This article, Berkshire’s a Bargain lays out a convincing argument to buy Berkshire Hathaway:
“Rather than the historical increases in book value of 22% or 19%, I assumed that Berkshire’s book value only grows by 15% per year for the next 10 years. At that rate, the book value per share would go from $57,010 today to $230,637 by 2015. I then assumed that in 2015, the stock would be trading at a historical low in terms of multiple of book value (1.35 times). That would mean that the shares would be priced at $311,360. On the basis of those assumptions, if I buy the shares today at $85,200, I would earn a 265% return on my initial investment or a compound annual rate of return of 13.8%. On a risk-adjusted basis, I have a hard time coming up with anything that comes close.”
He refers to this site, which calculates Berkshire Hathaway’s intrinsic value. The author quotes Buffet in 1995, when his stock was trading at 2.44 times book value (price/book value of 2.44) as saying “historically, Berkshire shares have sold modestly below intrinsic value. But recently, the discount has disappeared, and occasionally a modest premium has prevailed.” Then, in 2000 when “new hot issues” (as Graham would describe them) were at their peak, boring stocks like Buffett’s were trading at lows. Berkshire Hathaway was trading at 1.35 times book value. When this Fool article was published on November 2, Berkshire was trading at 1.5 times book ratio (which he says is still a bargain), and is today trading at 1.58 times book value.
The only assumption that I did not like at first was the fact that he assumes that Berkshire’s book value will increase just has it has in the past. However, Warren Buffett is seen as a value investor, and I am confident in the value investing approach and Warren Buffett’s track record to believe that he can achieve even the most conservative gain of 15% increase in book value over the next 10 years.