Chapter 14. Finding Value


[T]here was an absolutely open-ended, no-score-kept generosity of ideas, time, and spirit.

 --Warren Buffett on Benjamin Graham, 1976

After I met Warren for lunch, I began spending more time on my personal ideas of value. I bought energy and energy-related stocks, a potash manufacturer ripe for takeover, metals stocks, and some value stocks. I kept my Berkshire Hathaway holdings, of course.

I could write a long book on valuing Berkshire Hathaway. Instead I will offer you my completely unauthorized and lazy shortcut to understanding the value of Berkshire Hathaway. You can play around with balance sheets, discount rates, multiples, and the like; but basically Berkshire Hathaway invests in sound business that will stick around, and the businesses it owns have growing earnings.

A thorough analysis is hard, but understanding that there is a lot of value in the stock is easy. Getting the annual report brings a smile to my face and I dive in and get right to the action. Warren wrote in the 2007 shareholder letter that investments (about 40 percent financed by insurance float) are worth $90,600 per share. Now you add to that the value of $4,093 per share of a growing stream of earnings from the non-insurance operating businesses. As a long-term investor, you might use a 10-times multiple to earnings (as some long-term investors do) for a combined value—including investments—of $131,530. If you apply a 15 times earnings multiple (as other long-term investors do), ...

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