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By Matthew Coffina, CFA | 03-10-2014 02:00 PM

Slower Growth No Concern for Berkshire Shares

Although it underperformed the S&P 500 in 2013, Berkshire was firing on all cylinders and will likely outperform the index over the long run, says StockInvestor editor Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Ahead of the Berkshire Hathaway annual meeting in early May, I'm here today with Matt Coffina--he is editor of Morningstar StockInvestor--to look at 2013's results for Berkshire and also if there are any nuggets of wisdom in [chairman Warren] Buffett's letter this year.

Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Berkshire reported full-year 2013 results a few weeks back. Can you walk us through those, was there anything surprising? How is Berkshire doing right now?

Coffina: Berkshire was really firing on all cylinders last year. Operating earnings per share were up about 20%. They have some net investment gains, derivative gains, and perhaps most importantly, book value per share was up about 18%. This is really the metric that Buffett likes to point to as the key indicator of Berkshire's intrinsic value over time. Berkshire's actual intrinsic value is almost certainly meaningfully higher than book value per share, but still, as an objective measure of how that intrinsic value is changing from year to year, this is a pretty good metric to watch. So, up 18% again on book value per share.

Glaser: But that's much lower than the S&P's over-30% of return. Do you think that says that Berkshire is too big to grow faster than the market? What do you think that means for the company?

Coffina: Berkshire has always sort of underperformed the market in the up years, but then it more than makes up for that during the down years. There are a few reasons to expect this. For one, Berkshire's assets aren't all going to be mark-to-market every year like S&P 500 companies would be. So, not all of that gain, perhaps, and intrinsic value is going to be captured in book value per share in any given year. But also, Berkshire is just a very well-diversified, very, very large, slower-moving organization, and it can't really be expected to keep up with the S&P in a year that the S&P was up more than 32%.

I think the more relevant way to look at it would be over a longer-term time horizon, and in particular, encompassing a full market cycle. If you started in 2007, for example, before the financial crisis, then Berkshire is still beating the S&P.

Over the long run, I think Berkshire is capable going forward of probably in the neighborhood of 10% annual growth in book value per share, which should do better than the S&P over the long run given where we are in terms of current valuation levels. But the relative underperformance or outperformance will probably depend more on what the S&P does, especially in any given year, rather than what Berkshire does, which is going to be, I think, a more consistent over the long run, 10% total return.

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