Over the past 32 years, the per-share book value of Berkshire has grown from $19 to $19,011, at a rate of 23.8% compounded annually.
Due to the purchase of GEICO (becoming a wholly-owned subsidiary), there was a need to restate Berkshire’s 1995 financial statements.
From an economic point of view, the value of the 51% of GEICO owned at year-end 1995 increased significantly when the remaining 49% was bought.
This is because of major tax efficiencies and other benefits.
From an accounting point of view however, it was required for the value of the 51% to be written down at the time Berkshire went to 100%.
As a result, the original 51% of GEICO is now carried on the books at a value that is both lower than its market value at the time the remaining 49% was bought and also lower than the value at which that 49% is carried.
The Relationship of Intrinsic Value to Market Price
Over time, the total gains made by Berkshire shareholders should match the business gains of the company. When the market price temporarily overperforms or underperforms the business, some shareholders (buyers or sellers) will receive outsized benefits at the expense of those they trade with.
While the primary goal of Berkshire is to maximize the amount that their shareholders make, another goal is to minimize the benefits going to some shareholders at the expense of others.
In a public company, fairness prevails when market price and intrinsic value are in sync. This will never happen but a manager can do much to make them close.
The longer a shareholder holds his shares, the more his returns will match Berkshire’s business results; and the less it will depend on what his premium or discount to instrinsic value was when he bought it.
That is one reason Berkshire hopes to attract owners with long-term horizons.
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