Berkshire Hathaway 2018 Annual Meeting Audience Question # 33

There’s no formula to determine the intrinsic value of a business

Warren Buffett:

OK, Station 11.

Audience Member:

Hey, Warren. Charlie. Thank you again for having us and having me. I just can’t thank you guys enough and appreciate you guys enough for the body of work that you guys have delivered to us and the exemplar example that you guys have set with your principles. Thank you.

Charlie, you’ve mentioned that, if given the chance… or the same chance with a smaller capital base… you would still look for mispriced stock opportunities.

Charlie Munger:

Of course.

Audience Member:

And that would be determined through, obviously, what we’ve called the intrinsic value of the organization… or the company in question… an aggregate of the discounted future cash flows.

Would you work the arithmetic using a fictional data set to illustrate the mathematical principia to determine an intrinsic value?

And I hope you include the comprehensive mental model of the key metrics considered, and quantitative assessments of the management, and any assumptions of its industry to determine the durability of its earning power.

And, Warren, same to that effect. Would you also demonstrate or illustrate an arithmetic problem set using, with a significant capital base, and provide the object lessons on how those have changed from a small to a large capital base?

Charlie Munger:

Well, I can’t give you a formulaic approach because I don’t use one.

And I just mix all… I just mix all the factors and if the gap between value and price is not attractive, I go on to something else.

And sometimes it’s just quantitative. For instance, when Costco was selling at about 12 or 13 times earnings, I thought that was a ridiculously low value, just because the competitive strength of the business was so great and it was so likely to keep doing better and better.

Well, I can’t reduce that to a formula for you. I liked the cheap real estate. I liked the competitive position. I liked the way the personnel system worked. I liked everything about it.

And I thought, even though it’s three times book, or whatever it was then, that it’s worth more.

But that’s not a formula that anybody…

If you want a formula, you should go back to graduate school.

They’ll give you lots of formulas that won’t work.

Warren Buffett:

This is the longest we’ve ever gone in a Berkshire meeting without Charlie saying that… getting to the point where he prefers Costco to Berkshire.

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