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Stocks B / Berkshire Hathaway


Subject:  Float based valuation model Date:  1/6/2013  10:58 AM
Author:  rationalwalk Number:  197590 of 224494

The discussion regarding Berkshire's float and how it is invested inevitably leads to the question of whether the "float based valuation" models that were very popular 10-15 years ago ultimately led investors astray and resulted in valuations for Berkshire that, in retrospect, can be considered above fair value.

The float based valuation model is one developed by Alice Schroeder in the late 1990s and published in a 1999 report which is now available on a number of sites online. I think most everyone here is familiar with the methodology. Although not explicitly endorsed by Warren Buffett, many believe that Schroeder's access to Buffett in the late 1990s combined with the fact that she was subsequently selected as his official biographer indicate Buffett's general agreement with her work and methodology.

Although I used this methodology for years as my primary guide to Berkshire's value, I have come to believe that it is of very limited utility and can lead investors to overpay. The main problem with the model is the very extreme sensitivity of the model's results based on relatively small changes to the input variables used to calculate the present value of Berkshire's float: Investment Returns, Cost of Float, Growth of float, and Discount Rate.

There is often debate regarding whether Berkshire's float serves the functional equivalent of equity. What's interesting is that using the float based valuation model, the present value of Berkshire's float usually far exceeds its nominal value based on only mod