay a dividend)

  • Report this Comment On July 23, 2013, at 6:12 PM, veritasvincit wrote:

    Morgan,

    I'm a huge fan of yours, and hold BRK.B long.

    Thanks for this article as it's certainly helpful....

    I would ask that you clarify the third paragraph re: BRK.B's "trade" price vis a vis the A shares.

    While the B shares are certainly influenced, mathematically and otherwise, by A share trades, holders of B shares are likely a completely different set of investors/traders/speculators, and the frequency of trading B shares naturally is reflected in the current market price.

    While we observed a high level of correlation between the proportional (ate?) market valuation of A to B shares, can you foresee a number of circumstances that would lead those market prices to decouple?

    Thanks for all your articles and insights.

  • Report this Comment On July 23, 2013, at 6:27 PM, TMFHousel wrote:

    veritas,

    There should be little divergence between A and B shares, as A shares are convertible into 1,500 B shares. Thus, arbitrage opportunities should keep the spread fairly low.

    Buffett comments on this here:

    "The Class B can never sell for anything more than a tiny fraction above 1/1,500th of the price of

    A. When it rises above 1/1,500th, arbitrage takes place in which someone — perhaps the NYSE

    specialist — buys the A and converts it into B. This pushes the prices back into a 1:1,500 ratio"

    http://www.berkshirehathaway.com/compab.pdf

  • Report this Comment On July 23, 2013, at 8:16 PM, Seanickson wrote:

    Thanks for the table morgan. i think your assumptions are too conservative but time will tell

  • Report this Comment On July 23, 2013, at 8:46 PM, woolibulli wrote:

    Not sure what your assumptions were. You didn't even give the current Price to Book Value. Did I miss something?

  • Report this Comment On July 23, 2013, at 10:38 PM, StimULater wrote:

    On somebody's (I thought the Fool's) recommendation I bought B-H C. I can't seem to find anything on them. Was I a Fool?

  • Report this Comment On July 24, 2013, at 3:18 PM, mikecart1 wrote:

    My best guess is that Apple will compound at 7% using today's $442/share price and in 10 years will have a price-to-book value of nearly 1. At this point people will be so tired of their gadgets and no longer trust the market. However, the share price would then be a little over $869/share. While this might sound great, inflation will have taken over by then, the dollar would be worth pennies, and we will be trading platinum bars as currency while using Bitcoins for tabletop football.

  • Report this Comment On July 24, 2013, at 10:55 PM, Zombie111 wrote:

    Better to be conservative and have a pleasant surprise than the other way around.

  • Report this Comment On July 25, 2013, at 3:20 PM, dsciola wrote:

    Great idea Morgan on using Sensitivity Analysis here for BRK...no question its a tough animal to value.

    Can you touch on why u used a p/bv of 1.4 and 7% BV growth as your base-case assumption? Would love to hear how you arrived at those 2...was it based on historical growth rates / multiples?

    Dom

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