Chris Bloomstran

AI Summary

→ WHAT IT COVERS Chris Bloomstran of Semper Augustus joins Stig Brodersen to assess Berkshire Hathaway's 2025 intrinsic value at approximately $1.25 trillion (B shares worth ~$5.70), analyze Greg Abel's first shareholder letter, examine why reported operating earnings misled markets by nearly $3 billion, and evaluate broader S&P 500 valuation risks tied to record profit margins of 12.8% against a 26x earnings multiple. → KEY INSIGHTS - **Berkshire Intrinsic Value Framework:** Bloomstran uses four reconciling valuation methods — sum-of-parts, GAAP-adjusted economic earnings, 175% of book value, and the classic two-prong per-share method — averaging them to reach ~$1.25 trillion market cap intrinsic value. Book value grew 10.5% in 2024, driven by a 13.7% total return on the stock portfolio including Japanese trading companies. The B shares trade at roughly $0.85 on the dollar of fair value, representing a meaningful discount worth acting on. - **Operating Earnings Misread:** Berkshire's reported 2024 operating earnings appeared to fall nearly $3 billion year-over-year, triggering negative media coverage, but the actual economic picture was a $1.1 billion increase. Key distortions included $1.7 billion in yen currency translation swings, $600 million in reserve development differences, and $1.1 billion in incremental goodwill write-downs that Berkshire includes in operating earnings while most companies exclude them. Investors should strip these non-recurring items before drawing conclusions. - **GEICO's Profitability Cycle:** GEICO underwrote at an 85% combined ratio in 2025 — a 15% pretax margin versus its historical norm near breakeven for the broader auto insurance industry. To capture volume during this hard market, GEICO spent over $1 billion more on advertising, growing policies-in-force by 5%. Bloomstran flags that pricing pressure will intensify as competitors lower rates, making GEICO's current profitability unsustainable at this level and warranting a normalized underwriting assumption of roughly 95% combined ratio. - **Greg Abel Capital Allocation Test:** Abel's credibility as Buffett's successor will be judged not by his first letter but by how aggressively he deploys Berkshire's $270+ billion in investable cash during the next recession or financial crisis. Buffett acknowledged underdeploying in 2008-2009. With $40 billion annually generated by operating companies added to existing cash, Abel must be willing to commit roughly $300 billion opportunistically. Holding cash earning 3% while equities compound at 10% creates an irreversible compounding gap within five to six years. - **S&P 500 Margin and Multiple Risk:** The S&P 500 trades at 26x earnings against a 12.8% profit margin — the second-highest in global stock market history. Three percentage points of margin expansion came from lower interest rates, one point from the corporate tax cut to 21%, and the remainder from capital-light tech businesses. Bloomstran's five-factor return model (sales growth, share count change, multiple, margin, dividend yield) makes it mathematically difficult to generate more than 5% forward returns, with a decade-long loss scenario plausible if margins revert toward 10%. - **AI CapEx Return Problem:** The four major hyperscalers spent nearly $400 billion in CapEx in 2024, generating only ~$30 billion in incremental AI-related revenue. On a straight-line ten-year depreciation schedule, that CapEx alone creates $40 billion in annual depreciation expense exceeding current revenues. Cumulative projected spending of $3 trillion over five to six years requires $450 billion in incremental profit to generate a 15% return — a figure that dwarfs the combined cash flow from operations of Microsoft, Meta, Google, and Amazon today. - **Share Repurchase Illusion:** S&P 500 companies will likely exceed $1 trillion in buybacks in 2025, representing roughly 44% of net income, yet the aggregate share count has risen 3.3% since June 2020 and grown 1.8% over 25 years. Executives receive 2-3% of shares annually through compensation, fully offsetting repurchases. Bloomstran's framework: buybacks only create shareholder value when executed below intrinsic value without leverage, as Berkshire does — not as a mechanism to offset dilutive executive compensation packages tied to EBITDA or revenue growth hurdles. → NOTABLE MOMENT Bloomstran calculated that Berkshire Hathaway could have declined 99.26% in share price from Buffett's 1965 starting point and still outperformed the S&P 500 — including a scenario where an investor bought the market at its single best entry point in history, June 1, 1932, after an 86% crash. Berkshire's $6.1 million per $100 invested dwarfed the S&P's $4.4 million over a shorter period. 💼 SPONSORS [{"name": "Oslo Freedom Forum", "url": "https://oslofreedomforum.com"}, {"name": "Plus500", "url": "https://plus500.com"}, {"name": "NetSuite by Oracle", "url": "https://netsuite.com/tip"}, {"name": "Vanta", "url": "https://vanta.com/tip"}, {"name": "Shopify", "url": "https://shopify.com/tip"}] 🏷️ Berkshire Hathaway Valuation, Intrinsic Value Analysis, Greg Abel Leadership, S&P 500 Profit Margins, AI Capital Expenditure, Share Repurchase Mechanics, Insurance Underwriting Cycles