After Disappointing Again, Berkshire Hathaway Starting to Excite

Berkshire Hathaway

Warren Buffett’s fabulously successful company Berkshire Hathaway hasn’t been exciting at all for many years now. Some analysts are licking their chops over it now anyway.

The once mighty creation of legendary investor Warren Buffett, Berkshire Hathaway, that he built from a textile mill to one of the world’s largest conglomerates, has showed its age over the past few years. It has really gotten very old lately.

Berkshire Hathaway is more like a fund than a company, and a pretty big fund at that. The company holds over $800 billion in assets, across an extraordinarily diverse group of holdings.

A company’s stock value is not very representative of the present value of a company itself. Stock value of a public company is calculated by multiplying all of a company’s shares by the price that the shares were last traded. Book value, on the other hand, is the amount of net assets the company has, the market value of its assets less its liabilities.

Even with private companies, they aren’t just worth what they have in assets, as the future income flow that a business generates can be worth quite a bit if the profit and loss side of things looks good, or at least the prospects for this in the coming years look promising enough.

When you buy a company outright, you buy both the company’s present value and a piece of its future value as well, what the company may be worth years down the road based upon its success or potential for success. We call what a company is worth now book value, and what the total amount that we have decided that the shares are worth as share value.

If you buy a company for twice what it is worth, you are valuing it at a book value of 2, where the price is two times the current or book value. Private companies only get valued this way when they are sold, otherwise we are left to guess at what someone may pay for the company or a large portion of it in the open market should the current owners wish to sell it.

Stocks of public companies get valued like this constantly, traded on stock markets 5 days a week. The total value of all the shares is therefore in a constant state of flux, with price discovery of at least some sort occurring all trading day long. There are some issues though with valuing every share in the company by its last trade, where even small movements of small share lots can move a company’s overall value, this can still be used as a good benchmark because it can be applied consistently to all stocks.

It still seems odd though that we can buy 100 shares of a company and pay a few cents over the last traded price and presumably cause each and every share of the company to gain this amount. The net effect on the stock is a couple of cents but this has moved a lot of assumed value.

Then you sell them back at the original price for a loss and everyone gives their gains back. This sure causes a big move in the company’s share value from a couple of trivial trades that should not have the power to move trillion dollar companies at all.

We Need to Make Sure We Understand the Formulas We Use

In any case, this is the formula for the share value that many people like to compare to book value to get what they call book value, the ratio between the two. The lower the book value, the more people perceive a stock to be worth, in their estimation and according to their principles.

The principle that they use is a pretty odd one actually, although it may not appear to be odd at all to the untrained eye. You’re buying the company they think and you get more company per share. They look to predict future price growth of stocks by assuming that a poorer outlook by the market as evidenced by these lower book values represent greater potential.

This should be very counterintuitive though, and this is the same mistake as people make when they prefer companies valued lower based upon their price to earnings, with book value serving as a similar reference point, comparing stock prices with earnings in this case.

All you have to know in order to figure out what is wrong with these approaches is to remember how companies are valued in the future compared to the present generally. The higher the book value, the more people value the company in the future, the market’s interpretation of the company’s ultimate value just as if a company was bought outright.

Low book value actually does not bode well, because it expresses the value that the market has placed upon companies and yields a strategy of preferring inferior results. We can see this mistake clearly if we compare stocks in a beat-up sector like energy and compare them to a hot sector like tech. There are reasons why energy stocks have such low book value, and it is because its potential for growth in the future is so comparatively limited.

This is a lot like thinking that a last place sports team would somehow magically outperform and be a better bet than the good teams. Anything is possible, but common sense should point us more toward having probability on our side instead of well against us.

Now that we know how book value ratios play out, the idea that Berkshire Hathaway’s book value is now down to 1.2 in contrast to its 5 year average book value of 1.5 should not excite us very much.

It does not matter why this has happened, no more than it should matter why a sports team is so bad, as they just are. There are some things that are easy to notice though, things like Buffett going into the turtle with the company’s stock holdings and people just losing faith in him and reducing the premium they used to pay to ride with this legendary investor.

Book value tells us how good or bad the market’s expectations of a stock is, and the market’s expectation of Berkshire Hathaway stock has been going the wrong way for quite a while, and especially of late.

This is Not a Stock That Should Interest Us Right Now

Berkshire Hathaway stock has been underperforming the benchmark S&P 500 for over a decade now, but this underperformance has really grown over the last 2 years. The score in 2019 was 29%-9% in favor of the S&P 500, and this year Berkshire Hathaway only has managed a meager 1% gain while the big index has moved up 16%.

While these things can change, it requires change to cause change, as you don’t go from one state to another without the right influences. This does not include just assuming it will happen from nothing, from the present conditions with Berkshire to a more exalted level just due to the passage of time.

This does not stop some people from seeing book value so low and drop like it has as being something they desire. Some love to root for the underdog and our last place team will have its fans as well, but we do not want to hope underdogs turn things around without even wondering how and putting our money on these things.

We need to be curious as to why. James Shanahan of Edward Jones calls the stock a “solid opportunity” right now based upon it “executing well” during the pandemic. We look at it though and see its stock not executing very well at all not just during the pandemic but during the last couple of years. This does not make the opportunity very solid or even very sensible.

These analysts love to reference various fundamentals, but these numbers are not hidden but in full view of the market, and when they see these things that we may find appealing and do not find them very appealing, we already see the effect of this data and it does not add any appeal or effect at all beyond what it already has had.

Things that do matter is Buffett’s buying back more stock this year, where the $16 billion he spent in 2020 was three times that of 2019. This sort of thing does influence stock prices, and buybacks do so in a positive way by taking stock out of circulation and making existing stock more valuable. When they do this and the stock price only goes up as little as it has this year, the fact that it achieved this poor result in spite of these extra efforts to boost the stock is even more troubling if anything.

Berkshire Hathaway has been pretty much stuck in a range since the start of 2018, the period that the stock underperformed the market by so much. It did make it all the way back up to where it was during the coronavirus crash earlier in the year, but no further. Investors do not think less of them this year, and the 1% change tells us that they are still willing to pay as much as they did to start this year, but spinning our wheels is not what we want our investments to be doing when others are zooming by us.

Berkshire Hathaway may right their ship more in the coming years, as the company leadership moves to a new generation, or for any reason that will be seen as sufficient by the market for it to change its outlook and show this stock more love than they have been getting lately. Book value going down means less love, not more. Love not only makes us feel good, but in this case is also how we get paid.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

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