Tuesday, March 03, 2009

Berkshire anyone?

Warren Buffet has always paid particular attention to the book value (BV) of his stock -- the value his financial statements say the company is worth. Often times the market assigns a much different value to the stock. Buffet knows that though the market value (MV) of his company will vary, over the course of years and decades, MV and BV will have pretty strong correlation.

2008 was a historically bad year for BRK's BV and an even worse year for its MV. Its BV dropped 10% and its MV dropped nearly 40%. Berkshires ending market to book ratio was 1.37. Over the past 21 years, this ratio has averaged 1.69.Many analysts look at MV/BV ratios to decipher relative value. Similar to a PE ratio, the lower it goes, the cheaper the stock looks.

Berkshire's 5 lowest market to book ratios over the past 21 years averaged 1.4. The year following these low ratios, the stock price increased 36% on average.

Take a look:
2005 MV/BV = 1.46. 2006 return 27%
1999 MV/BV = 1.48. 2000 return 27%
1991 MV/BV = 1.41. 1992 return 30%
1990 MV/BV = 1.45. 1991 return 36%
1987 MV/BV = 1.21. 1988 return 59%

average return = 36%

Keep in mind, BRKs 2008 closing price was $96k. Today it is trading around $74k. Like he said in his latest shareholder letter, "Charlie and I feel like mosquitoes in a nudist camp -- there are opportunities everywhere."

With $27 billion in cash, the old Oracle is in a good position to do what he does best. Speculators/investors will reap significant returns as Berkshire's BV/MV ratio recovers to average levels over the next few years.


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