First thing first, the purpose of this post is to invite discussion and hopefully a healthy one. Specifically, I point out the upper bound on the valuation multiple the Oracle seems to have been practising all his life. The few times he broke his rule, he regretted and had to take write off charges. I also fully acknowledge that there are various flavours of "value" investing and for this reason, this post might not resonate with everyone.
Over the last couple of weeks, I have been going through all of the purchases Mr Buffet has made over his lifetime (especially the big ones). And then I started noticing that most of his big hitters were purchased at less than 10-11x pre-tax earnings. Some examples below.
* See's Candies (1972): \~5.5x pre-tax earnings
* Washington Post (1973): \~4x pre-tax earnings
* AMEX (1964/1994): \~6.9x pre-tax earnings
* KO (1988): \~10.1x pre-tax earnings
* PetroChina (2003): \~2.5x pre-tax earnings
* BNSF Railway (2009): \~10.3 pre-tax earnings
* Apple (2016): \~8x to 12x pre-tax earnings
* Lubrizol (2011): \~11.7x pre-tax earnings
* Japan Trading Houses (2020): \~5.0x pre-tax earnings
Lets talk about the **major exceptions:**
* Precision Castparts (PCP): \~14.3 pre-tax earnings (\~$37.2 billion against pre-tax income of $2.6 billion)
* He later wrote down the value by $9.8 billion, bringing it back down to \~10.5x pre-tax multiple
* General Re (1998): \~15x pre-tax earnings
* In 1998, Buffett acquired General Re using Berkshire stock. He later wrote that he "paid a steep price" and that the issuance of undervalued Berkshire shares to buy overvalued General Re shares was a mistake.
Additionally, in 2010 annual letter Buffett explained *"Now for the other half (non-insurance) of the valuation equation: Berkshire’s 2010 pre-tax earnings... were $5,926 per share.* ***Applying a multiple of 10 to this figure*** *delivers a value for the non-insurance businesses of $59,260 per share."....* he continues "*"If we were to use a* ***multiple of 12*** *(instead of 10), our valuation of the non-insurance businesses would increase to $71,112 per share..."*
This 2010 letter is the most concrete "proof" available where he systematised the 10x pre-tax rule for his own shareholders.
When I look at the valuation multiples in the current market, there are hardly a handful of names that meet this criteria. I also acknowledge there are multitudes of ways to skin the cat. This is NOT the only valuation method. But I am keen to hear what the community thinks of it?