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Warren Buffett Guides A Shareholder To Calculating Intrinsic Value - YouTube
Channel: iValue Investing
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WARREN BUFFETT: If it doesnât take too long,
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weâll be glad to,
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although I think I know the
answer already.
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(Laughs)
[24]
AUDIENCE MEMBER: OK.
[26]
We ended 2003 with about 5.422Â
billion of operating earnings.Â
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I estimated our look-through earningsÂ
to be approximately 915 million.
[40]
So in total, that was about 6.337 billionÂ
of estimated look-through earnings.
[49]
I knew that we spent a
billion-two on CAPEX,
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and our net depreciation
on tangible assets
[56]
was 829 million. So, there was aÂ
difference there of 173 million.
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And we spent more on CAPEX over theÂ
appreciation, over the last few years.
[68]
But in extrapolating out 20 years,
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I thought I might be kiddingÂ
myself to ascertaining
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the differences between CAPEX and depreciation.
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And Iâm using look-through earnings
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as a rough proxy for
distributable earnings.
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And Iâve assumed
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that Berkshire can grow its look-throughÂ
earnings at 15 percent per annum,
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from years one to five, and at 10Â
percent per annum, from years six to 20.
[102]
And the business will stop growing after year 20,
[106]
resulting in a 7 percentÂ
coupon from year 21 onwards.
[111]
I discounted the cumulative flowsÂ
in years one to 20 by 7 percent,
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and I discounted the
terminal value by 7 percent.
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I added the two together,
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to get what I thought was the intrinsicÂ
value of Berkshireâs cash stream.
[128]
I knocked off 103 billion ofÂ
liabilities and minority interests.
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I divided by 1,537,000 shares,
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to arrive at what I thought was aÂ
conservative calculation of the range
[143]
of Berkshireâs intrinsic value.
[145]
Am I off the mark, or is that the sortÂ
of methodology you might use yourself?
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WARREN BUFFETT: Well
â (Laughter and applause) â
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well, youâve done your homework.
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(Laughter)
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The
[162]
The line of thinking is correct,
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it just depends on what
variables you plug in.
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And we might have different ideas onÂ
variables, and neither one of us knows.
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But
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the approach, in general, theÂ
approach of trying to figure out
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distributable cash over a period ofÂ
time. The business today is worth,
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the present value at someÂ
number â youâre using 7 percent,Â
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but the question of
what number to use â
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But itâs worth the present value
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of all the cash it can distributeÂ
between now and Judgment Day.
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And if cash can be retained, andÂ
itâs at a rate higher â it produces â
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at a rate higher than yourÂ
discount rate, obviously,
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youâll get some benefit
from that retention.
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But,
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you know, I would say thatÂ
your assumptions about CAPEX,
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and
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related to depreciation,
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I would expect CAPEX to be, on average,
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a little more than depreciationÂ
unless we run into highly inflationary
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times.
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But of course, we have to keep buying businesses,
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and using the capital inÂ
the business that we retain.
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If we retain those earnings, we haveÂ
to use that to buy more businesses.
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And then the question is, what kindÂ
of returns can we expect on those?
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I donât quarrel with
the approach youâre using,
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but, you know, everybody
has to do their own
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equation and plug
in some numbers.
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And I think we might settle for lower numbers on
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earnings gains than you postulatedÂ
because weâre very large,Â
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and itâs â it gets harder all the time
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to deploy the kind of fundsÂ
that keep flowing into Omaha.
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Charlie?
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CHARLIE MUNGER: Yeah, andÂ
you shouldnât necessarily getÂ
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overly excited about last
year, as Warren said,
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that was a very unusual year whenÂ
everything worked together pretty darn well.
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WARREN BUFFETT: Except
interest rates on â
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CHARLIE MUNGER: Yeah, well, butÂ
a lot worked together very well.
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The interesting thing about BerkshireâsÂ
present valuation is how much cash,
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and cash equivalents it has to do something.
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And that is a very interesting question.
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How well are we going to do with this
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massive amount of investableÂ
cash and cash equivalents?
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WARREN BUFFETT: Yeah, we should beÂ
out working now. I mean â (laughter) â
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that is the test.
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I mean, weâve got a bunch of good businesses.
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Weâve got a lot of money that weâd likeÂ
to use to buy more good businesses.
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We may get lucky and
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deploy that quite rapidly.Â
We may wait a long time.
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Cash may pile up faster
than we can use it,
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in which case weâll haveÂ
to rethink the whole game.
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But our hope is
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â and so far we feel OK aboutÂ
whatâs happened in that â
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our hope is that we can deploy Â
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the money that flows in at â
in businesses that
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come close to being as good as theÂ
ones that weâve bought over the years.
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