Book value (contd.) - Warren Buffet said the same thing in his annual letter

I finally have time to go through Berkshire Hathaway’s annual letter. It has been widely covered by news that BH’s share price also got affected by the Kraft Heinz write-off and market cap drop. However, it’s not until I read his annual letter that I found out Warren Buffet’s view on book values evolved in a way that’s coherent with what I said in the previous two posts. I hereby copy/paste his opening remark:

Long-time readers of our annual reports will have spotted the different way in which I opened this letter. For nearly three decades, the initial paragraph featured the percentage change in Berkshire’s per-share book value. It’s now time to abandon that practice.

The fact is that the annual change in Berkshire’s book value – which makes its farewell appearance on page 2 – is a metric that has lost the relevance it once had. Three circumstances have made that so. First, Berkshire has gradually morphed from a company whose assets are concentrated in marketable stocks into one whose major value resides in operating businesses. Charlie and I expect that reshaping to continue in an irregular manner. Second, while our equity holdings are valued at market prices, accounting rules require our collection of operating companies to be included in book value at an amount far below their current value, a mismark that has grown in recent years. Third, it is likely that – over time – Berkshire will be a significant repurchaser of its shares, transactions that will take place at prices above book value but below our estimate of intrinsic value. The math of such purchases is simple: Each transaction makes per-share intrinsic value go up, while per-share book value goes down. That combination causes the book-value scorecard to become increasingly out of touch with economic reality.
— Warrent Buffet "To the Shareholders of Berkshire Hathaway Inc."


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