Book Value vs Intrinsic Value
Book value (per-share accounting value) increasingly understates Berkshire's intrinsic value as accounting rules only write down impaired assets, never revaluing winners upward.
Book Value vs Intrinsic Value
Book value per share is the accounting measure of Berkshire's net worth (assets minus liabilities), divided by shares outstanding. Intrinsic value is the true economic worth of the business. Buffett argues that at Berkshire, book value increasingly understates intrinsic value because accounting rules only write down impaired assets but never write up successful ones.
The Accounting Disconnect
How the Disconnect Occurred
Early Berkshire (1960s-1970s):
- Most assets in marketable securities
- Securities marked to market = book ≈ intrinsic value
Modern Berkshire (1990s-2020s):
- Most assets in operating businesses
- Acquired at premiums to book
- Accounting rules only impair, never appreciate
"The accounting rules that apply to controlled companies are materially different from those used in valuing marketable securities."
Why Book Value Understates Value
The Impairment Problem
Account rules say:
- Write down assets when impaired
- Never write up assets that have appreciated
Result: Successful businesses appear at cost on balance sheet forever.
See's Candy Example
See's Candy acquired 1972 for $25 million:
- Earned $2B+ since then
- Still carried at ~$25M on books
- True value: $20B+
"Many of these [businesses] are worth far more than their cost-based carrying value. But that amount is never revalued upward no matter how much the value of these companies has increased."
The Divergence Grows
Market vs Book Returns
| Period | Market Price Gain | Book Value Gain |
|---|---|---|
| 50 years (1964-2014) | 1,826,163% | 751,113% |
The market price has consistently outpaced book value — suggesting intrinsic value exceeds book value by a widening margin.
Buffett's View
Focus on Intrinsic Value
"The market price and intrinsic value almost invariably converge over time."
But:
- Book value is a proxy, not the real number
- Buffett looks at operating earnings instead
- Long-term value comes from intrinsic value growth
Famous Quotes
"In Wall Street parlance, our balance sheet was then in very large part 'marked to market.'"
"Today, our emphasis has shifted in a major way to owning and operating large businesses. Many of these are worth far more than their cost-based carrying value."
Related
- intrinsic-value — The true value
- compounding — How value grows
- berkshire-hathaway — Where this disconnect occurs