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, on an earnings-based multiple approach, is available here. Part 2 on book value can be found here. Part 3 on the two-column approach is here.
The float-based approach to valuing Berkshire is fraught with its own issues
The approach we will examine here for discounting the value of the investment portfolio is the float method. Over the years, the terminology surrounding this approach has become mixed to the point where many people use the terms float-based as a synonym for the two-column approach. The method we will investigate is similar to the one originally outlined by Alice Schroeder at PaineWebber in the late 1990s. This approach seeks to capture the premium of the insurance business over book value by capitalizing the future cash flows from the insurance float (the excess of premiums paid by policyholders that have not yet been paid out as claims).