That guy asking the question wanted to show off his intelligence in front of these two, I'm guessing he didn't get a job from them, especially when he brought up the modern finance part lol
Such a stupid selfish question, 2 of the goats sitting in front of you and you spend 5 minutes asking a dumb question that could have been condensed into 15 words if the guy was half as smart as he wanted people to think he was.
10% real return, pre-tax seems like a low hurdle for Berkshire, in any interest rate environment. The scale of BRK, even in 2003, was supposed to limit them, yet in an era of falling interest rates, their scale enabled them to make deals with BAC, GS, GE and OXY that easily cleared the 10% hurdle.
Show me if u know haalal business we are muslim we do halaal businesses our islaam teachs us halaal. The business which show both profit n loss this is good.
The guy asking the question is the reason so many people miss the forest for the trees.. and why warren does so well. Why do all these people ask 10 minute questions and not notice that Charlie can answer everything in less than 15 seconds.
Even though they have no scientific studies to back this up, the reason why they use 10 percent - and ought to - is because the long term average return of the Dow and the S&P is about 10% if you include dividends.
To shed any light on this.... when Warren and Charlie mention "our opportunity cost as a discount rate (on future cash flows) is 10%"... well that's their cost of capital when you consider the audience in front of them- who invest capital with Berks- have a *next best alternative use of their money* (opportunity cost) as being to invest it in an index delivering 10% p.a. The audience invests their capital in Berkshire and their opportunity cost as general public is to invest in an index producing 10%. So that is the hurdle rate Berkshire has to beat. I try to invest like these two (try!) and personally never bother fiddling with changing the discount rate in line with 7yr gilts etc.; everything is discounted at 10% and more focus is on durability and size of future cash flows and analysing the business instead.
Warren Buffet said at 8:16 that they would pay out 250 million dollars if one person hits the right number in a Pepsi Cola contest. Did he mean to say Coca Cola?
they did dcf of course but usually if the stock need to dcf to last digit isn’t going to work , so they literally just skip the opportunity cost cause overall they will hold more than ten years and make the present volatility like nothing
Before asking a question at a conference like this you must clarify to yourself "am I asking a question or providing an answer - that would at the same time - also stroke my own ego?"
Buffet’s first investment was a total loss…that how an investment firm is named after a New England textile company since he kept the corporate structure.
Looking at this and other interviews i can tell that indeed 10% is the minimum discount rate they apply. But this can increase if interests rates go up. The question about the risk is simply "How sure am i to have this earnings, on a scale to 1 to 10 where 10 is the us treasure bonds?" If the answer is 5 (so like 50/50) and interests rates are 6% they should go for a discount rate of 12% or more.
Giovanni Cadore I believe there’s a video where warren says adding a few percent to the percentage yield of the treasury bonds ie the interest rate/discount rate doesn’t make sense considering the aim of the discount is to find the value of future cash flows today. The only thing that diminishes the value of money over time is the annual inflation rate which is reflected in the percentage yield of the treasury bills (because new money is only introduced into society via the interest of treasury bonds ie an investor buys a bond, the government gets paid the price of the bond and the investor gains credit and earns a certain amount of interest (NEW MONEY ADDED INTO CIRCULATION)). He only does the DCF in his head if he believes the future cash flows to be obvious, and if they are OBVIOUS, the only thing that should diminish the value of these cash flows (theoretically) is the inflation rate. Add the cash flows that were discounted, divide by the number of years to get the average cash flow you will receive annually, divide by the market cap (ie the price you as “the owner” purchased the company for) to get your percentage annual rate of return. I think his margin of safety is a 12% rate of return, so divide the annual average cash flow withdrawal by 0.12 to get the required market cap for the investment to return 12% (hopefully). The required market cap can then be divided by the number of outstanding shares to get the intrinsic value (roughly) but remember warren doesn’t even do a calculation, the cash flow return relative to the price (market cap) generally must be so obvious it doesn’t require it. Overall I think the margin of safety is just buying the stock at a price considerably below this intrinsic value which will return his required 12%. I did this for each of the stocks he’s bought in the last 5 years and nearly every one projected to return over 12%.
@@thomasmatthews478 yes that makes sense. So you suggest to use the interest rates of us treasury across all stocks and then demand a margin from that. I think its a good idea and you explained it very well :) my only concern is when the interest rates are this low because it pushes the intrinsic value quite high
Or because high risk-adjusted returns with some fancy strategy leads to raising a lot of capital. Some massive funds with large AUMs doing some high risk adjusted returns but low real returns. Obviously collecting handsome fees on those AUMs.
What does 10% return mean. Is this 10% revenue per stock price? Please someone clarify what returns refers to and percent of what it refers to. Thank you!
I assume Buffet discounts LEVERED free cashflows (meaning cashflow after all debt services/interest payments have been paid). The good reason for this assumption is that he and Munger have stated on multiple occasions that WACC (weighted average costs of capital), which compute a discount rate for UNLEVERED free cashflow based on the share of equity and debt in the business multiplied, respectively, by the required returns for debt and equity make no sense to them and that they have never heard an intelligent discussion about them. Thus, 10 percent means that the discount rate they use to discount the projected levered free cashflows in the future is 10 percent per year compounding annually. If you determined this way that a company is worth exactly its current market capitalization, this company would be able to return to you 10 percent per year on average indefinitely (either through dividends or through stock price increases). This is slightly simplified, but essentially what it means.
Leonardo Purba Both Buffett and Munger are talking about opportunity costs among other things. Going for a walk may appear to cost nothing, until you consider the opportunity forgone to use that time earning money. Everything you do has an opportunity cost. Economics is primarily about the efficient use of scarce resources, and the notion of opportunity cost plays a crucial part in ensuring that resources are indeed being used efficiently.
Charlie's sitting there shaking his head thinking "fuck this guy and his numbers"
Lmao I had the same exact thought
His partner offet the relieve of annoyance
That guy asking the question wanted to show off his intelligence in front of these two, I'm guessing he didn't get a job from them, especially when he brought up the modern finance part lol
😭😭😭
They need to make a Buffett & Munger cartoon.
or a video game
Such a stupid selfish question, 2 of the goats sitting in front of you and you spend 5 minutes asking a dumb question that could have been condensed into 15 words if the guy was half as smart as he wanted people to think he was.
Exactly.
10% real return, pre-tax seems like a low hurdle for Berkshire, in any interest rate environment. The scale of BRK, even in 2003, was supposed to limit them, yet in an era of falling interest rates, their scale enabled them to make deals with BAC, GS, GE and OXY that easily cleared the 10% hurdle.
Has any shareholder at any shareholder BH annual meeting EVER asked a question less than 9 minutes in length? Ever?
Yes, many. Most in fact. The vast majority.
The question is way to long...
They don't explains. They explain. At least are 2 words.
10% on Equity or 10% on Sales??
10% cagr of stock return.
On equity
Pre tax
Show me if u know haalal business we are muslim we do halaal businesses our islaam teachs us halaal. The business which show both profit n loss this is good.
The guy asking the question is the reason so many people miss the forest for the trees.. and why warren does so well. Why do all these people ask 10 minute questions and not notice that Charlie can answer everything in less than 15 seconds.
"blah blah blah blah blah blah blah blah, look at how smart I am asking this really good question..."
-the guy asking the question
just buy warrens 13f :)
Way too long of a question dude.
It's a speech, not a question
Buffet answer is at 2:33
Many thanks 🥳
+2.30 mins to formulate 2 questions. That guy doesn't have the gift of synthesis for sure.
2:36 to skip past the nerd asking the question
Thank you!
I was about to comment the same. Pls follow it, it was absolutely crazy to listen to d question
bruv what kind of sense does it make to listen to an answer without knowing the question
@@willemvanoranje1533 You pay attention to what they're answering, you'll get it.
Thank you 👑 I was scrolling halfway through the comments as he made his question
Look how rich and young Charlie and Warren were long live Warren long live Charlie
Even though they have no scientific studies to back this up, the reason why they use 10 percent - and ought to - is because the long term average return of the Dow and the S&P is about 10% if you include dividends.
To shed any light on this.... when Warren and Charlie mention "our opportunity cost as a discount rate (on future cash flows) is 10%"... well that's their cost of capital when you consider the audience in front of them- who invest capital with Berks- have a *next best alternative use of their money* (opportunity cost) as being to invest it in an index delivering 10% p.a.
The audience invests their capital in Berkshire and their opportunity cost as general public is to invest in an index producing 10%. So that is the hurdle rate Berkshire has to beat.
I try to invest like these two (try!) and personally never bother fiddling with changing the discount rate in line with 7yr gilts etc.; everything is discounted at 10% and more focus is on durability and size of future cash flows and analysing the business instead.
Warren Buffet said at 8:16 that they would pay out 250 million dollars if one person hits the right number in a Pepsi Cola contest. Did he mean to say Coca Cola?
they did dcf of course but usually if the stock need to dcf to last digit isn’t going to work , so they literally just skip the opportunity cost cause overall they will hold more than ten years and make the present volatility like nothing
Only till it finishes not a sec later be ready for that all❤❤🎉🎉
Opportunity cost: guessing future opportunity cost, he wants to use lesser fire power with lower returns 4:50
Before asking a question at a conference like this you must clarify to yourself "am I asking a question or providing an answer - that would at the same time - also stroke my own ego?"
And I thought he was a coke man
Buffet’s first investment was a total loss…that how an investment firm is named after a New England textile company since he kept the corporate structure.
Not his first investment.
great video thanks - what year is this from?
2003 annual meeting
@@investmentknowledge2011 can you provide the time. Afternoon or noon and time also.
jesus...
Guinness world record!
Looking at this and other interviews i can tell that indeed 10% is the minimum discount rate they apply. But this can increase if interests rates go up. The question about the risk is simply "How sure am i to have this earnings, on a scale to 1 to 10 where 10 is the us treasure bonds?" If the answer is 5 (so like 50/50) and interests rates are 6% they should go for a discount rate of 12% or more.
If interest rates are 6%, you use 6%
@@thomasmatthews478 yeah you can use 6% but then you need to pay much less than that price (or in other words increase margin of safety)
Giovanni Cadore I believe there’s a video where warren says adding a few percent to the percentage yield of the treasury bonds ie the interest rate/discount rate doesn’t make sense considering the aim of the discount is to find the value of future cash flows today. The only thing that diminishes the value of money over time is the annual inflation rate which is reflected in the percentage yield of the treasury bills (because new money is only introduced into society via the interest of treasury bonds ie an investor buys a bond, the government gets paid the price of the bond and the investor gains credit and earns a certain amount of interest (NEW MONEY ADDED INTO CIRCULATION)). He only does the DCF in his head if he believes the future cash flows to be obvious, and if they are OBVIOUS, the only thing that should diminish the value of these cash flows (theoretically) is the inflation rate. Add the cash flows that were discounted, divide by the number of years to get the average cash flow you will receive annually, divide by the market cap (ie the price you as “the owner” purchased the company for) to get your percentage annual rate of return. I think his margin of safety is a 12% rate of return, so divide the annual average cash flow withdrawal by 0.12 to get the required market cap for the investment to return 12% (hopefully). The required market cap can then be divided by the number of outstanding shares to get the intrinsic value (roughly) but remember warren doesn’t even do a calculation, the cash flow return relative to the price (market cap) generally must be so obvious it doesn’t require it. Overall I think the margin of safety is just buying the stock at a price considerably below this intrinsic value which will return his required 12%. I did this for each of the stocks he’s bought in the last 5 years and nearly every one projected to return over 12%.
Pay particular attention to the fact he was buying Apple heavily from 2016-2018 then stopped 2019(because it became overpriced)
@@thomasmatthews478 yes that makes sense. So you suggest to use the interest rates of us treasury across all stocks and then demand a margin from that. I think its a good idea and you explained it very well :) my only concern is when the interest rates are this low because it pushes the intrinsic value quite high
I love this.. amazing video
Choosing smoothness in earnings is either for psychological reasons or because you may be unsure of your understanding of the business
Or because high risk-adjusted returns with some fancy strategy leads to raising a lot of capital. Some massive funds with large AUMs doing some high risk adjusted returns but low real returns. Obviously collecting handsome fees on those AUMs.
What does 10% return mean. Is this 10% revenue per stock price? Please someone clarify what returns refers to and percent of what it refers to. Thank you!
@Joël Hey thanks for the feedback. ROI then not ROIC?
I assume Buffet discounts LEVERED free cashflows (meaning cashflow after all debt services/interest payments have been paid). The good reason for this assumption is that he and Munger have stated on multiple occasions that WACC (weighted average costs of capital), which compute a discount rate for UNLEVERED free cashflow based on the share of equity and debt in the business multiplied, respectively, by the required returns for debt and equity make no sense to them and that they have never heard an intelligent discussion about them.
Thus, 10 percent means that the discount rate they use to discount the projected levered free cashflows in the future is 10 percent per year compounding annually. If you determined this way that a company is worth exactly its current market capitalization, this company would be able to return to you 10 percent per year on average indefinitely (either through dividends or through stock price increases). This is slightly simplified, but essentially what it means.
The final part was amazing
For more of this stuff - download
play.google.com/store/apps/detail…buffettomungology
The higher present value is worth the volatility
this confuse me. can somebody explain?
Leonardo Purba Both Buffett and Munger are talking about opportunity costs among other things. Going for a walk may appear to cost nothing, until you consider the opportunity forgone to use that time earning money. Everything you do has an opportunity cost. Economics is primarily about the efficient use of scarce resources, and the notion of opportunity cost plays a crucial part in ensuring that resources are indeed being used efficiently.
Alex Vanzijl cool post
@@alexvanzijl6796 cool
Thanks