Past, present, and future of Berkshire - Annual letter

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Past, present, and future of Berkshire - Annual letter

Post by Robert T » Sat Feb 28, 2015 9:05 am

.
An interesting read (pg. 24 -43).
http://submissions.morningstar.com/wp-c ... 14-ltr.pdf

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Re: Past, present, and future of Berkshire - Annual letter

Post by Peculiar_Investor » Sat Feb 28, 2015 9:22 am

You can get it directly from Berkshire Hathaway, 2014 Shareholder Letter
Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50 years and what each expects during the next 50. Neither changed a word of his commentary after reading what the other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39
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Re: Past, present, and future of Berkshire - Annual letter

Post by Toons » Sat Feb 28, 2015 9:46 am

Thanks,,,,Page 17-18 Make it worth the read for me ,it ends with

" Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing." :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Past, present, and future of Berkshire - Annual letter

Post by spectec » Sat Feb 28, 2015 10:51 am

I also liked his closing remarks about the question of whether BH's no-dividend policy is wise. There was a proposal last year to vote on the issue. It was never brought to a formal vote for technical reasons, but they did take a proxy vote anyhow. (Only a well-managed company with competent management would take this sort of risk)

The result?

"Our directors recommended a “no” vote but the company did not otherwise attempt to influence shareholders. Nevertheless, 98% of the shares voting said, in effect, “Don’t send us a dividend but instead reinvest all of the earnings.” To have our fellow owners – large and small – be so in sync with our managerial philosophy is both remarkable and rewarding."
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

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Re: Past, present, and future of Berkshire - Annual letter

Post by garlandwhizzer » Sat Feb 28, 2015 11:33 am

It is interesting that in earlier years Berkshire massively outperformed the S&P 500 but since 2009 it has underperformed that benchmark. This may be merely a pause in Warren's outperformance or it may be the effect of asset bloat. No matter how great you are as a stock picker if the volume of money you have to invest exceeds the available alpha generating opportunity pool, your results suffer. Berkshire's long track record of success has drawn in so much investor money that ironically its past success may doom its ability to consistently outperform the S&P 500 going forward. Whatever the case, Warren Buffett and Jack Bogle are in my opinion the two great heroes that stand head and shoulders above all others in the financial industry. The financial industry tends to be self-serving rather than client serving, but these two line up clearly on the side of the average investor.

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Re: Past, present, and future of Berkshire - Annual letter

Post by nisiprius » Sat Feb 28, 2015 11:39 am

One detail that I thought was important. Certainly no news here but a nice clear confirmation of what I've believed.
While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on acquisitions. ... However, the largest acquisition, Duracell, will not close until the second half of this year. It will then be placed under Marmon’s jurisdiction. Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us aren’t.)
To me this shows perfectly clearly:

*what Warren Buffett does is not the same thing a salaried person investing for retirement does;

*what Warren Buffett does is not the same thing a mutual fund manager does.

They take a direct, active role in the management of the businesses they own. The financial management, at least.

Warren Buffett does not pick stocks, they manage a business.

I can't "invest like Warren Buffett" unless I'm in a position to tell the Marmon Group LLC. whether or not to acquire Duracell.
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Re: Past, present, and future of Berkshire - Annual letter

Post by Sportswhiz00 » Sat Feb 28, 2015 1:26 pm

Bump for no reason other than it's a great read.

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Re: Past, present, and future of Berkshire - Annual letter

Post by spectec » Sat Feb 28, 2015 1:55 pm

nisiprius wrote:One detail that I thought was important. Certainly no news here but a nice clear confirmation of what I've believed.
While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on acquisitions. ... However, the largest acquisition, Duracell, will not close until the second half of this year. It will then be placed under Marmon’s jurisdiction. Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us aren’t.)
To me this shows perfectly clearly:

*what Warren Buffett does is not the same thing a salaried person investing for retirement does;

*what Warren Buffett does is not the same thing a mutual fund manager does.

They take a direct, active role in the management of the businesses they own. The financial management, at least.

Warren Buffett does not pick stocks, they manage a business.

I can't "invest like Warren Buffett" unless I'm in a position to tell the Marmon Group LLC. whether or not to acquire Duracell.
Fantastic point.
So the only way to invest LIKE Warren Buffet is to invest WITH Warren Buffett.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

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"Berkshire Hathaway's Annual Letter to Stockholders"

Post by Taylor Larimore » Sat Feb 28, 2015 2:18 pm

[Thread merged into here, see below. --admin LadyGeek]

Bogleheads:

It is interesting and informative to read Warren Buffett's Annual Letter to Stockholders. This is a portion that will resonate with Bogleheads:
Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can
tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet."
"There are a few investment managers, of course, who are very good – though in the short run, it’s difficult to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense Investing."
Best wishes.
Taylor
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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by baw703916 » Sat Feb 28, 2015 2:24 pm

There's not really a fundamental difference between "float" (which WB discusses extensively in reviewing BH's insurance operations) and borrowed money.
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Re: Past, present, and future of Berkshire - Annual letter

Post by Lax67 » Sat Feb 28, 2015 2:30 pm

So my take-away from pages 17-18 is to invest in U.S. equities for the long-haul and keep near term needs in short-term bonds or bank deposits.

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Re: Past, present, and future of Berkshire - Annual letter

Post by Boglegrappler » Sat Feb 28, 2015 2:54 pm

Berkshire's long track record of success has drawn in so much investor money that ironically its past success may doom its ability to consistently outperform the S&P 500 going forward
Garland,

Your comment is misstated. There hasn't been any investor money "drawn in" to BRK. They've never sold any stock.

It might be right to say that his investment success over the long term has ballooned the company with capital that is hard to deploy at above average returns. That gets to the same potential conclusion, but the reason is somewhat different.
They take a direct, active role in the management of the businesses they own. The financial management, at least.

Warren Buffett does not pick stocks, they manage a business.
If you read the annual report letter, you'll see that this isn't correct. Buffet has himself, Munger, and a skeleton crew of 24 people at headquarters. They can't possibly manage what they own. What they do is carefully pick managers who can manage businesses. The fact that they buy the whole company really doesn't make much difference. In my view, 75-85% of what they do could be done by an average investor, (if only he wasn't average). The great bulk of it was available on the public market (at prices cheaper than what Buffett paid).

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Re: Past, present, and future of Berkshire - Annual letter

Post by Twins Fan » Sat Feb 28, 2015 3:20 pm

By the average investor?? Maybe, but "average" could mean different things to different folks. Many may be overconfident in even thinking they're average.

I'm not average as an investor, well below it probably, have no interest in reading up on business models or managers, and really like the "common sense" approach recommended for the average investor by Buffett and Bogle.

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Re: Past, present, and future of Berkshire - Annual letter

Post by baw703916 » Sat Feb 28, 2015 3:26 pm

spectec wrote:
nisiprius wrote:One detail that I thought was important. Certainly no news here but a nice clear confirmation of what I've believed.
While Charlie and I search for new businesses to buy, our many subsidiaries are regularly making bolt-on acquisitions. ... However, the largest acquisition, Duracell, will not close until the second half of this year. It will then be placed under Marmon’s jurisdiction. Charlie and I encourage bolt-ons, if they are sensibly-priced. (Most deals offered us aren’t.)
To me this shows perfectly clearly:

*what Warren Buffett does is not the same thing a salaried person investing for retirement does;

*what Warren Buffett does is not the same thing a mutual fund manager does.

They take a direct, active role in the management of the businesses they own. The financial management, at least.

Warren Buffett does not pick stocks, they manage a business.

I can't "invest like Warren Buffett" unless I'm in a position to tell the Marmon Group LLC. whether or not to acquire Duracell.
Fantastic point.
So the only way to invest LIKE Warren Buffet is to invest WITH Warren Buffett.
I invest about 2% of my portfolio "like Warren Buffett". It's up 150% from my cost basis. :)
Most of my posts assume no behavioral errors.

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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by wamfan » Sat Feb 28, 2015 3:36 pm

There is a huge difference. With Buffet's float, he has been paid over the years to hold the money, and then his investments have made that lucrative. Would you take money if someone paid you to hold it for them?

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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by Boglegrappler » Sat Feb 28, 2015 3:42 pm

The difference is that there is no interest charge for the "float".
There is a huge difference. With Buffet's float, he has been paid over the years to hold the money, and then his investments have made that lucrative. Would you take money if someone paid you to hold it for them?
He isn't paid to hold the money. He just gets to invest it in the interim between receiving the premium and the time that the claim is paid. He's only "paid" based on what he can earn on it in the meantime, or, in an underwriting sense, to the degree that the premium was excessive in the first place.

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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by baw703916 » Sat Feb 28, 2015 4:02 pm

But if you invest it, and lose money, you still have to pay back the principal, so in that sense it's no different from leverage in that you can find yourself in the hole. While it's better in the sense that there may be no (or even a negative) effective interest rate on the "borrowed" money, there's not a defined amount that you owe--and whether you make or lose money will depend on how accurately you can estimate what your ultimate payout will be.

Ask the companies selling LTCi how lucrative that float has been for them. :P
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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by froggy » Sat Feb 28, 2015 4:21 pm

"Market forecasters will fill your ear but will never fill your wallet."

+1

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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by wamfan » Sat Feb 28, 2015 4:39 pm

Boglegrappler wrote:The difference is that there is no interest charge for the "float".
There is a huge difference. With Buffet's float, he has been paid over the years to hold the money, and then his investments have made that lucrative. Would you take money if someone paid you to hold it for them?
He isn't paid to hold the money. He just gets to invest it in the interim between receiving the premium and the time that the claim is paid. He's only "paid" based on what he can earn on it in the meantime, or, in an underwriting sense, to the degree that the premium was excessive in the first place.
For decades Berkshire has made an underwriting profit, which means they have in effect been paid to take policy holders' money. That has nothing to do with the returns on that money that Buffet has been able to generate.

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Re: "Berkshire Hathaway's Annual Letter to Stockholders"

Post by Boglegrappler » Sat Feb 28, 2015 5:17 pm

I understand underwriting profit. You're correct that it's separate from his investment returns.

The common behavior in the insurance business, however, is to use good investment returns to cut rates, and write more risky policies, leading to underwriting losses.

Part of Buffett's genius is to recognize that an insurance company can simply be regarded as an investment company that is funded by writing certain types of insurance. It helps that he's been a great investor.

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Re: Past, present, and future of Berkshire - Annual letter

Post by LadyGeek » Sat Feb 28, 2015 5:40 pm

FYI - I merged Taylor Larimore's thread into here. The forum software orders posts by time; Robert T posted the earliest.
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Re: Past, present, and future of Berkshire - Annual letter

Post by matjen » Sat Feb 28, 2015 6:45 pm

Invest like Warren. Buffett's Alpha

http://www.econ.yale.edu/~af227/pdf/Buf ... dersen.pdf

Berkshire Hathaway has realized a Sharpe ratio of 0.76, higher than any other stock or
mutual fund with a history of more than 30 years, and Berkshire has a significant alpha to
traditional risk factors. However, we find that the alpha becomes insignificant when
controlling for exposures to Betting-Against-Beta and Quality-Minus-Junk factors.
Further, we estimate that Buffett’s leverage is about 1.6-to-1 on average. Buffett’s returns
appear to be neither luck nor magic, but, rather, reward for the use of leverage combined
with a focus on cheap, safe, quality stocks. Decomposing Berkshires’ portfolio into
ownership in publicly traded stocks versus wholly-owned private companies, we find that
the former performs the best, suggesting that Buffett’s returns are more due to stock
selection than to his effect on management. These results have broad implications for
market efficiency and the implementability of academic factors.
Last edited by matjen on Sat Feb 28, 2015 7:01 pm, edited 1 time in total.
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Re: Past, present, and future of Berkshire - Annual letter

Post by Angst » Sat Feb 28, 2015 6:45 pm

Whew... a long read but wonderfully written. I've always found Buffett's comments a delight to read. Charlie Munger... well, he's not quite the wordsmith that Buffett is, but he was revealing. I particularly found what Buffett had to say about Berkshire by way of contrast with the conglomerates of the 1960's to be interesting. BH is something singular in the world of business.

Btw, did anyone else conclude that they had fairly clearly laid out their plans for succession? Either Greg Abel or Ajit Jain would be the future CEO, and Buffett explicitly said he wanted his son to be a "non-executive" chairman of the board, at least this is what I gathered from what both he and Munger had to say.

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Re: Past, present, and future of Berkshire - Annual letter

Post by Robert T » Sat Feb 28, 2015 10:16 pm

.
Here are some messages to me - at least from my reading. Some may quite plausibly come to different messages (for themselves).

Invest in the US (I would add that Berkshire itself - the way it allocates capital to productive uses - is an example of the 'magic' of the US economy)
Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 238 years by betting against America? … The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.
Have an equity orientation as inflation risk is much greater than volatility risk (“deep risk” vs. “shallow risk” to use Bernstein’s categorization)
The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. … Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.

It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. ... any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits. For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
Don't try to time the market, diversify broadly, keep fees low, don't use leverage
Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet. …[quoting Shakespeare “The fault, dear Brutus, is not in our stars, but in ourselves”.

... I know of no way to reliably predict market movements…
Buying low price-to-book stocks is better than high-price to book (i.e. have a value orientation)
… If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.
Pay attention to quality
The blueprint he [Munger] gave me was simple: Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.
Have a smaller cap orientation (than large/mega caps)
“The bad news is that Berkshire’s long-term gains – measured by percentages, not by dollars – cannot be dramatic and will not come close to those achieved in the past 50 years. The numbers have become too big. I think Berkshire will outperform the average American company, but our advantage, if any, won’t be great.”
Hold some cash
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” …. “And by that we mean U.S. Treasury bills, not other substitutes for cash that are claimed to deliver liquidity and actually do so, except when it is truly needed. When bills come due, only cash is legal tender. Don’t leave home without it.”
Be prepared for whatever tomorrow may bring
“… it is entirely predictable that people will occasionally panic, but not at all predictable when this will happen. Though practically all days are relatively uneventful, tomorrow is always uncertain. (I felt no special apprehension on December 6, 1941 or September 10, 2001.) And if you can’t predict what tomorrow will bring, you must be prepared for whatever it does.”
Based on the above, I don't think I am too far off by having an equity orientation, only holding amounts in fixed income to match my tolerance to short-term volatility, while maximixing potential for positive inflation adjusted returns (75:25 stock:bond portfolio); having a value (lower price-to-book) and smaller cap tilt (about mid-caps); focusing on maintaining a long-term asset allocation target (rather than market timing), keeping fees/expenses low; diversifying broadly, not using leverage; and having an emergency fund (oxygen).

Where I differ is on broader global allocation vs. US centric (although 50% equities, and 62.5% of overall portfolio is US based). I don't explicitly target quality (but if we believe quality factor loads, then I have a small implicit quality tilt).

Obviously no guarantees. Other ingredients of successful investing earlier referenced by Buffett: time, discipline, and patience.

Robert
.

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Re: Past, present, and future of Berkshire - Annual letter

Post by Runalong » Sun Mar 01, 2015 1:26 am

garlandwhizzer wrote:It is interesting that in earlier years Berkshire massively outperformed the S&P 500 but since 2009 it has underperformed that benchmark.
Looking at the charts it looks like from 2009 until now they've been pretty close, from 2007 until now BRK has "massively outperformed". I concede that it is save to say that if there are never any more bear markets or major corrections, BRK will continue to underperform.

Try recomputing by backing out all of BRK's cash (the S&P index is cash-less) and compare what's left of BRK (all non-cash holdings) with the S&P.

If all they were doing from now on was buying large equity positions in large cap companies, it would be virtually impossible for them to outperform.

If.

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Re: Past, present, and future of Berkshire - Annual letter

Post by Aish » Sun Mar 01, 2015 3:03 am

nisiprius wrote: I invest about 2% of my portfolio "like Warren Buffett". It's up 150% from my cost basis. :)

You mean buying and holding individual stocks?

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Re: Past, present, and future of Berkshire - Annual letter

Post by countmein » Sun Mar 01, 2015 11:00 am

… If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.
This is interesting. VTSAX is currently 2.4x book.

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Re: Past, present, and future of Berkshire - Annual letter

Post by baw703916 » Sun Mar 01, 2015 11:46 am

Aish wrote:
baw703916 wrote: I invest about 2% of my portfolio "like Warren Buffett". It's up 150% from my cost basis. :)

You mean buying and holding individual stocks?
No, BRK is 2% of my portfolio.
Most of my posts assume no behavioral errors.

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Re: Past, present, and future of Berkshire - Annual letter

Post by Robert T » Sun Mar 01, 2015 12:52 pm

countmein wrote:
… If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth.
This is interesting. VTSAX is currently 2.4x book.


With market cap added. [p/b / mkt cap] - according to M*.

Vanguard Total [US] Stock Market (VTSMX) = 2.4/$39bn
Vanguard Total World Stock Market (VT) = 1.9/$30bn
Berkshire Hathaway (BRK.B) = 1.5/$345bn

Berkshire still has relatively low p/b, but huge market cap (although is still half the size of Apple).
.

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Re: Past, present, and future of Berkshire - Annual letter

Post by Runalong » Sun Mar 01, 2015 2:19 pm

According to Yahoo Finance, BRK-B (current price approx $147/share) has over $36,000 cash per share.

http://finance.yahoo.com/q/ks?s=brk-b&ql=1

Now THAT's what I call value! :wink:

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