2017: Is book value per share still a good proxy for intrinsic value?

JAY GELB: This question is on Berkshire’s intrinsic value. A substantial portion of the company’s value is driven by operating businesses rather than the performance of the securities portfolio. Also, the values of previously acquired businesses are not marked up to their economic value, including GEICO, MidAmerican, and Burlington Northern. Based on these factors, is book value per share still a relevant metric for valuing Berkshire?

WARREN BUFFETT: Well, it’s got some relevance, but it’s got a whole lot less relevance than it used to. And that’s why — I don’t want to drop the book value per share factor, but the market value tends to have more significance as the decades roll along.

It’s a starting point. And clearly, our securities aren’t worth more than we’re carrying them for at that time. And, on the other hand, we’ve got the kind of businesses you’ve mentioned.

But we’ve got some small businesses that are worth 10 times or so, you know, what we could carry them for. We’ve also got some clunkers, too.

I think the best method, of course, is just to calculate intrinsic business value. But it can’t be precise.

We know — we think the probability’s exceptionally high that 120 percent understates it. Although, if it was all in securities, you know, 120 percent would be too high.

But as the businesses have evolved, as we built in unrecognized value at the operating businesses — unrecognized for accounting purposes — I think it still has some use as being kind of the base figure we use.

If it were a private company and 10 of us here owned it, instead we’d just sit down annually and calculate the businesses one by one and use that as a base value.

But that gets pretty subjective when you’ve got as many as we do. And so, I think the easiest thing is to use the standards we’re using now, recognizing the limitations in them.

Charlie?

CHARLIE MUNGER: Yeah. I think the equities in the insurance company offsetting shareholders’ equity in the company are really not worth the full market value because they’re locked away in a high-tax system.

And so I, basically, like it when our marketable securities go down and our own businesses go up.

WARREN BUFFETT: Yeah, we’re working to that end. We’ve been working that way for 30 years now or something like that.

CHARLIE MUNGER: We’ve done a pretty good job, too.

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: We have a lot of — we’ve replaced a lot of marketable securities with unmarketable securities that are worth a lot more.

WARREN BUFFETT: Yeah. And it’s actually a more enjoyable way to operate, too, beyond that, but —

CHARLIE MUNGER: Yeah. We know a lot of people we wouldn’t otherwise —

WARREN BUFFETT: Yeah.

CHARLIE MUNGER: — be with. Good people.