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Berkshire Coverage

Separating Investments From Operating Businesses No Berkshire-Valuation Panacea

In Part 3 of a 5-part series, Morningstar's Gregg Warren and Drew Woodbury say the so-called two-column approach to valuing Berkshire can be useful, but it also has significant shortcomings.

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Ahead of Saturday's  Berkshire Hathaway (BRK.A) (BRK.B) annual meeting we're taking a closer look at the best way to value the complex company. We believe that understanding the benefits and shortfalls of different methodologies can provide valuable insight into the ways in which different investors are approaching the firm's overall valuation. Part 1 of the series, discussing an earnings-based multiple approach, is available here. Part 2 on book value can be found here

The two-column approach to valuing Berkshire can be useful but is often misunderstood
The two-column method has become increasingly popular of late, and it has been publicly employed by a number of different market participants. Possibly most well-known for his use of this valuation method is Whitney Tilson from T2 Partners, who regularly updates and publishes a slide deck with his opinions on Berkshire Hathaway on his website. In addition to Tilson's method, there are a number of other ways to separate investments from the operating business in order to arrive at a more precise valuation model of Berkshire. Some of the approaches are not necessarily comprehensive in themselves but rather seek to overcome shortfalls of the previously mentioned approaches by supplementing a different valuation approach, such as seeking to overcome the difficulty of placing an earnings multiple on the insurance earnings by developing a valuation proxy for the insurance businesses. 

Greggory Warren does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.