Warren Buffett on intrinsic value. Intrinsic value definition: Intrinsic value is the number you get if you can predict all the cash the business can give you between now and judgement day.
Warren Buffett Intrinsic Value Formula - To calculate intrinsic value you have to use the discounted present value of the future cash flows.
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We are going to discuss the above more in depth tomorrow in a video explaining how to calculate intrinsic value step by step. Now, enjoy Warren Buffett on Intrinsic value.
The following is a computer generated transcript and may contain some errors.
Warren Buffett - Intrinsic Value Definition
Hello, Mr. Buffett, I got two short questions. One is how do you find intrinsic value in a company?
Well, intrinsic value is what is the number that if you were all knowing about the future, and could predict all the cash that the business would give you between now and Judgement Day, this counter to the proper discount rate. That number is what the intrinsic value of businesses in other words, the only reason for making an investment in laying out money now is to get more money later on. Right? That's, that's what investing is all about. Now, when you look at a stock when you look at the bottom, so make the United States government very easy to top, but you're gonna get back, it says it right on the bottom, it says when you get the interest payments, it says when you get the principal. So it's very easy to figure out the value of a bond, it could change tomorrow, if interest rates change, but you are the cash flows are printed on the bond, the cash flows aren't printed on a stock certificate, that's the job of the analyst is to print out, change that stock certificate, which represents an interest in the business and change that into a bond and say, This is what I think it's going to pay out in the future. When we buy, you know, some new machine for Shaw, make carpet, that's what we're thinking about. Obviously, you'll learn that in school, but it's the same thing for a big business it if you buy Coca Cola today, the company is selling for about 110 to $15 billion in the market. The question is, if you had 110 or 15 billion, you wouldn't be listening to me, but I'd be listening to you instantly. But the question is, when you lay it out today, to get what the Coca Cola company is going to deliver to you, over the next two or 300 years just got right doesn't make much difference after as you get further out. But and that is a question how much cash they're gonna give you? Isn't a question of, you know, the question how many analysts are going to recommend that or what the volume and the stock is, or what the chart looks like earning? It's a question how much cash it's gonna get. That's the only reason it's a truth. If you're buying a farm, it's true. If you're buying an apartment house, and a financial asset, oil in the ground, you're laying on cash and how to get more cash back later on. And the question is, is how much you're going to get? One you're going to get it? And how sure are you. And when I calculate intrinsic value of a business, when we buy businesses, and whether we're buying all of a business, or a little piece of a business, I always think we're buying the whole business because that's my approach to it. I look at it and say, what, what will come out of this business and when. And what you really like, of course, is them to be able to use the money they earn, and earn higher returns on it as you go along. I mean, Berkshire has never distributed anything to its shareholders. But its ability to distribute goes up as the value of the businesses we own increases. We can compound it internally. But the real question is Berkshire selling for we'll say 105 or so billion now? What can we distribute from that? 100? If you're going to buy the whole company for 105 billion Now, can we distribute enough cash to you soon enough to make it sensible at present interest rates? to lay out that cash now? And that's that's what it gets down to? And at the end? If you can't answer that question, you can't buy the stock. You know, you can you can gamble in the stock if you want to, or your neighbours can buy it. But if you don't answer that question, and I can't answer that for, for Internet companies, for example, there's a lot of companies all kinds of companies I can't answer it for, but I just stay away from us. Number two, so you get formulas involved in finding trinsic values on certain companies. I mean, you got a mathematical system set up just got a present value of future cash. Second question is, why haven't you written down your set of formulas or your strategies in written form so that you can share with everyone else?
Well, I think I actually have written about that. If you read the reports over the recent years, in fact, the most recent report, I use what I've just been talking about use the illustration of Aesop's because their Aesop was in 600 BC. smart man wasn't smart enough to know was 600 BC, though, I mean, we'll take a little foresight. But he saw, you know, in between tortoises inherits all these other things, he found time to write about Burj, and he said, a bird in the hand is worth two in the bush. That isn't quite complete. Because the question is, how sure are you that they're two in the bush? And how long you have to wait to get them out? Now, he probably knew that but he just didn't have time because he had all these other powers to write and had to get on with it. So but he was halfway there. And 600 BC. That's all there is to investing is. How many birds are in the bush? When are you going to get them out? And how sure are you now if interest rates are 15% Roughly, you've got to get two birds out of the bush in five years equal the bird in the hand. But if interest rates are 3%, and you can get two birds out in 20 years, it still makes sense to give up the bird in the hand, because it's all gets back to discounting against an interest, an interest rate. Promise, often you don't know, you know, not only how many birds in the bush, but in the case of the internet companies, there weren't any birds in the bush. But they still take the bird that you give them in the hand that but I actually have written about this sort of thing and stealing heavily from Aesop UI router, some 2600 years ago, but I've been behind on my reading