Warren Buffett: All You Need To Know About Investing in 6 Minutes

When we buy businesses, whether we're buying all of a business or a little piece of a business, I always think we're buying the whole business. Because that's my approach to it. I look at it and say, what will come out of this business and when? What you really like, of course, is for them to be able to use the money they earn and earn higher returns on it as you go along.

I mean, hello, Mr. Buffett. I got two short questions. One is, how do you find intrinsic value in a company? Well, intrinsic value is what is the number that, if you were all-knowing about the future and could predict all the cash that the business would give you between now and Judgment Day, discounted at the proper discount rate, that number is what the intrinsic value of businesses is. In other words, the only reason for making an investment and laying out money now is to get more money later on, right? That's what investing is all about.

Now, when you look at a stock, when you look at a bond, so means United States government, it’s very easy to tell what you're going to get back. It says it right on the bond; it says when you get the interest payments, it says when you get the principal. So it's very easy to figure out the value of a bond. It can change tomorrow if interest rates change, but the cash flows are printed on the bond. The cash flows aren't printed on a stock certificate; that's the job of the analyst.

It’s to take that stock certificate, which represents an interest in the business, and change that into a bond and say, this is what I think it's going to pay out in the future. When we buy, you know, some new machine for Shaw to make carpet, that's what we're thinking about, obviously. And you all learn that in business school, but it's the same thing for a big business. If you buy Coca-Cola today, the company is selling for about $110 or $15 billion in the market.

The question is, if you had $110 or $15 billion, you wouldn't be listening to me, but I'd be listening to you instantly. But the question is, would you lay it out today to get what the Coca-Cola company is going to deliver to you over the next two or three hundred years? The discount rate doesn't make much difference as you get further out, but that is a question of how much cash they're going to give you.

This isn't a question of any question about how many analysts are going to recommend it, or what the volume in the stock is, or what the chart looks like, or anything. It's a question of how much cash it's going to give you. That's your only reason. The truth? If you're buying a farm, it's true. If you're buying an apartment house, any financial asset, oil in the ground, you're laying out cash now to get more cash back later on.

And the question is, how much you're going to get? When are you going to get it? And how sure are you? And, when I calculate intrinsic value of a business, when we buy businesses, whether we're buying all of a business or a little piece of a business, I always think we're buying the whole business because that's my approach to it. I look at it and say, what will come out of this business and when?

And what you really like, of course, is for them to be able to use the money they earn and earn higher returns on it as you go along. I mean, Berkshire has never distributed anything to its shareholders, but its ability to distribute goes up as the value of the businesses we own increases. We can compound it internally, but the real question is, Berkshire is selling for, we'll say, $105 or so billion now.

What can we distribute from that hundred? If you're gonna buy the whole company for $105 billion now, can we distribute enough cash to you soon enough to make it sensible, at present interest rates, to lay out that cash now? And that's what it gets down to. If you can't answer that question, you can't buy the stock. You know, you can gamble in the stock if you want to or your neighbors can buy it, but if you don't answer that question—and I can't answer that for internet companies, for example, a lot of companies, all kinds of companies—I can't answer for, but I just stay away from those.

Number two, so you got formulas involved in finding intrinsic values on certain companies. I mean, you've got a mathematical system set up: discounted present value of future cash. The second short question is, why haven't you written down your set of formulas or your strategies in written form so you can share with everyone else?

Well, I think I actually have written about that. If you read the annual reports over the recent years, in fact, the most recent annual report, I use what I've just been talking about. I use the illustration of Aesop because here Aesop was in 600 BC. Smart man; he wasn't smart enough to know it was 600 BC, though. I mean, would take a little foresight there.

But Aesop, you know, in between tortoises and hares and all these other things, he found time to write about, you know, birds, and he said a bird in the hand is worth two in the bush. Now that isn't quite complete because the question is, how sure are you that there are two in the bush? And how long do you have to wait to get them out?

Now, he probably knew that, but he just didn't have time because he had all these other problems to write and had to get on with it. So, but he was halfway there in 600 BC. That's all there is to investing: how many birds are in the bush, when are you going to get them out, and how sure are you? Now, if interest rates are 15%, roughly, you've got to get two birds out of the bush in five years to equal the bird in the hand.

But if interest rates are 3% and you can get two birds out in 20 years, it still makes sense to give up the bird in the hand. Because it all gets back to discounting against an interest rate problem. Often, you don't know, you know, not only how many birds are in the bush, but in the case of the internet companies, there weren't any birds in the bush, but they still take the bird that you give them in the hand.

But, I actually have written about this sort of thing, and stealing heavily from Aesop, who wrote it some 2600 years ago.