Zooming Out On Berkshire Hathaway | The Acquirer's Multiple®

During their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discussed Zooming Out On Berkshire Hathaway. Here’s an excerpt from the episode:

Bill: Jake, let’s do the veggies.

Jake: Yes, sir.

Bill: Hopefully, it’s about how all of the processing in electronic vehicles is in China and how we’re finding out our– [crosstalk]

Bill: No.

Bill: No? Okay.

Jake: We’re going bigger than that.

Bill: Nice.

Jake: We might be afraid to dream a little bigger, darling.

Bill: The universe?

Jake: This is the universe. We’re going to be talking about different zoom lenses that we can imagine about the universe. This was inspired by a book called Just Six Numbers by Martin Rees. It’s a weird book. It’s mostly about cosmology, but there’s some really interesting analogies about the size and scope of the universe, and also these weird tunings of how the universe is constructed in the sun.

For instance, if gravity was that much stronger than it is in the universe, then our sun would basically deflate and implode. If the nuclear energy release that happens was any stronger than it is, our sun would basically blow itself apart. And so, there’s this constant tension of gravity holding the sun tighter, and then it exploding itself apart, and it lives in this pretty perfect sphere at that point. If you tuned it just a little bit differently, basically the universe wouldn’t exist. And so, there’s these numbers that they point out that this physicist points out that really are like so– They’re down to the 10,000th of a decimal level. If they’re just a little bit different than what they are, we wouldn’t have the periodic table, it’s nonstarter stuff. Anyway.

So, this is a thought experiment that I think is fun for us. So, let’s imagine that you’re sitting on a blanket in a nice green lawn. If we were to zoom out a bit, say a few meters, we’d see you laying down, relaxing, maybe pondering the universe. And now, let’s imagine that same scene, but from successively more remote viewpoints, and each one is 10 times further away than the previous one, okay?

So, the second frame out would show that you’re in the middle of a patch of grass. And then the third one out would show that you’re in a public park. And now we do a fourth one out, and we see some tall buildings near you. And a fifth one out, and we see that it’s an entire city. And the next one out shows you’re almost at the Earth’s horizon, and it’s noticeably curved. And two more frames out, and then we see that quintessential image of the 1960s that’s like the pale blue dot, the entire Earth with its continents and oceans and clouds. Then three more leaps out, and you see our inner solar system with the Earth orbiting the sun, and Mercury, and Venus inside of it.

Four more frames out, and we’re already a few light years away, and our sun looks like a star among all of its neighbors. Three more frames out, and we see billions of stars in a flat disk that makes up our Milky Way. Three more leaps out from that, and it shows that the Milky Way is this spiral galaxy. The next leap out shows that our galaxy is just one of hundreds that make up the Virgo cluster. A further leap out, and the Virgo cluster itself is a rather modest cluster compared to all of the ones around it. In this series, we’ve taken 25 leaps outward. So, it’s basically 10 to the 25th, each by a factor of 10.

The next set of frames zoom in by a factor of 10 instead of out. Let’s call 1 meter. Less than 1 meter, we see your arm. The next one in, we see a few centimeters, and maybe it’s just a patch of skin, for instance. Next frame in takes us into the texture of your human tissue. After that, you have individual cells. Then after that, we’re at the limits of a powerful microscope, and that’s where we’d see individual molecules, these long, tangled strings of proteins. The next zoom in would reveal individual atoms. And then after that, inside the atoms, we have these swarms of electrons that are surrounding a positively charged nucleus. A few more frames, and now we’re only making educated guesses as to what’s in there, based on what happens when we accelerate particles, and ram them into each other, and we see what comes out when they’re going, the speed of light when they hit each other, or near the speed of light, I should say.

So, basically, there’s 60 frames that are 10X that we’ve covered between our entire universe, and all the way down into our subatomic particles. Our current measurement systems, the instruments that we have only cover about 43 frames of these 60 frames. The other ones are inferred from math, and our understandings. Our ordinary human experience is only 9 frames of the 60 frames. So, our senses, when we’re just going about our daily lives, we have 9X, 10 to the 9th.

So, the takeaway is that the universe is this vast range of scales, most of which– they stretch larger and far smaller than the dimensions of our everyday sensations. So, what I thought it’d be fun to do was to bring this back to our world is, let’s look at all the different scales that Berkshire operates at. We’ll use dollars instead of meters as our measuring stick, and let’s just see what comes out of it. We’re not going to learn anything, but it’s just fun. So, no doubt, there’s got to be some pennies in a cash register somewhere at one of the Berkshire companies. So, the first one that we have is one 100th of a dollar as our smallest data point. Two frames zoomed out from that, and we see See’s Candy selling at a sucker for a dollar. Or, at least maybe you can go into the See’s Candy and smell some chocolate for a dollar at this point. I think that’s–

[laughter]

Jake: One more frame out, and we have Pampered Chef that’s selling a nice-looking spatula for $10. Another frame after that, and you can buy $150 pair of Brooks shoes. Another frame from that, and maybe it’s $2,000 of customer lifetime value for a GEICO policyholder. Another frame after that, and you have a Clayton home that you can buy for $70,000. Next one up is Warren’s famous salary of $100,000. Revenue per employee is almost a million dollars for Berkshire. One after that, or we could use Todd and Ted’s salary of $1 million if we wanted for that data point. There’s $40 million worth of Mondelez in the portfolio. Two more frames, and we find Charlie Munger with his $2 billion worth of Berkshire stock. Two more frames after that, and we have Berkshire’s cash pile of $130 billion. Maybe one last frame is $950 billion in assets that will round up to $1 trillion.

So, that gets us from our range from a penny all the way up to a trillion dollars for Berkshire. And so, that’s 15 frames of a 10X scale compared to our standard observations of 9, and what we can observe in the universe of 43.

Tobias: Well done.

Jake: If we wanted to get cute, we could probably add a couple more frames of like, “Oh, Berkshire operates in a $23 trillion US economy or $100 trillion-dollar global economy,” but I think we’re already starting to stretch it at this point, so let’s just quit while we’re way behind.

Tobias: [laughs] Good job, JT. That was wild. I actually thought you were going to go in a slightly different direction there. I thought you’re going to say this scale– [crosstalk]

Jake: I probably should have.

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