1) Today, I'd like to wrap up my weeklong analysis of Berkshire Hathaway (BRK-B), which I've called "America's No. 1 legacy stock" for years...
I began on Tuesday by looking at Berkshire's recent earnings report and continued Wednesday with my take on Porter Stansberry's open letter to the board of directors.
Then yesterday, I shared readers' comments on Porter's letter and reviewed new CEO Greg Abel's first annual letter. I also touched on the news that both Berkshire and Abel are buying back shares, which boosted the stock 2.7% yesterday.
Now, I'll update my estimate of Berkshire's intrinsic value...
My last update was on November 4 after third-quarter earnings. At the time, I calculated that the stock was trading at a roughly 11% discount to my estimate of its intrinsic value.
As longtime readers know, to make my calculation, I take Berkshire's cash and investments per share and add the value of the operating businesses. (I believe Warren Buffett has long used a similar method.)
At year-end, cash and investments came in at about $493,000 per A-share. Since then, the stock portfolio has gained roughly $830 per share, which makes the total around $494,000. And Berkshire's pretax operating earnings were $28,000 per A-share.
I account for volatile insurance and investment income by subtracting it and then adding back half of the average over the past two years. That works out to $13.2 billion of pretax earnings. (This is conservative given that total insurance and investment income has averaged $11.5 billion per year over the past decade.)
Investments and earnings per share ("EPS") are the two drivers of Berkshire's value, which you can see in the chart below. While there have been occasional dips, this is an extraordinary record of consistent growth:
A conservative, below-market multiple for the stock is 11 times earnings. So using pretax operating earnings of about $28,000 per share, that's a value of roughly $307,500 per A-share.
Putting it all together...
I estimate Berkshire's cash and investments are currently worth around $494,000 and its operating businesses are worth roughly $307,500. This comes to a total of about $801,000 per A-share (or $534 per B-share).
This table shows this calculation for each year-end since 2002:
Yesterday, Berkshire closed at $750,750 per A-share. That means the stock is trading at a roughly 6% discount to my estimate of intrinsic value.
At this level, I expect that Berkshire's stock will slightly beat the S&P 500 Index over the next five years. So if the S&P 500 compounds at 5%, I would expect Berkshire to do roughly 6% – with a bias toward the upside due to new leadership under Abel.
That puts the stock close to the level at which I generally think is the best time to buy – when it's trading at a 10% or greater discount to intrinsic value. So keep a close eye on it to take advantage of any pullbacks.
My Stansberry's Investment Advisory team and I recommended buying Berkshire's B-shares when they were trading at a 14% discount to intrinsic value. And subscribers who followed our advice since then are up 34%.
If you aren't a subscriber yet, you can find out how to become one right here.
2) Buffett's late business partner, Charlie Munger, read so much that he joked his children thought he was "a book with a couple of legs sticking out."
This blog lists 43 books he recommended over the years. My favorites include...
- Influence: The Psychology of Persuasion
- Guns, Germs, and Steel: The Fates of Human Societies
- Getting to Yes: Negotiating Agreement Without Giving In
- Man's Search for Meaning
- The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
If I were to add to Munger's list, I'd recommend the 1936 classic by Dale Carnegie, How to Win Friends and Influence People.
Here's what I wrote about it in my own book, The Art of Playing Defense: How to Get Ahead by Not Falling Behind:
It's a corny title, I know, but it's sold more than 30 million copies. Its most important lessons can be summarized in this way: "Most people don't care very much about you. They mainly care about themselves. So if you want people to like you, show genuine interest in and appreciation for them."
This book was such a revelation to me! All those years, I thought people were as interested in me as I was in myself, but they weren't! I know it sounds crazy, but other people will like you more – and think you are more interesting – the less you talk about yourself and the more you ask questions about them. I'm not kidding. Try it and see! And then keep doing it for the rest of your life.
Like Munger did, I read (or, increasingly, listen – at 2.5 times speed) pretty much all day, every day. And I agree 100% with this quote from him:
In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time – none, zero.
I've read roughly half the books on Munger's list and look forward to reading the rest!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.