Warren Buffett

  • Warren Buffett, the chairman and CEO of Berkshire Hathaway, said in his annual shareholder letter that he's abandoning his longtime metric for valuing his conglomerate's shares.
  • The measure, price-to-book value, compares a corporation's share price with the value of a company's balance sheet, minus liabilities.
  • By that measure, Berkshire Hathaway just posted the slowest annual growth in a decade, according to a Morgan Stanley analysis.


Warren Buffett, the chairman and CEO of Berkshire Hathaway known for his value-investing acumen, is shifting away from his decades-old approach to valuing his own conglomerate.

"Long-time readers of our annual reports will have spotted the different way in which I opened this letter," he wrote to shareholders in his annual letter published Saturday.

"For nearly three decades, the initial paragraph featured the percentage change in Berkshire's per-share book value. It's now time to abandon that practice. The fact is that the annual change in Berkshire's book value - which makes its farewell appearance on page 2 - is a metric that has lost the relevance it once had."

The decision over his long-used yardstick underscores the way in which his Omaha-based conglomerate's business has changed over the years, from one that is largely an insurance and investment portfolio to one that is an amalgamation of various businesses in different industries.

While analysts say a measurement like price-to-book serves as a fair measurement for the former, a more nuanced sum-of-the-parts valuation measurement is viewed as better-suited for the latter - especially as businesses like Berkshire Energy and BNSF Railway have become more prominent contributors to Berkshire's earnings.

Buffett, for his part, said his decision was motivated by three things.

First, Berkshire has shifted from a company whose assets are concentrated in stocks into a company whose "major value resides in operating businesses."

Second, accounting rules that require its book value to include Berkshire's various operating companies place them at an amount "far below their current value," creating a increasingly large distortion in total book value.

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Finally, Berkshire's buyback program was factored into Buffett's decision. Last summer, he said Berkshire Hathaway would loosen up its share repurchase policy.

In the past, Berkshire only bought back shares when they were trading at 1.2 times book value or cheaper. The new board-approved policy allows Berkshire to authorize buybacks when Buffett and Charlie Munger, his vice chairman, believe the shares are trading below Berkshire's "intrinsic value."

Now, as Buffett expects Berkshire to be a "significant repurchaser of its shares" over the years - buybacks typically boost stock prices and depress shares' book value - book value will likely become "increasingly out of touch with economic reality."

At the same time, Berkshire Hathaway's book value grew just 0.4% in 2018, to $141.42 (about R1960) per B-class share - the slowest pace in a decade, according to Kai Pan, an analyst at Morgan Stanley.

Pan wrote to clients in a note out Monday that Berkshire Hathaway's strong operating earnings were largely offset by both equity losses and a non-cash impairment that stemmed from Berkshire's Kraft-Heinz ownership. Shares of the food manufacturer plunged last week to an all-time low after reporting dismal quarterly earnings.

The decision to do away with Berkshire's book value as a feature of Buffett's shareholder letter marks a "natural evolution of Berkshire's business mix change, not an abrupt departure from Mr. Buffett's long-term investment philosophy," Pan told Business Insider.

Business Insider asked Pan whether Buffett's valuation decision might have implications for the way he assesses his own equity holdings, including Apple.

"Mr. Buffett will likely continue to evaluate Berkshire's equity investments using the most appropriate valuation framework, including price-to-book for banks and other financial holdings," Pan, who maintains a "neutral" rating on Berkshire, wrote in an email.

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