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Berkshire Hathaway
Fun with Price Trends

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By mungofitch
June 19, 2009

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The way to value any value investment is by looking at the, well, value. Not the price.

But, prices can be fun to look at also---especially on the day you buy and the day you sell.

I noted that Berkshire is trading at almost the same price it was trading at 11 years ago. Berkshire's share price has returned 0.421%/year compound return since the intraday high on June 22nd 1998.

Here is a little exercise which starts with a simple axiom: - Berkshire Hathaway stock is not more overvalued this year than it was around a decade or so ago. I think that this is a fairly conservative starting point, especially for anyone who has spent any time looking at both the market price and intrinsic value estimates for Berkshire around 1998 or so.

We extend this with a bit of thought experimentation: - Therefore, the trend growth in value must have been at least as high as the trend growth in price. - The trend growth in price and value will be more or less optimistic depending on the exact start date you choose for the trend line.

So, I simply found the exponential-growth line which is the best fit to the stock price in the last decade or so, and found the starting date for the fit that gives the absolutely most pessimistic possible slope starting around that era. This turns out to be a fit from March 4, 1998  to present, giving a compound annual growth rate of 6.35%/year. If you posit that Berkshire is not generally more overvalued in this era than it was in that era, then this is the absolute floor for any estimate of the growth rate in intrinsic value in the last decade or so.

If there is such a trend growth in value and price, this implies that there is a central trend line which both are following, despite short term zigs and zags above and below that trend. Since the trend line has an absolute value as well as a slope, this allows us to estimate where the price would be today if it were sitting exactly on this most-pessimistic-possible trend line. The price today would be $114,927 per A share today on that trend. That's 30.65% higher than the price at the moment, which is $87,967. Since a word is worth only 1/1000th a picture, here's what that most-pessimistic price trend line looks like since 1990.

Sure, this reasoning is largely nonsense. But...though prices are really only important on the day that you buy and the day that you sell, I suggest that this should be one of the former!

Jim