2012: What’s a reasonable pre-tax multiple to apply to Berkshire's non-insurance earnings?
JAY GELB: Warren, when you discuss Berkshire’s intrinsic value, why do you value the insurance business at only cash plus investments per share?
And what’s a reasonable multiple to apply to the pretax earnings of the non-insurance businesses?
WARREN BUFFETT: I would — I don’t value the insurance business quite the way you say it. I would value GEICO, for example, differently than I would value Gen Re, and I would value even some of our minor companies differently.
But basically, I would say that GEICO is worth — has an intrinsic value — that’s greater — significantly greater — than the sum of its net worth and its float. Now, I wouldn’t say that about some of our other insurance businesses.
But that’s for two reasons. One is, I think it’s quite rational to assume a significant underwriting profit at GEICO over the next decade or two decades, and I think it’s likely that it will have significant growth.
And both of those are value — items of enormous value. So that adds to the present float value, but I can’t say that about some other businesses.
But in any event, once you come up with your own valuation on that, in terms of the operating business, obviously different ones have different characteristics.
But I would love to buy a new bunch of operating businesses that had similar competitive positions in everything.
Under today’s conditions, I would love to buy those at certainly nine times pretax earnings, maybe 10 times pretax earnings. I’m not talking about EBITDA or anything like that, which is nonsense. I’m talking about regular pretax earnings.
If they have similar characteristics, we’d probably pay a little more than that, because we know so much more about them than we might know about some other businesses.
What would you say, Charlie?
CHARLIE MUNGER: When you used the word EBITDA, I thought to myself, I don’t even like hearing the word. (Laughter)
There’s so much nutcase thinking involving EBITDA. Earnings before what really counts in costs. (Laughter)
WARREN BUFFETT: Yeah. We prefer EBE, which is earnings before everything. (Laughter)
CHARLIE MUNGER: Right.
WARREN BUFFETT: It’s nonsense. I mean, if you compare a business that, you know, leases pencils or something like that where they all get depreciated in a two-year period and then compare that to some business that uses virtually no capital, you know, like See’s Candies, it’s just nonsense. But it works for the people that sell businesses.
It’s like Charlie’s friend that used to sell fishing flies, Charlie, right?
CHARLIE MUNGER: Right. They don’t sell these lures to fish. (Buffett laughs)