Book value fell out of fashion for a good reason. For most modern companies it measures the wrong things: it capitalises factories and ignores brands, software, research and customer relationships. A company whose value is its engineering team carries almost none of that value on its balance sheet, so the ratio of price to book tells you nothing except how capital-light the business is.
Berkshire is the exception, and it is worth being precise about why — because the exception does not generalise, and the moment you use the multiple carelessly you are back to comparing a railroad with a software company.
The reason is composition, not accounting
Roughly a quarter of Berkshire's book value is Treasury bills and cash. Another large slice is a portfolio of quoted equities carried at market value, marked every quarter by the market itself. For those assets, book value is not an estimate. It is the number.
That is what makes the multiple usable here. When most of what you own is marked to an observable market, book value becomes something close to a floor — not because accounting is generous, but because a Treasury bill is worth what a Treasury bill is worth.
Twenty-six years, and almost no help from the multiple
Here is the argument the rest of this note rests on, in one picture. Book value per share and the share price, from the 1999 year end to the latest close.
Book value per share compounded at 10.5% a year over 26.5 years, from $24.55 to $348.26 — a 14.2× increase. The share price compounded at 10.6%, from $36.60 to $546.97, a 14.9× increase.
Those two numbers are a tenth of a point apart, and that is not a coincidence. A share price is book value multiplied by whatever the market will pay for it, so the return a shareholder earns decomposes into exactly two parts:
price growth = book value growth × change in the multiple
The multiple did almost nothing. It was 1.49× book at the end of 1999 and it is 1.57× today — a drift of 5.4% in total, which spread over the whole period is about 0.2% a year. Set beside a 14.2× rise in book value, it rounds to nothing.
Which leaves only one candidate for where the money came from. Berkshire pays no dividend, so every dollar of profit it keeps lands in book value and stays there. Book value grew 14.2× because retained earnings were reinvested and the returns on them were retained in turn. Essentially the entire twenty-six-year return to a Berkshire shareholder is the compounding of retained earnings inside the company, not a re-rating of the stock.
That is a stronger claim than it may look, and it is worth saying what would falsify it. If the multiple had gone from 1.5× to 3×, half the return would have been the market changing its mind, and the next twenty-six years would start from a much worse place. It did not. Berkshire's shareholders were paid by the business, at roughly the rate the business earned, and they are not sitting on a multiple that has to keep expanding to make the record look good.
It is also why the multiple is worth quoting here at all. A price-to-book ratio is only informative when book value tracks the thing being valued. On this record it has — for twenty-six years, within five per cent.
Where it still understates
The operating businesses are the other half, and there book value does what it does everywhere else: it understates. BNSF sits on the balance sheet near its 2010 acquisition cost. GEICO's economics — a cost advantage built over fifty years — appear nowhere. Fifteen years of retained earnings reinvested inside the manufacturing businesses show up as plant, not as the earning power that plant produces.
So the multiple of book is a deliberately asymmetric measure: roughly accurate on the financial half, systematically low on the operating half. That is why the scenario range on the main valuation lands between 1.38× and 1.58× book rather than at 1.0×, and why the gap has been reasonably stable for twenty-six years.
How to use it
Use it as a cross-check, never as the valuation. The question it answers is narrow but useful: is today's price unusual relative to what the market has historically paid for this particular mix of assets? It cannot tell you whether that historical range was itself sensible.
For that you need the sum of the parts — and an opinion about what Berkshire does with its cash.