Warren Buffett is always searching for a bargain. And right now, he sees one in his own stock price…
“The surest way to make money is to buy your own dollar bills for $0.80 or $0.90,” the legendary investor said last week on CNBC.
Berkshire Hathaway – Buffett’s holding company – currently trades for 1.35 times book value (a rough measure of liquidation value). At that price, Buffett is interested in buying up his own dollars by buying back Berkshire shares…
[ad#Google Adsense 336×280-IA]We were curious if Buffett’s buyback strategy was a real money maker.
So we put our True Wealth Systems computers on the case…
Finding historical Berkshire Hathaway data can be a problem.
But our database is so extensive, we have access to more than 30 years of price and price-to-book-value data on Berkshire.
During his interview with CNBC, Buffett said, “We feel the value of Berkshire is well over 120% of book.”
That’s 1.2 times book value. So we simply tested Buffett’s idea of buying Berkshire when it trades for less than 1.2 times book value. Based on history, it’s an incredibly profitable idea…
You see, since 1981, if you’d simply used a “passive” strategy of buying and holding Berkshire for five years, your average annual gain would be 19% across any five-year period.
That is a fantastic buy-and-hold return, of course. But if you waited for Buffett’s buy signal… you would’ve made much more money…
By simply buying when Berkshire is below 1.2 times book and holding for five years, your average annual gain increases to 34% a year. That’s nearly twice the annual gain. And with compounding, it more than doubled your average five-year return…
The same holds true over shorter (three-year) and longer (10-year) holding periods…
Simply following Buffett’s advice to buy Berkshire’s stock below 1.2 times book – rather than buy and hold – leads to much larger long-term gains. And the effects of compounding make those gains even larger over time.
The only problem: You don’t get many shots to buy Berkshire at that level. In our study… the opportunity cropped up only seven times in 32 years…
Today, Berkshire is above the book value threshold we used, but not by much… As I said, it’s trading at 1.35 book value. The stock is not expensive, even at this price.
The history is clear, and Buffett is right. Buying shares of Berkshire at a great value is a great long-term strategy. Take advantage of it!
Good investing,
Steve Sjuggerud and Brett Eversole
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Source: DailyWealth