Question: How do you calculate intrinsic value? Buffett: Intrinsic value is terribly important but very fuzzy. We try to work with businesses where we have fairly high probability of knowing what the future will hold. If you own a gas pipeline, not much is going to go wrong. Maybe a competitor enters forcing you to […]
Category: Investing Basics
Buffett on Good Businesses
By Warren Buffett This article is an excerpt from Warren Buffett’s Letter to Berkshire Shareholders, 1987 Gypsy Rose Lee announced on one of her later birthdays: “I have everything I had last year; it’s just that it’s all two inches lower.” As the table shows, during 1987 almost all of our businesses aged in a more upbeat way. […]
Buffett’s Valuation Metrics
Question: What valuation metrics do you use? Buffett: The appropriate multiple for a business compared to the S&P 500 depends on its return on equity and return on incremental invested capital. I wouldn’t look at a single valuation metric like relative P/E ratio. I don’t think price-to-earnings, price-to-book or price-to-sales ratios tell you very much. […]
Buffett on Discounted Cash Flow (DCF) Models
Warren Buffett: All investing is laying out cash now to get some more back in the future. The concept of “a bird in the hand” came from Aesop in about 600 BC. He knew a lot, but not that [he lived in] 600 BC. He couldn’t know everything. [laughter] The question is, how many birds […]
Warren Buffett’s Discount Rate
Question: When you estimate intrinsic value in capital intensive companies like McDonald’s and Walgreens where a very healthy and growing operating cash flow is largely offset by expenditures for new stores, restaurants, etc how do you estimate future free cash flow? And at what rate do you discount those cash flows? Warren Buffett: We use […]
Buffett’s Hurdle Rate
Question: What’s your investment hurdle rate? Warren Buffett: 10% is the figure we quit on — we don’t want to buy equities when the real return we expect is less than 10%, whether interest rates are 6% or 1%. It’s arbitrary. 10% is not that great after tax. [CM: We’re guessing at our future opportunity […]
Buffett’s Advice to New Investors
Question: What advice would you give to new investors? Warren Buffett: I think you should read everything you can. In my case, by the age of 10, I’d read every book in the Omaha public library about investing, some twice. You need to fill your mind with various competing thoughts and decide which make sense. […]
Buffett Didn’t Make Money from Technical Analysis
Warren Buffett: At age 11 I started investing, purchasing three shares of Cities Service Preferred. I had read every book on investing in the Omaha library. I was really into charting and technical analysis. I loved it, but didn’t make any money from it. At 19 I read Graham’s “The Intelligent Investor” and it changed my world. Did […]
Buffett Talks about Diversification
Question: What are your views on diversification? Buffett: I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the […]
Buffett on Asset Allocation
Question: What do you think of setting an asset allocation? Warren Buffett: We don’t hold any committee meetings. The business of saying you should have 50% in stocks, 30% in bonds…it’s nonsense. The idea of recommending that assets should be split 60/40 [between stocks and bonds], and then have a big announcement that you’re moving […]
Buffett on Large Caps vs Small Caps
Question: Why do large caps outperform small caps? Warren Buffett: We don’t care if a company is large cap, small cap, middle cap, micro cap. It doesn’t make any difference. The only questions that matter to us: Do we understand the business? Do we like the people running it? And does it sell for a […]
Buffett on Share Repurchases
Gillette doesn’t repurchase their shares … Coke consistently repurchases their shares. We generally like the policy of companies that have really wonderful businesses repurchasing their shares. The problem with most companies repurchasing their shares is that they are frequently so-so businesses and they are repurchasing shares for purposes other than intensifying the interest of shareholders […]