Warren Buffett's intrinsic value formula is the most calculated of all investments. Although it seems elusive to most people, the calculations become more apparent for those who have studied Buffett Columbia Business Professor Benjamin Graham. Remember that the intrinsic value formula used by Buffett is a modification of Graham's ideas and rationale.
One of the most amazing things about Benjamin Graham is that he actually thinks bonds are safer than stocks and investments are more likely. Because of the high inflation rate [a completely different topic], Buffett strongly opposes today, but it is important to understand how Buffett evaluates stocks [stocks].
When we look at Buffett's definition of intrinsic value, we know that he quotes that intrinsic value is simply the discounted value of the company's future cash flow. So what does this mean?
Then, before we understand this definition, we must first understand the value of the bond. When a bond is issued, it is placed on the market at face value [or face value]. In most cases, this face value is $1,000. Once the bond enters the market, the issuer will pay the bondholder a coupon of six months [in most cases]. These coupon payments are based on the exchange rate determined at the time the bond was originally issued. For example, if the coupon rate is 5%, the bondholder will receive two annual coupons of $25 – a total of $50 per year. These coupon payments will continue to be paid until the bond expires. Some bonds mature within a year, while other bonds mature within 30 years. Regardless of the terms, once the bond matures, the face value will be repaid to the bondholder. If you want to pay attention to this security, the value is based entirely on these key factors. For example, what is the coupon rate, how long I will receive these coupons, and how much face value I will receive when the bond expires.
Now you may wonder why I wrote all the information about bonds when I was writing an article about Warren Buffett's intrinsic value calculations. Then the answer is simple. The value of the buffet is the same as his valuation of the bond!
You know, if you want to calculate the market value of a bond, you simply insert the input from the terms listed above into the bond's market value calculator and process the number. It doesn't make any difference when dealing with stocks. Think about it. When Buffett said that he discounted the future value of cash flow, what he actually did was sum up the dividend he wanted to receive [like a bond coupon], and he estimated the future business book value [like bond The ticket value is the same]. By estimating these future cash flows from the key terms mentioned in the previous sentence, he is able to use the considerable rate of return to convert the money back to its current value.
Now this is often a confusing part – discounting future cash flows. In order to understand this step, you must understand the time value of money. We know that the money we pay in the future is different from the money in our hands. Therefore, discounts must be applied [just like bonds]. For investors, the discount rate is usually a controversial issue, but for Buffett it is simple. First, he discounted his future cash flow by ten years of federal bills because it provided him with a relative comparison with zero-risk investments. He did this to get started, so he knew how much risk he had in the potential choice. After this figure was established, Buffett subsequently discounted future cash flows at a rate that forces the intrinsic value to equal the current market price of the stock. This can be confusing for many people, but it is the most important part. By doing so, Buffett can immediately see his return on any particular stock option.
Although Buffett estimates that many future cash flows are not specific figures, he usually chooses a good, stable company to mitigate this risk.Easy Accounting For Investment Clubs,Click here!