When asked at the Annual Meeting in May 1996 for detail on his discounting method, for example, how many future years does he extend the calculation to, Buffett explained that, yes, the discounted owner earnings is the framework at the heart of investing or buying businesses, but, no, there are no written down calculations at Berkshire with cut-off dates for calculating what is called in “the terminal value”.
He said that though the equation is simple and direct “we’ve never actually sat down and written out a set of numbers to relate that equation. We do it in our heads, in a way, obviously. I mean, that’s what it’s all about. But there is no piece of paper. There never was a piece of paper that shows what our calculation on Helzberg’s or See’s Candy or The Buffalo News was, in that respect.” Buffett and Munger fear that people get hung up on the illusory appearance of “scientific” quality when using apparently sophisticated numerical analysis. In reality, inputs to the formula are of an imprecise nature. What you need are good ballpark estimates after taking on board the all-important qualitative factors that create shareholder value (quality of franchise and management). “We are sitting in the office thinking about that question with each business or each investment. And we have discount rates, in a general way, in mind. But we really like the decision to be obvious enough to us that it doesn’t require making a detailed calculation. It’s the frame
0 Comments
Leave a Reply. |
Prof. Glen Arnold
I'm a full-time investor running my portfolio from peaceful Leicestershire countryside. I also happen to be UK´s best selling investment book author and a Financial Times Best selling author. Originally, I wrote all my ideas out in full on this website. Now that ADVFN publish them they are entitled to display the full version for six months – you can see them here. Thus can I only post the first few paragraphs here for anything younger than six months.
I write 2 to 3 newsletters per week - investing is about making the right decisions, not many decisions. Categories
All
Archives
February 2021
|