Berkshire Hathaway 2003 Annual Meeting Audience Question # 48

The fact that intrinsic values are fuzzy to calculate doesn’t mean that it’s not the proper way to think about it

Warren Buffett:

The question on intrinsic value… you know, we’ve written about it in reports. I don’t think there’s much additional to say.

I mean, the intrinsic value of any financial asset, you know, is the stream of cash that it’ll produce between now and Judgment Day, discounted by an interest rate that equates between all the different possible assets.

That’s true of an oil royalty, a farm, an apartment house, an equity, a business operation, you know, a lemonade stand. And that… you have to decide what sort of businesses that you think you can understand well enough to make a… some kind of reasonable calculation.

It’s not scientific, but it is the intrinsic value. I mean the fact that it’s fuzzy to calculate doesn’t mean that it’s not the proper way to think about it.

And at Berkshire, you’ve got two questions. You’ve got the question of what the businesses we own now are worth. And then, since we redeploy all the capital they generate, you have to figure out what you’re willing to assume about what we do with the capital.

And you can look back and say that, 35 years ago or so, that people perhaps underestimated what would be done with the capital that was generated, so that it looks very cheap if you look back on it now. But we’re in a whole different game now with huge amounts of capital.

And you have to make a decision as to whether the billions and billions and billions of dollars we generate will be deployed in a way that creates lots more cash later on. And it’s what Charlie and I think about, but we can’t give any prediction on it.

Charlie?

Charlie Munger:

Yeah, I think our reporting, considering the complexity of the enterprise as now constituted, is better than that of any similar enterprise I know, in terms of enabling a shareholder to calculate intrinsic value.

So, I think we’ve done better than anybody else, and we do it conscientiously. And if you ask, “Will we improve from here?” I don’t think so.

Warren Buffett:

We’ve worked hard at doing what you’re talking about, and it… but even working hard at it, I mean, we’ve given you the data we would want ourselves. We don’t know the answer, but we do know it’s what you have to think about.

And we do it when we buy McLane’s, when we buy Clayton Homes. When we buy anything, we are attempting to look out into the economic future and say, “What kind of cash can this business generate over time? How sure do we feel about it? And how does the purchase price compare with that?”

And if we feel we’re getting a… we have to feel fairly good about our projections. Won’t feel perfect, because we… no one knows the answer precisely. We have to feel pretty good about our projections, and then we have to have a purchase price that’s rational in relation to those.

And we get some surprises in both directions. Actually, if you go way back, we’ve had more pleasant surprises than we would have expected. But we won’t get them from this point, mostly because of size, and also because the world’s a little more competitive.

Charlie?

Charlie Munger:

Nothing more.

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