AUDIENCE MEMBER 00:08
Good morning Mr. Buffett and Mr. Munger. My name is Ram Tarecard (PH) from Sugar Land, Texas.
I’ve been a Berkshire shareholder since 1987 and always battling with the idea of what really is the intrinsic value for the company.
We have seen that, over time, a change in book value is a big indicator of the change in intrinsic value of Berkshire. Although in absolute terms, you have said again and again, that intrinsic value far exceeds book value.
In calculating the book value of Berkshire, our partly-owned businesses, like Coke and Gillette, are valued at their market value. This component of book value fluctuates, often irrationally, depending on the mood of the market.
Do you think that using a look-through book value, just like you used look-through earnings, is a superior measure for tracking changes in intrinsic value?
In fact, I had written a letter to you last August and I was very pleased to get a response from you personally saying that this approach makes sense.
My question is, does this approach really give you a better measure for tracking intrinsic value? And if so, would you consider publishing it in the annual report? Thank you.
WARREN BUFFETT 01:32
Yeah, thanks for the question. I would say that — I’m not sure how you phrased it when you wrote me and how I phrased it going back, but look-through book value would not mean much, actually.
The very best businesses, the really wonderful businesses, require no book value. They — and we are — we want to buy businesses, really, that will deliver more and more cash and not need to retain cash, which is what builds up book value over time.
Admittedly, the prices of marketable securities, at any given time, are not a great indication of their intrinsic value. They are far better, though, than the book value of those companies in indicating intrinsic value.
Berkshire’s book — Berkshire’s intrinsic value, in a very general way, and trends in it, are better reflected in book value than is the case at a very high percentage of companies. It’s still a very — it’s not a great proxy.
It’s the best — it’s a proxy that is useful in terms of direction, in terms of degree, in a general way over time. But it’s not a substitute for intrinsic value.
It — in our case, when we started with Berkshire, intrinsic value was below book value. Our company was not worth book value in early 1965. You could not have sold the assets for that price that they were carried on the books, you could not have — no one could make a calculation, in terms of future cash flows that would indicate that those assets were worth their carrying value.
Now it is true that our businesses are worth a great deal more than book value. And that’s occurred gradually over time. So obviously, there are a number of years when our intrinsic value grew greater than our book value to get where we are today.
Book value is not a bad starting point in the case of Berkshire. It’s far from the finishing point. It’s no starting point at all of any kind in — you know, whether it’s The Washington Post or Coca-Cola or Gillette.
It’s a factor we ignore. We do look at what a company is able to earn on invested assets and what it can earn on incremental invested assets. But the book value, we do not give a thought to.
CHARLIE MUNGER 03:55
Well, I think that’s obviously correct.
WARREN BUFFETT 04:01
Oh. He’ll come back next year. Number 1. (Laughter)
~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.
Do not evaluate solely based on book value, look at what a company is able to earn on invested assets and what it can earn on incremental invested assets.