It isn’t jumps in stock market prices of his investments that Buffett measures himself by. He focuses on increases in intrinsic value. A very rough and ready proxy for annual changes in intrinsic value is movements in net worth (book value). For example, in just the twelve months of 1998 Berkshire’s net worth balance sheet gain was $25.9bn, which translates to a per share book value rise of 48.3%.
Over the 34 years since Buffett had taken a substantial stake in that down-at-heel textile maker, Berkshire Hathaway, its per share book value had grown from $19 in 1964 to $37,801 in 1998 (it is now over $300,000), a rate of 24.7% compounded annually.
Even this underestimates the achievement because “intrinsic value still far exceeds book value.” (Buffett’s emphasis on “far”). In other words, the balance sheet net asset figure does not adequately capture the value of the discounted owner earnings expected to accrue to Berkshire from its collection of excellent economic franchises and high-class businesses in future years.
“Gains in book value are, of course, not the bottom line at Berkshire. What truly counts are gains in per-share intrinsic business value. Ordinarily, though, the two measures tend to move roughly in tandem.” (1997 letter to Berkshire shareholders)
While Buffett remained focused on intrinsic value, he found himself in 1998 surrounded by people caught up in the psychology of a stock market mania, later called the dot-com bubble, where shares were pushed up by punters hoping for increasing numbers of eyeballs looking at a particular Silicon Valley company’s website.
Despite the great gains in Berkshire’s share price as it was swept along with the naïve excitement, he never lost sight of the real origins of value, that is, the soberly assessed likely cash to flow to shareholders in the long run.
Don’t preen yourself if a general market rise lifts you up
In his 1997 letter to shareholders Buffett pointed out the error in thinking you, as an investor, had done well when in reality all that had happened was the market was on a tear.
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