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No. of Recommendations: 14

I very much like your way of doing the 2-column approach, not that RR's approach isn't fine as well.

In particular, I intuitively prefer the calculation of what multiple the current market value of BRK is assigning to the earnings, rather than assigning an arbitrary multiple (e.g., 10 times pre-tax earnings).

In other words, if MC is market cap of Berkshire, Col1 is the value of the insurance investments and ops is the operating earnings, RR does it this way:

Col1 + 10*ops = $141,948, and MC=$106,720 (all numbers per A share, Col2 is annualized pre-tax earnings), so Berkshire is a good buy.

Your way:

MC - Col1 = $165.31 billion - $127.14 billion = $38.17 billion,
and (annualized after-tax earnings are $4.24 billion, 38.17/4.24 = 9.0 i.e. Mr Market is assigning a multiple of 9 to after-tax earnings, so Berkshire is a good buy.

The 3 major additional considerations I would posit are:

(i) Operating earnings are hugely depressed by the mark-to-market rule applied to the current value of the index put that Buffett has sold. I would tend to agree that the value of this position has gone down steeply, and this is looking like a very unlucky bet so far. Nevertheless, it is hard to imagine that this hit to earnings is going to be a recurring theme. If you add back about a billion of after tax earnings, and annualize, you would get an after tax P/E multiple of 38.17/5.57 = 7.

(ii) Adding $150 million to the 3 month after-tax Marmon earnings, since those earnings started mid-March, would give you another $0.2 billion earnings, giving a multiple of 38.17/5.77 = 6.6.

(iii) Now add the new earnings from the preferred shares of GS and GE, with 10% pre-tax returns on $8 billion instead of 2% returns on the cash. The 8% difference, say $420 million after tax, would get us to an after tax multiple of 38.17/6.19 = 6.2.

Of course, there is no end to this game, and other adjustments are possible. Your assumptions, (cost of float = zero from now onwards, no float growth and no deduction for the deferred tax liability on the investments) could be modified, in particular the counter-historical assumption that there will be no underwriting gains. The tax liability on unrealized gains, discounted a number of years, would go in the opposite direction. And it is perhaps reasonable to posit that re-insurance earnings are likely to go up, as credit has become so much tighter.

Any way you slice it, I think Berkshire is very attractively priced for some spectacular returns in the next few years.

Regards, BP
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