Buffett’s Buyback Math – why 120% of book value is the magic number for Berkshire

In 2012 Warren Buffett indicated he would buyback Berkshire Hathaway (BRK.A) stock up to 120% of its book value, but have you wondered why 120% is the right yardstick and not 110% or 130%? There have been a few posts explaining why 120% might sound reasonable premised on assumptions around estimated book growth and future multiples, however these arguments are unconvincing in my view.

I believe the ‘magic’ 120% of book value is a simple back-of-the-envelope calculation which makes an adjustment for Berkshires capital structure. Continue reading

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Insurance float and intrinsic valuation

Link to PDF document (24 pages)

This is a detailed study of insurance float and its role in the valuation of insurance stocks. Buffett made insurance float famous using it to turn Berkshire into an insurance and investment powerhouse. In doing so he has detailed the importance of float in understanding Berkshires valuation, though much of his teachings around float has been lost outside of Berkshire. However, his process remains highly applicable to mainstream insurance analysis, particularly in the determination of intrinsic value.

The report will explore the application of his principles to Australian insurance companies with a focus on successful valuation and stock-picking. Readers will learn why conventional valuation techniques can be flawed and how float-based valuation can be used within a value investing framework. The key issues I cover include: Continue reading