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I calculate the value of Berkshire Hathaway as an elementary school student

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Many think that stock valuation requires accurate forecasts, complex models, and a lot of high-level math. But that is not the case. It is much more about the approximate but correct evaluation of the future and a meaningful evaluation model, which can also be very simple.

For example, when I think about the fair value of the Berkshire Hathaway– Share thoughts, then I do the calculations like an elementary school student. I want to do that right now..

The simplest is to assess the cash position of Warren Buffett’s holding company. According to the latest data, this amounts to 144 billion US dollars, which in my opinion can simply be added to the value, even if the sum, of course, constantly changes a little.

Things get a little more complicated when it comes to Berkshire Hathaway’s stock portfolio. That was worth just over $350 billion at the end of 2021. However, we don’t know what has changed in the portfolio since then, and of course the stock market fluctuates too.

Therefore, I would simply adjust this reading for the change in the Dow Jones Industrial Average, which was down roughly 10% year-to-date earlier this week. This gives us an approximate portfolio value of $315 billion. This is a very offhand calculation, but we just want to be right.

Now we have yet to assess the holdings that are directly owned by Berkshire Hathaway. That’s the hardest part because it’s so subjective. We can estimate the net profit generated by the participations in 2021 at 27,460 million dollars.

I see no reason why we shouldn’t rate this win at the same multiple as the Dow Jones Industrial Average, which is currently hovering around 18. So if we multiply net profit by that, we get a value of about $494 billion.

Now all I have to do is add the three values ​​together ($144 billion, $315 billion, and $494 billion) and I get my estimated fair value of Berkshire Hathaway of $953 billion. As you can see, it was anything but complicated. You could even calculate the sum without a calculator.

Of course, it cannot be said reliably whether this is really a good approximation of the true value. Only the future will tell. But I suppose you don’t need to hide from complex models for which spreadsheets have been created page by page with mathematical formulas. After all, longtime hedge fund manager Whitney Tilson popularized a very similar approach.

Now the question of practical application arises. For that, look at Berkshire Hathaway’s current market value, which was $728 billion earlier in the week. That’s almost 24% less than my calculated value, which makes the stock look cheap to me.

So Warren Buffett’s diligent share buybacks make sense. He’s certainly much better than I am at calculating his enterprise value, but I suspect he wouldn’t use a spreadsheet to do that either.

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The article Calculating Berkshire Hathaway’s Value Like an Elementary School Student first appeared in The Motley Fool Germany.

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Divulge: Marlon Bonazzi does not own any of the shares mentioned. The Motley Fool owns shares and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: Long $200 January 2023 Call Options on Berkshire Hathaway (B-Shares), Short $200 January 2023 Put Options on Berkshire Hathaway (B-Shares) and Short $265 Call Options in January 2023 in Berkshire Hathaway (B shares).

Motley Fool Germany 2022

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