By Michael Tarsala
A long-time business contact asked me today if I knew why Warren Buffett's annual letter always emphasizes the performance of Berkshires per-share book value and not simply the annual performance of the company's shares.
My surly (I prefer to say nuanced) response was that the year-by-year returns don't matter all that much to a long-term investor, anyway. The important measure is the cumulative growth rate relative to the market!
CAGR of Berkshire shares: 14.9%
CAGR of the S&P 500: 6.8%
To further satisfy the question, I put together this annual chart:
Berkshire's shares underperformed the S&P 500 more than a third of the time studied. Not so good if that were truly the goal. But again, the cumulative performance is strong, driven by the eight years Berkshire beat the market by 20% or more.
My chart doesn't totally jibe with the front page of Berkshire's letter, by the way, because I couldn't pull every data point on a total return basis going back that far. If you were to include dividends, I think the chart would look very similar.
As for book value, it's true that the orange bars had fewer negative years than the blue ones.
Again, that's not the point. This is: Buffett thinks per-share book value is THE metric to measure his investing success, as it strips out the market's judgments. He doesn't care what the market thinks, or if he topped the S&P in any particular year.
But if there is any ulterior motive at all in the way the information is presented, here it is:
By beginning his letter with all these facts about book value, I see it as a not-so-subtle hint to look at Berkshire's long-term valuation. As you can see in the chart, Berkshire is trading at a lower-than-usual premium to its book value. The current price to book is about 1.2 times. The WSJ notes the average premium over the past two decades has been 1.6 times.
Hedge fund manager Whitney Tilson made the same point on CNBC this week: He thinks Berkshire is undervalued on price to book.
With that, my friend found a satisfactory answer.
My only bone of contention is this: Whether or not Buffett thinks it's important, the letter should probably include more stock performance facts.
The same question my buddy asked will probably be repeated next year.