Buffett's View of Intrinsic Value
Paraphrasing Williams's theory, Buffett tells us the value of a business is the total of the net cash flows (owner earnings) expected to occur over the life of the business, discounted backwards to today by an appropriate interest rate.
Owner Earnings
Net income + Depreciation + Depletion + Amortization – Capital Expenditures – Other Working Capital = Owner Earnings
This is Buffett’s equation for determining a more accurate cash flow.
Discount Rate
The rate offered by long-term treasury bonds. This is referred to as being “risk-free” because the guarantee that the government will pay back the initial principal (initial investment) with interest is virtually 100%. This guarantee comes from the fact that the government has the ability to impose taxation (on goods, services, income, etc…)
Owner Earnings
Net income + Depreciation + Depletion + Amortization – Capital Expenditures – Other Working Capital = Owner Earnings
This is Buffett’s equation for determining a more accurate cash flow.
Discount Rate
The rate offered by long-term treasury bonds. This is referred to as being “risk-free” because the guarantee that the government will pay back the initial principal (initial investment) with interest is virtually 100%. This guarantee comes from the fact that the government has the ability to impose taxation (on goods, services, income, etc…)
According to Buffett, since all investments ultimately compete with one another the risk-free rate should be used as the benchmark in comparing investment returns.
posted by Raphael Blogger at
11:16 PM
