At a recent celebration of the 100th Anniversary of Forbes Magazine, Warren Buffett predicted that the Dow Jones Industrial Average (DJIA) will reach 1,000,000 in 100 years. Since the DJIA is currently at 22,350, this would require a compounded annual return of 3.9% over this time period.
If the DJIA will reach 1,000,000 in 100 years, then how long will it take for Warren Buffett’s Berkshire Hathaway (class A) shares to reach $1,000,000? At their closing price of $273,139 on September 22, 2017, these shares will reach this target price in 16 years if Berkshire matches its compounded annual gain in its price per share of 8.5% that it has achieved over the past 10 years. If its growth rate matches that of the S&P 500 with dividends included over the past 50 years of 9.7%, Berkshire will reach $1,000,000 in 14 years.
Berkshire’s compounded growth rate in share price over its 52 year history has equaled 20.8% per annum. Since this performance has more than doubled that of the S&P 500 over this time period, it is not unreasonable for Berkshire to continue to outperform this index and reach $1,000,000 per share sooner.
Berkshire Hathaway’s assets are largely comprised of over 90 largely autonomously managed companies in numerous industries. Its businesses are well-managed as is its portfolio of common stocks. With $100 billion in cash on its balance sheet and generating over $1 billion in free cash flow per month, Berkshire is likely to make major additions to both its stable of companies as well as its common stock portfolio. These additional investments will provide a steady source of growth in earnings as well as to its share price over time.
Warren Buffett’s magic number of 1,000,000 will be achieved for Berkshire’s common stock long before it is attained for the DJIA.
(Note: Berkshire Hathaway class B shares closed on September 22, 2017 at $181.86. Since they are valued at 1/1,500 of each class A share, their price when Berkshire class A shares reach $1,000,000 would be $666.67 per class B share.)
Article by Dr. David Kass