For decades, many have seen Warren Buffett as the greatest investor of all time. His Berkshire Hathaway (BRK.A 0.37%) (BRK.B 0.33%) has produced life-changing wealth for his early investors, and even now, the insurance giant continues to see sizable gains, taking its Class A shares past the $300,000 mark to make it the highest-priced stock on the New York Stock Exchange.
Yet in the past, Buffett has emphasized a different measure of value for his company. Rather than worrying about the fluctuations of the stock price, Berkshire's annual shareholder letters have focused on book value per share -- an accounting construct that Buffett traditionally saw as a more reasonable and less volatile way to judge the value of his company.
Over time, both metrics have shown impressive results. Over its 54-year history, Berkshire's stock has grown at a 20.5% average annual rate, while book value has seen 18.7% average annual growth. As you can see below, book value changes have sometimes outperformed and sometimes underperformed stock price changes.
Data source: Berkshire Hathaway 2018 annual shareholder letter. Chart by author.
Yet in this year's shareholder letter released on Feb. 23, Buffett said that he would abandon looking at book value. He cited two main reasons. First, Berkshire has increasingly relied on wholly owned operating companies for its success, and book value doesn't reflect the rising market value of Berkshire's wholly owned operating companies. Second, Berkshire intends to be a "significant repurchaser" of its own shares, and paying above the per-share book value on those buybacks will push overall book value down -- even as it increases the intrinsic value per share of the company in Buffett's eyes.
Instead, Buffett will focus on stock price moves in Berkshire's annual assessment of financial results. The Berkshire CEO admits that using share price can be more volatile, but over time, it should provide a fair measure of how the company does.
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Some see Buffett's move away from book value as an abandonment of his principles. Yet with recent changes to accounting rules that have taken away some of the utility of using book value, the decision accentuates Buffett's willingness to adapt to changing times rather than remaining locked in an outdated way of looking at things. It's that flexibility that has served the investing legend so well over the long run -- and rewarded Berkshire shareholders so handsomely along the way.
