My popular article on the valuation of the S&P 500 index has been updated. With the surge in stock prices in the past few month that market now looks about fairly valued and no longer looks under-valued.
Today’s Financial Post reveals the sad story of First Leaside Group of Companies which with $370 million invested by some 1200 investors has gone into receivership. This is an investment company with very prominent Board members that has been around since the 1980’s.
I note that investors were apparently targeted by cold calls and repeated sales pressure.
There are many thousands of small investment outfits raising money in Canada. Often in real estate and oil and gas. Having listened to their advertisements for many years and having been solicited a few times, I have never invested a cent. (Well, except for about $1500 I put into the Canadian Property Investors Trust back in the early 1980’s which went insolvent shortly after).
One I started investing through TD Waterhouse I have stuck to that 100%. I would not be very comfortable writing a cheque to some investment outfit. I prefer to buy only what trades online. Many small investment outfits are perfectly legitimate. But it would take a lot of effort to get comfortable with any of these. A good general rule of thumb in life is that the harder (and more desperately) someone is trying to sell you something, the more cautious you should be. The best products, be they cars or investments do not need high pressure sales.
Warren Buffett’s annual letter to shareholders was released this morning. This wisdom-filled letter is in effect a gift to investors and is released in such a way that hundreds of thousands can download it all at the same time. Basically everyone on earth gets this gift at the same time (Who says there is no Santa Claus?).
http://www.berkshirehathaway.com/letters/2011ltr.pdf
Buffett has always said his job is to increase the ture or intrinsic value per share of Berkshire at a rate higher than the total return on the S&P 500 index. He uses accounting book value as an under-stated measure of progress. If he can do this the stock price will follow. In 2011 book value increase4.6% which beat the total return on the S&P 500 which was 2.1%.
Since Buffett took over Berkshire in 1965 its book value per share has increased at a compounded rate of 19.8% annually, which just over twice the compounded return on the S&P 500 (including dividends) which was 9.2%. By beating the S&P 500 by 10.6% per year Buffett has grown the book value per share of Berkshire by a staggering 513,055%. The S&P 500 total return over that period was 6,397%. A dollar of book value in Berkshire has grown to $5130 while a dollar in the S&P 500 has grown to $64.
However Buffett is quick to point out that we should account for inflation. The purchasing power of a dollar has decreased such that it takes over $7 (on average) to buy what $1 bought in 1965. Let’s assume it is exactly $7 for the sake of round numbers. Dividing by 7, the real return in purchasing power of the book value a Berkshire share has gown by 513,055% / 7 = 73,294%.
And the share price market value has grown somewhat faster than its book value per share.
Remarkably, Berkshire shares that were about $15 in 1965 today sell for $120,000 each. A gain of an even 800,000%. It takes 1500 B shares to make an A share. Accordingly the B shares trade at $120,000 / 1500 or $80 per share. (I don’t have the exact price of Berkshire in 1965 and it would have fluctuated through the year, Buffett’s average cost to acquire control of Berkshire was under $15 but some of those purchases were prior to 1965).
Remarkably enough, the equivalent of a B share in 1965 would have cost about $15/1500 or 1 cent. So, each penny invested in Berkshire in shares in 1965 is now worth $80. Even after inflation that means each penny’s worth of real purchasing power has been transformed into $11.43 today. A gain of 114,300%.
I’d be surprised if any public company has EVER provided a return of over 100,000% in real after-inflation purchasing power since 1965. Perhaps Apple has, and if so, that would be over a shorter time.
And I am highly confident that we will see Berkshire’s shares continue to grow in terms of both booth value and market value over the next few years in particular.