|New Threads Only:|
|New Threads & Replies:|
Forum List » Guru News and Commentaries|
Guru News, Stock picks and commentaries
Warren Buffett on Valuing Assets Purchased for Financial Gain
Posted by: Value Study (IP Logged)
Date: July 17, 2013 08:53AM
In the 2000 Berkshire Hathaway chairman’s letter, Warren Buffett puts forth a “formula for valuing all assets that are purchased for financial gain.”
In this letter, he states:
Quote:The paragraphs that follow in the 2000 Berkshire Hathaway Chairman’s Letter explain this formula:
Quote:Buffett’s formula is essentially a net present value calculation in which he uses the risk-free interest rate (i.e. the yield on long-term U.S. bonds) to determine the maximum value of the cash flows from an asset.
While I don’t know if Buffett actually performs this calculation in his personal investing, if he did, he would probably first establish a range of maximum values for an asset (making sure to use conservative estimates and focus on “industries where business surprises are unlikely to wreak havoc on owners”) and then decide if the current price of the asset represented a large-enough margin of safety (i.e. discount) to this calculated range of values.
I have read other quotes online attributed to Warren Buffett that seem to indicate that Buffett doesn’t actually do the above maximum value calculation. (For example, see the following article that addresses Warren Buffett’s discount rate in discounted cash flow calculations.)
However, even if Buffett doesn’t do this calculation, I don’t believe it changes the validity of it. As Buffett states, if you can establish the necessary formula inputs, you can determine a range of maximum values for any asset. And this can be a very valuable tool for any investor trying to establish the upper-bound value of an asset.
So, the next time you’re wondering what the maximum value of an asset should be, think about Aesop’s investment insight (as expanded and explained by Warren Buffett).
Guru Discussed: Warren Buffett: Current Portfolio, Stock Picks
Stocks Discussed: BRK.A, BRK.B,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.