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No. of Recommendations: 19
RR,

I believe your valuation is not consistent with the two column approach that Buffett describes in his letters. The fundamental difference is that Buffett does not include underwriting income in the calculation of the earnings in column 2. I see that you only took out the net investment income in coming up with the earnings to use for column 2. If I am missing something with your calculations, let me know.

Per Buffett's method of reporting, the value of the insurance business is completely reflected by including all of the investments held by the insurance companies in column 1 (cost of float = zero from now onwards, no float growth and no deduction for the deferred tax liability on the investments).

From the latest 10-Q, here are the numbers for the two column approach(with the difference that the earnings in column 2 are post tax, minority interests having been taken care of):

Investments on the insurance side: $127.14 billion
Non-insurance earnings for 9 months: $3.18 billion
Annualized non-insurance earnings: $4.24 billion

Market value of Berkshire today: $165.31 billion

The implied multiple on the post tax earnings of the operating business this year is 9. This makes the unwarranted assumption that fair value of the investments is reflected in their market prices, an assumption that is likely to be way off mark in today's markets. At the end of Q3, the paper loss on Berkshire's investments stood at 7.504 billion, a loss that is likely to be reversed and then some over the next 5-10 years. The multiple is also likely being applied to current depressed earnings for a portion of these earnings.

With the markets falling as much as they have, and as quickly as they have, giving Buffett the environment he has been waiting for so long, Berkshire's intrinsic value is growing and growing quickly.

Best,
Ragu
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