Finding The Next Berkshire
As a data driven investor, I ache to find the next Berkshire Hathaway. With the mountains of financial information that is available to today’s investor, you might think it would be possible. But that’s not as easy as one might think. Diamonds in the rough are hard to find and financial diamonds often look like ordinary stones for years on end. Berkshire Hathaway is a good example.
In fact, as John Rekenthaler has written (in Morningstar Report), you would not think that Berkshire Hathaway was so great after the first ten years of Warren Buffett’s management of the company.
[After] 10 years of Buffett’s management, BRK’s stock-market performance suggested few hints of his genius. Yes, BRK had twice surged by more than 70% in a calendar year, but its best result among the eight remaining years was a 13% gain, and it had lost money on five of those occasions.
But Rekenthaler also points out that Berkshire’s share price over that period did not reflect its growth in book value over the same period. Over the ten year period from 1965–1975, Berkshire book value increase was explosive, comparable only to the rise in oil prices during the same period. Of course, investors cannot buy book value but the expectation is that share price eventually reflects book value and consistently rising increases in book value suggest a strong company.
In February 1981, Buffett again took pen to paper and wrote his sixteenth annual shareholders letter. In it, having run the business for sixteen years, he wrote:
In the sixteen years since present management assumed responsibility for Berkshire, book value per share . . . has increased from $19.46 to $400.80, or 20.5% compounded annually.
At that time, Berkshire’s share price was $430 per share. Would you have bought it? Remember, the price was five dollars below the book value. If you had bought 50 shares for $21,500, those shares would be worth approximately $21.2 million today. But — and it’s a huge “but” — would you have been willing to wait forty years for that investment to achieve its current value? Are you prepared to “think longer” about your investments and play out your investment thesis over a lifetime? Would you have the discipline to do nothing?
