Decoding Warren Buffett: Book Value vs. Market Value
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What news headlines open the episode and why do they matter to investors?
With your money briefing, I'm J.R. Whalen at The Wall Street Journal in New York. When Warren Buffett speaks, people listen. But when the Oracle of Omaha spoke of book value versus market value last week, it caused quite a stir. We'll sort out the method behind the message in a moment. First, these money and market stories you should know. CEOs from the nation's top three credit reporting agencies went before a Democratic House panel on Tuesday as Congress considers new legislation with regard to fixing inaccuracies in consumers' credit reports. A new proposed bill calls for a new right for consumers to challenge errors in their credit reports, also bars employers from using credit reports to screen job applicants, and allows greater power for the Consumer Financial Protection Bureau to regulate the industry.
The CEOs pushed back against the need for new legislation, saying they have made significant improvements to their systems and practices in recent years. The CEO of Equifax told lawmakers that since the massive 2017 data breach at the company, it has increased the technology spending by a billion dollars. The company is also investing more to help consumers access their data and fix errors more easily. Meanwhile, the reopening of the government in January sparked a strong uptick in consumer confidence in February.
How did Congress and credit bureaus respond to proposed consumer credit reforms?
The conference board, which surveys consumers, says that households' outlook for jobs and pay was also generally more favorable. The so-called labor differential, which shows the gap between survey participants who say that jobs are plentiful and those who indicate jobs are hard to get, hit an 18-year high in February. The report also showed that future inflation expectations continued to fall, hitting the lowest level in about 15 years. And the unemployment rate among Americans with disabilities has fallen dramatically, but the disabled remain disproportionately employed by governments and in low-wage occupations. The Labor Department says the jobless rate for disabled Americans fell to 8% last year, and that was the lowest rate in a decade,
of comparable records and well below a peak of 15 percent in 2011. But despite the gains, people with disabilities were more likely to work in public sector jobs in low-wage occupations and to be self-employed. Last year, 14.1 percent of employed persons with disabilities worked for a government entity compared with 13.4 percent of those without disabilities.
Berkshire Hathaway CEO Warren Buffett sent a chill through financial circles when he announced in his annual letter to investors last week that he would no longer report Berkshire's wealth creation in terms of book value. But was there some method behind the move that surprised some? Wall Street Journal Heard on the Street Deputy Editor Spencer Jacob joins us to discuss. So Spencer, just to lay things out, what does book value of a company indicate?
So book value is a by-the-book accounting measure. It shows the assets and the liabilities of a company and the value that accrues to shareholders. It's very hard to fudge. Market value moves up and down the whims of the market. It depends how
What does the February consumer confidence and labor differential report reveal?
how optimistic people are about something. And so people were a little bit surprised because Warren Buffett has not really paid a lot of respect to the market. In other words, he's gotten rich off of the market's irrationality. And so people read a lot into this move to say like, well, maybe now he thinks the market is more rational than accounting measures. And is he losing it or is he sort of straying from his views? And that is not the case, but it's easy to think so.
And Buffett feels that using book value as a barometer doesn't provide always a fair or accurate reading of a company's overall value?
That's right. So if you look at what Berkshire was and has become, you get to kind of understand it. He took it over. It was just kind of a failing textile company that he turned into an investment vehicle. And he said when he took it over, the book value of that textile company way overstated the value of the company.
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Chapters
7 chapters
1
What news headlines open the episode and why do they matter to investors?
0:05–1:22
2
How did Congress and credit bureaus respond to proposed consumer credit reforms?
1:22–3:16
3
What does the February consumer confidence and labor differential report reveal?
3:16–4:53
4
Why did Warren Buffett stop using book value to report Berkshire’s wealth creation?
4:53–6:35
5
How does book value differ from market value and why does it matter for Berkshire?
6:35–7:59
6
How do share repurchases and Berkshire’s operating subsidiaries widen the book–market gap?
7:59–8:53
7
What does Buffett’s shift to market value signal about his investing philosophy?
8:53–9:03
Speakers
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