Post by T Bhat on Nov 8, 2011 22:21:36 GMT -5
From yahoo message board:
The return on Berkshire stock will equal the growth in IV adjusted by the change
in price/IV (or the growth in BV adjusted by the change in price/BV).
annualized return = BV growth rate + annualized change in P/BV
While this is simple algebra, unfortunately both terms in the equation are
uncertain.
As discussed in the previous post, my best guess for the BV growth rate over th
next few years about 8%/yr.
So how about the change in P/B? Since mid 1998 Berkshire's P/B has been
falling, pretty much in concert with the falling PE of the overall stock market.
The decline in PE of the stock market begain in March 2000. Berkshire's P/B
fell from a high in June 1998 of 2.8 to a low of 1.0 in Sept 2011. The current,
fair value P/B, by my estimate, is about 1.6.
While the PE of the S&P may well continue to fall, with Berkshire's introduction
of the stock repurchase plan I am optimistic that Berkshire's P/B now will have
a floor of about 1.1x. BRKa now stands at a P/B of 1.2. Assuming no change in
P/B and a BV growth rate of 8%/yr, the expected return of BRKa stock is 8%/yr.
If a floor of 1.1x book value holds, then the uncertainty in the return of BRKa
stock lies more to the upside. If P/B does not change, we get an 8%/yr return,
assuming the 8% growth rate in BV is correct. If P/B increases toward a fair
value of 1.6x, then we get a higher return.
The return on Berkshire stock will equal the growth in IV adjusted by the change
in price/IV (or the growth in BV adjusted by the change in price/BV).
annualized return = BV growth rate + annualized change in P/BV
While this is simple algebra, unfortunately both terms in the equation are
uncertain.
As discussed in the previous post, my best guess for the BV growth rate over th
next few years about 8%/yr.
So how about the change in P/B? Since mid 1998 Berkshire's P/B has been
falling, pretty much in concert with the falling PE of the overall stock market.
The decline in PE of the stock market begain in March 2000. Berkshire's P/B
fell from a high in June 1998 of 2.8 to a low of 1.0 in Sept 2011. The current,
fair value P/B, by my estimate, is about 1.6.
While the PE of the S&P may well continue to fall, with Berkshire's introduction
of the stock repurchase plan I am optimistic that Berkshire's P/B now will have
a floor of about 1.1x. BRKa now stands at a P/B of 1.2. Assuming no change in
P/B and a BV growth rate of 8%/yr, the expected return of BRKa stock is 8%/yr.
If a floor of 1.1x book value holds, then the uncertainty in the return of BRKa
stock lies more to the upside. If P/B does not change, we get an 8%/yr return,
assuming the 8% growth rate in BV is correct. If P/B increases toward a fair
value of 1.6x, then we get a higher return.