Full afternoon Q&A session from the 1997 Berkshire Hathaway Annual Meeting with the world’s richest man and most successful investor, Warren Buffett and his partner, Charlie Munger.
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PM 1997 Berkshire Hathaway Annual Meeting With Warren Buffett, Charlie Munger - Full Q&A
I used to have a friend that was a stock salesman many years ago and when you'd have lunch with him he would just keep going like this and finally would get to say what's that and he say that's opportunity. He was pretty good. OK let's. Kelly tells me we should start with number two. Zone 2 so we're going to start with two. Yes I'm Fred Coker from Boulder Colorado. And this is a question about intrinsic value and it's a question for both of you because you have written that perhaps you would come up with different answers. You write and speak a great deal about intrinsic value and you indicate that you try to give shareholders the tools in the annual report so they can come to their own determination. What I'd like you to do is expand upon that a little bit. First of all what what do you believe to be the important tools either in the bircher annual report or other annual reports that you review in determining intrinsic value. Secondly what rules or principles or standards do you use in applying those tools. And lastly how does that process that is the use of the tools the application of the standards relate to what you have previously described as the filters you use in determining your valuation of a company.
If we could see in it looking at any business what its future cash inflows or outflows from the business to the owners or from the owners would be over the next we'll call it 100 years or until the businesses are extinct and then could discount that back at the appropriate interest rate at which I'll get to in a second. That would give us a number for intrinsic value. And I was it would be like looking at a bond that had a whole bunch of coupons on it that was doing 100 years. And if you can see what those coupons are you can figure the value of that bond compared to government bonds if you want to stick an appropriate risk rate in. Or you can compare one government bond with five percent coupons to another government bond with 7 percent coupons each one of those bonds has a different value because they have different coupons printed on them. Businesses have coupons that are going to develop in the future too. The only problem is they aren't printed on the instrument and it's up to the investor to try to estimate what those coupons are going to be over time as we have said and high tech businesses or something like that we don't have the faintest idea what the coupons are going to be when we get into businesses where we think we can understand them reasonably well we're trying to print the coupons out we are trying to figure out what businesses are going to be worth in 10 or 20 years. When we bought See's Candy in 1972 we had to come to the judgment as to whether we could figure out the competitive forces that would operate the strengths and weaknesses of the company and how that would look over a 10 or 20 or 30 year period. And if you attempt to assess intrinsic value it all relates to cash flows.
The only reason for putting cash into any kind of an investment now is because you expect to take cash out not by selling it to somebody else because that's just a game of who beats who buy buy in a sense of what the asset itself produces. That's true if you're buying a farm it's true if you're buying if you're buying a business. And the filters you described were there are a number of filters which say to us we don't know what that business is going to be worth and in 10 or 20 years and we can't even make an educated guess. Obviously we don't think we know the three decimal places or two decimal places or anything like that what precisely what's going to be produced but we have a high degree of confidence that we're in the ballpark with certain kinds of businesses the fillers are designed to make sure we're in those kinds of businesses. We basically use long term risk free government bond type interest rates to think back in terms of what we should discount at. And you know that's that's what the game of investment is all about investment is putting out money to get more money back later later on from the asset and not by selling it to somebody else but by what the asset itself will produce. If you're an investor.