Predicting the Oracle of Omaha

It is great pleasure to quantitatively assess the future of Berkshire Hathaway (NYSE: BRK-B). The Oracle of Omaha is considered as one of the greatest investors. Here we would like to introduce a deterministic model for a BRK-B share price. Berkshire Hathaway, Inc. is a publicly owned investment manager. The BRKB structure is highly diversified with interests from GEICO (car insurance) to Dairy Queen.

The model is deterministic since it has been obtained by decomposition of a share price into a weighted sum of two consumer price indices. One may follow up our simple assumption that the growth in the CPIs related to BRK-B, e.g. transportation service, TS, and dairy products, DAIRY, might be seen in the change of the pricing power for the studied company. These two CPIs are revealed as the drivers of the BRK-B price. However, they were actually selected using the LSQ method from a set of 92 different (not seasonally adjusted) CPIs. The best model predicting the monthly closing prices adjusted for dividends and splits has the smallest RMS error from July 2003 to March 2012.

We have borrowed the time series of monthly closing prices of BRK-B from Yahoo.com (the closing price for March 2012 is included) and the CPI estimates through February 2012 are published by the BLS. The best-fit model for BRKB(t) is as follows:

BRKB(t) = -0.802DAIRY(t-11) – 2.24TS(t-7) + 21.13(t-2000) + 584.66, March2012

where BRKB(t) is the BRK-B share price in U.S. dollars, t is calendar time. Figure 1 displays the evolution of the defining CPIs since 2002. Instructively, both indices are relevant to the BRK-B structure and have negative slopes. The DAIRY index likely has a larger impact on the growth of the price becasue of higher amplitude oscillations. The TS index is rather a linear line since 2002 with only a small positive fluctuation (negative impact on the price) in the end of 2008.

Figure 2 depicts the high and low monthly prices for an BRK-B share together with the predicted and measured monthly closing prices. The predicted prices are well within the limits of the share price uncertainty. The model residual error is shown in Figure 3 with the standard deviation between July 2003 and March 2012 of $4.73.

The accelerated growth in the DAIRY index since April 2011 induced a mid-term decline in the share price. This rise in dairy price did not come to end yet and we cannot exclude that the actual BRK-B price will return to the predicted level of $73 per share by the third quarter of 2012. The TS price index does not show any sign of deceleration and food price together with dairy products will likely be rising till 2014. If the model is right, we may observe in 2013 some further decline in BRK-B price.

Figure 1. The evolution of defining indices.

Figure 2. Observed and predicted monthly closing prices for a BRK-B share.

Figure 3. The model residual error: sterr=$4.73.