More on Berkshire
According to the book, The Money Masters, the original investors into Warren Buffet’s investing partnership would have turned $10 000 in 1956 into $300 000 by the time he dissolved in 1969. The original partnership saw him receive 25% of the profits above a 6% annual return on capital. On these numbers the approximate compounded annual return was 27,5%
Each year Buffett wrote to his co investors saying:
“I cannot promise results to partners, but I can and do promise this:
When valuations became extremely stretched in 1969 and Buffett was unable to find bargains, he dissolved the partnership, giving investors back their capital plus their proportional share in Berkshire Hathaway which was one of the funds principal holdings and where Buffett was instated as chairman.
Three years later the stock market slumped and in the early to mid 1970’s Buffett via Berkshire was able to buy into a range of listed companies at good prices.
Now Berkshire’s listed stock holding has a book value of $33,7 billion and a market value of $61,5 billion. This includes 12,6% of American Express Company, 8,6% of Coca Cola and 10,5% of Munich Re.
Berkshire last added to their Coca Cola shares in 1995. It is carried at a book value of $1,3 billion (market cap of $13,1 billion). In that year they received $88 million in dividends. These dividends have increased each year and in 2011 they expect $376 million (+-2,8% dividend yield). Buffett is expecting this to double in 10 years.
Buffett recommends looking less at earnings per share than at return on capital when making assessment of value.
Long term interest rates indicate overall fair value levels.
An interesting point made in the book is that Buffett has a theory that the Dow Jones is worth ones times book value if you expect US Treasury Bills to yield an average of 11 percent in the future, 1,3 times if the expectation falls to 8,5% and close to twice if you expect Treasury Bills to yield 5%.
This essentially speaks to the discounting of future income streams at different interest rates where in a lower the interest rate environment, investors should be willing to pay more for businesses.
Looking at the book value of the S&P500 in the US, this has declined from over 4 times at its peak in March 2000 to now below 2 times, having dipped to below 1,5 times in 2009.
Right now 1 year treasury yields are exceptionally low. The 10 year US Treasury yields 3,4% and the 30 year 4,5%. While this is likely to pick up, at these levels Buffett says shares can be priced at twice book value and still be fair value.
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