Berkshire Hathaway 2003 Annual Meeting Audience Question # 52

When evaluating a company, Warren and Charlie looks at it as if they will hold it forever

Warren Buffett:

Number 2.

Audience Member:

Hi, I’m Steve Casbell from Atlanta. My question involves interest rates.

When you calculate the intrinsic value of a business in a period of low interest rates, like we have currently, do you use a higher discount rate to factor in higher rates in the future?

And also, when… do you ever look at a company’s free cash flow yield relative to current rates?

And if I could also get your thoughts on the dividend tax cut. If, by some miracle, the politicians think logically and get rid of the dividend taxes, would Berkshire ever pay a dividend?

Warren Buffett:

The question on discount rates, we use the same discount… I mean in theory… we would use the same discount rate across all securities, because if you really knew the cash they were going to produce, you know, that would take care of it.

We may be more conservative in estimating the returns of cash from some, but the discount rate we would use is a constant.

Now, in terms of where we commit, you know, we don’t want to use the fact that short-term rates are 1 1/4 percent to think that something that yields us 3 percent or 4 percent is a good deal.

So we sort of have a minimum threshold in our mind about which we’re… below which… we’re unwilling to commit money. And we’re unwilling to commit it whether interest rates are 6 or 7 percent, or whether they’re 3 or 4 percent, or whether they’re, on a short-term basis, 1 percent.

We just… we don’t want to get hooked into long-term investments at low rates just because they’re a little bit better than short rates would be or low Government rates would be. So, we have minimum thresholds in our mind.

I can’t tell you precisely what they are, but they’re a whole lot higher than present Government rates would be.

And at other times, we’d be very happy owning Governments, just because we feel that they offer attractive enough rates.

I would… when we’re looking at a business, we’re looking at holding it forever. And we want to be sure we’re getting an adequate return on capital. We don’t regard what we can get on short- term rates now as adequate, but we’ll still sit in… rather than bend a little bit and start settling for lower rates for 30 years because rates for 30 days are so low, we would rather just sit it out and wait a while.

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