Google!

Google is among a handful of companies that have made its stockholders trillions of dollars in gains since going public.  A share which you could have bought for a (split-adjusted) price of $2.51 at the end of 2004 could have been sold for $289.95 at the end of 2025.  That is a total return of 11,452% which works out to a Cumulative Annual Growth Rate  (CAGR) of  25.4% return every year for 21 years.  

The figure shows graphically some important financials about each share of Google stock over Google's 21 year experience as a public company.  Plotted are Price per Share, Book per Share, and Earnings per Share.  The plot is "semi-logarithmic" meaning that while the x-axis shows the years from 2004 through 2025 spaced evenly (linearly), the dollar values plotted on the y-axis rise exponentially, with each major tick on that axis representing a dollar value 10X higher than the previous tick.  The logarithmic y-axis allows us to show particular annual growth rates (CAGRs) as straight lines on the plot.  

Each series of data is "smoothed" by fitting it to a best fit straight trend line.  The exact CAGR for that fitted trend line is indicated on the graph.  Because the best-fit trend line for Price, Revenue, and Earnings are nearly parallel lines on the plot, they are all arising from CAGRs that are nearly the same in value, all three are fitted by about a 23% CAGR.

That the values of a share price, the revenue per share, and the earnings per share all grow at about the same CAGR makes sense if one considers the fundamental purpose of buying a share of stock is to purchase the future cash flows associated with that stock.  The Earnings/share each year are the cash flows the company has earned associated with that share, so it makes sense that as those earnings grow at about 23% CAGR, the share price would grow at about 23% CAGR.  

That the Revenue/share also grows at about 23% CAGR means that the profit margin of Google has not changed much over the entire 24 year period shown.  In fact, the profit margin for the trendlines shown has risen smoothly from 15.1% in 2004 up to 16.5% in 2025, so the profit margin has trended slightly upward over time.  

If the purpose of owning a share of stock is to own all the earnings over time associated with that stock, then the ratio of annual earnings to stock price is the rate of return of the stock investment.  For the trendlines shown in the figure for Google, The return of the stock in 2004 is 3.2%, and over the 21 years to 2025, that return has slowly fallen to 2.8%.  So over time, the purchasers of Google's shares have been willing to pay slightly more for each dollar of cash flow.  The reasons for this are probably many and varied, but one likely reason is that, over time, as Google has consistently grown the amount a share of stock earned by 23% per year, the people buying the shares have been more and more confident that future earnings would continue to go up reliably, and so have been willing to pay a little more for that growing stream of earnings as their confidence increased.  

What will Google do in the future?  You may have heard that the past performance of a share of stock is no indication of how that stock will perform in the future.  In fact, past performance of Google stock has historically been an excellent indicator of how the stock would perform in the future, hence the straight and parallel trend lines stretching out over 21 years on the figure.  Does that mean Google is guaranteed to keep going up by 23% per year?  No, it does not, there are no guarantees, especially about the future.  

An aspect of Google stock we will not cover here is that from 2018 through 2025 Google spent nearly $340 billion to "buy back" nearly 1.7 billion shares of its stock. But that it is something to talk about in a different blog post, perhaps.  

Berkshire Stock Price vs Book Value

In 2024, Predicting Berkshire Hathaway stock price from current "Price/Book" Ratio showed how the price performance of BRK stock over the next year was correlated with the current "Price/Book" ratio of the stock.  The suggestion was that if BRK continued performing how it had performed during the entire 21st century so far, that the performance of BRK stock over the next year or so could be predicted from the current Book price of the share of BRK stock.  

Here we look at much more history of the price of BRK stock and the Book value of that stock.  We consider data from 1965 through 2025, where 1965 is the year in which Warren Buffett bought a controlling interest in Berkshire Hathaway, and 2025 is the last full year we have had before this post is published.  The more extensive data does not negate the results from the previous post, which emphasized the ability of the investor to adjust her sense of urgency to invest depending on the ratio between current stock price and most recent book value per share.  But the larger take-away from the current work is more descriptive.  And that is the thesis that for BRK stock, Book value per share and Price of a share of stock appear to be imperfect, somewhat noisy measurements of some mysterious underlying feature of the stock, call it Intrinsic Value.  And to the extent that we believe Intrinsic Value changes slowly and smoothly, Book value per share looks like a lower-noise measurement of intrinsic value than Price of stock.  That is, when we look at the data below, we see Book value engaging in relatively small wiggles around the trend change in Book value, while we see stock Price engaging much larger wiggles around its trend line.  

But the larger truth is that, over 6 decades and 4.5 orders of magnitude, Price and Book seem to be tracking a long term smooth growth in value of BRK.  Not that we have any reason to doubt the value of Book value for estimating whether the current Price is on the high-ish side or the low-ish side at any given moment.  One can see price variations where buying that the most favorable time can boost returns over the next few years, while buying at the least favorable time can result in an investment which is flat or even slightly down over the next few years.  But the longer term story is: the stock goes up by about 10% APR, on average, and over many years, that growth swamps the bumps and wiggles of the short term.

The results are summarized in the plot below.  On here is a plot of the price of BRK.A, shares at the end for each year from 1965 through 2025.  Also on this same plot is the book value per A share for the stock at the end of each year from 1965 through 2025.

The most obvious trend is that BRK.A stock has been a tremendously good performer over these 60 years rising fairly continuously in price 36,792 X in those 60 years.  Also fairly obvious is that the stock price pretty much tracks the book value of the company over that time.  If all we concluded from this is that BRK stock goes through decades at a time of fairly predictable Book value growth which are reflected in decades at a time of fairly predictable stock price growth, we would know something which has certainly proved valuable to those who invested in the stock in the past, and might possibly continue into the future, just as it has continued into the future for the last 60 years.  

At this point an explanation for the fitted straight lines and the equations written next to them is due.  The straight lines are some form of fitted exponential curve, algorithm courtesy of Microsoft Excel.  The equation next to each of theses straight lines shows the values in the exponential fit.  The main point about these is they quantify the rate of growth of the Price or Book or whatever y-value quantity they are fitting.  

Looking at the very top equation, we see a term e^0.0931x.  The x-axis on these plots is measured in years.  This very top line applies to stock price values from 1998-2025.  So that very top line fitted to that exponential means the stock price from 1998-2025 great at an average rate of 9.31% APR (Annual Percentage Rate).  

The next line down are the Book values of a share of stock at the end of each year from 1998-2025.  These book value rose at 10.02% APR.  So the Book value of a share is rising slightly faster than the Price of a share during that time, on average the ration Price/Book falls slowly by about 0.7% APR. During that time, the P/B ranges from 1.18 in 2011 to 1.95 in 2001. 

Moving down and to the left, the two fitted lines on the graph show the increase of Price and Book for the stock from 1965 through 1998.  During this time, the exponential fit shows the Stock Price rises at 25.9% APR while the Book rises more slowly at 22.8% APR.  

We see from 1965-1979 that the Price is sometimes higher than Book, and sometimes lower than Book, meaning the Price/Book ratio varies during this interval between being <1 to being >1.  But the fitted trend line shows that, on average, Price/Book is rising by 3.1% APR, which is why in the figure we can see that after 1979, The Price/Book stays above 1, and rises through 1997 to a high of ~ 2.  

1998: Gen Re Acquisition

Looking at the full set of data, we see that, capturigin the essential picture:

1)    From 1965 through 1998, Stock and Book grew by about 25% APR

2)    From 1998-2025, Stock and Book grew by about 9% APR.

What happened in 1998 is easy to say, how it is related to a persistent decrease by more than a factor of two in the rate of earnings growth is not something we understand at all.  

The thing that happened in 1998 is that Berkshire Hathaway acquired a re-insurance company called Gen Re, by giving existing Gen Re shareholders shares of Berkshire Hathaway stock.  The deal was reported to be worth about $22 Billion and it was accomplished by expanding the outstanding share count of Berkshire Hathaway by ~22%.  

We know historically that for a few years after the acquisition, Berkshire sold off billions of dollars of options positions, taking losses in many cases from the valuations at which Gen Re had carried those positions on its books. One can see looking at the book value points for 1998 through 2002 that during that period, earnings stayed nearly constant (they grew 10% in 4 years), presumably reflecting the drag on earnings from liquidating overvalued options positions.  

But after the 1998-2002 flat spot in earings, Earnings begin growing again, and they then grow steadily from 2002 through 2025 with no signs of slowing down or stopping.  But there is one thing which is very different about the growth after 2002.  It is at about 10% APR instead of the 25% APR achieved up through 1998.

Summary and Conclusions

1. Growth at Berkshire Hathaway has been exponential since Warren Buffett took control in 1965.  Until 1998 that exponential growth rate was ~25% APR, but since 1998 it has been more like 9.4% APR.
2. There is nothing happening right now that we can see that suggests the ~9.4% APR rise will stop any time soon.
3. During its first 3 decades, stock Price/Book bounced around a little, but mostly rose smoothly from a bit below 1 up to a peak of nearly 2.
4. In 1998 Gen Re was acquired, the outstanding share count was increased by about 20%, and the growth rate of earnings dropped from 25% APR to about 10% APR.