Decoding Warren Buffett: Book Value vs. Market Value


Are you hiring with indeed you can post a job in minutes set up screener questions than zero in on your shortlist of qualified candidates using an online dashboard get started today at indeed dot com slash podcast. That's indeed dot com slash podcast. With your money briefing. Im JR Waylon at the Wall Street Journal in New York when Warren Buffett speaks people listen, but when the oracle of Omaha spoke of book value versus market value last week, it caused quite a stir will sort out the method behind the message in a moment. I these money and markets stories, you should know CEO's in the nation's top three credit reporting agencies went before a democratic house panel on Tuesday as congress considers new legislation with regard to fixing inaccuracies and consumers credit reports. A new proposed Bill calls for a new rights for consumers to challenge errors in their credit reports also bars employers from using credit reports to screen job applicants and allows greater power for the consumer financial protection bureau to regulate the industry the CEO's push back against the need for new legislation saying they have made significant improvements to their systems and practices in recent years. The CEO of equifax told lawmakers that since the massive two thousand seventeen data breach. The company it has increased the technology spending by a billion dollars. The company is also investing more to help consumers access their data and fix errors more easily. Meanwhile, the reopening of the government in January sparked a strong uptick in consumer confidence in February the Conference Board, which surveys consumers says it households outlook for jobs and pay was also generally more favourable, the so called labor differential, which shows the gap between survey participants who say that jobs are plentiful and those who indicate jobs are hard to get it an eighteen year high in February report also showed that future inflation expectations. Continued to fall hitting the lowest level in about fifteen years and the unemployment rate among Americans disabilities has fallen dramatically but the disabled remain disproportionately employed by governments and in low wage occupations Labor Department says jobless rate for disabled Americans fell to eight percent last year. And that was the lowest rate in a deck. Decade of comparable records and well below peak of fifteen percent and two thousand eleven but despite the gains people with disabilities were more likely to work in public sector jobs in low wage, occupations, and to be self employed last year, fourteen point one percent of employed persons would disabilities work for a government entity compared with thirteen point four percents of those without disabilities. Are you hiring with indeed you can post a job in minutes set up screener questions than zero in on your shortlist of qualified candidates using an online dashboard get started today at indeed dot com slash podcast. That's indeed dot com slash podcast. Berkshire Hathaway CEO Warren buffet sent a chill through financial circles when he announced his annual letter to investors last week that he would no longer report berkshires wealth creation in terms of book value. But was there some method behind the move that surprise some Wall Street Journal hurt on the street deputy editor Spencer Jacob joins us to discuss. So Spencer just a lay things out. What does book value of a company indicate so book value is a by the book, accounting measure, it shows the assets and the liabilities of a company and the value that accrues to shareholders, it's very hard to fudge market value moves up and down the web's. The market depends how how optimist people are about something. And so people were a little bit surprised because Warren Buffett has not really paid a lot of respect to the market. In other words, he's gotten rich off of the markets irrationality. And so people read a lot into this move to say. Well, maybe now he he thinks the market is is more rational than accounting measures. And is he losing it? Or is he sort of, you know, straying from his views, and that that is not the case. But it's easy to think. So and buffet feels that using book value as a barometer doesn't provide always a fair or accurate reading of a company's overall value. That's right. So if you look at at what Berkshire was an has become you get to understand it. You know, he took it over. It was just a kind of a failing textile company that he turned into an investment vehicle, and he said when he took it over the book value of that textile company way, overstated the value of the company, it wasn't realistic because textiles were not a good business. Even then when he took it over, but over time as the, you know, he's he bought stocks and bought individual companies bought gyco and See's candies. Bought Burlington Northern railroad and other insurers those companies have become part of Berkshire. There's no market price anymore for those. So you know, he he does invest in them. But the book value of those assets has not grown as quickly as the market value. Berkshire. So to put it in round terms, the book values grown something like a million percent during his tenure, which is pretty good. But the market value has grown something like two million percent since his tenure. And so the gap has gone in the other direction. And and that's why he says that it no longer reflects, and there's some more complicated reasons as well. Now, you know, he he has a pile of over one hundred billion dollars in cash that he could use to to buy companies. He also uses it to buy stocks. But he also uses it to buy shares of Berkshire Hathaway is the investment that he knows he made that point in your column that have created a large gap between the book and the market value when he began to buy back the shares. That's right. It exacerbates the gap. And so if you uses some of that money, and he said that he has certain criteria, and he has his own measure of the intrinsic value of the company so right now. Berkshire Hathaway's trading it something like a forty. Or fifty percent premium to its its book value. He said that he has his own idea of what the the real value is a Berkshire Hathaway, and when it goes below that he might use some of that cash to buy it. But when he uses a dollar of the cash on the balance sheet to buy back, those shares then it widens that gap further. So what he's saying is that that gap is just so big now that he's not going to measure, your wealth creation in terms of book value anymore. You can use market value in in terms of what you know, whenever you happen to have bought berkshire-hathaway, if you're a shareholder, you've you've done well over most periods, especially over very long period, you've become very wealthy. Owning it the real wealth that it has created for you is the market value, but people did misinterpret because they think that like, you know, he he's kind of derided the sort of the market's ups and downs, and wims and moods. And maybe now he's sort of embracing it more, and that that is not really not the case. It's just that, you know, in the specific case of his company because it has all these operating subsidiaries that he's not going to sell. He's not going to sell his railroad. He's not going to. L gyco. He's not going to sell these things and realize the full market value. Whatever they may be that gap is going to keep on growing and growing. And that's why he's steering you away from looking at that, you know, decoding Warren Buffett is common activity. It's like a cottage industry, but one thing is for sure he really has never been a big fan of chasing after the ebbs and flows in the dramatic ups and downs of the market. That's right. You know, he uses this allegory that he got from his mentor Benjamin Graham, which is Mr. market. He said pretend that you have a business partners name is Mr. market and some days, you know, and he he's mentally unbalanced. You know, some days he's super optimistic and he wants to buy your share of the business for way, more than you think it's worth. And then the next day he comes in and he's super pessimistic. He wants to sell you his share for you, no way less than than it really is worth. And he said, you know, you that you're basically doing business with with someone like that in the long run where the ebbs and flows allow you to pick things up more cheaply or sell things more dearly than than the the. Intrinsic values and that that is still the case. And that is still the case even with his own company where the market sometimes a little bit too optimistic about it. And sometimes it's more pessimistic. And that's that's how you, you know, over his tenure he's made something like sixteen times, what you would have made just owning the, you know, the the S and P five hundred by itself and Buffa carries a lot of credibility, and if market value readings allow him to better gauge, the health of Berkshire and the subsidiaries investors elected to keep listening. I think they are. I mean, I think that's what ultimately that's what people care about. And they thought that he was a bit of a stodgy for pointing to the book value for so many years ago, they're not many companies that that measure their shareholder wealth creation in terms of book value, they measured and just in terms of market value. And they viewed this somewhat throwing in the towel. But you know, what he said is that it's at least closer, it's at least a better measure of of wealth creation than book value because book value is sort of, you know, it's just moving farther and farther ways, and I'm not going to change. This is still you know, or LA. Largely a conglomerate that has operating businesses. It's not going to sell these businesses. It's going to keep them for a long long time. And so that gap is going to keep on growing. And so it's just is not useful anymore and the only other measure out there. He's not going to give you a measure of intrinsic value because that's totally subjective. So the market is the the only other thing out there. It's the next best thing. But it's not very good. All right. That's Wall Street Journal heard in the street deputy editor Spencer Jacob here in our studio Spencer. Thanks for stopping by. Sure. And that's your money briefing. I'm Jay are Whalen in New York for the Wall Street Journal.

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