No. of Recommendations: 19
Buffett created massive value for Berkshire Hathaway shareholders over the past 50-plus years. But Buffett has never invested in anything that has changed the world....
THE MARKET LOOKS FORWARD.


It's a fair point.
Berkshire does not invest in things that grow in value particularly quickly.
Despite occasionally buying something while it's really cheap, it's pretty certain they can't and won't have a really high growth rate in future.
Their rate of growth has been remarkably constant since 1998, when they did a big transformative acquisition.
Their days of fast growth ended 20 years ago.

Berkshire's main knack is merely investing in things that tend to have very long streams of earnings well into the future. (and not overpaying for them)
No investment of theirs in the last 50 years has caused a permanent loss over 1% of the portfolio size, which is quite a trick.
Since few of the things they buy ever stop earning, the rate of earnings stacks up and compounds.
Use the cash in hand to buy something that throws off money, wait till the cash piles up again, repeat at a bigger scale.
This doesn't provide get-rich-quick opportunities, but it has a certain attractive inexorability.

As for the S&P, sure, it has done better than Berkshire for quite a few time frames in market total return.
Better than almost any other choice in the investing world, lately.
But a lot of that result is because the S&P got more expensive and Berkshire didn't.
If you're smart enough to sell while prices are high, expanding valuation multiples are a great way to make money, of the "take it home and spend it" kind.
But for long holds your return never exceeds (well, asymptotically approaches) the rate of value creation.
Berkshire's value has been going up at around inflation plus 8-9%/year for the last 5-20 years, at a fairly constant rate.
The S&P 500 value hasn't gone up nearly that fast.

Let's say we take a baseline year that was not top or bottom of cycle for either, start of 2006.
How much has the value of the S&P 500 index risen since then?
S&P real sales are up inflation + 1.39%/year in 13 years. That's the pessimist's figure, which assumes currently high net margins will mean revert a lot.
S&P smoothed real earnings are up inflation + 3.26%/year. That's usually a sane metric.
For the optimist, maybe add another 1%/year for the roughly 10% one-time boost in earning power value from the tax changes.
Add around 2%/year for dividends, since the figures above are valuation metrics for the index alone.
But the S&P price has done much better than this because of expanding valuation multiples. The multiple of smoothed real earnings rose over 20% since then, for example.

For comparison, a fairly decent valuation metric for Berkshire is up in the same time period inflation + 7.97%/year.
That metric is basically the current market value of investments per share, plus a multiple of pre-tax earnings per share on operations not related to investments.
Book per share is up inflation + 8.27%/year.
The market price return was between those two figures, so within rounding error it got neither more expensive nor cheaper.

So, very round numbers, I'd say that Berkshire has been generating value at around 2.5-3%/year faster rate than the S&P 500 total return,
but the S&P has been getting more expensive at maybe that same rate, in round numbers leading to a tie in market total return.
An advantage of 2.5-3% isn't much, but it's better than a kick in the head.
For a buyer today, the other advantage is that Berkshire isn't overvalued, in absolute terms or relative to its history.
There is no one-time stretch of poor performance to anticipate because of the end of a stretch of stretched valuations.
It's much harder to make that case for the broad US market.
So...back to the quote..."the market looks forward". It's the future that matters, not the past.
The past matters only to the extent that it can help us understand how we got where we are, and whether those effects are likely to be smaller, the same, or larger in the years to come.
Starting from here, performance for Berkshire between now and after the dust settles on the next bear is likely to be better than for the S&P.
That's because it's less likely to suffer a one time fall in valuation multiples, and likely to continue to grow in value at a slightly higher rate.
Those aren't sure things, but they're sensible central expectations based on how the past informs us of how we got to where we are.

In case anybody is interested, here are some recent figures of that valuation metric for Berkshire.
This is just a yardstick, not an estimate of fair value. Think of it as fair value multiplied by some unknown constant.
That being said, when you pay much more than this number you tend to get ho-hum returns for a year or two, then the trend rate of value growth.
When you pay much less than this number you tend to get excellent returns for a year or two, then the trend rate of value growth.
That's more or less true of any investment with a market price, but it's just easier to find a decent metric for BRK.

2001     67354
2002 76604
2003 85125
2004 87066
2005 89134
2006 106512
2007 117409
2008 108433
2009 116676
2010 133482
2011 147259
2012 172482
2013 205344
2014 232809
2015 249006
2016 264333
2017 301672
2017 307973
2018 307678

2018 looks crappy, in large part because of the market sell-off in Q4.
Given the recent market rebound, I'm guessing the metric at end Q1 will likely be in the vicinity of $332000.
A simple trend line through the data set suggests a metric of 347664 at year end, and 381910 end next year.
These are nominal numbers, not inflation adjusted.
As an aside, this table more or less coincidentally corresponds to my own period of BRK ownership.
My first block of shares started at around that price.

Jim
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