Collection: Warren Buffett - #38 | Book Value Is Not Intrinsic Value



I’m Will Jacks (PH) from Chicago. I’m sort of representing Benjamin Graham today, the question he might ask. You talked earlier about how you — about the value of your shares, the A shares, let’s say, because the B is tied to the A. But — and I know it — I don’t expect a complete answer, but generally, how would you go about placing a value on the A shares? WARREN BUFFETT

Yeah. Well, that’s obviously a key question. As I’ve said, we try to give you the information. But I think people, to the extent they’ve made a mistake in the past in valuing Berkshire — and they have made this mistake over time, including many commentators, including some institutions — is to look at it as simply a breakup value to our businesses. I mean, you know, you can — you could do the same with General Electric, we — a magnificently run operation by Jack Welch. But I don’t think the way you should look at a business like General Electric is to think about what would happen if they sold each division today, paid the taxes, and then distributed the proceeds. And that has tended to be the case with many people looking at Berkshire, looking at it on a static basis. And that is not the way that Charlie and I have looked at it over time. It lends itself a little more to that kind of analysis because we have a lot of money in marketable securities. But we have a lot of money in other things, too. And the question of Berkshire, in valuing the intrinsic of any business, of course, is what is going to be the stream of cash over many years in the future — in fact, all of the years in the future, discounted back at an appropriate interest rate. I’ve talked about that in the past in the annual report. Berkshire is a collection of businesses. And some of which we own in their entirety, some of which we own part of. And some of those businesses have very interesting dynamics to them. And they — the value of our insurance business, for example, if you go back 26 — what was it? Twenty-eight years or so since we — 29, I guess — since we bought it from Jack Ringwalt. We paid 8.7 million, I believe, 8.4 — 8.7 million for two companies that Jack controlled. If you had the foresight at that time to — and I didn’t, but — if you had the foresight at that time to see what that would develop out of that insurance business, you would’ve come to the conclusion that their value to us was going to be far, far greater than the value at which they were then carried on our balance sheet. They were part of a business which had enormous potential. And that’s been, probably, the most significant asset that’s been developed at Berkshire. But right now, we have over seven — right at 7 billion — over 7 billion — of float that’s been developed from our insurance business. We couldn’t foresee that 25 or 30 years ago. But it would’ve been a big mistake to think in terms of the book value of that business being representative of its actual value to us over time, if it was run right. And that situation probably prevails today. So, it’s a — Berkshire is a group of, on balance, very fine businesses to which we hope to add. The intrinsic value will be affected by the job we do in allocating capital. It’ll be affected by the job our managers do in running their businesses. It’ll be affected by some items that we don’t foresee now and, perhaps, have no control over. But it is not measured, essentially, by what we could sell each separate business for and pay the tax on now. We haven’t run it that way. We’ve run it so that we get the use of a lot of capital at very low cost. Between deferred taxes and our insurance float, we have some 12 billion or so on the liability side that we think will be a very low cost. And that’s — doesn’t show as an asset, but it can be quite valuable. Charlie, you want to —? CHARLIE MUNGER

No. I don’t think I’ve got anything to add to that. WARREN BUFFETT

Oh. I was all set to write it down, too. (Laughter)

Zone 2, please.


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[YAPSS Takeaway]

Do not value a growing business using book value.