Warren Buffett And Charlie Munger: Discounted Future Earnings Method

Warren Buffett And Charlie Munger: Discounted Future Earnings Method

Warren Buffett and Charlie Munger get questioned on the details of business valuation and discounted future earnings. From the 1995 Berkshire Hathaway annual meeting.

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Warren Buffett And Charlie Munger: Discounted Future Earnings Method

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Keith Bryer from San Francisco. I have a question when you're valuing the companies and you discount back the future earnings you talked about how many years out you generally go and you don't go out of general a number of years. How do you arrive at that time period.

I'd say a very good question and it's I mean it's the heart of investing are buying businesses which we regard as the same thing. But… And it is the framework in which we operate. I mean we are trying to look at businesses in terms of what kind of cash can they produce if we're buying all of them or will they produce if we're buying part of them. And there's a difference. And then at what discount rate. The way to bring it back and I think your question was how far out do we look and all that despite the fact. That we can define that in. A very kind of simple and direct. Equation. You know we are we've never actually sat down and written out a set of numbers that right that equation we do in our heads in a way obviously. I mean that's that's what it's all about. But there is no piece of paper. And we never there never was a piece of paper that shows what our calculation on Helberg Hersey's candy or the Buffalo News was in that respect. So it would be attaching a little more scientific quality to our analysis than there really is if I gave you some gobbledygook about while we do it for 18 years and stick a terminal value on and do all of this. We are sitting at the office thinking about that question with each businesses or each investment and we have discount rates in a general way in mind. But we really like the decision to be obvious enough to us. That it doesn't require making a detailed calculation and. It's the framework. But it's not applied in the sense that we actually fill in all the variables that are far away setting a term.

Yeah. Berkshire is being run the way Thomas Margon the great Nobel laureate ran the biology department at Caltech. He banned the freedom calculator which was the computer of that era and people said how can you do this. Everyplace Zoltan Kelt Keltec we have freedom calculators going everywhere. And he said well we're picking up these great nuggets of gold just by organized common sense and resources are short and we're not going to resort to any damn placer mining as long as.

We can pick up these major aggregations of gold. That's the way Berkshire works. And I hope the placer mining arrow will never come. Somebody once subpoenaed our staffing papers on some acquisition. Of course not only did we not have any stabbing papers we didn't have any staff.


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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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