yego.me
💡 Stop wasting time. Read Youtube instead of watch. Download Chrome Extension

Warren Buffett and Charlie Munger on How to Calculate Future Earnings


2m read
·Nov 12, 2024

I have a question. When you're valuing the companies and you discount back the future earnings, you talked about how many years out you generally go. If you don't go out a general number of years, how do you arrive at that time period?

Well, that's a very good question. It's the heart of investing, or buying businesses, which we regard as the same thing. It is the framework in which we operate. I mean, we are trying to look at businesses in terms of what kind of cash can they produce if we're buying all of them, or will they produce if we're buying part of them, and there's a difference.

Then, at what discount rate do we bring it back? I think your question was how far out do we look and all that. Despite the fact that we can define that in a very kind of simple and direct equation, you know, we haven't 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's no piece of paper, and we never had a piece of paper that shows what our calculation on Helzberg's or See's Candy or the Buffalo News was in that respect.

So, it would be attaching a little more scientific quality to our analysis than there really is if I gave you some gobbledygook about while we do it for 18 years and stick a terminal value on and do all of this. We are sitting in the office thinking about that question with each business or each investment. 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 framework, but it's not applied in the sense that we actually fill in all the variables. Is that a fair way of saying it?

Yeah. Berkshire is being run the way Thomas Hunt Morgan, the great Nobel Laureate, ran the biology department at Caltech. He banned the freedom calculator, which was the computer of that era. People said, "How can you do this? Everywhere else in Caltech we have freedom calculators going." He said, "Well, we're picking up these great nuggets of gold just by organized common sense. Resources are short, and we're not going to resort to any damn placer mining as long as we could pick up these major aggregations of gold." That's the way Berkshire works, and I hope the placer mining era will never come.

Somebody once subpoenaed our staffing papers on some acquisition, and of course, not only did we not have any staffing papers, we didn't have any staff.

More Articles

View All
Writing standard equation of a circle | Mathematics II | High School Math | Khan Academy
[Voiceover] So we have a circle here and they specified some points for us. This little orangeish, or, I guess, maroonish-red point right over here is the center of the circle, and then this blue point is a point that happens to sit on the circle. And s…
Acoustic Levitation in ULTRA SLOW MOTION - Smarter Every Day 134
Hey, it’s me Destin. Welcome back to Smarter Every Day. I am in Chicago. Anthony picked me up in his awesome Mustang and told me to come to this building because we’re gonna film acoustic levitation. What is this? This is an acoustic levitator. It’s si…
How the End of the Cold War Led to Birth of the International Space Station | Rewind the '90s
NARRATOR: Our story opens with revolution. After decades of cold war, the mighty Soviet empire is collapsing. MAN: The wall is effectively down. NARRATOR: Just weeks before the 90s begin, the most famous symbol of the political divide between east and w…
Top 5 Stocks the “Super Investors” Are Buying in 2022 | Stocks to buy (2022)
There’s an old saying that goes like this: imitation is the sincerest form of flattery. This, for sure, applies to investing. Legendary investor Monish Pabrai puts it a little more direct: he says that there is no shame in getting your investment ideas fr…
A Little Sea Sick | Wicked Tuna
Like liver, like failing. Your liver failing. Did you puke? No, it’s not my stomach. We’ve been fishing hard for almost five straight weeks now, and I woke up this morning with an excruciating pain in my side. Um, it feels like when my appendix burst. I c…
How can we protect the polar regions and fight climate change? We went to Paris to find out
Well, I have made it to the city of love, and here is a crazy story for you. I’ve just been on a surfing trip; that’s why I’m dressed for the beach, not for Paris. A National Geographic called me and they said, “You need to cut your surfing trip short and…