Warren Buffett: How to Know if a Stock is Undervalued
ฝัง
- เผยแพร่เมื่อ 9 ก.พ. 2025
- (#Warren Buffett #Valueinvesting)
How do you calculate the intrinsic value of a stock? This may be the single most important question in all of investing. Everyone knows that the secret to good investing is finding undervalued stocks, but how exactly do you determine if a stock is undervalued? To do this, you have to find the true value of a stock, referred to as its intrinsic value, and compare that to what the stock is currently selling for. Let’s listen to this clip of Warren Buffett explaining the theory behind calculating the intrinsic value of a stock. Then, we will use an example company to demonstrate the concept Warren Buffett laid out with a tangible demonstration. But first, make sure to like this video and subscribe to the channel if you aren't already because it is my goal to help you better understand investing by studying the greatest investors.
While Warren Buffett did a great job explaining the theory behind calculating intrinsic value, this tangible example I am about to provide should help explain the concept even further. Keep in mind this example is simplified, but it demonstrates the concepts Warren Buffett laid out in the clip in a way that may make more sense for you. This is the general framework that I personally use in my job as a professional investor at a large investment fund to think about valuing any type of cash flow producing asset: whether it is a stock, bond, or an apartment building. Now, let’s take a hypothetical company, called ABC Corp. ABC Corp stock is selling at 75 dollars per share and we want to know if the stock is undervalued compared to its intrinsic value. Let's say ABC Corp will operate over a 10 year period and make 10 dollars per share in the first year, growing its annual earnings by 1 dollar every year, all the way to 19 dollars per share at the end of year 10, in which it will stop operating. The next important variable is the interest rate in which you discount the cash flows back by. Let’s use 5% in this example. In the clip, Warren Buffett mentioned that he uses the long term risk free rate as his discount rate. In the US, the risk free rate is the interest rate on long-term government bonds.
With the variables that we laid out, that means ABC corp stocks intrinsic value is about 109 dollars per share. In this example ABC Corp stock is selling at a roughly 30% percent discount to its intrinsic value. Meaning that it is undervalued and a savvy, value-oriented investor would want to make this purchase. It is important to note and as Warren Buffett and Charlie Munger point out in the clip, that there needs to be a significant discount between the intrinsic value and what the stock is selling for to account for the uncertainty involved in predicting the future cash flows of the business and potentially using the wrong interest rate. This is known in value investing as the Margin of Safety. So there we have it. I hope you found this video helpful in your understanding of investing. Talk to you soon!
![How to BUY undervalued stocks? [simple strategies] #STOCK MARKET INVESTING FOR BEGINNERS](http://i.ytimg.com/vi/CSU28yiq2kE/mqdefault.jpg)
Are you fan of Warren Buffett? Here’s Warren Buffett’s top 5 investments of all time: th-cam.com/video/TnDcC04jFiM/w-d-xo.html
If the dicount rate is 5% then 10 year dicount is 63%
If the company is expected to earn 145 usd per share in 10years
then if you discount it by 63%
you get 89 usd dollars
so when you buy it at 75/share you should outperform bonds in 10years by 18,6%, but underperform market
but to outperform market you have to use bigger dicount rate
Rf for 1997 to low, now it’s ok
Is the person who ask the question Mr pabrai?
If you ask me, this is a high-level educational video, I agree with Warren Buffet. A blend of different ETFs is my favorite way of inveesting. For example, you could have some covered call etfs for dividends and other etf`s for growth. A combination such as : JEPI , DIVO , QYLD, SCHD and JEPQ. You have to combine them according to your own personal situation. I tallied my dividends for the previous year; $102k. Blessed, grateful, disciplined and focused.
Consistently invsting in high quality dividend paying ETFs & stocks over the long term is a relatively easy strategy to create generational wealth. My "boring" ETF's portfolio paid me over $4,000 in dividends last month.
Anyone have recomnnendations for a reliable monthly invstment? I hope to ultimately supplement my incume from work with a monthly incume from invstments. I will still make long-term invstments, but it would be wonderful to have a little additional money each month.
Heavily backing PLTR right now. But I’m still open to buying more because some brilliant companies seem at good prices as i have north of 150 grand i don't know where to dump bro. What’s your thought Jeremy?
Buy GME, DJT!!!
Not bad for a starting position! It is very easy to buy in on trending stocks but the problem is knowing when to sell or hold, which is why having guidance is important. I've been in touch with my CFA for about 3 years now and although I was initially skeptical about it, I will say I've made more progress within a that time frame generating 7-figure profits.
This is incredible. Could you recommend who you work with? I really could use some help at this moment.
My CFA is ’Patricia Grace Barry’ , a renowned figure in her line of work. I recommend researching her credentials further. She has many years of experience and is a valuable resource for anyone looking to navigate the financial market.
I’ve just looked up her full name on my browser and found her webpage, very much appreciate this
Wonderful -- thank you so much! You often just hear snippets of Buffet's wisdom but these longer clips give so much more wisdom and context, also making the principals easier to commit to memory.
I’m happy you enjoyed the video :)
At 15:30 some example parameters are shown. Then, we are told those parameters equate to $109/share instrinsic value. HOW WAS THIS CALCULATION PERFORMED? Please SHOW THE CALCULATION.
I didn't get it either
They literally tell you most years - formulae available in The Intelligent Investor by Ben Graham
Magic I guess 😂
Cashflows will look like this
(Year 1( 10 times 0.95 = 9.5.
(Year 2) 11 times 0.95*0.95 =9.92
(year 3 ) 12 times 0.95*0.95*0.95 = 10.28
And so on. you can use scientific calculator to do the compounding of 5% discount rate. by using xy option.
I thought maybe I missed something lol. How can you put out a video about how to calculate intrinsic value and then not provide the formula?
Could you do the actual math of how you got those calculations that would be very helpful. What #s are yiu adding subtracting and multiplying?
Do you mind proving the title of the one you watched?@@bryanmichael772
42
Stock Price: $75/share
Time Period: 10 years
Annual Earnings Growth: $1
Discount Rate: 5%
Intrinsic Value for ABC Corp = $109/share
Intrinsic Value Formula using above:
Year 1: 1.05^1 = 1.05
Earnings = 10
10/1.05 = 9.52
Year 2: 1.05^2 = 1.1025
Earnings = 11
11/1.1025 = 9.98
Year 3: 1.05^3 = 1.158
Earnings = 12
12/1.158 = 10.37
Year 4, 5, 6, 7, 8, 9…
Year 10: 1.05^10 = 1.63
Earnings = 19
19/1.63 = 11.66
Intrinsic Value = $108.87
notes:
- intrinsic value vs. stock price
-there’s 2 ways to invest: on price speculation and on financials (berkshire does solely financials)
-invest in companies you would be okay investing in for 100 years
- don’t forget opportunity cost of your investments. this will lead to a concentrated portfolio (“WHICH WE DONT MIND”). they are saying it’s okay to concentrate on certain stocks when you don’t have a lot of money because you have to make good decisions with your little amount of money. -DEAD ON-
- determine intrinsic value over a 10 year period using (10 year earning growth number)
(removing long- term bond interest rate and decent margin to account for innacuracy)
yearly earnings/ (long-term interest rate on gov bonds)^(how many years)
Year 1:
10/(1.05^1)
Year 10:
19/(1.05^9)
Add all the years together and you got the intrinsic value.
where did you find this risk free rate of 5%, isn't it a bit low and we should use the average long term market return, which is about 7-8%?
30 year treasuries are at around 2%. Risk premium of 3-4% gives a (2%+3%) 5 or 6% discount rate which is what the market is yielding. If interest rates went to 8%, investors would demand more than that, say, 12%; the discount rate increases, prices drop to compensate for this increased yield.
The 7-10% growth in the past was due to the greatest economy the world has seen during the greatest time period of that economy. The future results (without excess inflation) will likely be mucb lower, say 5-7% a year would seem more plausible.
would have prolly been richer right now. If I had listened to random advice on TH-cam and started investing earlier😩
How much is the Tesla stock right now🤔
@@militarybase9116 Tesla is $850 right now.Assets are rapidly growing! BTC was at $30k earlier in March now it's $37k and still growing!!
@@bobbyj2305 You can buy opportunities and make good profits
Nice video, but it would have been nice to see the actual math leading to the share price.
Thank you for the feedback Michael. I put in those variables into a net present value calculation and that’s why I didn’t include the math. In the future, I will make sure to include it!
@@InvestorCenter I agree we Michael
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You will waste your time watching / trying to understand that
Read the Berkshire reports and the reports of the companies they own. It’s not a simple formula for each company. It all boils down to predicting the cash flows and discounting them at the rate of LT government debt
I think when to sell is equally as important to when to buy.
The guy asking this question is Mohnish Pabrai? he's another great investor who got inspired from these 2 legends..
Thks for believing in what I do even I never trusted what I do thku really kind of all of u ❤❤ talked so much because I didn't believe what I do thats enough for me if we get there❤❤
What Uncle Warren says about intrinsic value and how he gets there are two different things. If you listen closely, much of what he says would require an infinite amount of time to determine just to arrive to a present value. The variables are endless and every time one variable changes future cash flows change as well and so too does its discount rate. So, we can only guess as to what the future may hold. This is why future cash flows are discounted back to present day b/c no one knows what the future will bring , but we do know what things are now. If an asset's PV is greater than it's FMV, and by a significant margin, it's a money maker. You have to purchase assets for less than they're worth. Price and value dislocation does occur in the market. You have to be patient, cause they don't show up too often. As Buffett says, "if you want to bag a rare pink elephant, you have to have enough ammo in your pink elephant shotgun when it shows up."
crystal clear voice, awesonme
Interesting, so the Intrinsic Value formula does not use the stock price, it just use the forecasted EPS.
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i googled the npv calculation
what would be the cash outflow??
i still don't understand how you get to the intrinsic value of $109
I’m trying to follow the Buffet strategy, but I started with ~1k and I’ve been pushing this little snowball around for a minute.
Keep up the good work!!!
How much do you have now?
@@caetanogarelli6657 let's say I'm no Warren Buffet. 🤓
@@theedgereport7383 time will tell
@@theedgereport7383 good luck my friend!
As Warren Buffet advises buying companies at a big discount to intrinsic value, how should we judge Berkshire shares trading at a significant premium to NAV?
What an awesome video! Thanks Dave
I like to use the WACC has my discount rate
Uncle buffet. Knows best. ,So my strategy is if I buy one company ,buy some of the competition , coke. Vs. PepsiCo. Ford vs. . Gm. Etc. Competition. Is American business at it's best
Why does it feel like one of their greatest regrets was not going into politics, but the feeling is trumped over the peace of mind from choosing not to do so. Don't read too much into this, it's just my question
Hi, How did you came to $109/share !? Can you share the calculation !?
I discounted the cash flows by the 5% rate back to the present. It is essentially a net present value calculation
Essentially (10/1.05^1) + (11/1.05^2) + (12/1.05^3) + ...continued on to the rest of the cash flows
@@InvestorCenter Thanks alot for your prompt response
Today it's not about return ON capital. Today it is about return OF capital.
I am from Germany so i maybe only know the German words for that so could you please explain the Diffrence to me?
Return of capital means you get your original capital back pmus any dividends or other financial return
Return of capital means you hope you get the original amount back ir percentage of that cuz it turn out to be an unstable or unprofitably venture
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Any source to find online intrinsic value of a stock ?
Sure... but he actually says that you can only apply DCF model to companies with a clear future. How do you define that? Very few companies are that predictable. Also... why using the 10-yr bond, and not a WACC rate?
Very few companies are that predictable. Correct. That’s why Warren Buffett avoids high tech companies because he can’t accurately predict the cash flows. As to why he doesn’t use WACC, it is because Warren Buffett doesn’t believe in the efficient market theory which is the basis of the WACC and CAPM. Hope that was helpful
@@InvestorCenter Mmmh It's not just tech. I just don't agree. I mean that even consumer brands or insurance can get disrupted! Even within that space, almost every companies can turn worse. Even Seth Karman said that he can't do that.. So the method isn't the answer.. What about General Mills.. Isn't that similar to Hormel? Could you predict 20 years ago the difference in future growth? What about Sea's Candies and Hershey? Buffett should have bought Hershey, but he didn't know it was a better company. Future growth is just impossible to predict. How do you know if McDonald's will stay with us forever or not?
As for the rate of return... Many value investors use their expected-return (what they want to get). That gives totally different results than using the free rate. Also, if interest rates are low like in Japan or Europe, every company would be undervalued.. why aren't valuations extremely high? If interest rates are below 0, like in Germany.. prices should be infinite! Yet, you can find companies with low multiples in Europe. On the other hand, if a stock as a low multiple, you get a high earnings yield, no matter if it's undervalued or not. According to Buffett, now he should buy stocks with P/E of 20 because rates are low. He doesn't, because he doesn't trust interest rates.. So in practice, he just buy at low multiples, not because of DCF model. What do you think? 😊
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He literally says where you should be focused if you have a portfolio around 100k. Not looking at where everyone else is looking at these huge companies. Your focus should be small caps under 300million not looking at a 100b market cap company
We want to hear his opinion on the coca cola boycott!!
MATH (109 is wrong): formula: capital * (1 + 5%) power 10 = ValueAfter10Years(V) => capital (discounted stock val) = (10+11+...19 = 145) / (1,05 power 10) = 89.02
Thanks for the awesome short example at the end!
Glad you found it useful!
@@InvestorCenter what formula did you use??? Plz reply
@@giovannifrrri5495 net present value (NPV)
@@InvestorCenter thanks, you could've shown the calculation in the video IMO. Love your videos, bro, but why is there a woman speaking for the newer videos? I guess it's a voice over, but yours was good too. Anyway congats, I watched your video on your career and I want to work for an investment bank too. Another thing, for sure is don't hesitate to go into much more detail or explaining more complex topics, we're here for it , thanks again, boss!
U know more about history and geography than the subjects themselves❤❤🎉🎉haha
The idea about discounting is simple. The biggest challenge is to estimate the future cash flow. I'm not sure if that's something most investors can do.
How would one even go about doing that? I know Buffett says he tries to ignore macroeconomics, but that must be involved in his analysis on some level?
buffett doesnt even do this ...he states he doesnt use any formulas in his analysis.
My man- that timer at the bottom got me
Just trying to get creative 😂
That example at the end was helpful. Thank you.
Thanks for💹
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I didn't understand the example at the end.
Where to put all these values at the end to get stock valued at 109$/stock after 30% discount. where to put these figures
He always manages to say a lot without saying much.
Hi, based on your example provided at the end, this is where I get confused... does the balance sheet have any bearing on the intrinsic value of the company? If a company is loaded with debt vs. if a company is very financially responsible, that surely has an impact on the intrinsic value, right?
Right. But as described, it's meant to be a simplified example. In the video, Warren likened the stock to a bond with an unknown coupon; hence the example at the end being very simplified (no balance sheet, and the company ending operations after a fixed period).
A more comprehensive discounted cash flow analysis would include the balance sheet, the terminal growth rate, and the changing share count over time.
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this doesnt work today just by a good company hold until u cant no more
I wanted to hear numbers like P/E by whatever ,there is a formula
But if you are discounting it using the risk free rate you are assuming your npv is as risky as treasury bills, which is not necessarily accurate...you'd have to discount at Risk Premium + Risk Free rate...
Perhaps Buffet dosnt use the Risk free rate to "alone" to discount...but it's an input into what he uses to computer their discount rate
I don’t understand how you arrived at $109?
How do you get $109?
But how do we find a stock’s interest rate? 15:20
Is there a way to look this up or to calculate it?
The interest rate isn't for the stock. It's the default return of some other investment that you consider to be completely safe. In the example, he mentioned long-term government bonds, which are typically 3%-4%. Some people use the average return of the S&P 500, which is closer to 10%. You use that number as a discount rate. What that gives you isn't how much money you'll make, but instead, how much MORE money you'll make than your default investment. Like if your potential investment shows a return of 10% and your default investment is a 3% bond, you discount the 10% by 3%. So it would show a 7% return, because you're getting 7% more than you would otherwise. If your default investment is a 10% return (10% discount rate), then the potential investment would show a discounted return of 0% because it isn't any higher than your default. For more specific info, Google "discounted cash flow formula". Frankly, the discount rate is up to you and doesn't really matter. The important thing is that it's a realistic default return and that you use the same number every time for every company you look at.
Hello but you dont show the formula that you implement with those variable
Lisa
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I could have sold Starbucks at a 47% gain. Now it’s down to 25% so yeah, got to sell when there’s some big wins.
Lol I was terrible in math class. No idea how we got to $109
Very nice information
Why use the risk free rate to discount a much riskier asset?
Stock cash in support vat in balance point of demand
Do I always take the 10 years to calculate the NVP or is it always different?
10 years is a common timeframe, but analysts typically don't even give an estimate past 3 years. Usually, net present value estimates go as far out as possible with actual analyst estimates, then just assume slowly decreasing earnings growth after that. Some versions of the calculation add in "terminal value" which is going past the 10 years. But it's all based on assumptions. If your assumptions are wrong, the output will be wrong.
Can someone tell me How he Arrived at $109 per share of Intrinsic Value.?
Exactly. He doesn't explain the only important thing
How did you get 109?what was the calculation?
All future earnings every year you will discount them with 5% and add the all final value of ten years you get the sum of intrinsic value
@@aashutiwari385Could you please write it down and show me a total of 109/-?
Are they talking about book value when they say liquidating value?
Are the ten years future or past? How do you use the interest rate?
The ten years is the future cash flows. You used the interest rate to discount the cash flows back to the present day. Google “Net present value” formula on Google to learn about the calculations!
@@InvestorCenter Got it ,thanks.
In case PE ratio under 40 then shall we consider that stock is undervalued
Not always. Some companies with low PE is justified.
Product down rate zero product in financial to product up size
Mr. Warren Buffett, I urgently need Lucio Costa's house, Rio de Janeiro, Brazil. I need this place that I bought. I don't have the money to buy another house. Can you help me solve this?
So how can you calculate to get 109 ? Im lost
3:00, 5:45, 10:10, 11:55, 13:50, 14:55
Still don’t understand how you got IntrinsicValue….. 🤔
Excelent!
Thank you, Daniel!
.you didn't actually show how to know if a stock is undervalued. you just simply said it was based on a few made up numbers... what is the point of this video
I have often noticed that at these meetings, WB and the late CM never answered a question directly as this video demonstrates. Why is that?
Or their "answer" was always couched in some vague, esoteric vernacular subject to interpretation. Kind of like listening to a corrupt politician.
The presenter uses the word "calculate" at the beginning of this presentation, yet at the end, never reveals exactly what the "calculation", (formula) should be.
They truly went to old school way and stick to it.
What if you google to find the intrinsic value of a stock? How accurate is it?
Not accurate
I’m sure thats how Warren buffet works too LMAO
Product in point zero rate in financial in account service down freelance
Where to put all these values at the end to get stock valued at 109$/stock after 30% discount. where to put these figures
Stock product under rate in support in aval
Product price in discount market down free down get free one why?
They didnt answer the qustion how to calculate intrinsic value 😅
Stock exchange zero rate why free bonus?
Bro use an existing stock i was trying to follow along
Vix is fairly average thus not much more unstable than the past
You state that the stock is worth $90 without any explanation of how you arrived at that figure.
January free product in bonus why?
Where do i find the long term govt bond yield? Is the 10 year?
Yes
Coca-Cola is generally one of the most valuable stocks when it comes to both dividends and just company in general Sure it's at its intrinsic value however you still get a sweet dividends.
They lost me with the "too white" shit.
Why did it then underperform the s&p over any given 10-20 year period
Product under rate stock finance market cash in rebound point in return left to product
Product down freelance cash demand point
Never purchase, if a stock remain undervalued always.
How you got the intrinsic value of 109 ?
RIGHT. NOW. I. WOULD. LIKE. TO. FIND. OVERVALUED. THANKS. !!!
8:59 namaste 🙏
👍🏻
Haven’t seen you comment recently. Missed you
@@InvestorCenter ahh 😌 that’s good to hear…some one is missing me somewhere. I usually see your videos but donot comment much. But I ll try to now comment in your videos just to remind you I am around.
Respect.
Do you have a spreadsheet to have it better analyze in detail?
Yes I use a spreadsheet as part of my analysis
Easy. When the big fish aren't buying (or when they've sold what they got).
Long rate finance vat point in stock why free bonus
Demand finance in product down
High debt , High payout over 100% & Neg buybacks
Why free capon?
farther is not further..
Product down under rate price stock infor vat
Stock of cash unseen vat season product
Warren Buffett has been old since the 1800s.
He was born as a 75 year old man
In another video Buffett says that his hurdle rate is 10 %. So his discount rate must be 10 % at least.
Now he says that he is discounting with long-term risk-free government bond typ interest rates.
Where is the sum?