Calculate Intrinsic Value Like Warren Buffett! | Warren Buffett's Valuation Method
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- เผยแพร่เมื่อ 2 มิ.ย. 2024
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In this one I explain exactly how Warren Buffett calculates the intrinsic value of a company on the stock market. I just finished reading all of Warren Buffett's essays and have compiled all of his tips on calculating the value and buy price of a business.
Buffett indicates that he uses a traditional Discounted Cash Flow method of valuation. This intrinsic calculation method involves estimating the total amount of cash a stock or business can provide its owners over its remaining lifetime, and discounting them at a risk-free rate.
A significant amount of Warren Buffett's investing success comes down to his ability to estimate future cash flow. This is ultimately a result of Buffett's thorougher understanding of consumer behaviour. If you want to become a great investor, the first step is to expand your knowledge of how businesses operate in industries that are of interest to you. The more you study these industries, the more accurately you will be able to make estimations of the cash a business or stock can provide you over the next 10 years.
Now Buffett concedes that it isn't possible to accurately project the cash flow of specific years into the future, because we don't know how consumers will behave in the short term. We may know that a person who owns and has always owned iPhones is likely replace that iPhone with a new one in the next 5 years, but we don't know when that is specifically going to happen. So instead of estimating specific cash flows, we just estimate a conservative growth rate for cash over the next 10 years.
Once we have our cash flow growth rate, we want to grow what's called Owner's Earnings which is a cash flow number Buffett uses to estimate the amount of cash an owner can pull out of a business within a specific year. The calculation of this number is outlined in his letters to the shareholders and involves adding back non-cash charges to Net Income, as well as subtracting capital expenditures used to maintain the long term assets of the business.
Finally we need a risk-free rate which is the rate we can achieve from investing in a 10-year US or AUS treasury bond. At the current time this is 2.7%
We simply plug all that into a Growth Annuity Formula (linked above), and we get an intrinsic value calculation, which then needs to be discounted a further 60-80% to allow for a margin of safety.
If you want to learn more I suggest you check out my other videos in the 'How to Invest in the Stock Market" playlist on my channel. Subscribe if you enjoyed.
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Disclaimer: The information & opinions in these videos are strictly for educational & entertainment purposes ONLY. None of the opinions discussed should be taken as financial advice as I am NOT a financial advisor. Please do your own research & consult a financial advisor.
Awesome vid hamish, I love how you make things easier to understand for us 👌
clearest explanation of discount rate i’ve heard
Awesome video and explained very well! I’m struggling with grasping all the areas of valuation so a more detailed video would be brilliant!
Yes! Detailed tutorial would be awesome! Great video!
Crack up intro bro :D another great video! You are killing it, keep em coming. You are gonna be huge one day man. Sharing all your vids, cheers Hamish!
That's so nice Ben, thank you!
love the work you do, the little tips work great, hope this one gives you some revenue :)
cheers!
Awesome. Looking forward to a further tutorial. Thanks mate
Yes please Hamish. Love listening and learning from you 😃🌟
Thanks for watching!
Yes please a full detail tutorial with a relevant example of a company. I would like BA (Boeing) if possible :).
I'll write that down, expect it in the next couple weeks!
Hamish Hodders valuation of a company is individual to him, the numbers he gets are due to research and education on the specific company. and they are worthless to you, as you need to find your own numbers to use.
don't mean to but in but people can't give you the answers if you are trying to invest.
@@HamishHodder Did you make an example video for this?
Make the step by step video! I would love that. Love your content man.
An in depth analysis of how intrinsic value is derived for a given stock using buffets principles wud be awesome. Love the content. Keep it up
Wow this is amazingly useful. I've been searching for this exact valuation idea for years. I had something similar myself but without discount rates applied, however I kind of based future projection based on historical performance.
Hamish, I would love to see a video of you showing how you calculate the IntrinsicValue of Apple. Love your channel and hope to see Apple done in the future. Thanks, Greg- USA.
Great video! Would love to see a stock breakdown video. Thanks for sharing your knowledge!
Awesome video! An in-depth analysis example would be super helpful!
Oooh yes a full in depth tutorial video, no skims or rushes. Full detail would be epic, not particularly fussy which stock. But its be great to have a work along , but not just plugging values into excel(which is epic, but it's best to get a solid look behind the scenes for a learning basis) :)
As per all your videos, love them, you're a very switched on lad and I hope you're proud of your achievements.
Please keep posting such videos !!
Thanks mate! would love a full detailed tutorial! cheers!
Most of the information went over my head, but I am determined to learn all this. We would greatly appreciate you if you did a video breaking down a company stock. Thanks!!
Would you be able to do a detailed video going through the calculations of how to find that information on the financial statements that would be helpful for the newbies.
super vid. def put together a full video ..
Great video, please make a detailed tutorial video. Thank you Hamish
Coming your way Nelson!
Would love to see a more detailed video! Great content. Subscribed!
welcome to the team!
Yes please to full video. I think this is the only channel where I can actually learn how to work with the real numbers. Keep it up 👍🏻
Thanks so much!
Thank you for the video. The topic was nicely discussed. Please please please make the video showing detailed calculation using some practical data & situation.
Thanks for another valuable video. A big yes for the full tutorial video pls.
Thanks Ruby!
Awesome video, saved! did you end up doing a longer more in-depth video on this? thanks again Hamish!
Very informative!
Dude, this is great. Lucid & crisp explanation. You deserve a fucking standing ovation mate!
Yeah that’s would be great man to have a full video
Your content is the best
Hamish Hodder, wow this video is great. Thank you, you have given a clear picture. I just have a small doubt. I read on a few books that said that Warren preferred the Equity per share concept to judge a company's growth and not Earnings per share. Can you throw some light on why you have used net earnings. And why are the dividends not considered in your expression to calculate Intrinsic value? Thank you in advance.
I second the in depth video, sub added
Great video, would be relevant with a couple of examples from maybe Warren's portfolio and the reason he invested based on this valuation. Great video again and thanks.
Thankyou a detail tutorial of a plc company.
Hi thanks for breaking it for us.
Just commenting so that you can make a ton of money. Awesome content mate!
Hahah thanks Ashain!
Yea please do an in depth one like you suggested in the video of all the steps that would be really great :)
Thank you, Hamish, please make detailed video with examples
Nice content, thanks
Great video. Have you released the detailed intrinsic value analysis of a stock?
Good job man!
Thanks!
Great stuff Hamish! This is why valuing companies using things like EBITDA is so dangerous because it doesn't take into account capex! Let alone maintenance capex!! Appreciate you sharing this!!
Spot on!
Your video is amazing. Please make a detail tutorial with a example of any company.
Yes please, a full tutorial on a specific stock. Thx
Yes please a full detail tutorial with a relevant example of a company.
Would love for you to go through each step in detail!
Hi thanks for the video. Please make a fully detailed video on calculating intrinsic value. Thanks.
Yes please ... a detailed video will be great
Great video.
Thanks James 😊
Full detail video!
Good stuff Hamish. Managing risk and preserving capital is very important. I could be wrong but it seems to me that Buffet invests in mature businesses which removes some of the "guesswork" out of his calculations. Of course the biggest variable is how much you want to discount the future price back to today's dollars and that along with estimating growth rates well into the future is a real challenge. Hence the margin of safety I guess. There are many companies that can't even give accurate guidance themselves 12 months into the future, let alone 5 years. Probably best to avoid those.
Couldn't agree more!
Yes please post a video in detail
Wonderful video! At 5:04, isn't (A) equivalent of Free Cash Flow? If not, what's the difference?
Do you know how to calculate expected dividend returns in a drip if we have the initial capital invested, growth rate, yield and annual yield growth? Thank you
Would love video on evaluation also downloaded 5 yr and 10 yr sheet thank you. IG wanted to do something with newer stock with maybe only 3 years of financial would you suggest using sheet and just inputing quarterly ? Or how would go about it I know generally you do 10 yrs + companies but would love to hear insight. Thanks again for everything !
great video
Thanks!
superb
I will second a detailed example from the ASX please
Great!
great vid! I am able to calculate the intrinsic value of the company now. But how do I convert this into the stock price at which I should buy?
Buffett usually is quoted saying that he just looks to pay 'substantially less' than intrinsic value however that could be interpreted in a few ways. I'd say he likely means paying 40-60% less than intrinsic value.
Is the owners earnings formula EBIT* (1-Tax) + Depreciation - Capex - change in net working capital? Is the owners earnings basically Free cashflow?
I’d appreciate if I could get a full detail tutorial. I’m just now diving in to investments with my first curiosity being a safety of margin so this would really be of a benefit to me. What say you?
Wonderful info! TY! My only request might be to use more illustration to demonstrate your point.
What about the bonus shares that the company provides. Shoudnt we add that too in the calculation?
Silly question but to get your discount rate of 26%: did you go 15%(desired % of earnings per year) + 0.5x15 (50% margin of error) + 3% (to allow for time value of money to be accounted for) = 25.5 which is ~26%
Thank you!
what the name of the tutorial video please?
My mentor taught me that in order to know maintenance Capex when they don't tell you could do two things. 1, use as an approximation the Capex sales of a mature company in that industry or 2, grab the depreciation as a maintenance capex(obviously this happens when reported capex is higher than the depreciation) how do you do it?
I like this content.
Thanks for the feedback!
Hello Hamish
I am new listner and I really enjoy your videos it is very informative.
I would like you give analysis of Micron Technology.
Thanks,
Bhailal Patel
I'll check it out, welcome!
Please do the videos you suggested to do at the end
Show us that live work through. Use Costco as an example perhaps, or qualcomm?
Please make a detailed video as to how to cal the value of a co.
I have very rarely seen an actual changes in working capital figure on a cashflow statement. I dont really understand how FCF and owners earnings is different besides using average maintenance capex instead of total capex.
please note that this equation of (present value of annuity growth) assumes the future value after the ten years period is zero ...and that value differs from your equation of future price to earnings multiple (p=E*((1+g)/(1+i))^n*(p/E)n)... the value of the two methods will be different. what do you think is better?
Yes so that video bro
By working out the (enterprise value - debt + cash) / outstanding shares = intrinsic value
Hi Hamish
I am looking for good portfolio manager, can you recommed one.
Thanks,
Bhailal Patel
its yourself brother only you can manage your portfolio the best you feel me?!!
I like to watch your Chanel.
So, would you say having admitted that he overpaid on Kraft Heinz, this is an example as to why he is holding on to his holdings in the company. In other words, he states that it is his belief that it is still a solid company to own but at the same time seeing the drop in value, he has not come in to purchase any more- just wondering what your thoughts are?
Can we use the free cash flow that is easily available on cash flow statement because maintenance capex is hard to find
Yep!
Hamish Hodder thanks for your quick reply.
If free cash flow figure can be used, then why go through all this process of calculation?
How does negative working capital affect the valuation method?
Make a detailed video please
Thanks
I’ve heard about 26% rate of return from Phil Town podcast. He actually said why he targets that rate of return.
Can anyone guess why do we want exactly 26% and not 27% or 25%? 😃
im intrigued. Go on, tell us.
Found it. That is the compounded annual growth rate needed to grow a $5 bill into a $10 bill within 3 years.
th-cam.com/video/TcajXo_BVPU/w-d-xo.html
@@CaribbeanEmbassyUKTV You nailed it! It's highly unlikely the market will keep 50% discount for 3 straight years. So, if the market fixes it's mistake in 3 years, we double our money during that period.
If you could break down the intrinsic value and have me understand it, I would be very impressed. Thanks good video
Full detail tutorial video please.
Pleeeeese full detail tutorial
yes please a UK stock called Persimmon
Hamish hodler
Hahaha
Nice ph call, Hamish
This calculator does not consider terminal value. please recheck it and confirm me whether the calculation is correct or not. Love from Bangladesh
an us bond is risk free , because they usually just print the money to pay back the bond %))))
Should we buy BRK
That's up to you. If you think you can completely understand all of the businesses it owns then it could make a good investment at the right price. Personally I find the diversity of businesses too difficult to thoroughly understand.
It's not just a matter of clicking the buy button with berkshire.. They vet people who want to buy in. They hate the idea of people trading the stock.
Bear in mind though, that warren and charlie are playing a very different game to retail.
They vet people? I wasn’t vetted on any occasion buying brk-b but always do your research before purchasing any investment
Mark Saw there’s barely any stable growth in brk now and both Charlie and warren are from like the Stone Age. There expiration date is near... when either one goes away that stock is gonna plummet to the ground
Tutorial please
Give us more examples please
Great explanation and excellent video !
Please break it down!!!
Ye make a 40 min video 👍🏼👍🏼👍🏼
why would buffet have a margin of safety of 75 percent off the discount rate. that seems like a arbitrary number.
So in short, a discounted cash flow analysis
Risk free rates are too low historically to provide accurate predictions when using this method. (you'll end up with very high valuations for companys worth when yields are low (as they are now) I Simply use historic AVERAGES for 10yr governments bond rate over the last 40 years. That, in itself ensures a very good margin of safety in the current environment.