1996: Should Berkshire's price-to-book multiple expand over time?

AUDIENCE MEMBER: Mr. Buffett, my name is Steven Tuchner. I’m a shareholder from Toronto, Canada. And my question concerns the valuation of Berkshire shares.

Given the large number and dollar size of the private businesses recorded at historic cost, which Berkshire owns, shouldn’t the multiple to book that the stock trades at, essentially, expand over time to reflect the increases in intrinsic value of the private holdings?

And I cite Buffalo News on the books at, essentially, I think around zero. And even GEICO now will be on the books at, probably, between 3 and 4 billion — worth more than that — as examples of the disparity between intrinsic value and book value?

WARREN BUFFETT: Most of the businesses that we own all of, or at least 80 percent of, are carried on the books at considerably less than they’re now worth.

And with some of them, it’s dramatic, although it’s not dramatic compared to a $40 billion total market valuation for Berkshire. It’s dramatic relative to the carrying price.

Because when we bought See’s Candy for an effective $25 million in 1972, it was earning 4 million, pretax. It earned over 50 million, pretax, last year. When we bought the Buffalo News, it was making nothing. Paid 30 and a fraction million. And it’s now earning, maybe, 45 million. And we’ve got a number of businesses. And GEICO’s worth more than we carry it for because of the accounting peculiarities of the first 50 percent.

So, it is true that, overwhelmingly, our businesses are worth something more than intrinsic value — than book value — and, in many cases, very substantially more, although that’s reflected in the market price of our stock.

I don’t think you can go from year to year and trace the intrinsic value precisely by changes in book value. We use changes in book value as a very rough guide as to movement, and sometimes I comment.

There have been certain annual reports where I’ve said our intrinsic values grew more than the proportional change in book value, and there’s been others where I’ve said I thought it was roughly the same.

So, I don’t think you can use it as a — stick some multiplier on it and come up with a precise guide — a precise number. But I do think it’s a guide to movement.

Our insurance business, though, is the most dramatic case of dollar difference between book value and intrinsic value. I mean, the number has gotten very big over time there. I personally think it will tend to get bigger, because I think GEICO will grow, and I think our other businesses will do well.

The trick, of course, is to take the new capital as it comes along — and not from the issuance of the B, because that’s relatively small compared to the amount of capital we will just generate from operations.

Our float will grow from year to year. Our earnings will be retained. And we’ve got to go out and find things to do that three or five years from now that people say, “Well, that’s worth more than the book value.” And that’s a job. It’s a tougher job than it was. But it’s kind of fun.