2011: Are complex valuations of Berkshire unnecessary?
AUDIENCE MEMBER: This is Hsiang Hsiao Chu (PH) from Ottawa, Ontario. Warren, Charlie, I admire you guys tremendously.
I want to ask a question about the valuation of your company. You said, “Price is what you pay and value is what you get.”
In your letter to the shareholders this year, each Class A share owns about — investment about $95,000, and each share commands an earnings of $6,000.
So in my simplistic way of calculation, each share is worth $95,000 of investment plus the earnings discounted at 7 percent. That’s another about $90,000. So it adds up to about 185,000. Is that correct?
Does that mean the complexity of your empire is a value trap?
WARREN BUFFETT: We give those figures because we think they’re important, both the investments per share and the operating earnings per share, excluding earnings that come from the investments, and leaving out insurance underwriting profits or losses, because we think at worst they’ll break even, but they do bounce around from year to year.
Those figures are pretax on the operating earnings, so I’m not sure whether you’re applying your discount factor to pretax or after-tax.
But we think they’re important. And I would expect — well, the operating earnings, you know, are almost certain to increase. How much, you know, who knows? But that number is likely to go up.
The investments are still about the same as at year-end but that — they could go up or down based on whether we’re able to buy more operating businesses.
Our goal is to build both numbers to some extent, but our primary goal is to build the operating earnings figures.
We never — we — if Charlie and I had to stick a number in an envelope in front of us as to what we thought the intrinsic value of Berkshire was, well, neither one of us would stick a figure, we’d stick a range, because it would be ridiculous to come up with a single specific number, which encompasses not only the businesses we own, but what we’re going to do with the capital in the future.
But even our ranges would differ modestly, and they might differ tomorrow, in terms of how I would feel versus today, but not dramatically at all.
I would say this: I think — I certainly — well, you’ve received signals once or twice when we said we would buy in our stock, we obviously thought that it was selling below the bottom of a conservative range of intrinsic value, and we did that once some years ago.
And by saying so, of course, the stock went up, and so we never got any stock bought. So there’s sort of a self-defeating factor about taking the kind of approach to it that we do, in terms of really telling people that the only reason we’ll buy in stock is because we think it’s cheap. That is not standard practice in corporate America at all.
In fact, corporate America, to some extent, buys in their stock more aggressively when it’s high than when it’s low. But they may have some equation in their mind that escapes my reasoning power.
But the — I would — we do not regard Berkshire as overpriced. And I would say that we had, very recently, we had a very, very large international company that might well have been interested in doing something with Berkshire, and it’s a very nice company, but it’s bigger than we can handle unless we would use a lot of stock.
And we won’t use the stock. We just think our shareholders would come out behind. It would be a wonderful company and, you know, make a lot of headlines, but in the end our shareholders would be poorer because our stock is a currency, and unless it’s fully valued, it’s a big mistake to use it as a currency.
Now, we used some in the Burlington deal, but we used a whole lot more cash, and, in effect, we only used 30 percent for stock, and it was worth doing, but it was painful.
And if Lubrizol had wanted to do a deal involving stock, we would not have done it. I told James Hambrick that right off the bat.
So we had absolutely no interest in buying Lubrizol — we were perfectly willing to give, you know, close to $9 billion in cash, and in my view, we’re getting our money’s worth.
But we would not have given a significant portion of it in Berkshire stock, because we would be giving away part of the businesses we already own, and we like Burlington, and we like See’s Candy. We like ISCAR.
And to give away a portion of those, even to get another very good business, would not make financial sense for our shareholders.
So you can draw your own deductions about our calculations of intrinsic value from that statement.
CHARLIE MUNGER: Well, he’s obviously looking at two right factors. And I think that we have not permanently lost the ability to do some interesting things eventually with our enormous wealth in cash and marketable securities.
We won’t always be as inactive as we are now.
WARREN BUFFETT: We’re not that inactive, Charlie. (Laughter)
CHARLIE MUNGER: Well, I don’t know. You practically crawl out of your skin, sometimes.
WARREN BUFFETT: Nine billion is — you know, we say normal earning power is 12 billion. That uses up a good portion of one year’s quota.
Although we’d like to use more. I mean, there’s no question.
CHARLIE MUNGER: Now you’re talking.
WARREN BUFFETT: Can you see us using stock in the next few years?
CHARLIE MUNGER: If the business were good enough, of course.
Our trouble is — it’s a terrible trouble you people have — the businesses you already own are so good it’s not wise to part with them to get a business we don’t own. Ordinarily.