Warren Buffett Explains How To Calculate The Intrinsic Value Of A Stock

one of the most Christians that I get

asked as an investing teacher is how do

you calculate the intrinsic value of a

stock now don't get me wrong I have my

tools and methods and doing it myself

but why learn from me when you can learn

from the greatest value investor of all

time warren buffett's remember a value

investor is someone who determines the

value of a business before buying it

determines the value of the stock and

buffett is the king of value investing

so this video I'm going to show you a

clip of Buffett talking about how to

calculate the intrinsic value of a stock

and this is a question about intrinsic

value and it's a question for both of

you because you have written that

perhaps you would come up with different

answers you write and speak a great deal

about intrinsic value and you indicate

that you try to give shareholders the

tools in the annual report so they can

come to their own determination what I'd

like you to do is expand upon that a

little bit first of all what what do you

believe to be the important tools either

in the Berkshire annual report or other

annual reports that you review in

determining intrinsic value secondly

what rules or principles or standards do

you use in applying those tools and

lastly how does that process that is the

use of the tools the application of the

standards relate to what you have

previously described as the filters you

use in determining your valuation of a


if we could see in it looking at any

business what its future cash inflows or

outflows from the business to the owners

or from the owners would be over the

next we'll call it a hundred years or

until the business is extinct and then

could discount that back at the

appropriate interest rate well which

I'll get to in a second that would give

us a number for intrinsic value in other

words it would be like looking at a bond

that had a whole bunch of coupons on it

that was doing a hundred years and if

you could see what those coupons are you

configure the value of that bond

compared to government bonds if you want

to stick an appropriate risk rate in or

you can compare one government bond with

five percent coupons to another

government bond with seven percent

coupons each one of those bonds has a

different value because they have

different coupons printed on them

businesses have coupons that are going

to develop in the future - the only

problem is they aren't printed on the

instrument and it's up to the investor

to try to estimate what those coupons

are going to be over time as we have

said in high tech businesses or

something like that we don't have a

faintest idea what the coupons are going

to be when we get into businesses where

we think we can understand them

reasonably well we are trying to print

the coupons that we were trying to

figure out what businesses are going to

be worth in 10 or 20 years when we

bought See's candy in 1972 we had to

come to the judgment as to whether we

could figure out the competitive forces

that would operate the strengths and

weaknesses of the company and how that

would look over a 10 or 20 or 30 year

period and if you attempt to assess

intrinsic value it all relates to cash

flows the only reason for putting cash

into any kind of an investment now is

because you expect to take cash out not

by selling it to somebody else because

that's just a game of who beats who but

by in a sense by what the asset itself

produces that's truly if you're buying a

farm it's true if you're buying if

you're buying a business and the filters

you describe we're there their number of

filters which say to us we don't know

what that business is gonna be worth in

in 10 or 20 years and we can't even make

an educated yes obviously we don't think

we know to three decimal places or two

decimal places or anything what like

that what precisely what's going to be

produced but we have a high degree of

confidence that we're in the ballpark

with certain kinds of businesses the

filters are designed to make sure we're

in those kinds of businesses we

basically use long term risk free that's

government bond type interest rates to

think back in terms of what we should

discount at and you know that's that's

what the game of investment is all about

investment is putting out money to get

more money back later later on from the

asset and and not by selling it to

somebody else but by what the asset

itself will produce if you're an

investor you're looking at what they ask

that you're looking what the asset is

going to do in our case businesses if

you're a speculator you're primarily

focusing on what the price of the object

is going to do independent of the

business and that's not our game so we

figure if we're right about the business

we're gonna make we're gonna make a lot

of money and if we're wrong about the

business we don't have any hopes we

don't expect to make money and and in

looking at Berkshire we try to tell you

as much as possible as we can about our

business of the key factors those are

the things that Charlie on what the

things we put in our report about those

businesses are the things that we look

at ourselves so if Charlie had nothing

to do with Berkshire but he looked at

our report he would probably in my view

he would come to pretty much the same

idea of intrinsic value that he would

come to from being around it you know

for X number of years the information

should be there we give you the

information that if the positions were

reversed we would want to get from you

and in companies like coca-cola or

Gillette or Disney or those kind of

businesses you will see the information

in the reports you have to have some

understanding of what they're doing but

you have that in your everyday

activities you'll get that

you'll get that kind of knowledge yeah

you won't get it you know in terms of

some high-tech company but you'll get it

with those kind of companies and then

you sit down and you you try to print

out the future so that you have it those

are the key things that you need to

focus on when determining the intrinsic

value of a business focus on the future

cash flows of the business that you are

buying how much money will this business

earn for you in the future and then work

out how much is those earnings is their

cash flow worth for you today

you don't need to get an exact number

just get a ballpark figure as Warren

Buffett famously quoted it is better to

be approximately right being precisely

wrong and what you want to do is focus

on those businesses that are more stable

where you have a better idea of the

earnings that they will get in the

future some businesses they are just too

hard to put an approximate value upon

and I know some of you might find this

interview a little vague but if you do

want to learn more about calculated

intrinsic value I do have a course which

goes over this in a lot more detail with

practical advice and a practical

spreadsheet attached so if you do want

to see that the link to there is in the

description either way it is key that

you know the value of a stock before you

buy it you wouldn't go out and buy a

local business if you did not have a

rough idea on how much it was worth so

why do it with a stock learning to

calculate the intrinsic value is what

made Buffett rich