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Author: rationalwalk Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 210412  
Subject: Re: Still cheap at 4 year high Date: 10/4/2012 1:53 PM
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What would (did) you peg fair value at at say end Q2 2007?

I still have spreadsheets from that timeframe so I went back to check. It is somewhat humbling and/or embarrassing but it is what it is:

My year-end 2006 valuation was $153K based on a float based valuation model. I pegged the value of the insurance operations at $183.5 million, the value of the non-insurance businesses at $43.5 million, and assumed that 50 percent of the deferred tax liability was part of intrinsic value. Total valuation was $236 million which worked out to $153K/A share based on 1.54 million shares outstanding.

I didn't maintain valuation models based on price/book or two-column back then. I also maintained limited historical data and, in retrospect, the level/quality of analysis was quite poor. If I had done a better job, maybe I would have cross-checked the float based model with other models and historical valuation levels and had second thoughts. The float based model I used in early 2007 based on year-end 2006 data implied a very high P/B of 2.18x.

Of course, by the end of 2007, Berkshire DID in fact come close to hitting my price target ... but I only sold a minimal number of shares because by then I had further increased my IV estimate based on more aggressive assumptions. I also did not want to pay capital gains taxes (maybe that is a subconscious reason that I raised my IV estimate so I wouldn't have to sell).

Even without being able to foresee the financial crisis, it should have been apparent that Berkshire was fully valued in late 2007 so complaining about "hindsight bias being 20/20" won't get me off the hook!

Then again, all we can do is learn from the past and try to avoid repeating those mistakes in the future. For me, that means maintaining much better data, having multiple valuation models, and promising to begin selling shares when the price begins to imply that 3-5 year forward returns are likely to fail to meet my required hurdle rate after accounting for the capital gains tax hit I will face.
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